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Exam 4: Analysis of Financial Statements

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Question 31

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Other things held constant,the more debt a firm uses,the lower its profit margin will be.

A) True
B) False

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Question 32

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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.

F) A) and C)
G) None of the above

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Question 33

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The return on invested capital measures the total return that a company has provided for its investors.

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

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

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. -Refer to Exhibit 4.1.What is the firm's P/E ratio?

If a firm sold some inventory on credit,its current ratio would probably not change much,but its quick ratio would increase.

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. -Refer to Exhibit 4.1.What is the firm's TIE?

Although a full liquidity analysis requires the use of a cash budget,the current and quick ratios provide fast and easy-to-use estimates of a firm's liquidity position.

Your sister is thinking about starting a new business.The company would require $375,000 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?

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).

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750.What was its return on total assets?

HD Corp and LD Corp have identical assets,sales,interest rates paid on their debt,tax rates,and EBIT.Both firms finance using only debt and common equity and total assets equal total invested capital.However,HD uses more debt than LD.Which of the following statements is CORRECT?

The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

Which of the following statements is CORRECT?

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-capital ratio was 45.0%.The firm finances using only debt and common equity and its total assets equal total invested capital.Based on the DuPont equation,what was the ROE?

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. -Refer to Exhibit 4.1.What is the firm's profit margin?

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

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.

The operating margin measures operating income per dollar of assets.