Question 1

Current ratio and quick ratio 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 quick ratio subtracts inventory from other current assets.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

LeCompte Corp. has $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?

Accepted Answer

A)   7.57%
B)   7.95%
C)   8.35%
D)   8.76%E) B) and C)
F) A) and D)

Question 4

Which statement about inventories is correct?

Accepted Answer

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

Question 5

If a bank loan officer were considering a company's request for a loan, which of the following statements is correct?

Accepted Answer

A)   The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
B)   Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
C)   Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
D)   The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.E) None of the above
F) C) and D)

Question 6

-Refer to Scenario: Pettijohn Inc. What is the firm's quick ratio?

Accepted Answer

A)   0.49
B)   0.61
C)   0.73
D)   0.87E) B) and C)
F) All of the above

Question 7

Which of the following might represent a major distortion brought about by a move to implement "mark to market" accounting?

Accepted Answer

A)   A rise or fall in the market value of assets will not afford investors a better basis for assessing the future value of their investments.
B)   Uncertainty regarding whether the adjusted market prices reflect temporary or permanent changes to the asset's value may result in ambiguous signals when financial ratios are prepared.
C)   Financial statements represent historical information in that they reflect collective past performance (balance sheet)  and the most recent past performance (income statement) . As such, it is not necessary to adjust asset valuation to reflect current market values.
D)   Since prices change over time, "mark to market" is inferior to current accounting methods because a move to "mark to market" asset valuation will create a disconnect between past and future financial information.E) A) and B)
F) A) and C)

Question 8

Amram Company's current ratio is 1.9. Considered alone, which action would reduce the company's current ratio?

Accepted Answer

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

Question 9

Which of the following statements is correct?

Accepted Answer

A)   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.
B)   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.
C)   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.
D)   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.E) A) and B)
F) B) and C)

Question 10

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 Du Pont equation, what was Vaughn's ROE?

Accepted Answer

A)   14.77%
B)   15.51%
C)   16.28%
D)   17.10%E) B) and D)
F) A) and B)

Question 11

Which of the following statements is correct?

Accepted Answer

A)   The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
B)   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.
C)   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.
D)   Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favourable basis than income from stock.E) C) and D)
F) A) and D)

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

-Refer to Scenario: Pettijohn Inc. What is the firm's profit margin?

Accepted Answer

A)   1.40%
B)   1.56%
C)   1.73%
D)   1.93%E) None of the above
F) A) and B)

Question 14

-Refer to Scenario: Pettijohn Inc. What is the firm's TIE?

Accepted Answer

A)   1.94
B)   2.15
C)   2.39
D)   2.66E) All of the above
F) B) and C)

Question 15

One 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.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is correct?

Accepted Answer

A)   If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
B)   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.
C)   If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
D)   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.E) B) and C)
F) None of the above

Question 17

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is correct?

Accepted Answer

A)   Company E probably has fewer growth opportunities than company P.
B)   Company E is probably judged by investors to be riskier than company P.
C)   Company E must pay a lower dividend than company P.
D)   Company E trades at a higher P/E ratio than company P.E) A) and D)
F) All of the above

Question 18

An 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?

Accepted Answer

A)   $54,979
B)   $57,873
C)   $60,919
D)   $64,125E) B) and C)
F) None of the above

Question 19

-Refer to Scenario: Pettijohn Inc. What is the firm's dividends per share?

Accepted Answer

A)   $2.62
B)   $2.91
C)   $3.20
D)   $3.53E) B) and C)
F) A) and D)

Question 20

Even 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.

Accepted Answer

A) True 
 B)False

Exam 3: Analysis of Financial Statements

-Refer to Scenario: Pettijohn Inc. What is the firm's profit margin?

Correct Answer
verified

If a bank loan officer were considering a company's request for a loan, which of the following statements is correct?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

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 Du Pont equation, what was Vaughn's ROE?

Correct Answer
verified

Even 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.

Correct Answer
verified

-Refer to Scenario: Pettijohn Inc. What is the firm's TIE?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

One 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.

Correct Answer
verified

Which statement about inventories is correct?

Correct Answer
verified

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is correct?

Correct Answer
verified

Amram Company's current ratio is 1.9. Considered alone, which action would reduce the company's current ratio?

Correct Answer
verified

Current ratio and quick ratio 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 quick ratio subtracts inventory from other current assets.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

-Refer to Scenario: Pettijohn Inc. What is the firm's quick ratio?

Correct Answer
verified

Which of the following might represent a major distortion brought about by a move to implement "mark to market" accounting?

Correct Answer
verified

-Refer to Scenario: Pettijohn Inc. What is the firm's dividends per share?

Correct Answer
verified

Exam 3: Analysis of Financial Statements

-Refer to Scenario: Pettijohn Inc. What is the firm's profit margin?

Correct AnswerverifiedShow Answer

If a bank loan officer were considering a company's request for a loan, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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 Du Pont equation, what was Vaughn's ROE?

Correct AnswerverifiedShow Answer

Even 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.

Correct AnswerverifiedShow Answer

-Refer to Scenario: Pettijohn Inc. What is the firm's TIE?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

One 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.

Correct AnswerverifiedShow Answer

Which statement about inventories is correct?

Correct AnswerverifiedShow Answer

Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Amram Company's current ratio is 1.9. Considered alone, which action would reduce the company's current ratio?

Correct AnswerverifiedShow Answer

Current ratio and quick ratio 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 quick ratio subtracts inventory from other current assets.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

-Refer to Scenario: Pettijohn Inc. What is the firm's quick ratio?

Correct AnswerverifiedShow Answer

Which of the following might represent a major distortion brought about by a move to implement "mark to market" accounting?

Correct AnswerverifiedShow Answer

-Refer to Scenario: Pettijohn Inc. What is the firm's dividends per share?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified