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Chapter 07: Analysis of Financial Statements
POINTS:
1
66. Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets
ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to
$33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the
ROE?
a.
9.32%
b.
9.82%
c.
10.33%
d.
10.88%
e.
11.42%
ANSWER:
d
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67. Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets
ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to
reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the
41% debt ratio. By how much would the reduction in assets improve the ROE?
a.
4.69%
b.
4.93%
c.
5.19%
d.
5.45%
e.
5.73%
POINTS:
1
68. Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The
debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO
wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total
assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the
Chapter 07: Analysis of Financial Statements
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Page 43
ROE change in response to the change in the capital structure?
a.
2.08%
b.
2.32%
c.
2.57%
d.
2.86%
e.
3.14%
POINTS:
1
69. For the coming year, Crane Inc. is considering two financial plans. Management expects sales to be $301,770,
operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and
75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or
more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating
costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response
to the change in the capital structure?
a.
3.83%
b.
4.02%
c.
4.22%
Chapter 07: Analysis of Financial Statements
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Page 44
d.
4.43%
e.
4.65%
Interest consistent with
Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization
charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be
rolled over.
Balance Sheet (Millions of $)
Assets
2016
Chapter 07: Analysis of Financial Statements
Cash and securities
$ 1,554.0
Accounts receivable
9,660.0
Inventories
13,440.0
Total current assets
$24,654.0
Net plant and equipment
17,346.0
Total assets
$42,000.0
Liabilities and Equity
Accounts payable
$ 7,980.0
Notes payable
5,880.0
Accruals
4,620.0
Total current liabilities
$18,480.0
Long-term bonds
10,920.0
Total liabilities
$29,400.0
Common stock
3,360.0
Retained earnings
9,240.0
Total common equity
$12,600.0
Total liabilities and equity
$42,000.0
Income Statement (Millions of $)
2016
Net sales
$58,800.0
Operating costs except depr'n
$54,978.0
Depreciation
$ 1,029.0
Earnings bef int and taxes (EBIT)
$ 2,793.0
Less interest
1,050.0
Earnings before taxes (EBT)
$ 1,743.0
Taxes
$ 610.1
Net income
$ 1,133.0
Other data:
Shares outstanding (millions)
175.00
Common dividends
$ 509.83
Int rate on notes payable & L-T bonds
6.25%
Federal plus state income tax rate
35%
Year-end stock price
$77.69
70. Refer to the data for Pettijohn Inc. What is the firm's ROA?
a.
2.70%
b.
2.97%
c.
3.26%
d.
3.59%
e.
3.95%
ANSWER:
a
71. Refer to the data for Pettijohn Inc. What is the firm's ROE?
a.
8.54%
b.
8.99%
c.
9.44%
d.
9.91%
e.
10.41%
ANSWER:
b
72. Refer to the data for Pettijohn Inc. What is the firm's BEP?
a.
6.00%
b.
6.32%
c.
6.65%
d.
6.98%
e.
7.33%
ANSWER:
c
73. Refer to the data for Pettijohn Inc. What is the firm's profit margin?
a.
1.40%
b.
1.56%
c.
1.73%
d.
1.93%
e.
2.12%
ANSWER:
d
74. Refer to the data for Pettijohn Inc. What is the firm's dividends per share?
a.
$2.62
b.
$2.91
c.
$3.20
d.
$3.53
e.
$3.88
ANSWER:
b
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75. Refer to the data for Pettijohn Inc. What is the firm's cash flow per share?
a.
$10.06
b.
$10.59
c.
$11.15
d.
$11.74
e.
$12.35
ANSWER:
e
76. Market value ratios provide management with an indication of how investors view the firm's past performance and
especially its future prospects.
a.
True
b.
False
Chapter 07: Analysis of Financial Statements
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Page 49
ANSWER:
True
77. Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price.
Which of the following statements is CORRECT?
a.
Company A trades at a higher P/E ratio.
b.
Company A probably has fewer growth opportunities.
c.
Company A is probably judged by investors to be riskier.
d.
Company A must have a higher market-to-book ratio.
e.
Company A must pay a lower dividend.
ANSWER:
a
78. Which of the following statements is CORRECT?
a.
If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this
suggests that the board of directors should fire the president.
b.
If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this
suggests that the board of directors should fire the president.
c.
Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to
be.
Chapter 07: Analysis of Financial Statements
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Page 50
d.
The higher the market/book ratio, then, other things held constant, the higher one would expect to find the
Market Value Added (MVA).
e.
If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this
situation to continue, then its market/book ratio and MVA are both likely to be below average.
ANSWER:
d
79. The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term
notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects
would occur as a result of this action?
a.
The company's debt ratio increased.
b.
The company's current ratio increased.
c.
The company's times interest earned ratio decreased.
d.
The company's basic earning power ratio increased.
e.
The company's equity multiplier increased.
ANSWER:
b
80. Which of the following statements is CORRECT?
Chapter 07: Analysis of Financial Statements
a.
If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their
market-to-book ratios must also be the same.
b.
If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
c.
If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E
ratios must also be the same.
d.
If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price
earnings ratio.
e.
If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at
a faster rate.
ANSWER:
c
81. Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What
was its P/E ratio?
a.
13.84
b.
14.57
c.
15.29
d.
16.06
e.
16.86
POINTS:
1
82. Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its
market/book ratio?
a.
1.34
b.
1.41
c.
1.48
d.
1.55
e.
1.63
ANSWER:
a
83. Emerson Inc.'s would like to undertake a policy of paying out 45% of its income. Its latest net income was $1,250,000,
and it had 225,000 shares outstanding. What dividend per share should it declare?
a.
$2.14
b.
$2.26
c.
$2.38
d.
$2.50
e.
$2.63
ANSWER:
d
84. Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its
debt-to-assets ratio was 46%. How much debt was outstanding?
a.
$3,393,738
b.
$3,572,356
c.
$3,760,375
d.
$3,958,289
e.
$4,166,620
ANSWER:
e
Chapter 07: Analysis of Financial Statements
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Page 54
Pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization
charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be
rolled over.
Balance Sheet (Millions of $)
Assets
2016
Cash and securities
$ 1,554.0
Accounts receivable
9,660.0
Inventories
13,440.0
Total current assets
$24,654.0
Net plant and equipment
17,346.0
Total assets
$42,000.0
Liabilities and Equity
Accounts payable
$ 7,980.0
Notes payable
5,880.0
Accruals
4,620.0
Total current liabilities
$18,480.0
Long-term bonds
10,920.0
Total liabilities
$29,400.0
Common stock
3,360.0
Retained earnings
9,240.0
Total common equity
$12,600.0
Total liabilities and equity
$42,000.0
Income Statement (Millions of $)
2016
Net sales
$58,800.0
Operating costs except depr'n
$54,978.0
Depreciation
$ 1,029.0
Earnings bef int and taxes (EBIT)
$ 2,793.0
Less interest
1,050.0
Earnings before taxes (EBT)
$ 1,743.0
Taxes
$ 610.1
Net income
$ 1,133.0
Other data:
Shares outstanding (millions)
175.00
Common dividends
$ 509.83
Int rate on notes payable & L-T bonds
6.25%
Federal plus state income tax rate
35%
Year-end stock price
$77.69
85. Refer to the data for Pettijohn Inc. What is the firm's EPS?
a.
$5.84
b.
$6.15
c.
$6.47
d.
$6.80
e.
$7.14
ANSWER:
c
