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Exam 4: Analysis of Financial Statements

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Question 31

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Refer to Exhibit 4.1. What is the firm's market-to-book ratio?

A) 0.87
B) 1.02
C) 1.21
D) 1.42
E) 1.67

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

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Question 32

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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. Both firms finance using only debt and common equity and total assets equal total invested capital. However, company HD has a higher total debt to total capital 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.

F) B) and C)
G) A) and B)

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Question 33

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Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

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

Beranek Corp has $720,000 of assets (which equal total invested capital) , and it uses no debt-it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital 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?

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

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.

Which of the following statements is CORRECT?

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

The days sales outstanding 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.

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

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt) . Its sales for the last year were $595,000, 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?

You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is CORRECT?

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, 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.

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.

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

Wie Corp's sales last year were $315,000, 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?

The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short- term obligations without relying on the sale of inventories.

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total invested capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

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