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Exam 4: Analysis of Financial Statements

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Question 51

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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 47.5%.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? Do not round your intermediate calculations.

A) 17.08%
B) 11.29%
C) 14.48%
D) 14.91%
E) 13.03%

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

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Question 52

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The current and quick ratios 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.

A) True
B) False

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Question 53

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Which of the following statements is CORRECT?

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? Do not round your intermediate calculations.

If a firm sold some inventory on credit as opposed to cash,there is no reason to think that either its current or quick ratio would change.

Which of the following actions is an example of "window dressing?"

Han Corp's sales last year were $425,000,and its year-end receivables were $52,500.The firm sells on terms that call for customers to pay 30 days after the purchase,but some delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.Assume all sales to be on credit.Do not round your intermediate calculations.

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75.Its sales were $285,000 and its net income was $10,600.The firm finances using only debt and common equity,and its total assets equal total invested capital.The CFO believes that the company could have operated more efficiently,lowered its costs,and increased its net income by $10,250 without changing its sales,assets,or capital structure.Had it cut costs and increased its net income by this amount,how much would the ROE have changed? Do not round your intermediate calculations.

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.

X-1 Corp's total assets at the end of last year were $365,000 and its EBIT was $52,500.What was its basic earning power (BEP) ratio?

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 capital ratio and therefore a higher interest expense.Which of the following statements is CORRECT?

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

The days sales outstanding ratio 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.

One problem with ratio analysis is that relationships can be manipulated.For example,we know that if our current ratio is less than 1.0,then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

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.

Other things held constant,the more debt a firm uses,the lower the firm's return on total assets will be.

Garcia Industries has sales of $207,500 and accounts receivable of $18,500,and it gives its customers 25 days to pay.The industry average DSO is 27 days,based on a 365-day year.If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average,and if it earns 8.0% on any cash freed up by this change,how would that affect its net income,assuming other things are held constant? Assume all sales to be on credit.Do not round your intermediate calculations.

Last year Ann Arbor Corp had $240,000 of assets (which equals total invested capital) ,$305,000 of sales,$20,000 of net income,and a debt-to-total-capital ratio of 37.5%.The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $33,000.The firm finances using only debt and common equity.Assets,total invested capital,sales,and the debt to capital ratio would not be affected.By how much would the cost reduction improve the ROE? Do not round your intermediate calculations.

Profitability ratios show the combined effects of liquidity,asset management,and debt management on a firm's operating results.

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?