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Question;[i]. Which of;the following statements is CORRECT?;a.An;increase in the DSO, other things held constant, could be expected to increase;the ROE.;b.An;increase in the DSO, other things held constant, could be expected to increase;the total assets turnover ratio.;c.An;increase in a firm?s debt ratio, with no changes in its sales or operating;costs, could be expected to lower the profit margin.;d.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.;e.If two;firms have the same ROA, the firm with the most debt can be expected to have;the lower ROE.;[ii]. 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.HD would;have the higher net income as shown on the income statement.;b.HD would;have the lower net income as shown on the income statement.;c.Without;more information, we cannot tell if HD or LD would have a higher or lower net;income.;d.HD would;have to pay more in income taxes.;e.HD would have the lower equity multiplier for;use in the Du Pont equation.;[iii]. Other;things held constant, which of the following alternatives would increase a;company?s cash flow for the current year?;a.Reduce the;days? sales outstanding (DSO) without reducing sales.;b.Increase;the number of years over which fixed assets are depreciated.;c.Decrease;the accounts payable balance.;d.Reduce the;inventory turnover ratio without affecting sales.;e.Decrease;the accrued wages balance.;[iv]. 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 has a higher ROA.;b.Company HD has a higher times interest earned (TIE) ratio.;c.Company;HD has more net income.;d.Company;HD pays less in taxes.;e.Company;HD has a lower equity multiplier.;[v]. 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 ROE.;b.Company HD has a lower times interest earned (TIE) ratio.;c.Company;HD has more net income.;d.Company;HD pays more in taxes.;e.Company;HD has a lower equity multiplier.;[vi]. 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 return;on assets must be above the industry average.;b.Its total;assets turnover must be above the industry average.;c.Its total;assets turnover must be below the industry average.;d.Its total;assets turnover must equal the industry average.;e.Its return;on assets must equal the industry average.;[vii]. Which of;the following statements is CORRECT?;a.If Firms A;and B have the same earnings per share and market-to-book ratio, they must have;the same price earnings ratio.;b.If Firms A;and B have the same net income, number of shares outstanding, and price per;share, then their market-to-book ratios must also be the same.;c.If Firms A;and B have the same net income, number of shares outstanding, and price per;share, then their P/E ratios must also be the same.;d.If Firms A;and B have the same P/E ratios, then their market-to-book ratios must also be;the same.;e.If Firm;A?s P/E ratio exceeds that of Firm B, then B is likely to be less risky and;also to be expected to grow at a faster rate.;[viii].CompaniesHD andLD;have the same total assets,sales, and operating costs, 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.Company LD;has a higher basic earning power ratio (BEP).;b.Company HD;has a higher basic earning power ratio (BEP).;c.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.;d.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.;e.Given this;information, LD must have the higher ROE.;[ix]. If a bank;loan officer were considering a company?s request for a loan, which of the;following statements would you consider to be CORRECT?;a.The lower;the company?s TIE ratio, other;things held constant, the lower the interest rate the bank would charge the;firm.;b.The lower;the company?s EBITDA coverage ratio, other things held constant, the lower the;interest rate the bank would charge the firm.;c.Other;things held constant, the lower the current asset ratio, the lower the interest;rate the bank would charge the firm.;d.Other;things held constant, the lower the debt ratio, the lower the interest rate the;bank would charge the firm.;e.Other;things held constant, the higher the debt ratio, the lower the interest rate;the bank would charge the firm.;[x]. Walter;Industries? current ratio is 0.5.;Considered alone, which of the following actions would INCREASE;the company?s current ratio?;a.Use cash;to reduce short-term notes payable.;b.Use cash;to reduce accounts payable.;c.Borrow;using short-term notes payable and use the cash to increase inventories.;d.Use cash;to reduce long-term bonds outstanding.;e.Use cash;to reduce accruals.;[xi]. Safeco?s;total current assets are $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 this transaction?;a.The;transaction would have no effect on the firm? financial strength as measured by;their current ratios.;b.The;transaction would improve both firms? financial strength as measured by their;current ratios.;c.The;transaction would lower both firm? financial strength as measured by their;current ratios.;d.The transactions;would lower Safeco?s financial strength as measured by its current ratio but;raise Risco?s current ratio.;e.The transaction would raise Safeco?s financial;strength as measured by its current ratio but lower Risco?s current ratio.;PART II ? Questions;and Problems from Prior Test Bank not used in Part I;[xii]. Russell;Securities has $100 million in total assets and its corporate tax rate is;40%. The company recently reported that;its basic earning power (BEP) ratio was 15% and its return on assets (ROA) was;9%. What was the company?s interest;expense?;a.$;0;b.$ 2,000,000;c.$ 6,000,000;d.$15,000,000;e.$18,000,000;[xiii].You are;given the following information;Stockholders? equity = $1,250, price/earnings ratio = 5, shares outstanding;= 25, and market/book ratio = 1.5.;Calculate the market price of a share of the company?s stock.;a.$ 33.33;b.$ 75.00;c.$ 10.00;d.$166.67;e.$133.32;[xiv]. Meyersdale;Office Supplies has common equity of $40 million. The company?s stock price is $80 per share;and its market/book ratio is 4.0. How;many shares of stock does the company have outstanding?;a. 500,000;b. 125,000;c. 2,000,000;d.800,000,000;e.Insufficient;information.;[xv]. Strack;Houseware Supplies Inc. has $2 billion in total assets, $0.2 billion in current;liabilities, $0.6 billion in long-term debt, and $1.2 billion in common;equity. The company?s 300 million shares;of common stock are selling at $20 per share.;What is Strack?s market/book ratio?;a.1.25;b.2.65;c.3.15;d.4.40;e.5.00;[xvi]. A firm has;a profit margin of 15% on sales of $20,000,000.;If the firm has debt of $7,500,000, total assets of $22,500,000, and an;after-tax interest cost on total debt of 5%, what is the firm?s ROA?;a. 8.4%;b.10.9%;c.12.0%;d.13.3%;e.15.1%;[xvii].Culver Inc.;has EBT of $300. The company?s times;interest earned ratio is 7.00. Calculate;the company?s interest charges.;a.$42.86;b.$50.00;c.$40.00;d.$60.00;e.$57.93;[xviii]. Tapley;Dental Supply Company has the following data;Net income $240;Sales $10,000;Total assets;$6,000;Debt ratio 75%;TIE ratio 2.0;Current ratio 1.2;BEP ratio;13.33%;If Tapley could streamline operations, cut;operating costs, and raise net income to $300 without affecting sales or the;balance sheet (the additional profits will be paid out as dividends), by how;much would its ROE increase?;a.3.00%;b.3.50%;c.4.00%;d.4.25%;e.5.50%;[xix]. A firm;that has an equity multiplier of 4.0 will have a debt ratio of;a.4.00;b.3.00;c.1.00;d.0.75;e.0.25;[xx]. Your;company had the following balance sheet and income statement information for;2005;Balance Sheet;Cash $ 20;A/R;1,000;Inventories;5,000;Total current assets $6,020 Debt $4,000;Net fixed assets;2,980 Equity 5,000;Total assets $9,000 Total;claims $9,000;Income Statement;Sales $10,000;Cost of goods sold 9,200;EBIT $ 800;Interest (10%) 400;EBT $ 400;Taxes (40%) 160;Net income $ 240;The industry average inventory turnover is 5. You think you can change your inventory;control system and steer your turnover to the industry average. This change will have no effect on either;sales or cost of goods sold. The cash;generated from reducing inventories will be invested in tax-exempt securities;that yield 7%. What will your profit;margin be after the change in inventories is reflected in the income statement?;a.2.1%;b.2.4%;c.4.5%;d.5.3%;e.6.7%;[xxi]. The Wilson;Corporation has the following results;Sales/Total assets 2.0?;Return on assets (ROA) 4.0%;Return on equity (ROE) 6.0%;What is Wilson?s profit margin and debt ratio?;a.2%, 0.33;b.4%, 0.33;c.4%, 0.67;d.2%, 0.67;e.4%, 0.50;[xxii].The;Charleston Company is a relatively small, privately owned firm. Last year the company had net income of;$15,000 and 10,000 shares were outstanding.;The owners were trying to determine the equilibrium market value for the;stock prior to taking the company public.;A similar firm that is publicly traded had a price/earnings ratio (P/E);of 5.0. Using only the information;given, estimate the market value of one share of Charleston?s stock.;a.$10.00;b.$ 7.50;c.$ 5.00;d.$ 2.50;e.$ 1.50;[xxiii]. Cleveland;Corporation has 100,000 shares of common stock outstanding, its net income is;$750,000, and its P/E is 8. What is the;company?s stock price?;a.$20.00;b.$30.00;c.$40.00;d.$50.00;e.$60.00;[xxiv].Iken Berry Farms has $5 million in current;assets, $3 million in current liabilities, and its initial inventory level is;$1 million. The company plans to;increase its inventory, funded by additional short-term debt (notes;payable). Assume that the value of the;remaining current assets will not change.;The company?s bond covenants require a current ratio greater than or;equal to 1.5. How much inventory can be;purchased before the covenants are violated?;a.$0.50;million;b.$1.00;million;c.$1.33;million;d.$1.66;million;e.$2.33;million;[xxv]. Cannon;Company has enjoyed a rapid increase in sales in recent years, following a;decision to sell on credit. However, the;firm has noticed an increase in its collection period. Last year, total sales were $1 million, and;$250,000 of these sales were on credit.;During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in;the forthcoming year by 50%, and, while credit sales should continue to be the;same proportion of total sales, it is expected that the days sales outstanding;will also increase by 50%. If the;resulting increase in accounts receivable must be financed externally, how much;external funding will Cannon need?;a.$ 41,096;b.$ 51,370;c.$ 47,359;d.$106,471;e.$ 92,466;[xxvi].Ruth;Company currently has $1,000,000 in accounts receivable, and its days sales;outstanding (DSO) is 50 days. The;company wants to reduce its DSO to the industry average of 32 days by;pressuring more of its customers to pay their bills on time. The company?s CFO estimates that if this;policy is adopted the company?s average sales will fall by 10%. Assuming that;the company adopts this change and succeeds in reducing its DSO to 32 days;what will be the level of accounts receivable following the change?;a.$576,000;b.$633,333;c.$750,000;d.$900,000;e.$966,667;[xxvii]. The;Carter Co.?s return on equity (ROE) is 18%.;If sales were $4 million, the debt ratio was 40%, and total liabilities;were $2 million, what would be Carter?s return on assets (ROA)?;a.10.80%;b. 0.80%;c. 1.25%;d.12.60%;e.Insufficient;information.;[xxviii]. Humphrey Hotels? operating income (EBIT) is $40;million. The company?s times interest;earned (TIE) ratio is 8.0, its tax rate is 40%, and its basic earning power;(BEP) ratio is 10%. What is the;company?s return on assets (ROA)?;a.6.45%;b.5.97%;c.4.33%;d.8.56%;e.5.25%;[xxix].Selzer Inc.;sells all its merchandise on credit. It;has a profit margin of 4%, days sales outstanding equal to 60 days, receivables;of $150,000, total assets of $3 million, and a debt ratio of 64%. What is the firm?s return on equity;(ROE)? Assume a 365-day year.;a. 7.1%;b.33.4%;c. 3.4%;d.71.0%;e. 8.1%;[xxx]. A firm has;a debt ratio of 50%. Currently, its;interest expense is $500,000 on $5,000,000 of total debt outstanding. Its tax;rate is 40%. If the firm?s ROA is 6%, by;how many percentage points is the firm?s ROE greater than its ROA?;a.0.0%;b.6.0%;c.5.2%;d.7.4%;e.9.0%;[xxxi].Assume;Meyer Corporation is 100% equity financed.;Calculate the return on equity (ROE), given the following information;Earnings before taxes $1,500;Sales $5,000;Dividend payout ratio 60%;Total assets turnover 2.0;Tax rate 30%;a.25%;b.30%;c.35%;d.42%;e.50%;[xxxii]. Alumbat;Corporation has $800,000 of debt outstanding, on which it pays 10% annual;interest. Alumbat?s annual sales are;$3,200,000, its average tax rate is 40%, and its net profit margin is 6%. The company must maintain a TIE ratio of at;least 4 times or its bank will refuse to renew its loan, resulting in bankruptcy. What is Alumbat?s current TIE ratio?;a.2.4;b.3.4;c.3.6;d.4.0;e.5.0;[xxxiii]. Moss;Motors has $8 billion in assets, and its tax rate is 40%. The company?s basic;earning power (BEP) ratio is 12%, and its return on assets (ROA) is 3%. What is Moss? times interest earned (TIE);ratio?;a.2.25;b.1.71;c.1.00;d.1.33;e.2.50;[xxxiv]. Lancaster;Motors has total assets of $20 million. Its basic earning power is 25%, its;return on assets (ROA) is 10%, and the company?s tax rate is 40%. What is Lancaster?s TIE ratio?;a.2.5;b.3.0;c.1.5;d.1.2;e.0.6;[xxxv].Peterson;Packaging Corp. has a basic earning power of (BEP) of 9% on $9 billion of total;assets, and its times interest earned (TIE) ratio is 3.0. Peterson?s depreciation and amortization;expense totals $1 billion. It has $0.6 billion in lease payments and $0.3;billion must go towards principal payments on outstanding loans and long-term;debt. What is Peterson?s EBITDA coverage;ratio?;a.2.06;b.1.52;c.2.25;d.1.10;e.2.77;[xxxvi]. Last;year, Kansas Office Supply had $400,000 of net income on $24,000,000 of sales;its total assets turnover was 6.0, and the company?s ROE was 15%. If the company only finances with debt and;equity, what is the company?s debt ratio?;a.0.20;b.0.30;c.0.33;d.0.60;e.0.66;[xxxvii]. The;Merriam Company has determined that its return on equity (ROE) is 15%. If its;debt ratio is 0.35 and its total assets turnover is 2.8, what is the profit;margin?;a. 3.48%;b. 5.42%;c. 6.96%;d. 2.45%;e.12.82%;[xxxviii].Collins;Company had the following partial balance sheet and complete income statement information;for 2005;Partial Balance Sheet;Cash $ 20;A/R 1,000;Inventories 2,000;Total current assets $ 3,020;Net fixed assets 2,980;Total assets $ 6,000;Income Statement;Sales $10,000;Cost of goods sold 9,200;EBIT $ 800;Interest (10%) 400;EBT $ 400;Taxes (40%) 160;Net income $ 240;The industry average DSO is 30. Collins wants to lower its DSO to equal the;industry average, which is expected to have no effect on either sales or cost;of goods sold. If the cash generated from;reducing receivables is used to retire debt (which was outstanding all last;year and has a 10% interest rate), what will Collins? new debt ratio be?;a.33.33%;b.45.28%;c.52.75%;d.60.00%;e.65.65%;[xxxix]. Taft;Technologies has the following relationships;Annual sales $1,200,000.00;Current liabilities $ 375,000.00;Days sales outstanding (DSO);(365-day year) 40.00;Inventory turnover ratio 4.80;Current ratio 1.20;The company?s current assets consist of cash;inventories, and accounts receivable.;How much cash does Taft have on its balance sheet?;a.-$ 8,333;b. $ 68,493;c. $125,000;d. $200,000;e. $316,667;[xl]. Aaron;Aviation recently reported the following information;Net income $500,000;ROA 10%;Interest expense $200,000;The company?s average tax rate is 40%. What is the company?s basic earning power;(BEP)?;a.14.12%;b.16.67%;c.17.33%;d.20.67%;e.22.50%;[xli]. Dean;Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common;stock, which currently trade at $60 a share. The company continues to expand;and anticipates that one year from now its net income will be $2,500,000. Over the next year the company also;anticipates issuing an additional 100,000 shares of stock, so that one year;from now the company will have 400,000 shares of common stock. Assuming the company?s price/earnings ratio;remains at its current level, what will be the company?s stock price one year;from now?;a.$55;b.$60;c.$65;d.$70;e.$75;[xlii].Parcells;Jets has the following balance sheet (in millions);Cash $ 100 Notes;payable $ 100;Inventories 300 Accounts payable 200;Accounts receivable 400 Accruals 100;Total current assets $ 800 Total current liabilities $;400;Net fixed assets 1,200 Long-term bonds 600;Total;debt $1,000;Total common equity 1,000;Total assets $2,000 Total;liabilities and equity $2,000;Parcells? DSO is 40, which exceeds the industry;average of 30. Assume that Parcells is;able to reduce its DSO to the industry average without reducing sales, and the;company uses freed-up cash to reduce its outstanding long-term bonds. What will;be the new current ratio?;a.1.75;b.1.33;c.2.33;d.1.25;e.1.67

 

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