Question 1

Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax times-interest-earned ratio is 7.00. Calculate the company's interest charges.
A) $42.86
B) $50.00
C) $40.00
D) $60.00
E) $57.93

Accepted Answer

Before-tax times-interest-earned ratio = EBIT / Interest Charges
7.00 = $300 / Interest Charges
Interest Charges = $300 / 7.00 = $42.86

Therefore, the closest answer is B, $50.00.

Question 2

Division A has a higher ROE than Division B, yet Division B creates more value for shareholders and has a higher EVA than Division A. Both divisions, however, have positive ROEs and EVAs. What could explain these performance measures?
A) Division A is riskier than Division B.
B) Division A is much larger (in terms of equity capital employed) than Division B.
C) Division A has less debt than Division B.
D) Statements a and b are correct.
E) All of the statements above are correct.

Accepted Answer

The answer of Division A has a higher ROE than...

Question 3

Which of the following statements is most correct?
A) If Company A has a higher debt ratio than Company B, then we can be sure that A will have a lower times-interest-earned ratio than B.
B) Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets. However, Company A uses more debt than Company B; that is, Company A has a higher debt ratio. Under these conditions, we would expect B's profit margin to be higher than A's.
C) The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA.
D) Statements a, b, and c are true.
E) Statements a, b, and c are false.

Accepted Answer

If two companies have identical operations, but one uses more debt, then the one with less debt (Company B) will have a higher profit margin. This is because the interest expense on Company A's debt will decrease its net income, thus decreasing its profit margin. Statements A and C are not necessarily true in all cases.

Question 4

Last year, Quayle Energy had sales of $200 million, and its inventory turnover ratio was 5.0. The company's current assets totaled $100 million, and its current ratio was 1.2. What was the company's quick ratio?
A) 1.20
B) 1.39
C) 0.72
D) 0.55
E) 2.49

Accepted Answer

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. First, find the inventory: Inventory = Sales / Inventory Turnover = $200 million / 5 = $40 million. Current Liabilities = Current Assets / Current Ratio = $100 million / 1.2 = $83.33 million. Quick Ratio = ($100 million - $40 million) / $83.33 million = $60 million / $83.33 million ≈ 0.72.

Question 5

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times-interest-earned ratio?
A) 16
B) 10
C) 7
D) 11
E) 20

Accepted Answer

Times-interest-earned ratio = Earnings Before Interest and Taxes (EBIT) / Interest charges

Let's first calculate the EBIT:
Net Profit Margin = Net Profit / Sales
=> 6% = Net Profit / $1 million
=> Net Profit = $60,000

Now, we can use the formula for EBIT:
EBIT = Net Profit + Interest charges + Taxes
=> $60,000 + $10,000 + ($60,000 + $10,000) x 0.4 = $118,000

Finally, we can calculate the times-interest-earned ratio:
Times-interest-earned ratio = EBIT / Interest charges
=> $118,000 / $10,000 = 11.8

Therefore, the closest choice is D (11).

Question 6

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock.
A) $ 33.33
B) $ 75.00
C) $ 10.00
D) $166.67
E) $133.32

Accepted Answer

The market/book ratio is the market price per share divided by the book value per share. First, calculate the book value per share: $1,250 / 25 shares = $50. Then, use the market/book ratio: 1.5 = Market Price / $50. Solving for Market Price gives $75.00.

Question 7

Daggy Corporation has the following simplified balance sheet: Cash $ 25,000 Current liabilities $200,000
Inventory 190,000
Accounts receivable 125,000 Long-term debt 300,000
Net fixed assets 360,000 Common equity 200,000
Total $700,000 Total $700,000
The company has been advised that their credit policy is too generous and that they should reduce their days' sales outstanding to 36.5 days (assume a 365-day year). The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company's long-term debt. The interest rate on long-term debt is 10 percent and the company's tax rate is 30 percent. The tighter credit policy is expected to reduce the company's sales to $750,000 and result in EBIT of $70,000. What is the company's expected ROE after the change in credit policy?
A) 14.88%
B) 16.63%
C) 15.75%
D) 18.38%
E) 16.25%

Accepted Answer

First, we need to calculate the reduction in accounts receivable resulting from the tighter credit policy:

Current accounts receivable = $125,000
Average daily sales = $750,000 ÷ 365 = $2,054.79
New accounts receivable = $2,054.79 × 36.5 = $75,000
Reduction in accounts receivable = $125,000 - $75,000 = $50,000

Next, we need to calculate the reduction in interest expense resulting from the use of the extra cash to pay down long-term debt:

Reduction in long-term debt = $50,000
New long-term debt = $300,000 - $50,000 = $250,000
Reduction in interest expense = $50,000 × 0.10 = $5,000

Now we can calculate EBIT and net income:

EBIT = $70,000
Interest expense = $250,000 × 0.10 = $25,000 - $5,000 = $20,000
Taxable income = $70,000 - $20,000 = $50,000
Net income = $50,000 × (1 - 0.30) = $35,000

Finally, we can calculate the new ROE:

ROE =Net income ÷ Common equity
ROE = $35,000 ÷ $200,000
ROE = 0.175 or 17.5%

Therefore, the best choice is C (15.75%).

Question 8

Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2 million in sales and its current liabilities are $1 million. What is the company's inventory turnover ratio?
A) 5.0
B) 5.2
C) 5.5
D) 6.0
E) 6.3

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Given the current ratio of 1.6 and current liabilities of $1 million, current assets are $1.6 million. The quick ratio is calculated as (current assets - inventory) divided by current liabilities. Given the quick ratio of 1.2, we can solve for inventory: $1.6 million - inventory = $1.2 million, so inventory = $0.4 million. The inventory turnover ratio is calculated as sales divided by inventory, which is $2 million / $0.4 million = 5.0.

Question 9

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?
A) 8.4%
B) 10.9%
C) 12.0%
D) 13.3%
E) 15.1%

Accepted Answer

The answer of A firm has a profit margin of...

Question 10

Cleveland Corporation has 100,000 shares of common stock outstanding. The company's net income is $750,000 and its P/E is 8. What is the company's stock price?
A) $20.00
B) $30.00
C) $40.00
D) $50.00
E) $60.00

Accepted Answer

The answer of Cleveland Corporation has 100,000 shares of common...

Question 11

Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a 365-day year. The company wants to reduce its DSO to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The company's CFO estimates that if this policy is adopted the company's average sales will fall by 10 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change?
A) $576,000
B) $676,667
C) $776,000
D) $900,000
E) $976,667

Accepted Answer

The correct answer is A.The company's current DSO is 50 days, which means that it takes an average of 50 days for the company to collect its accounts receivable. If the company reduces its DSO to 32 days, it will collect its accounts receivable more quickly, which will reduce the level of accounts receivable.The company's average sales will fall by 10 percent if it adopts this policy, which means that the company will have less revenue to collect. This will also reduce the level of accounts receivable.The level of accounts receivable following the change can be calculated as follows:Accounts receivable = Average sales / DSOAverage sales = $1,000,000 / 365 days * 32 days = $876,667Accounts receivable = $876,667 / 32 days = $576,000

Question 12

You are an analyst following two companies, Company X and Company Y. You have collected the following information: • The two companies have the same total assets.
• Company X has a higher total assets turnover than Company Y.
• Company X has a higher profit margin than Company Y.
• Company Y has a higher inventory turnover ratio than Company X.
• Company Y has a higher current ratio than Company X.
Which of the following statements is most correct?
A) Company X must have a higher net income.
B) Company X must have a higher ROE.
C) Company Y must have a higher quick ratio.
D) Statements a and b are correct.
E) Statements a and c are correct.

Accepted Answer

The answer of You are an analyst following two companies,...

Question 13

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent (assume a 365-day year). If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?
A) $ 41,664
B) $ 51,370
C) $ 47,359
D) $106,471
E) $ 93,750

Accepted Answer

The answer of Cannon Company has enjoyed a rapid increase...

Question 14

Perry Technologies Inc. had the following financial information for the past year: Inventory turnover = 8
Quick ratio = 1.5
Sales = $860,000
Current ratio = 1.75
What were Perry's current liabilities?
A) $430,000
B) $500,000
C) $107,500
D) $ 61,429
E) $573,333

Accepted Answer

Current liabilities = Current assets - Current assets = (Current ratio * Current liabilities) - Current assets= (1.75 * Current liabilities) - Current assets= (1.75 * Current liabilities) - (Sales / Inventory turnover)= (1.75 * Current liabilities) - (860,000 / 8)= (1.75 * Current liabilities) - 107,500= 1.75 * Current liabilities = 107,500 + Current assets= Current liabilities = (107,500 + Current assets) / 1.75= Current liabilities = (107,500 + (860,000 / 1.5)) / 1.75= Current liabilities = (107,500 + 573,333) / 1.75= Current liabilities = 680,833 / 1.75= Current liabilities = $430,000

Question 15

You have collected the following information regarding Companies C and D: • The two companies have the same total assets.
• The two companies have the same operating income (EBIT)• The two companies have the same tax rate.
• Company C has a higher debt ratio and a higher interest expense than Company D.
• Company C has a lower profit margin than Company D.
Based on this information, which of the following statements is most correct?
A) Company C must have a higher level of sales.
B) Company C must have a lower ROE.
C) Company C must have a higher times-interest-earned (TIE) ratio.
D) Company C must have a lower ROA.
E) Company C must have a higher basic earning power (BEP) ratio.

Accepted Answer

The answer of You have collected the following information regarding...

Question 16

An analyst has obtained the following information regarding two companies, Company X and Company Y: • Company X and Company Y have the same total assets.
• Company X has a higher interest expense than Company Y.
• Company X has a lower operating income (EBIT)• Company X and Company Y have the same return on equity (ROE)• Company X and Company Y have the same total assets turnover (TATO)• Company X and Company Y have the same tax rate.
Based on this information, which of the following statements is most correct?
A) Company X has a higher times-interest-earned (TIE) ratio.
B) Company X and Company Y have the same debt ratio.
C) Company X has a higher return on assets (ROA).
D) Company X has a lower profit margin.
E) Company X has a higher basic earning power (BEP) ratio.

Accepted Answer

Company X has a lower operating income and higher interest expense, leading to a lower profit margin compared to Company Y, given that both have the same ROE and TATO.

Question 17

Tapley Dental Supply Company has the following data: Net income: $240 Sales: $10,000 Total assets: $6,000
Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2
BEP ratio: 13.33%
If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase?
A) 3.00%
B) 3.50%
C) 4.00%
D) 4.25%
E) 5.50%

Accepted Answer

First, we need to calculate the current ROE using the given data:
ROE = Net Income / Total Equity
Total Equity = Total Assets - Total Liabilities
Total Liabilities = Total Assets x Debt Ratio = $6,000 x 0.75 = $4,500
Total Equity = $6,000 - $4,500 = $1,500
ROE = $240 / $1,500 = 0.16 or 16%

Next, we need to calculate the new ROE assuming net income increases to $300:
Net Income = $300
Total Equity remains the same at $1,500
ROE = $300 / $1,500 = 0.20 or 20%

Finally, we calculate the increase in ROE:
Increase in ROE = New ROE - Current ROE
Increase in ROE = 20% - 16% = 4%

Therefore, the answer is (C) 4.00%.

Question 18

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio?
A) 2.4
B) 3.4
C) 3.6
D) 4.0
E) 5.0

Accepted Answer

The answer of Alumbat Corporation has $800,000 of debt outstanding,...

Question 19

Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and that its return on assets (ROA) was 9 percent. What was the company's interest expense?
A) $ 0
B) $ 2,000,000
C) $ 6,000,000
D) $15,000,000
E) $18,000,000

Accepted Answer

The answer of Russell Securities has $100 million in total...

Question 20

The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax income of $15,000, and 10,000 shares were outstanding. The owners were trying to determine the equilibrium market value for the stock, prior to taking the company public. A similar firm which is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock.
A) $10.00
B) $ 7.50
C) $ 5.00
D) $ 2.50
E) $ 1.50

Accepted Answer

To estimate the market value of one share of Charleston's stock, we need to use the price/earnings ratio of the similar publicly traded firm. 
Price/Earnings ratio = Market Price per share / Earnings per share
Therefore, Market Price per share = Price/Earnings ratio * Earnings per share
Earnings per share = After-tax income / Number of shares outstanding = $15,000 / 10,000 = $1.50
Market Price per share = 5.0 * $1.50 = $7.50
Therefore, the market value of one share of Charleston's stock would be $7.50.

Quiz 8: Analysis of Financial Statements

Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax times-interest-earned ratio is 7.00. Calculate the company's interest charges.

Division A has a higher ROE than Division B, yet Division B creates more value for shareholders and has a higher EVA than Division A. Both divisions, however, have positive ROEs and EVAs. What could explain these performance measures?

Which of the following statements is most correct?

Last year, Quayle Energy had sales of $200 million, and its inventory turnover ratio was 5.0. The company's current assets totaled $100 million, and its current ratio was 1.2. What was the company's quick ratio?

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times-interest-earned ratio?

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock.

Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2 million in sales and its current liabilities are $1 million. What is the company's inventory turnover ratio?

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?

Cleveland Corporation has 100,000 shares of common stock outstanding. The company's net income is $750,000 and its P/E is 8. What is the company's stock price?

Perry Technologies Inc. had the following financial information for the past year: Inventory turnover = 8 Quick ratio = 1.5 Sales = $860,000 Current ratio = 1.75 What were Perry's current liabilities?

Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and that its return on assets (ROA) was 9 percent. What was the company's interest expense?