Question 1

Please refer to Table 4-7 for the following question.
Table 4-7
Hokie Corporation Comparative Balance Sheet
For the Years Ending December 31, 2009 and 2010
(Millions of Dollars)
  
Hokie had net income of $28 million for 2010 and paid total cash dividends of $20 million to their common stockholders.
-Calculate the following 2010 financial ratios of Aggie Corporation using the information given in Table 4-7:
i.current ratio
ii.acid test ratio
iii.debt ratio
iv.return on total assets
v.return on common equity

Accepted Answer

The answer of Please refer to Table 4-7 for the...

Question 2

Rural Hydroponics has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000.What is Rural Hydroponics' total asset turnover?

Accepted Answer

Total Asset Turnover = Sales / Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Ending Total Assets = Total Equities + Total Liabilities = $560,000 + $435,000 = $995,000
Beginning Total Assets = Ending Total Assets - Increase in Current Assets
Increase in Current Assets = Current Assets - Previous Current Assets
Previous Current Assets = Current Assets - Increase in Current Assets
Assuming increase in current assets is equal to 0, Previous Current Assets = $700,000
Beginning Total Assets = $995,000 - ($700,000 - $0) = $295,000
Average Total Assets = ($295,000 + $995,000) / 2 = $645,000
Total Asset Turnover = $2,250,000 / $645,000 = 3.49 (rounded to two decimal places)
Therefore, the best choice is C.

Question 3

Blanton Corporation increased its financial leverage during 2010 by taking out a loan and using the proceeds to buy back common stock.At the end of 2010,the corporation reported higher earnings per share and higher return on equity.However,its stock price declined.Discuss why this may happen.

Accepted Answer

The answer of Blanton Corporation increased its financial leverage during...

Question 4

TransSystems Inc.has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000.What is TransSystems Inc.'s debt ratio?

Accepted Answer

The formula for debt ratio is Total Debt/Total Assets.
Total Debt = Total Assets - Total Equity, thus Total Debt = 995,000 - 560,000 = 435,000.
Debt Ratio = Total Debt/Total Assets = 435,000/995,000 = 0.437 or 43.7%.

Question 5

All of the following will improve a firm's liquidity position EXCEPT

Accepted Answer

Option C is the only one that will not improve a firm's liquidity position. Increasing the average collection period means that the firm is taking longer to collect its accounts receivable, which can result in cash flow problems and decrease the firm's liquidity position. All other options (increasing accounts receivable turnover, increasing inventory turnover, and investing in marketable securities) would enhance the firm's liquidity position. Option D may depend on the interest rate of the long-term debt and the return on the marketable securities, but in general, it would increase the liquidity position.

Question 6

Bill's Bike Shop has a return on assets of 12%.Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60.What is Bill's return on equity?

Accepted Answer

Bill's return on equity (ROE) can be calculated using the formula ROE = Return on Assets (ROA) / (1 - Debt/Assets). Given ROA = 12%, Debt = $60, and Assets = $100, the calculation is 12% / (1 - 60/100) = 30%.

Question 7

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

Accepted Answer

Liquidity ratios are used to determine a company's ability to meet its short-term obligations. This includes the ability to pay bills and other current liabilities. Therefore, a firm that wants to know if it has enough cash to meet its bills would most likely use a liquidity ratio such as the current ratio, which measures a company's current assets relative to its current liabilities.

Question 8

Beverly Corp.had total sales of $1,200,000 in 2010 (80 percent of its sales are credit).The company's gross profit margin is 25 percent,its ending inventory is $150,000,and its accounts receivable balance is $90,000.What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?

Accepted Answer

The answer of Beverly Corp.had total sales of $1,200,000 in...

Question 9

Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?

Accepted Answer

The answer of Assume that a firm issues a six-month...

Question 10

Please refer to Table 4-6 for the following question.
Table 4-6
Financial Data for Springfield Power Co. as of December 31, 2010:
 
-From the information presented in Table 4-6,calculate the following ratios for the Springfield Power Co.
i.current ratio
ii.acid test ratio
iii.average collection period
iv.inventory turnover
v.gross profit margin
vi.operating profit margin
vii.net profit margin
viii.total asset turnover

Accepted Answer

The answer of Please refer to Table 4-6 for the...

Question 11

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

Accepted Answer

Imposing stricter credit terms can lead to a shorter average collection period, higher accounts receivable turnover (as receivables are collected more quickly), and potentially lower sales due to the stricter credit conditions deterring some customers.

Question 12

Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000.What is Denver Systems' return on equity?

Accepted Answer

The answer of Denver Systems has total assets of $1,000,000;...

Question 13

RBW Corp.has cash of $48,000; short-term notes payable of $35,000,accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000.What is RBW's current ratio?

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Current assets are $48,000 (cash) + $100,000 (accounts receivable) + $200,000 (inventories) = $348,000. Current liabilities are $35,000 (short-term notes payable) + $120,000 (accounts payable) + $90,000 (accruals) = $245,000. The current ratio is $348,000 / $245,000 = 1.42.

Question 14

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Accepted Answer

The current ratio is calculated by dividing the current assets by the current liabilities. If the company borrows $10,000 and puts it into the checking account, the current assets will increase by $10,000 but the current liabilities will remain the same. Therefore, the current ratio will increase only if the ratio was less than one before the transaction. If the ratio was already equal to or greater than one, adding $10,000 to current assets will not change the ratio.

Question 15

SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000.What is SNL's times-interest-earned ratio?

Accepted Answer

The times-interest-earned ratio is calculated as (Gross Profit - Operating Costs) / Interest Expense. Here, it's ($825,000 - $620,000) / $18,000 = $205,000 / $18,000 = 11.4.

Question 16

Which of the following ratios would be the best way to determine how customers are paying for their purchases?

Accepted Answer

The average collection period ratio measures how long it takes customers to pay their outstanding invoices, so it would be the best way to determine how customers are paying for their purchases.

Question 17

Which of the following has the most significant influence on return on equity?

Accepted Answer

Operating income directly impacts the numerator of the return on equity formula (net income/equity), making it the most significant factor influencing return on equity. Common dividends and principal payments impact equity, but not the numerator. Accruals impact both the numerator and the denominator, but they are typically less significant than operating income.

Question 18

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit?

Accepted Answer

The acid test ratio, also known as the quick ratio, measures a company's ability to pay off its current liabilities with its current assets excluding inventory. This ratio provides insight into a company's ability to meet short-term financial obligations and is therefore useful in assessing the risk associated with a firm being able to pay off its short-term line of credit. Return on equity, operating profit margin, and fixed asset turnover do not provide specific information on a company's ability to meet short-term financial obligations.

Question 19

Complete the following balance sheet using the information given.Round account balances to the nearest dollar.

Accepted Answer

The answer of Complete the following balance sheet using the...

Question 20

During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000.The result of this growth will be

Accepted Answer

The operating profit margin is calculated as EBIT/Sales. Initially, it was 250,000/1,000,000 = 25%. After the growth, it became 400,000/2,000,000 = 20%, indicating a lower operating profit margin. However, because EBIT increased from $250,000 to $400,000, net income also increased, assuming no changes in interest expenses and tax rates.

Quiz 4: Evaluating a Firms Financial Performance