MIDTERM-FS ANALYSIS-TEST

1. When calculating a firm’s free cash flow from earnings before interest and taxes we must
add back depreciation, amortization and depletion expense and allowances because
a. they are non-cash expenditures.
b. the accounting method for reporting such expenses may be different from
that reported to the taxing authority.
c. they approximate the value of fixed asset purchases during the year.
d. they are unrelated to the amount of taxes paid during the year.

2. When calculating the dollar amount of fixed assets purchased during the year what
information is required? Assume that no fixed assets were disposed of during the year.
a. the current and prior year’s gross fixed assets
b. the current and prior year’s net fixed assets
c. the current and prior year’s net fixed assets plus the firm’s depreciation
expense for the year.
d. either a or c will suffice

Cold Weather Sports, Inc. (CWS)

Cold Weather Sports, Inc. (CWS) just completed its 2003 fiscal year. During the year, CWS
had sales of $10,000 and total expenses (no interest expenses were incurred) of $6,000.
Assume that CWS pays 30% of its EBIT in taxes and that depreciation expense of $1,200
is included in the total expense number listed above. A list of some balance sheet items for
CWS for end of fiscal year 2002 and 2003 is as below.

2002
Current Assets $1,000
Net Long-Term Assets 5,000
Accounts Payable 600
Accrued Expenses 500
Short-Term Debt 2,000
Long-Term Debt 3,000

2003
Current Assets $1,200
Net Long-Term Assets 5,600
Accounts Payable 800
Accrued Expenses 600
Short-Term Debt 2,100
Long-Term Debt 3,200

No fixed assets were disposed of during the year.

3. What is Cold Weather Sports’ operating cash flow for 2003?

a. $2,400
b. $2,800
 c. $4,000
d. none of the above

4. What was the dollar amount of fixed assets purchased during the year for Cold Weather
Sports?
a. $600
b. $1,200
c. $1,800
d. none of the above

5. What is the amount of free cash flow generated by Cold Weather Sports in 2003?
a. $100
b. $2,100
c. $2,300
d. none of the above

6. The effect of an increase in a firm’s accounts payable during the year, assuming that the
current asset portion of the balance sheet remains the same, is
a. an outflow of cash.
b. an inflow of cash.
c. neither an inflow nor an outflow of cash.
d. a decrease in the equity of the firm.

7.Granny’s Jug Herbal Shop has total current liabilities of $2,000 and an inventory of $1,000. If its
current ratio is 2.5, then what is its quick ratio?
a. 2.0
b. 2.5
c. 3.0
d. 3.5

8. Wunder Boy Bat Co. has an average age of inventory equal to 121.67 days. If its end of
year inventory level is $4,000, then what does that imply for the cost of goods sold during
the year? (round to the nearest dollar)
a. $1,333
b. $3,000
c. $12,000
d. $16,000

9. The firm that you work for had credit sales of $3,500,000 last year and on average had
$33,000 in its accounts receivable during the year. What is its average collection period?
a. 3 days
b. 3.44 days
c. 3.5 days
d. none of the above
10. In general, the more debt a firm uses in relation to its total assets
a. the less risk there is to the equity holders of the firm.
b. the less financial leverage it uses.
c. the greater the financial leverage it uses.
d. the greater extent to which it uses equity.

11. Devil Inc. has total liabilities equal to $3,500 and total assets equal to $5,000. What is
Devil’s asset-to-equity ratio?
a. 1.43
b. 2.33
c. 3.33
d. none of the above

12. Straw Corp has an operating profit of $1,200 produced from $9,800 in sales. If Straw has
no interest expense and currently pays 35% of its operating profits in taxes and $200 per
year in preferred dividends, then what is Straw’s net profit margin?
a. 5.92%
b. 7.96%
c. 7.96%
d. 10.20%

13. Straw Corp has an operating profit of $1,200 produced from $20,000 in total assets. If
Straw has no interest expense and currently pays 35% of its operating profits in taxes and
$200 per year in preferred dividends, then what is Straw’s net profit margin?
a. 2.90%
b. 3.90%
c. 5.0%
d. none of the above

Import, Inc.
Import, Inc. has earnings available for common shareholders of $700 produced by sales of
$10,000. It also has total assets of $20,000 and an assets to equity ratio of 2.5.

14. What is Import Inc.’s return on assets?

a. 14%
b. 7%
c. 3.5%
d. none of the above

15. What is Import Inc.’s return on common equity?

a. 7.0%
b. 8.75%
c. 17.5%
d. none of the above
16.FactorMax is currently selling for $75 per share. If it is selling at a P/E ratio of 50, calculate
FactorMax’s recent earnings per share.
a. $.15
b. $.67
c. $1.50
d. none of the above

17. What is the financial ratio that measures the price per share of stock divided by earnings
per share?
a. Return on assets
b. Return on equity
c. Debt-equity ratio
d. Price-earnings ratio

Stone Cold Incorporated

Balance Sheet: 12/31/04

Assets 2004 2003
Cash and Marketable Securities 10 80
Accounts Receivable 375 315
Inventories 615 415
Total Current Assets 1,000 810
Net plant and equipment 1,000 870
TOTAL ASSETS 2,000 1,680

Liabilities and Equity 2004 2003

Accounts Payable 60 40
Notes Payable 140 60
Accruals 110 130
Total Current Liabilities 310 230
Long Term Bonds 754 580
TOTAL DEBT 1,064 810
Preferred Stock 40 40
Common Stock 130 130
Retained earnings 766 700
TOTAL COMMON EQUITY 896 830
TOTAL LIABILITIES AND EQUITY 2,000 1,680

Income Statement: 12/31/04 2004 2003

Net Sales 3,200 2,850
Operating Costs (excludes Dep/Amortization) 2,700 2,497
EBITDA 500 353
Depreciation 100 90
Amortization 0 0
Depreciation and Amortization 100 90
 EBIT 400 263
Less Interest 88 60
EBT 312 203
Taxes (40%) 124.8 81.2
NET INCOME (before Preferred Dividends) 187.2 121.8
Preferred Dividends 4 4
NET INCOME 183.2 117.8
Common Dividends 117 53
Addition to Retained Earnings 66.2 64.8

18. Refer to Stone Cold. For 2004, what was the return on assets?
a. 9.16%
b. 12.40%
c. 15.60%
d. 20.00%

19. Refer to Stone Cold. For 2004, what was the return on common equity?
a. 9.36%
b. 12.40%
c. 20.44%
d. 20.90%

20. Refer to Stone Cold. For 2004, what was the debt-to-equity ratio?
a. 0.81
b. 0.84
c. 0.98
d. 1.19

21. Refer to Stone Cold. For 2004, what was the average collection period for the firm in 2004?
a. 6.84 days
b. 8.77 days
c. 42.77 days
d. 51.22 days

22. Refer to Stone Cold. For 2004, what was the total asset turnover for 2004?
a. 0.80
b. 1.20
c. 1.40
d. 1.60

23. Refer to Stone Cold. For 2004, what was the times interest earned ratio for 2004?
a. 2.13
b. 2.77
c. 3.55
d. 4.55
24. What was the free cash flow in 2004 for Stone Cold Incorporated?
a. -$55.20
b. -$44.80
c. $145.20
d. $215.00

25. Consider the following financial information for Classic City Ice Cream Corporation:

2004 Financial Data

Net Income $ 50,000
Total Assets $300,000
Total Shareholder Equity $200,000
Net Sales $100,000

What is the total asset turnover for the firm in 2004?

a. 16.67%
b. 25.00%
c. 33.33%
d. 40.00%

26. Consider the following financial information for Classic City Ice Cream Corporation:

2004 Financial Data

Net Income $ ???,???
Total Assets $250,000
Total Shareholder Equity $200,000
Net Sales $100,000

If the return on equity is 20%, what was Net Income for 2004?
a. $25,000
b. $40,000
c. $50,000
d. $65,000

Titans Electronics
Titans Electronics reports the following data for the past year:

EBIT $1,000,000 # of Common shares 400,000

Net Income $ 480,000 Total Dividends Paid $120,000
Interest Paid $ 200,000 Current Assets $ 80,000
Total Assets $6,000,000 Current Liabilities $ 60,000
Market Price of
Common equity $ 20
27. What is the current P/E ratio for the Titans?
a. 8.00
b. 10.00
c. 15.50
d. 16.67

28. Titans Electronics is applying for a new line of credit from their banking partner. To issue
the credit, the bank requires the following cutoffs for certain financial ratios:

TIE ratio of 4.25 Current Ratio of 1.50 ROA of 5%.

What is a likely response from the bank to the application?

a. The bank will have reservations, as the TIE ratio does not meet
requirements.
b. The bank will have concerns, as the current ratio does not meet
requirements.
c. The bank will have concerns, as the ROA is not high enough.
d. The bank will have concerns, as two or more of the requirements are not
met.

Exhibit 2-1
The tax schedule for corporate income is shown in the table below:

Taxable Income Over Not Over Tax Rate

$ 0 $ 50,000 15.00%
50,000 75,000 25.00%
75,000 100,000 34.00%
100,000 335,000 39.00%
335,000 500,000 34.00%
10,000,000 15,000,000 35.00%
15,000,000 18,333,333 38.00%
18,333,333 ............... 35.00%

29. Refer to Exhibit 2-1. Pale Rider Corporation reports taxable income of $500,000 in 2004.
What was their tax liability for the year?
a. $56,100
b. $91,650
c. $170,000
d. $200,000

30. Refer to Exhibit 2-1. Pale Rider Corporation reports taxable income of $500,000 in 2004.
What was the average tax rate they paid for the year?
a. 23.25%
b. 25.00%
c. 29.40%
 d. 34.00%

31. Refer to Exhibit 2-1. Big Diesel Incorporated reports taxable income of $200,000 in 2004.
What was the average tax rate they paid for the year?
a. 25.00%
b. 29.40%
c. 30.63%
d. 34.00%

32. Refer to Exhibit 2-1. Big Diesel Incorporated currently predicts taxable income of $200,000
for the next year. If this is their actual income, what will be the tax liability for Big Diesel?
a. $45,250
b. $56,500
c. $61,250
d. $91,650

33. What ratio measures the ability of the firm to satisfy its short term obligations as they come
due?
a. Activity ratio
b. Times interest earned ratio
c. Current ratio
d. Inventory turnover ratio

34. The asset to equity ratio for a firm is 1.5, and the firm has total assets of $6,000,000. Last
year, net income for the firm was $250,000, and the earnings per share for the firm was
reported as $0.50. If the current price-to-earnings ratio is 20, what is the current market-to-
book ratio for the firm?
a. 0.60
b. 0.80
c. 1.00
d. 1.25

35. The asset to equity ratio for a firm is 1.5, and the firm has total assets of $3,000,000. Last
year, net income for the firm was $250,000, and the earnings per share for the firm was
reported as $0.50. What is the current book value per share for the firm?
a. $2
b. $4
c. $6
d. $8

36. Which financial ratio measures the effectiveness of management in generating returns to
common stockholders with its available assets?
a. Gross profit margin
b. Return on equity
 c. Return on assets
d. Current ratio

37. When is the return on assets equal to the return on equity?

a. When the current ratio of the firm equals 1.
b. When the firm issues equal amounts of long term debt and common stock.
c. When the firm issues no dividends for a given time period.
d. When the firm only issues equity to finance its borrowing.

38. Consider the following working capital information for Full House Corporation:

Year 2003 2004

Accounts Receivable $ 0 $100
Inventory $100 $100
Accounts Payable $ 0 $ 50

What was the effect on free cash flow for the firm this past year?
a. Increase of $100
b. Increase of $150
c. Decrease of $50
d. Decrease of $100

39. A firm reports net income of $500,000 for 2004. The most recent balance sheet for the
reports retained earnings of $2,000,000. The firm will pay out 25% of net income as
dividends. What will the new balance be for retained earnings?
a. $1,875,000
b. $2,125,000
c. $2,375,000
d. $2,500,000

40. A firm reports a current ratio of 2 and a quick ratio of 1.2. The firm has total current assets
of $4,000. If the firm reports cost of goods sold at $25,000 for the given year, what is the
average age of their inventory?
a. 12.35 days
b. 15.63 days
c. 18.24 days
d. 23.36 days

41. The average age of the inventory for a firm is 10 days old. If the current dollar amount of
inventory is $1,000, what is a good estimate for the cost of goods sold over the last year?
a. $16,500
b. $26,500
c. $32,500
d. $36,500
 42. Accountants:
a. generally construct financial statements using the cash-based approach
b. generally construct financial statements using the accrual-based approach
c. must apply Generally Accepted Accounting Principles to fairly portray how
the firm has performed in the past
d. must apply Generally Accepted Accounting Principles to fairly portray how
the firm will perform in the future
e. both (b) and (c)

43.Which of the following statements is true?

a. Financial professionals prefer the accrual-based approach as it focuses
more attention on cash inflows and outflows
b. Financial managers do not need to make any adjustments to financial
statements for decision-making
c. Financial managers must convert cash-based financial statements to
accrual-based ones before they can begin analyzing a firm
d. Financial professionals prefer the cash-based approach as it focuses more
attention on cash inflows and outflows

44. Which of the following statements is false?

a. On the balance sheet a firm's assets are listed in ascending order of
liquidity.
b. In a common size balance sheet, all assets are expressed as a percentage
of sales.
c. Net property, plant and equipment represents the original value of all real
property, structures and long-lived equipment owned by the corporation.
d. all of the above statements are false

45. The Statement of Retained Earnings

a. reconciles the net income earned during a given time period and any cash
dividends paid with the change in Retained Earnings between the start and
end of that period.
b. shows a snapshot of the firm's financial position at a specific point in time
c. reconciles the net income earned during a given time period and any cash
dividends and interest on debt paid with the change in Retained Earnings
between the start and end of that period
d. shows the impact of Treasury Stock on the firm's Common Equity

46. Which of the following statements is false?

a. The Notes to Financial Statements provide little information that is relevant
to professional security analysts.
b. The Notes to Financial Statements provide additional information about a
firm, including employee compensation plans, revenue recognition
practices and leases.
 c. The Notes to Financial Statements provide detailed explanatory information
that is keyed to various accounts on the financial statements.
d. all of the above statements are true
e. both (a) and (c) are false

47. Which of the following is not a classification of a firm's cash flows:

a. investment flows
b. financial flows
c. operating flows
d. capital flows

48. Which of the following represents an inflow of cash?

a. A decrease in any liability
b. Dividends paid
c. repurchase or retirement of stock
d. an increase in any asset
e. A decrease in any asset

49. How is depreciation accounted for on the Statement of Cash Flows?

a. Depreciation is irrelevant for cash flow purposes and has no place on the
Statement of Cash Flows.
b. Depreciation expense is included in the operating activities section of the
statement.
c. As depreciation is deducted to determine Net Income there is no need to
include it on the statement.
d. none of the above

50. The Statement of Cash Flows is helpful to financial managers in that:

a. It calls attention to unusual changes in either the major categories of cash
flow or specific items so that the financial manager can pinpoint problems
the firm may be having
b. It calls attention to the expenses deducted to determine net income.
c. Financial managers can create pro forma statements to determine whether
or not the firm will need additional external financing.
d. All of the above
e. Both (a) and (c)

51. Which of the following statements is false?

a. A firm's creditors are primarily interested in a firm's Activity Ratios.
b. Norms exist for all financial ratios that can be applied across all industries.
c. Current and future stockholders are most interested in a firm's short-term
liquidity ratios.
d. All of the above statements are false.

52. Which of the following statements is true?

a. Net working capital is a firm’s current assets divided by its current liabilities.
 b. Net working capital is a firm's current assets minus its current liabilities.
c. Net working capital measures a firm's ability to meet its short-term
obligations.
d. All of the above statements are false.

53. The DuPont system:

a. breaks the ROA and ROE ratios into component pieces
b. requires data from only the balance sheet
c. evaluates ROA the product of a firm's profit on its sales and the efficiency
of the firm to generate sales from its investment in its assets
d. all of the above
e. Both (a) and (c)

54. Use the following information to determine Bill's Solvency Ratio.

Total net worth: $150,000

Cash surplus: $15,000
Income after taxes: 105,000
Total assets: $300,000
a. 14.29%
b. 50%
c. 2
d. None of the above

____ 55. Considered alone, which of the following would INCREASE a company’s current ratio?
a. An increase in net fixed assets.
b. An increase in accrued liabilities.
c. An increase in notes payable.
d. An increase in accounts receivable.
e. An increase in accounts payable.

____ 56. Which of the following would, generally, indicate an IMPROVEMENT in a company’s
financial position, holding other things constant?
a. The TIE declines.
b. The DSO increases.
c. The quick ratio increases.
d. The current ratio declines.
e. The total assets turnover decreases.

____ 57. A firm wants to strengthen its financial position. Which of the following actions would
INCREASE its current ratio?
a. Reduce the company’s days’ sales outstanding to the industry average and
use the resulting cash savings to purchase plant and equipment.
b. Use cash to repurchase some of the company’s own stock.
 c. Borrow using short-term debt and use the proceeds to repay debt that has
a maturity of more than one year.
d. Issue new stock, then use some of the proceeds to purchase additional
inventory and hold the remainder as cash.
e. Use cash to increase inventory holdings.

____ 58. Which of the following statements is CORRECT?

a. A reduction in inventories 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. If a firm increases its sales while holding its inventories constant, then,
other things held constant, its fixed assets turnover ratio will decline.

____ 59. 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?
a. Company E probably has fewer growth opportunities.
b. Company E is probably judged by investors to be riskier.
c. Company E must have a higher market-to-book ratio.
d. Company E must pay a lower dividend.
e. Company E trades at a higher P/E ratio.

____ 60. Which of the following statements is CORRECT?

a. Borrowing by using short-term notes payable and then using the proceeds
to retire long-term debt is an example of “window dressing.” Offering
discounts to customers who pay with cash rather than buy on credit and
then using the funds that come in quicker to purchase additional
inventories is another example of “window dressing.”
b. Borrowing on a long-term basis and using the proceeds to retire short-term
debt would improve the current ratio and thus could be considered to be an
example of "window dressing."
c. Offering discounts to customers who pay with cash rather than buy on
credit and then using the funds that come in quicker to purchase fixed
assets is an example of “window dressing.”
d. Using some of the firm’s cash to reduce long-term debt is an example of
“window dressing.”
e. “Window dressing” is any action that does not improve a firm’s fundamental
long-run position and thus increases its intrinsic value.
____ 61. Casey Communications recently issued new common stock and used the proceeds to pay
off some of its short-term notes payable. This action had no effect on the company’s total
assets or operating income. Which of the following effects would occur as a result of this
action?
a. The company’s current ratio increased.
b. The company’s times interest earned ratio decreased.
c. The company’s basic earning power ratio increased.
d. The company’s equity multiplier increased.
e. The company’s debt ratio increased.

____ 62. A firm’s new president wants to strengthen the company’s financial position. Which of the
following actions would make it FINANCIALLY stronger?
a. Increase accounts receivable while holding sales constant.
b. Increase EBIT while holding sales and assets constant.
c. Increase accounts payable while holding sales constant.
d. Increase notes payable while holding sales constant.
e. Increase inventories while holding sales constant.

____ 63. If the CEO of a large, diversified, firm were filling out a fitness report on a division manager
(i.e., “grading” the manager), which of the following situations would be likely to cause the
manager to receive a BETTER GRADE? In all cases, assume that other things are held
constant.
a. The division’s basic earning power ratio is above the average of other firms
in its industry.
b. The division’s total assets turnover ratio is below the average for other
firms in its industry.
c. The division’s debt ratio is above the average for other firms in the industry.
d. The division’s inventory turnover is 6, whereas the average for its
competitors is 8.
e. The division’s DSO (days’ sales outstanding) is 40, whereas the average
for its competitors is 30.

____ 64. Which of the following would indicate an IMPROVEMENT in a company’s financial position,
holding other things constant?
a. The inventory and total assets turnover ratios both decline.
b. The debt ratio increases.
c. The profit margin declines.
d. The times-interest-earned ratio declines.
e. The current and quick ratios both increase.

____ 65. If a bank loan officer were considering a company’s loan request, which of the following
statements would you consider to be CORRECT?
 a. The lower the company’s inventory turnover ratio, other things held
constant, the lower the interest rate the bank would charge the firm.
b. Other things held constant, the higher the days sales outstanding ratio, the
lower the interest rate the bank would charge.
c. Other things held constant, the lower the debt ratio, the lower the interest
rate the bank would charge.
d. The lower the company’s TIE ratio, other things held constant, the lower
the interest rate the bank would charge.
e. Other things held constant, the lower the current ratio, the lower the
interest rate the bank would charge the firm.

____ 66. Which of the following statements is CORRECT?

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. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is
used because interest is paid with post-tax dollars, so the firm's ability to
pay current interest is affected by taxes.
e. All else equal, increasing the debt ratio will increase the ROA.

____ 67. A firm wants to strengthen its financial position. Which of the following actions would
INCREASE its quick ratio?
a. 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.
b. Issue new common stock and use the proceeds to increase inventories.
c. Speed up the collection of receivables and use the cash generated to
increase inventories.
d. Use some of its cash to purchase additional inventories.
e. Issue new common stock and use the proceeds to acquire additional fixed
assets.

____ 68. Amram Company’s current ratio is 2.0. Considered alone, which of the following actions
would LOWER the current ratio?
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 accruals.
 d. Use cash to reduce short-term notes payable.
e. Use cash to reduce accounts payable.

____ 69. Which of the following statements is CORRECT?

a. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was
higher than the industry average, and was increasing and trending still
higher, this would be interpreted as a sign of strength.
b. A high average DSO indicates that none of its customers are paying on
time. In addition, it makes no sense to evaluate the firm's DSO with the
firm's credit terms.
c. There is no relationship between the days’ sales outstanding (DSO) and
the average collection period (ACP). These ratios measure entirely
different things.
d. A reduction in accounts receivable would have no effect on the current
ratio, but it would lead to an increase in the quick ratio.
e. If a firm increases its sales while holding its accounts receivable constant,
then, other things held constant, its days’ sales outstanding will decline.

____ 70. Which of the following statements is CORRECT?

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. A firm’s use of debt will have no effect on its profit margin.
c. 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 and a lower return on assets.
d. 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.
e. 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 operating margin and return
on assets.

____ 71. Which of the following statements is CORRECT?

a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios
must also be equal.
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/or be expected to grow at a faster rate.
e. 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.

____ 72. 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
increase.
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%. Without additional information, we cannot
tell what will happen to the ROE.
c. The DuPont equation provides information about how operations affect the
ROE, but the equation does not include the effects of debt on the ROE.
d. Other things held constant, an increase in the debt ratio will result in an
increase in the profit margin.
e. 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.

____ 73. 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 be above the industry average.
b. Its return on assets must equal the industry average.
c. Its TIE ratio must be below the industry average.
d. Its total assets turnover must be below the industry average.
e. Its total assets turnover must equal the industry average.

____ 74. 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?
a. Company HD has a lower total assets turnover than Company LD.
b. Company HD has a lower equity multiplier than Company LD.
c. Company HD has a higher fixed assets turnover than Company LD.
d. Company HD has a higher ROE than Company LD.
e. Company HD has a lower operating income (EBIT) than Company LD.
____ 75. 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?
a. The ROA will decline.
b. Taxable income will decline.
c. The tax bill will increase.
d. Net income will decrease.
e. The times-interest-earned ratio will decrease.

____ 76. Which of the following statements is CORRECT?

a. The ratio of long-term debt to total capital is more likely to experience
seasonal fluctuations than is either the DSO or the inventory turnover ratio.
b. If two firms have the same ROA, the firm with the most debt can be
expected to have the lower ROE.
c. An increase in the DSO, other things held constant, could be expected to
increase the total assets turnover ratio.
d. An increase in the DSO, other things held constant, could be expected to
increase the ROE.
e. An increase in a firm’s debt ratio, with no changes in its sales or operating
costs, could be expected to lower its net profit margin.

____ 77. 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?
a. Without more information, we cannot tell if HD or LD would have a higher
or lower net income.
b. HD would have the lower equity multiplier for use in the DuPont equation.
c. HD would have to pay more in income taxes.
d. HD would have the lower net income as shown on the income statement.
e. HD would have the higher operating margin.

____ 78. 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?
a. Company HD pays less in taxes.
b. Company HD has a lower equity multiplier.
c. Company HD has a higher ROA.
d. Company HD has a higher times-interest-earned (TIE) ratio.
e. Company HD has more net income.
____ 79. 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?
a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times-interest-earned (TIE) ratio.

____ 80. Which of the following statements is CORRECT?

a. If a firm has high current and quick ratios, this always indicate that the firm
is managing its liquidity position well.
b. If a firm sold some inventory for cash and left the funds in its bank account,
its current ratio would probably not change much, but its quick ratio would
decline.
c. If a firm sold some inventory on credit, its current ratio would probably not
change much, but its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no
reason to think that either its current or quick ratio would change.
e. The inventory turnover ratio and days sales outstanding (DSO) are two
ratios that are used to assess how effectively a firm is managing its current
assets.

____ 81. Which of the following statements is CORRECT?

a. A decline in a firm's inventory turnover ratio suggests that it is improving
both its inventory management and its liquidity position, i.e., that it is
becoming more liquid.
b. In general, it's better to have a low inventory turnover ratio than a high one,
as a low one indicates that the firm has an adequate stock of inventory
relative to sales and thus will not lose sales as a result of running out of
stock.
c. If a firm's fixed assets turnover ratio is significantly lower than its industry
average, this could indicate that it uses its fixed assets very efficiently or is
operating at over capacity and should probably add fixed assets.
d. The more conservative a firm's management is, the higher its debt ratio is
likely to be.
e. The days sales outstanding ratio tells us how long it takes, on average, to
collect after a sale is made. The DSO can be compared with the firm's
credit terms to get an idea of whether customers are paying on time.

____ 82. Which of the following statements is CORRECT?

a. Other things held constant, the more debt a firm uses, the higher its
 operating margin will be.
b. Debt 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.
c. Other things held constant, the more debt a firm uses, the higher its profit
margin will be.
d. Other things held constant, the higher a firm's debt ratio, the higher its TIE
ratio will be.
e. Debt management ratios show the extent to which a firm's managers are
attempting to reduce risk through the use of financial leverage. The higher
the debt ratio, the lower the risk.

____ 83. Which of the following statements is CORRECT?

a. Other things held constant, the less debt a firm uses, the lower its return on
total assets will be.
b. The advantage of the basic earning power ratio (BEP) over the return on
total assets for judging a company's operating efficiency is that the BEP
does not reflect the effects of debt and taxes.
c. The return on common equity (ROE) is generally regarded as being less
significant, from a stockholder's viewpoint, than the return on total assets
(ROA).
d. The price/earnings (P/E) ratio tells us how much investors are willing to pay
for a dollar of current earnings. In general, investors regard companies
with higher P/E ratios as being more risky and/or less likely to enjoy higher
future growth.
e. Suppose you are analyzing two firms in the same industry. Firm A has a
net profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt
ratio is 70% versus 20% for Firm B. Based only on these two facts, you
cannot reach a conclusion as to which firm is better managed, because the
difference in debt, not better management, could be the cause of Firm A's
higher profit margin.

____ 84. Which of the following statements is CORRECT?

a. In general, if investors regard a company as being relatively risky and/or
having relatively poor growth prospects, then it will have relatively high P/E
and M/B ratios.
b. The basic earning power ratio (BEP) reflects the earning power of a firm's
assets after giving consideration to financial leverage and tax effects.
c. The "apparent," but not necessarily the "true," financial position of a
company whose sales are seasonal can change dramatically during a
given year, depending on the time of year when the financial statements
are constructed.
d. The market/book (M/B) ratio tells us how much investors are willing to pay
for a dollar of accounting book value. In general, investors regard
 companies with higher M/B ratios as being more risky and/or less likely to
enjoy higher future growth.
e. It 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.

____ 85. Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions
would INCREASE the company’s current ratio?
a. Borrow using short-term notes payable and use the cash to increase
inventories.
b. Use cash to reduce accruals.
c. Use cash to reduce accounts payable.
d. Use cash to reduce short-term notes payable.
e. Use cash to reduce long-term bonds outstanding.

____ 86. 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?
a. The transactions would improve Safeco’s financial strength as measured
by its current ratio but lower Risco’s current ratio.
b. The transactions would lower Safeco’s financial strength as measured by
its current ratio but raise Risco’s current ratio.
c. The transactions would have no effect on the firm’ financial strength as
measured by their current ratios.
d. The transactions would lower both firm’ financial strength as measured by
their current ratios.
e. The transactions would improve both firms’ financial strength as measured
by their current ratios.

____ 87. 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?
a. Given this information, LD must have the higher ROE.
b. Company LD has a higher basic earning power ratio (BEP).
c. Company HD has a higher basic earning power ratio (BEP).
d. If the interest rate the companies pay on their debt is more than their basic
earning power (BEP), then Company HD will have the higher ROE.
e. If the interest rate the companies pay on their debt is less than their basic
earning power (BEP), then Company HD will have the higher ROE.
____ 88. Which of the following statements is CORRECT?
a. 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 B's.
b. 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.
c. 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.
d. Suppose all firms follow similar financing policies, face similar risks, have
equal access to capital, and operate in competitive product and capital
markets. However, firms face different operating conditions because, for
example, the grocery store industry is different from the airline industry.
Under these conditions, firms with high profit margins will tend to have high
asset turnover ratios, and firms with low profit margins will tend to have low
turnover ratios.
e. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of
1.5 times, a zero debt ratio and therefore an equity multiplier of 1.0, and an
ROE of 7.5%. The CFO recommends that the firm borrow money, use it to
buy back stock, and raise the debt ratio to 50% and the equity multiplier to
2.0. She thinks that operations would not be affected, but interest on the
new debt would lower the profit margin to 4.5%. This would probably not
be a good move, as it would decrease the ROE from 7.5% to 6.5%.

____ 89. Ryngard Corp's sales last year were $27,000, and its total assets were $16,000. What was
its total assets turnover ratio (TATO)?
a. 1.57
b. 1.64
c. 1.49
d. 1.94
e. 1.69

____ 90. Beranek Corp has $665,000 of assets, and it uses no debt--it is financed only with common
equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%,
using the proceeds from borrowing to buy back common stock at its book value. How
much must the firm borrow to achieve the target debt ratio?
a. $303,240
b. $266,000
c. $324,520
d. $250,040
e. $252,700
____ 91. Ajax Corp's sales last year were $460,000, its operating costs were $362,500, and its
interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?
a. 7.80
b. 7.18
c. 8.19
d. 7.72
e. 9.75

____ 92. Royce Corp's sales last year were $260,000, and its net income was $23,000. What was
its profit margin?
a. 7.61%
b. 7.25%
c. 8.85%
d. 8.58%
e. 10.97%

____ 93. River Corp's total assets at the end of last year were $380,000 and its net income was
$32,750. What was its return on total assets?
a. 6.98%
b. 7.15%
c. 8.62%
d. 10.77%
e. 10.43%

____ 94. X-1 Corp's total assets at the end of last year were $380,000 and its EBIT was 52,500.
What was its basic earning power (BEP) ratio?
a. 11.88%
b. 11.19%
c. 16.44%
d. 16.16%
e. 13.82%

____ 95. Zero Corp's total common equity at the end of last year was $430,000 and its net income
was $70,000. What was its ROE?
a. 14.98%
b. 16.28%
c. 12.70%
d. 15.79%
e. 12.21%
____ 96. Your sister is thinking about starting a new business. The company would require
$380,000 of assets, and it would be financed entirely with common stock. She 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. $58,482
b. $45,144
c. $52,326
d. $51,300
e. $39,501

____ 97. Song Corp's stock price at the end of last year was $27.75 and its earnings per share for
the year were $1.30. What was its P/E ratio?
a. 20.28
b. 26.47
c. 20.07
d. 21.35
e. 24.12

____ 98. Hoagland Corp's stock price at the end of last year was $22.50, and its book value per
share was $25.00. What was its market/book ratio?
a. 0.85
b. 0.90
c. 0.86
d. 0.97
e. 1.00

____ 99. Precision Aviation had a profit margin of 4.75%, a total assets turnover of 1.5, and an
equity multiplier of 1.8. What was the firm's ROE?
a. 14.88%
b. 13.59%
c. 15.52%
d. 13.47%
e. 12.83%

____100. Meyer Inc's assets are $745,000, and its total debt outstanding is $185,000. The new CFO
wants to establish a debt ratio of 55%. The size of the firm does not change. How much
debt must the company add or subtract to achieve the target debt ratio?
a. $168,563
b. $224,750
c. $191,038
 d. $211,265
e. $271,948

____101. Helmuth Inc's latest net income was $1,210,000, and it had 225,000 shares outstanding.
The company wants to pay out 45% of its income. What dividend per share should it
declare?
a. $2.49
b. $2.06
c. $2.11
d. $2.69
e. $2.42

____102. Garcia Industries has sales of $167,500 and accounts receivable of $18,500, and it gives
its customers 25 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. $508.32
b. $405.68
c. $488.77
d. $386.13
e. $518.09

____103. Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales
last year were $435,000, 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. 5.18
b. 4.86
c. 5.29
d. 5.34
e. 5.40

____104. Han Corp's sales last year were $395,000, and its year-end receivables were $52,500. The
firm sells on terms that call for customers to pay 30 days after the purchase, but some
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. 15.92
 b. 15.18
c. 13.88
d. 18.51
e. 14.07

____105. Wie Corp's sales last year were $365,000, 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. The firm'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. $202,917
b. $221,179
c. $213,063
d. $160,304
e. $184,654

____106. A new firm is developing its business plan. It will require $635,000 of assets, and it projects
$450,000 of sales and $355,000 of operating costs for the first year. Management is
reasonably 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. 50.87%
b. 59.34%
c. 49.87%
d. 62.34%
e. 42.89%

____107. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt).
Its sales for the last year were $520,000, and its net income was $25,000. Stockholders
recently voted in a new management team that has promised to lower costs and get the
return on equity up to 15.0%. What profit margin would the firm need in order to achieve
the 15% ROE, holding everything else constant?
a. 10.71%
b. 9.41%
c. 10.82%
d. 8.11%
e. 12.66%
____108. Last year Ann Arbor Corp had $300,000 of assets, $305,000 of sales, $20,000 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. 5.34%
b. 5.82%
c. 6.59%
d. 8.67%
e. 6.93%

____109. Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 280,000
shares outstanding, and its debt ratio was 44%. How much debt was outstanding?
a. $4,704,700
b. $5,355,350
c. $5,205,200
d. $4,054,050
e. $5,005,000

____110. Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-
end assets were $250,000. The firm's total-debt-to-total-assets ratio was 67.5%. Based on
the DuPont equation, what was the ROE?
a. 21.98%
b. 18.94%
c. 23.38%
d. 22.68%
e. 22.22%

____111. Last year Rennie Industries had sales of $240,000, assets of $175,000, a profit margin of
5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its
assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this
amount, and had the debt ratio, sales, and costs remained constant, how much would the
ROE have changed?
a. 3.55%
b. 3.19%
c. 3.66%
d. 3.01%
e. 3.59%
____112. Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its
sales were $320,000 and its net income was $10,600. The CFO believes that the company
could have operated more efficiently, lowered its costs, and increased its net income by
$10,250 without changing its sales, assets, or capital structure. Had it cut costs and
increased its net income by this amount, how much would the ROE have changed?
a. 5.82%
b. 9.10%
c. 7.31%
d. 8.87%
e. 7.46%

____113. Last year Jandik Corp. had $325,000 of assets, $18,750 of net income, and a debt-to-total-
assets ratio of 37%. Now suppose the new CFO convinces the president to increase the
debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would
increase. However, the CFO believes that better cost controls would be sufficient to offset
the higher interest expense and thus keep net income unchanged. By how much would the
change in the capital structure improve the ROE?
a. 2.19%
b. 1.67%
c. 1.57%
d. 1.94%
e. 2.17%

____114. Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income,
and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive
fixed assets and inventory that could be sold, enabling it to reduce its total assets to
$252,500. Sales, costs, and net income would not be affected, and the firm would maintain
the same debt ratio (but with less total debt). By how much would the reduction in assets
improve the ROE?
a. 5.67%
b. 5.30%
c. 4.40%
d. 4.18%
e. 5.98%

____115. Jordan Inc has the following balance sheet and income statement data:

Cash $14,000 Accounts payable $42,000

Receivables 70,000 Other current liabilities 28,000
Inventories 280,000 Total CL $70,000
Total CA $364,000 Long-term debt 140,000
Net fixed assets 126,000 Common equity 280,000
Total assets $490,000 Total liab. and equity $490,000
 Sales $280,000
Net income 21,000

The new CFO thinks that inventories are excessive and could be lowered sufficiently to
cause the current ratio to equal the industry average, 2.10, without affecting either sales or
net income. Assuming that inventories are sold off and not replaced to get the current ratio
to the target level, and that the funds generated are used to buy back common stock at
book value, by how much would the ROE change?
a. 28.16%
b. 20.93%
c. 24.28%
d. 32.29%
e. 25.83%

____116. Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end
assets of $355,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt
was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE
would have been affected if the firm had used a 50% debt ratio. Assume that sales,
operating costs, total assets, and the tax rate would not be affected, but the interest rate
would rise to 8.0%. By how much would the ROE change in response to the change in the
capital structure?
a. 3.17%
b. 3.42%
c. 3.48%
d. 3.08%
e. 2.99%

____117. Quigley Inc. is considering two financial plans for the coming year. Management expects
sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax
rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The
interest rate on the debt would be 8.8%, but under a contract with existing bondholders the
TIE ratio would have to be maintained at or above 3.2. Under Plan B, the maximum debt
that met the TIE constraint would be employed. Assuming that sales, operating costs,
assets, the interest rate, and the tax rate would all remain constant, by how much would the
ROE change in response to the change in the capital structure?
a. 7.10%
b. 7.40%
c. 8.21%
d. 8.73%
e. 7.25%

____118. What is the firm's current ratio?

a. 1.17
 b. 1.04
c. 1.28
d. 1.32
e. 1.11

____119. What is the firm's quick ratio?

a. 0.46
b. 0.59
c. 0.57
d. 0.73
e. 0.60

____120. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.
a. 55.27
b. 66.46
c. 80.45
d. 57.37
e. 69.96

____121. What is the firm's total assets turnover?

a. 1.26
b. 1.43
c. 1.20
d. 1.48
e. 1.38

____122. What is the firm's inventory turnover ratio?

a. 3.75
b. 3.98
c. 3.19
d. 3.23
e. 3.79

____123. What is the firm's TIE?

a. 2.56
b. 2.62
c. 2.80
d. 2.64
e. 2.70
____124. What is the firm's debt ratio?
a. 65.15%
b. 76.11%
c. 49.67%
d. 78.05%
e. 64.50%

____125. What is the firm's ROA?

a. 2.30%
b. 1.96%
c. 2.44%
d. 2.51%
e. 1.87%

____126. What is the firm's ROE?

a. 7.92%
b. 6.49%
c. 6.16%
d. 6.94%
e. 5.77%

____127. What is the firm's BEP?

a. 5.81%
b. 5.59%
c. 5.70%
d. 6.44%
e. 4.85%

____128. What is the firm's profit margin?

a. 1.79%
b. 1.90%
c. 1.88%
d. 1.92%
e. 1.96%

____129. What is the firm's operating margin?

a. 3.75%
b. 4.51%
c. 5.27%
d. 5.42%
e. 4.75%
____130. What is the firm's dividends per share?
a. $0.85
b. $0.69
c. $0.79
d. $0.73
e. $0.65

____131. What is the firm's EPS?

a. $2.36
b. $1.68
c. $1.98
d. $1.94
e. $1.62

____132. What is the firm's P/E ratio?

a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6

____133. What is the firm's book value per share?

a. $28.09
b. $30.84
c. $28.39
d. $30.53
e. $38.16

____134. What is the firm's market-to-book ratio?

a. 0.65
b. 0.85
c. 0.74
d. 0.95
e. 0.78

____135. What is the firm's equity multiplier?

a. 2.82
b. 3.49
c. 2.31
d. 2.14
e. 2.2