Question 1

Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

Accepted Answer

The answer of Taggart Technologies is considering issuing new common...

Question 2

Which of the following statements is CORRECT?

Accepted Answer

The use of debt increases the financial risk of a firm and, therefore, the cost of equity rises. As a result, the firm's overall cost of capital increases, and this may lower the firm's profit margin on sales. However, the impact of financial leverage on profit margin on sales depends on the firm's profitability, the cost of borrowing, and the riskiness of the firm. Therefore, 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.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 4

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

Accepted Answer

Reducing the days' sales outstanding (DSO) means the company is collecting its accounts receivables faster, which increases cash flow for the current year. Choices A, B, D, and E do not directly increase cash flow for the current year.

Question 5

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

Accepted Answer

The answer of Walter Industries' current ratio is 0.5. Considered...

Question 6

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

The answer of Companies HD and LD have the same...

Question 7

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Accepted Answer

The answer of Companies HD and LD have the same...

Question 8

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 9

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?

Accepted Answer

Profit margin is calculated by dividing net income after taxes by total sales.
Profit margin = (Net income after taxes / Total sales) x 100%

In this case,
Profit margin = (23,000 / 320,000) x 100%
Profit margin = 0.071875 x 100%
Profit margin = 7.19%

Therefore, the answer is C) 7.19%.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 11

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?

Accepted Answer

The answer of Branch Corp.'s total assets at the end...

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 13

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?

Accepted Answer

The answer of Orono Corp.'s sales last year were $435,000,...

Question 14

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Accepted Answer

The answer of Companies HD and LD have the same...

Question 15

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?

Accepted Answer

Current ratio is calculated by dividing current assets by current liabilities. Before the transaction, Safeco has a current ratio of 2 (20/10) and Risco has a current ratio of 0.5 (10/20). After borrowing $10 million and holding it in cash, both companies' current assets will increase by $10 million, but their current liabilities will remain the same. Therefore, Safeco's new current ratio will be 1.67 (30/10) and Risco's new current ratio will be 0.67 (20/30). Safeco's current ratio will decrease, indicating lower financial strength, while Risco's current ratio will increase, indicating higher financial strength.

Question 16

Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

Accepted Answer

The answer of Companies HD and LD are both profitable,...

Question 17

You 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?

Accepted Answer

Since the firm's ROE is above the industry average and its profit margin is below the industry average, it must have a higher asset turnover ratio to generate a higher ROE. Therefore, its total assets turnover must be above the industry average to compensate for the lower profit margin. The debt ratio is irrelevant in this scenario.

Question 18

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of Appendix D at the end of the text.
The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the amount of time they have to work the problems. Our difficulty assessments assume that they have a formula sheet and a "reasonable" amount of time for the test. Note that some problems are trivially easy if students have formula sheets.
To work some of the problems, students must transpose equations and solve for items that are normally inputs. For example, the equation for the profit margin is given as Profit margin = Net income/Sales. We might have a problem where sales and the profit margin are given and then require students to find the firm's net income. We explain to students in class before the exam that they will have to transpose terms in the formulas to work some problems.
Problems 57 to 86 are all stand-alone problems with individualized data, but problems 87 through 105 are all based on a common set of data, and they require students to calculate ratios and find items like EPS, TIE, and the like using this data set. The statements can be changed algorithmically, and this changes the calculated ratios and other items.
-Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

Accepted Answer

The total assets turnover ratio (TATO) is calculated by dividing sales by total assets. For Arshadi Corp., this is $52,000 / $22,000 = 2.36.

Question 19

HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Accepted Answer

The answer of HD Corp. and LD Corp. have identical...

Question 20

Beranek Corp. has $410,000 of assets, and it uses no debt--it is financed only with common equity. The 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?

Accepted Answer

The answer of Beranek Corp. has $410,000 of assets, and...

Quiz 3: Analysis of Financial Statements Part 2 Fixed Income Securities

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

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

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?

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?

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Companies HD and LD are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) . However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?

You 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?

HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?