Deck 8: Financial Analysis

Question 1

management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

Answer 1

True

Question 2

is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

Answer 2

False

Question 3

Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Answer 3

False

Question 4

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities However, Firm A has a higher inventory turnover ratio than B Therefore, we can conclude that A's quick ratio must be smaller than B's.

Question 5

decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

Question 6

inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

Question 7

basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

Question 8

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

Question 9

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Question 10

times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

Question 11

though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than that of B.

Question 12

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Question 13

Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

Question 14

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year Trend analysis is one method of measuring changes in a firm's performance over time.

Question 15

"apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

Question 16

Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

Question 17

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

Question 18

inventory turnover and current ratio are related The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Question 19

current ratio and inventory turnover ratios both help us measure the firm's liquidity The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

Question 20

current and quick ratios always indicate that a firm is managing its liquidity position well.

Question 21

Which of the following statements is CORRECT?

A) If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
B) If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
C) A firm's use of debt will have no effect on its profit margin on sales.
D) If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
E) The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

Question 22

Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher priceWhich 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.

Question 23

firm wants to strengthen its financial position Which of the following actions would increase its current ratio?

A) Use cash to increase inventory holdings.
B) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
C) Use cash to repurchase some of the company's own stock.
D) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
E) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

Question 24

Which of the following statements is CORRECT?

A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.
B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
C) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
D) The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

Question 25

a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Question 26

firm wants to strengthen its financial position Which of the following actions would increase its quick ratio?

A) Issue new common stock and use the proceeds to acquire additional fixed assets.
B) Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable.
C) Issue new common stock and use the proceeds to increase inventories.
D) Speed up the collection of receivables and use the cash generated to increase inventories.
E) Use some of its cash to purchase additional inventories.

Question 27

problem with ratio analysis is that relationships can be manipulated For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

Question 28

Suppose a firm wants to maintain a specific TIE ratio It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

Question 29

Considered alone, which of the following would increase a company's current ratio?

A) An increase in accounts payable.
B) An increase in net fixed assets.
C) An increase in accrued liabilities.
D) An increase in notes payable.
E) An increase in accounts receivable.

Question 30

Which of the following statements is CORRECT?

A) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.
B) If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
C) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.
D) There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
E) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

Question 31

Which of the following statements is CORRECT?

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.

Question 32

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000 What was its total assets turnover ratio (TATO)?

A) 2.03
B) 2.13
C) 2.25
D) 2.36
E) 2.48

Question 33

Lincoln Industries' current ratio is 0.5 Considered alone, which of the following actions would increase the company's current ratio?

A) Use cash to reduce long-term bonds outstanding.
B) Borrow using short-term notes payable and use the cash to increase inventories.
C) Use cash to reduce accruals.
D) Use cash to reduce accounts payable.
E) Use cash to reduce short-term notes payable.

Question 34

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.
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.

Question 35

observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average Which of the following statements is CORRECT?

A) Its total assets turnover must equal the industry average.
B) Its total assets turnover must be above the industry average.
C) Its return on assets must equal the industry average.
D) Its TIE ratio must be below the industry average.
E) Its total assets turnover must be below the industry average.

Question 36

problem with ratio analysis is that relationships can be manipulated For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

Question 37

Which of the following statements is CORRECT?

A) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
B) A reduction in inventories held would have no effect on the current ratio.
C) An increase in inventories would have no effect on the current ratio.
D) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
E) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

Question 38

Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate However, Firm A has a higher debt ratio If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

Question 39

Amram Company's current ratio is 1.9 Considered alone, which of the following actions would reduce the company's current ratio?

A) Use cash to reduce accounts payable.
B) Borrow using short-term notes payable and use the proceeds to reduce accruals.
C) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
D) Use cash to reduce accruals.
E) Use cash to reduce short-term notes payable.

Question 40

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

A) The total assets turnover decreases.
B) The TIE declines.
C) The DSO increases.
D) The EBITDA coverage ratio increases.
E) The current and quick ratios both decline.

Question 41

investor is considering starting a new business The company would require $475,000 of assets, and it would be financed entirely with common stock The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5% How much net income must be expected to warrant starting the business?

A) $52,230
B) $54,979
C) $57,873
D) $60,919
E) $64,125

Question 42

Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000 What was its profit margin on sales?

A) 6.49%
B) 6.83%
C) 7.19%
D) 7.55%
E) 7.92%

Question 43

Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000 The average firm in the industry has a total assets turnover ratio (TATO) of 2.4 Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

A) $164,330
B) $172,979
C) $182,083
D) $191,188
E) $200,747

Question 44

Bostian, Inchas total assets of $625,000Its total debt outstanding is $185,000 The Board of Directors has directed the CFO to move towards a debt ratio of 55% How much debt must the company add or subtract to achieve the target debt ratio?

A) $158,750
B) $166,688
C) $175,022
D) $183,773
E) $192,962

Question 45

LeCompte Corphas $312,900 of assets, and it uses only common equity capital (zero debt) Its sales for the last year were $620,000, and its net income after taxes was $24,655 Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15% What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

A) 7.57%
B) 7.95%
C) 8.35%
D) 8.76%
E) 9.20%

Question 46

Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000 What was its ROE?

A) 16.87%
B) 17.75%
C) 18.69%
D) 19.67%
E) 20.66%

Question 47

Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500 Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30 On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.

A) 7.95
B) 8.37
C) 8.81
D) 9.27
E) 9.74

Question 48

Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500 What was its basic earning power (BEP)?

A) 18.49%
B) 19.47%
C) 20.49%
D) 21.52%
E) 22.59%

Question 49

Heaton Corpsells on terms that allow customers 45 days to pay for merchandise Its sales last year were $425,000, and its year-end receivables were $60,000 If its DSO is less than the 45-day credit period, then customers are paying on time Otherwise, they are paying late By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a 365-day year when calculating the DSO A positive answer indicates late payments, while a negative answer indicates early payments.

A) 6.20
B) 6.53
C) 6.86
D) 7.20
E) 7.56

Question 50

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

Question 51

new firm is developing its business plan It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year Management is quite sure of these numbers because of contracts with its customers and suppliers It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

A) 47.33%
B) 49.82%
C) 52.45%
D) 55.21%
E) 58.11%

Question 52

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

Question 53

Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750 What was its return on total assets?

A) 7.22%
B) 7.58%
C) 7.96%
D) 8.36%
E) 8.78%

Question 54

year Urbana Corphad $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%

Question 55

Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay The industry average DSO is 27 days, based on a 365-day year If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

A) $267.34
B) $281.41
C) $296.22
D) $311.81
E) $328.22

Question 56

Emerson Inc.'s would like to undertake a policy of paying out 45% of its incomeIts latest net income was $1,250,000, and it had 225,000 shares outstandingWhat dividend per share should it declare?

A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63

Question 57

Hutchinson Corporation has zero debt-it is financed only with common equityIts total assets are $410,000The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value How much must the firm borrow to achieve the target debt ratio?

A) $155,800
B) $164,000
C) $172,200
D) $180,810
E) $189,851

Question 58

Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500 What was the firm's times interest earned (TIE) ratio?

A) 4.72
B) 4.97
C) 5.23
D) 5.51
E) 5.80

Question 59

Ziebart Corp.'s EBITDA last year was $390,000 (= EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease The firm had no amortization charges What was the EBITDA coverage ratio?

A) 7.32
B) 7.70
C) 8.09
D) 8.49
E) 8.92

Question 60

Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8 What was the firm's ROE?

A) 12.79%
B) 13.47%
C) 14.18%
D) 14.88%
E) 15.63%
Easy/

Question 61

is the firm's book value per share?

A) $61.73
B) $64.98
C) $68.40
D) $72.00
E) $75.60

Question 62

is the firm's BEP?

A) 6.00%
B) 6.32%
C) 6.65%
D) 6.98%
E) 7.33%

Question 63

is the firm's profit margin?

A) 1.40%
B) 1.56%
C) 1.73%
D) 1.93%
E) 2.12%

Question 64

is the firm's market-to-book ratio?

A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08

Question 65

is the firm's P/E ratio?

A) 12.0
B) 12.6
C) 13.2
D) 13.9
E) 14.6

Question 66

is the firm's EPS?

A) $5.84
B) $6.15
C) $6.47
D) $6.80
E) $7.14

Question 67

year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2 The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs Had it reduced its assets in this amount, and had the debt ratio, sales, and costs remained constant, by how much would the ROE have changed?

A) 1.81%
B) 2.02%
C) 2.22%
D) 2.44%
E) 2.68%

Question 68

is the firm's equity multiplier?

A) 3.33
B) 3.50
C) 3.68
D) 3.86
E) 4.05

Question 69

is the firm's inventory turnover ratio?

A) 4.38
B) 4.59
C) 4.82
D) 5.06
E) 5.32

Question 70

is the firm's ROE?

A) 8.54%
B) 8.99%
C) 9.44%
D) 9.91%
E) 10.41%

Question 71

is the firm's dividends per share?

A) $2.62
B) $2.91
C) $3.20
D) $3.53
E) $3.88

Question 72

is the firm's TIE?

A) 1.94
B) 2.15
C) 2.39
D) 2.66
E) 2.93

Question 73

is the firm's ROA?

A) 2.70%
B) 2.97%
C) 3.26%
D) 3.59%
E) 3.95%

Question 74

is the firm's debt ratio?

A) 45.93%
B) 51.03%
C) 56.70%
D) 63.00%
E) 70.00%

Question 75

is the firm's cash flow per share?

A) $10.06
B) $10.59
C) $11.15
D) $11.74
E) $12.35

Question 76

year Mason Inchad a total assets turnover of 1.33 and an equity multiplier of 1.75 Its sales were $195,000 and its net income was $10,549 The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?

A) 5.66%
B) 5.95%
C) 6.27%
D) 6.58%
E) 6.91%

Question 77

is the firm's EBITDA coverage?

A) 3.29
B) 3.46
C) 3.64
D) 3.82
E) 4.01

Question 78

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 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

Question 79

year Vaughn Corphad sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000 The firm's total-debt-to-total-assets ratio was 42.5% Based on the Du Pont equation, what was Vaughn's ROE?

A) 14.77%
B) 15.51%
C) 16.28%
D) 17.10%
E) 17.95%