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Exam 7: Analysis of Financial Statements

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Question 51

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The Cavendish Company 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 debt ratio increased.
B) The company's current ratio increased.
C) The company's times interest earned ratio decreased.
D) The company's basic earning power ratio increased.
E) The company's equity multiplier increased.

F) C) and E)
G) C) and D)

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Question 52

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Exhibit 7.1 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 Exhibit 7.1.What is the firm's profit margin?

A) 1.40%
B) 1.56%
C) 1.73%
D) 1.93%
E) 2.12%

F) B) and D)
G) B) and C)

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Question 53

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Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

Heaton Corp.sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,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.

Exhibit 7.1 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 Exhibit 7.1.What is the firm's cash flow per share?

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?

Orono Corp.'s sales last year were $435,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times interest earned (TIE) ratio?

Exhibit 7.1 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 Exhibit 7.1.What is the firm's book value per share?

Companies Heidee and Leaudy have the same total assets,sales,operating costs,and tax rates,and they pay the same interest rate on their debt.However,company Heidee has a higher debt ratio.Which of the following statements is CORRECT?

Exhibit 7.1 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 Exhibit 7.1.What is the firm's BEP?

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?

Exhibit 7.1 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 Exhibit 7.1.What is the firm's total assets turnover?

Which of the following would indicate an improvement in a company's financial position,holding other things constant?

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving,i.e.,it is becoming more liquid.

High current and quick ratios always indicate that a firm is managing its liquidity position well.

The inventory turnover and current ratio are related.The combination of a high current ratio and a low inventory turnover ratio,relative to industry norms,suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Last year Urbana Corp.had $197,500 of assets,$307,500 of sales,$19,575 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 firm wants to strengthen its financial position.Which of the following actions would increase its quick ratio?

Firms A and B have the same current ratio,0.75,the same amount of sales and cost of goods sold,and the same amount of current liabilities.However,Firm A has a higher inventory turnover ratio than B.Therefore,we can conclude that A's quick ratio must be smaller than B's.