FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 4: Analysis of Financial Statements

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

True/False

Review LaterAdd Note

Review Later

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 less risky and/or more likely to enjoy higher growth in the future.

A) True
B) False

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

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%.The firm finances using only debt and common equity,and total assets equal total invested capital.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%.The firm finances using only debt and common equity,and total assets equal total invested capital.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 total debt to total capital 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%.The firm finances using only debt and common equity,and total assets equal total invested capital.Under these conditions,the ROE will decrease.

F) A) and E)
G) A) and C)

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

Zero Corp's total common equity at the end of last year was $350,000 and its net income was $70,000.What was its ROE?

If a firm's ROE is equal to 9% and its ROA is equal to 6%,its equity multiplier must be 1.5.

Exhibit 4.1 The balance sheet and income statement shown below are for Koski 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. $\begin{array}{lc}\text { Assets } & 2018 \\\text { Cash and securities } & \$ 3,000 \\\text { Accounts receivable } & 15,000 \\\text { Inventories } & 18,000 \\\text { Total current assets } & \$ 36,000 \\\text { Net plant and equipment } & \$ 24,000 \\\text { Total assets } & \$ 60,000\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 18,630 \\\text { Accruals } & 8,370 \\\text { Notes payable } & 6,000 \\\text { Total current liabilities } & \$ 33,000\\\\\text { Long-term bonds } & \$ 9,000 \\\text { Total liabilities } & \$ 42,000 \\\text { Common stock } & \$ 5,040 \\\text { Retained earnings } & 12,960 \\\text { Total common equity } & \$ 18,000\\\text { Total liabilities and equity }&\$60,000\end{array}$ $\begin{array}{lr}\text { Income Statement (Millions of } \$ \text { ) } & {2018} \\ \text { Net sales } & \$ 84,000 \\\text { Operating costs except depreciation } & 78,120 \\\text { Depreciation } & 1,680 \\\text { Earnings before interest and taxes (EBIT) } & \$ 4,200 \\\text { Less interest } & 900\\\text { Earnings before taxes (EBT) } &{\$ 3,300} \\\text { Taxes } & 1,320 \\\text { Net income } & \$ 1,980\\\\\text { Other data: }\\\text { Shares outstanding (millions) } & 500.00 \\\text { Common dividends (millions of } \$ \text { ) } & \$ 693.00 \\\text { Int rate on notes payable \& L-T bonds } & 6 \% \\\text { Federal plus state income tax rate } & 40 \% \\\text { Year-end stock price } & \$ 47.52\end{array}$ -Refer to Exhibit 4.1.What is the firm's dividends per share? Do not round your intermediate calculations.

Duffert Industries has total assets of $1,050,000 and total current liabilities (consisting only of accounts payable and accruals) of $150,000.Duffert finances using only long-term debt and common equity.The interest rate on its debt is 9% and its tax rate is 40%.The firm's basic earning power ratio is 15% and its debt-to capital rate is 40%.What are Duffert's ROE and ROIC? Do not round your intermediate calculations.

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.

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?

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

Last year Rennie Industries had sales of $270,000,assets of $175,000 (which equals total invested capital) ,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.The firm finances using only debt and common equity.Had it reduced its assets by this amount,and had the debt/total invested capital ratio,sales,and costs remained constant,how much would the ROE have changed? Do not round your intermediate calculations.

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 occurred as a result of this action?

Exhibit 4.1 The balance sheet and income statement shown below are for Koski 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. $\begin{array}{lc}\text { Assets } & 2018 \\\text { Cash and securities } & \$ 3,000 \\\text { Accounts receivable } & 15,000 \\\text { Inventories } & 18,000 \\\text { Total current assets } & \$ 36,000 \\\text { Net plant and equipment } & \$ 24,000 \\\text { Total assets } & \$ 60,000\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 18,630 \\\text { Accruals } & 8,370 \\\text { Notes payable } & 6,000 \\\text { Total current liabilities } & \$ 33,000\\\\\text { Long-term bonds } & \$ 9,000 \\\text { Total liabilities } & \$ 42,000 \\\text { Common stock } & \$ 5,040 \\\text { Retained earnings } & 12,960 \\\text { Total common equity } & \$ 18,000\\\text { Total liabilities and equity }&\$60,000\end{array}$ $\begin{array}{lr}\text { Income Statement (Millions of } \$ \text { ) } & {2018} \\ \text { Net sales } & \$ 84,000 \\\text { Operating costs except depreciation } & 78,120 \\\text { Depreciation } & 1,680 \\\text { Earnings before interest and taxes (EBIT) } & \$ 4,200 \\\text { Less interest } & 900\\\text { Earnings before taxes (EBT) } &{\$ 3,300} \\\text { Taxes } & 1,320 \\\text { Net income } & \$ 1,980\\\\\text { Other data: }\\\text { Shares outstanding (millions) } & 500.00 \\\text { Common dividends (millions of } \$ \text { ) } & \$ 693.00 \\\text { Int rate on notes payable \& L-T bonds } & 6 \% \\\text { Federal plus state income tax rate } & 40 \% \\\text { Year-end stock price } & \$ 47.52\end{array}$ -Refer to Exhibit 4.1.What is the firm's inventory turnover ratio? Do not round your intermediate calculations.

The operating margin measures operating income per dollar of assets.

Other things held constant,a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

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.

Wie Corp's sales last year were $280,000,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? Do not round your intermediate calculations.

Amram Company's current ratio is 2.0.Considered alone,which of the following actions would lower the current ratio?

Helmuth Inc's latest net income was $1,500,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare? Do not round your intermediate calculations.

Considered alone,which of the following would increase a company's current ratio?

Hoagland Corp's stock price at the end of last year was $20.50,and its book value per share was $25.00.What was its market/book ratio?