Question 1

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.

Accepted Answer

Trend analysis involves analyzing changes in a firm's financial performance over time, rather than just looking at ratios for a single year. Therefore, the statement is true.

Question 2

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

Accepted Answer

The market/book ratio is calculated by dividing the stock price by the book value per share. So, $33.50 / $25.00 = 1.34.

Question 3

If 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.

Accepted Answer

Equity multiplier = Total assets/Total equity
Since the firm finances only with debt and equity, total assets = total debt + total equity

Equity multiplier = (total debt + total equity)/total equity

3 = (D+E)/E
3 = 1 + (D/E)
2 = D/E
D/E = 2

Debt ratio = total debt / total assets
= D / (D+E)
= 2 / (2+1)
= 0.667

Therefore, the statement is true.

Question 4

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?
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.

Accepted Answer

Since the firm's ROE is above the industry average, it is generating a higher return than its competitors for every dollar of equity invested. If its profit margin and debt ratio are both below the industry average, this means that the firm is efficient in generating profits and has a lower debt burden compared to its competitors. Therefore, to achieve a higher ROE with lower profitability and debt, the firm must have a higher total assets turnover ratio than the industry average, which means it is generating more sales from its assets.

Question 5

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.
 
-Refer to the data for Pettijohn Inc. What is the firm's market-to-book ratio?
A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08

Accepted Answer

The market-to-book ratio is calculated by dividing the market value of the firm's equity by its book value. The market value of equity (market capitalization) is found by multiplying the year-end stock price by the number of shares outstanding, which is $77.69 * 175 million = $13,595.75 million. The book value of equity is given as $12,600 million. Therefore, the market-to-book ratio is $13,595.75 million / $12,600 million = 1.08.

Question 6

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

Accepted Answer

The P/E ratio can be calculated by dividing the stock price by the earnings per share. Therefore, Vang Corp.'s P/E ratio would be:
P/E ratio = Stock price / Earnings per share
P/E ratio = $33.50 / $2.30
P/E ratio = 14.57
Therefore, the answer is choice B, 14.57.

Question 7

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.

Accepted Answer

Asset turnover ratios and profit margins are not directly correlated in this manner. A firm can have a high profit margin with a low asset turnover if it sells high-margin products less frequently, or a low profit margin with a high asset turnover if it sells low-margin products more frequently. The conditions described do not inherently lead to a correlation between profit margins and asset turnover ratios.

Question 8

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
A) Company Heidee has a lower times interest earned (TIE) ratio.
B) Company Heidee has a lower equity multiplier.
C) Company Heidee has more net income.
D) Company Heidee pays more in taxes.
E) Company Heidee has a lower ROE.

Accepted Answer

The answer of Companies Heidee and Leaudy have the same...

Question 9

Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?
A) Heidee would have the higher net income as shown on the income statement.
B) Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
C) Heidee would have the lower equity multiplier for use in the DuPont equation.
D) Heidee would have to pay more in income taxes.
E) Heidee would have the lower net income as shown on the income statement.

Accepted Answer

The answer of Heidee Corp. and Leaudy Corp. have identical...

Question 10

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 DuPont 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.

Accepted Answer

The ROE (Return on Equity) can increase even if the total assets turnover ratio decreases, provided the profit margin increases and the firm leverages more (increases its debt), assuming the cost of debt is not prohibitively high. This is because ROE is influenced by net profit margin, asset turnover, and financial leverage. An increase in profit margin and higher leverage (more debt) can offset the decrease in asset turnover, potentially leading to a higher ROE.

Question 11

Last year Vaughn Corp. had 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 DuPont equation, what was Vaughn's ROE?
A) 14.77%
B) 15.51%
C) 16.28%
D) 17.10%
E) 17.95%

Accepted Answer

The answer of Last year Vaughn Corp. had sales of...

Question 12

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

Accepted Answer

The answer of Stewart Inc.'s latest EPS was $3.50, its...

Question 13

Which of the following statements is CORRECT?
A) All else equal, increasing the debt ratio will increase the ROA.
B) The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
D) If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
E) Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

Accepted Answer

C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. This is because the equity multiplier is calculated as Total Assets/Total Equity, and using debt increases total assets without increasing equity, thus increasing the ratio.

Question 14

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%

Accepted Answer

The answer of Northwest Lumber had a profit margin of...

Question 15

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.
 
-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

Accepted Answer

The answer of Pettijohn Inc.
The balance sheet and income statement...

Question 16

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?
A) Company Heidee has a lower operating income (EBIT) than Company LD.
B) Company Heidee has a lower total assets turnover than Company Leaudy.
C) Company Heidee has a lower equity multiplier than Company Leaudy.
D) Company Heidee has a higher fixed assets turnover than Company Leaudy.
E) Company Heidee has a higher ROE than Company Leaudy.

Accepted Answer

The answer of Companies Heidee and Leaudy are virtually identical...

Question 17

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.
 
-Refer to the data for Pettijohn Inc. What is the firm's P/E ratio?
A) 12.0
B) 12.6
C) 13.2
D) 13.9
E) 14.6

Accepted Answer

The answer of Pettijohn Inc.
The balance sheet and income statement...

Question 18

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

Accepted Answer

First, we need to calculate the total amount of income to be paid out as dividends:

Income to be paid out = Net income x Payout ratio
Income to be paid out = $1,250,000 x 0.45
Income to be paid out = $562,500

Next, we need to calculate the dividend per share:

Dividend per share = Income to be paid out / Number of shares outstanding
Dividend per share = $562,500 / 225,000
Dividend per share = $2.50

Therefore, the dividend per share that should be declared is $2.50, which corresponds to option D.

Question 19

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
A) Company Heidee has more net income.
B) Company Heidee pays less in taxes.
C) Company Heidee has a lower equity multiplier.
D) Company Heidee has a higher ROA.
E) Company Heidee has a higher times interest earned (TIE) ratio.

Accepted Answer

The answer of Companies Heidee and Leaudy have the same...

Question 20

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.
 
-Refer to the data for Pettijohn Inc. What is the firm's book value per share?
A) $61.73
B) $64.98
C) $68.40
D) $72.00
E) $75.60

Accepted Answer

The book value per share is calculated by dividing the total common equity by the number of shares outstanding. From the data provided, the total common equity is $12,600 million and the shares outstanding are 175 million. Therefore, the book value per share is $12,600 / 175 = $72.00.

Quiz 3: Analysis of Financial Statements

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.

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?

If 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.

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?

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?

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

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

Which of the following statements is CORRECT?

Last year Vaughn Corp. had 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 DuPont equation, what was Vaughn's ROE?

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?

Which of the following statements is CORRECT?

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?

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

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?

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