Deck 8: Analysis of Financial Statements

Question 1

Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Answer 3

True

Question 4

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

Question 5

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Question 6

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.

Question 7

If sales decrease and financial leverage increases, we can say with certainty that the profit margin on sales will decrease.

Question 8

If a firm has high current and quick ratios, this is always a good indication that a firm is managing its liquidity position well.

Question 9

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time.

Question 10

Suppose two firms have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, one firm has a higher debt ratio. If BEP is greater than the interest rate on debt, the firm with the higher debt ratio will also have a higher rate of return on common equity.

Question 11

If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio.

Question 12

The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus, some firms must meet more than just their scheduled interest payments out of earnings. Therefore, the fixed charge coverage is more inclusive than the TIE ratio.

Question 13

The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relationship of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

Question 14

The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.

Question 15

Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will pay on that debt, and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

Question 16

The inventory turnover and current ratios are related. The combination of a high current ratio and a low inventory turnover ratio relative to the industry norm might indicate that the firm is maintaining too high an inventory level or that part of the inventory is obsolete or damaged.

Question 17

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Question 18

Two firms have the same current ratio, 0.75, and the same amount of sales. However, Firm A has a higher inventory turnover ratio than Firm B. Therefore, we can conclude that the quick ratio of Firm A will be smaller than that of Firm B.

Question 19

We can use the fixed assets turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

Question 20

Market value ratios provide management with a current assessment of how investors in the market view the firm's past performance and future prospects.

Question 21

Which of the following actions will increase a company's quick ratio?

A) Reduce inventories and use the proceeds to reduce long-term debt.
B) Reduce inventories and use the proceeds to reduce current liabilities.
C) Issue short-term debt and use the proceeds to purchase inventory.
D) Issue long-term debt and use the proceeds to purchase fixed assets.
E) Issue equity and use the proceeds to purchase inventory.

Question 22

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

A) The transactions will have no effect on the current ratios.
B) The current ratios of both firms will be increased.
C) The current ratios of both firms will be decreased.
D) Only Pepsi Corporation's current ratio will be increased.
E) Only Coke Company's current ratio will be increased.

Question 23

Devon Inc. has a higher ROE than Berwyn Inc. (17 percent compared to 14 percent), but it has a lower EVA than Berwyn. Which of the following factors could explain the relative performance of these two companies?

A) Devon is much larger than Berwyn.
B) Devon is riskier, has a higher WACC, and a higher cost of equity.
C) Devon has a higher operating income (EBIT).
D) Statements a and b are correct.
E) All of the statements above are correct.

Question 24

If the equity multiplier is 2.0, the debt ratio must be 0.5.

Question 25

Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

A) Fixed assets are sold for cash.
B) Long-term debt is issued to pay off current liabilities.
C) Accounts receivable are collected.
D) Cash is used to pay off accounts payable.
E) A bank loan is obtained, and the proceeds are credited to the firm's checking account.

Question 26

Which of the following alternatives could potentially result in a net increase in a company's free cash flow for the current year?

A) Reducing the days-sales-outstanding ratio.
B) Increasing the number of years over which fixed assets are depreciated.
C) Decreasing the accounts payable balance.
D) All of the answers above are correct.
E) Answers a and b are correct.

Question 27

Which of the following statements is most correct?

A) If a company increases its current liabilities by $1,000 and simultaneously increases its inventories by $1,000, its current ratio must rise.
B) If a company increases its current liabilities by $1,000 and simultaneously increases its inventories by $1,000, its quick ratio must fall.
C) A company's quick ratio may never exceed its current ratio.
D) Answers b and c are correct.
E) None of the answers above is correct.

Question 28

Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

A) Company J must have a higher P/E ratio.
B) Company J must have a higher market to book ratio.
C) Company J must be riskier.
D) Company J must have fewer growth opportunities.
E) All of the statements above are correct.

Question 29

Generally, firms with high profit margins have high asset turnover rates, and firms with low profit margins have low turnover rates; this result is exactly as predicted by the extended Du Pont equation.

Question 30

Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)

A) Fixed assets are sold for cash.
B) Cash is used to purchase inventories.
C) Cash is used to pay off accounts payable.
D) Accounts receivable are collected.
E) Long-term debt is issued to pay off a short-term bank loan.

Question 31

Which of the following statements is most correct?

A) If a company's ROA is 7 percent, then its ROE must be greater than or equal to 7 percent.
B) The BEP and ROA will be the same for a company with no debt in its capital structure.
C) A company with a low debt ratio will have a high equity multiplier.
D) Both statements a and c are correct.
E) None of the statements above is correct.

Question 32

Which of the following statements is most correct about Economic Value Added (EVA)?

A) If a company has no debt, its EVA equals its net income.
B) If a company has positive ROE, its EVA must also be positive.
C) A company's EVA will be positive whenever the cost of equity exceeds the ROE.
D) All of the statements above are correct.
E) None of the statements above is correct.

Question 33

One of the problems of ratio analysis is that account relationships can be manipulated. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is low initially, for example, below 1.0.

Question 34

Variations in accounting methods among firms can invalidate financial comparisons between firms.

Question 35

Company R and Company S each have the same operating income (EBIT) and basic earning power (BEP) ratio. Company S, however, has a lower times-interest-earned (TIE) ratio. Which of the following statements is most correct?

A) Company S has a higher ROA.
B) Company S has a higher net income.
C) Company S has a higher interest expense.
D) Statements a and b are correct.
E) Statements a, b, and c are correct.

Question 36

Which of the following statements is most correct?

A) Many large firms operate different divisions in different industries, and this makes it hard to develop a meaningful set of industry benchmarks for these types of firms.
B) Financial ratios should be interpreted with caution because there exist seasonal and accounting differences that can reduce their comparability.
C) Financial ratios should be interpreted with caution because it may be difficult to say with certainty what is a "good" value. For example, in the case of the current ratio, a "good" value is neither high nor low.
D) Ratio analysis facilitates comparisons by standardizing numbers.
E) All of the statements above are correct.

Question 37

Which of the following statements is most correct?

A) Using cash to purchase inventories will increase a company's quick ratio and reduce its current ratio.
B) Using cash to purchase inventories will reduce a company's quick ratio and increase its current ratio.
C) If a company's total assets turnover ratio exceeds the industry average, and yet its fixed assets turnover ratio is below the industry average, this suggests that the company has excessive current assets (more than the industry average).
D) Answers b and c are correct.
E) None of the answers above is correct.

Question 38

The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements. This time sensitivity is especially true with respect to the firm's balance sheet.

Question 39

The basic earning power ratio (BEP) reflects the earning power of the firm's assets inclusive of the effects of leverage and taxes. Therefore, this ratio measures the net earning power of the firm reflecting the magnitude of the leverage employed.

Question 40

Stennett Corp.'s CFO has proposed that the company issue new debt and use the proceeds to buy back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume that the proposal would have no effect on the company's operating earnings.)

A) Return on assets (ROA) will decline.
B) The times interest earned ratio (TIE) will increase.
C) Taxes paid will decline.
D) None of the statements above is correct.
E) Statements a and c are correct.

Question 41

Which of the following actions will cause an increase in the quick ratio in the short run?

A) $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit on the sale, which is added to retained earnings.
B) A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.)
C) Marketable securities are sold at cost.
D) All of the answers above.
E) Answers a and b above.

Question 42

Which of the following statements is most correct?

A) A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.
B) The use of debt in a company's capital structure results in tax benefits to the investors who purchase the company's bonds.
C) All else equal, a firm with a higher debt ratio will have a lower basic earning power ratio.
D) All of the answers above are correct.
E) Answers a and c are correct.

Question 43

If a company increases its debt ratio, but leaves its operating income (EBIT) and total assets unchanged, which of the following is most likely to occur:

A) The company's tax liability will fall.
B) The company's net income will rise.
C) The company's basic earning power will fall.
D) Answers a and b are correct.
E) None of the answers above is correct.

Question 44

Which of the following statements is most correct?

A) If a firm's ROE and ROA are the same, this implies that the firm is financed entirely with common equity. (That is, common equity = total assets).
B) If a firm has no lease payments or sinking fund payments, its times-interest-earned (TIE) ratio and fixed charge coverage ratios must be the same.
C) If Firm A has a higher market to book ratio than Firm B, then Firm A must also have a higher price earnings ratio (P/E).
D) All of the statements above are correct.
E) Answers a and b are correct.

Question 45

Huxtable Medical's CFO recently estimated that the company's EVA for the past year was zero. The company's cost of equity capital is 14 percent, its cost of debt is 8 percent, and its debt ratio is 40 percent. Which of the following statements is most correct?

A) The company's net income was zero.
B) The company's net income was negative.
C) The company's ROA was 14 percent.
D) The company's ROE was 14 percent.
E) The company's after-tax operating income was less than the total dollar cost of capital.

Question 46

Company A is financed with 90 percent debt, whereas Company B, which has the same amount of total assets, is financed entirely with equity. Both companies have a marginal tax rate of 35 percent. Which of the following statements is most correct?

A) If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.
B) If the two companies have the same return on assets, Company B will have a higher return on equity.
C) If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.
D) All of the answers above are correct.
E) None of the answers above is correct.

Question 47

Reeves Corporation forecasts that its operating income (EBIT) and total assets will remain the same as last year, but that the company's debt ratio will increase this year. What can you conclude about the company's financial ratios? (Assume that there will be no change in the company's tax rate.)

A) The company's basic earning power (BEP) will fall.
B) The company's return on assets (ROA) will fall.
C) The company's equity multiplier (EM) will increase.
D) All of the answers above are correct.
E) Answers b and c are correct.

Question 48

Which of the following statements is most correct?

A) If two firms pay the same interest rate on their debt and have the same rate of return on assets, and if that ROA is positive, the firm with the higher debt ratio will also have a higher rate of return on common equity.
B) One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is weak initially.
C) Generally, firms with high profit margins have high asset turnover ratios, and firms with low profit margins have low turnover ratios; this result is exactly as predicted by the extended Du Pont equation.
D) All of the statements above are correct.
E) None of the statements above is correct.

Question 49

Companies A and B each have the same level of total assets, the same tax rate, and the same earnings before interest and taxes (EBIT). Company A, however, has a higher debt ratio. Which of the following statements is most correct?

A) Company A has a lower return on assets (ROA).
B) Company A has a lower basic earning power (BEP).
C) Company A has a lower times interest earned (TIE) ratio.
D) Answers a and c are correct.
E) All of the answers above are correct.

Question 50

Last year Thatcher Industries had a current ratio of 1.2, a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct?

A) If the company obtained a short-term bank loan for $500,000 and used the proceeds to purchase inventory, its current ratio would fall.
B) Last year Thatcher industries had $200,000 in inventories.
C) Last year Thatcher industries had $416,667 in current assets.
D) All of the answers above are correct.
E) Answers a and b are correct.

Question 51

Which of the following statements is most correct?

A) If two companies have the same return on equity, they should have the same stock price.
B) If Company A has a higher profit margin and higher total assets turnover relative to Company B, then Company A must have a higher return on assets.
C) If Company A and Company B have the same debt ratio, they must have the same times interest earned (TIE) ratio.
D) Answers b and c are correct.
E) None of the answers above is correct.

Question 52

Van Buren Company has a current ratio = 1.9. Which of the following actions will increase the company's current ratio?

A) Use cash to reduce short-term notes payable.
B) Use cash to reduce accounts payable.
C) Issue long-term bonds to repay short-term notes payable.
D) All of the answers above are correct.
E) Answers b and c are correct.

Question 53

You observe that a firm's profit margin is below the industry average, its debt ratio is below the industry average, and its return on equity exceeds the industry average. What can you conclude?

A) Return on assets is above the industry average.
B) Total assets turnover is above the industry average.
C) Total assets turnover is below the industry average.
D) Both statements a and b are correct.
E) None of the statements above is correct.

Question 54

Which of the following statements is most correct?

A) If a company uses cash to buy inventory, its current ratio will decline.
B) If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way the ratio is calculated, other things held constant.
C) During a recession, it is reasonable to think that most companies' inventory turnover ratios will change while their fixed asset turnover ratios will remain fairly constant.
D) During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline.
E) Each of the statements above is false.

Question 55

A firm is considering actions which will raise its debt ratio. It is anticipated that these actions will have no effect on sales, operating income, or on the firm's total assets. If the firm does increase its debt ratio, which of the following will occur?

A) Return on assets will increase.
B) Basic earning power will decrease.
C) Times interest earned will increase.
D) Profit margin will decrease.
E) Total assets turnover will increase.

Question 56

Which of the following statements is correct?

A) A firm's quick ratio can never exceed its current ratio.
B) An increase in a firm's debt ratio will increase its equity multiplier.
C) If a firm has no lease payments or sinking fund payments, its fixed charge coverage ratio will equal its times-interest-earned ratio.
D) Statements b and c are correct.
E) All of the statements above are correct.

Question 57

Which of the following actions can a firm take to increase its current ratio?

A) Issue short-term debt and use the proceeds to buy back long-term debt with a maturity of more than one year.
B) Reduce the company's days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
C) Use cash to purchase additional inventory.
D) Statements a and b are correct.
E) None of the statements above is correct.

Question 58

Which of the following statements is most correct?

A) An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales.
B) An increase in the DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio.
C) An increase in the DSO, other things held constant, would generally lead to an increase in the ROE.
D) In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets.
E) It is more important to adjust the Debt/Assets ratio than the inventory turnover ratio to account for seasonal fluctuations.

Question 59

Which of the following statements is most correct?

A) If two firms have the same ROE and the same level of risk, they must also have the same EVA.
B) If a firm has positive EVA, this implies that its ROE exceeds its cost of equity.
C) If a firm has positive ROE, this implies that its EVA is also positive.
D) Statements b and c are correct.
E) All of the statements above are correct.

Question 60

Which of the following statements is most correct?

A) If Firms A and B have the same level of earnings per share, and the same market to book ratio, they must have the same price earnings ratio.
B) Firms A and B have the same level of net income, taxes paid, and total assets. If Firm A has a higher interest expense, its basic earnings power ratio (BEP) must be greater than that of Firm B.
C) Firms A and B have the same level of net income. If Firm A has a higher interest expense, its return on equity (ROE) must be greater than that of Firm B.
D) All of the answers above are correct.
E) None of the answers above is correct.

Question 61

Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax 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

Question 62

Division A has a higher ROE than Division B, yet Division B creates more value for shareholders and has a higher EVA than Division A. Both divisions, however, have positive ROEs and EVAs. What could explain these performance measures?

A) Division A is riskier than Division B.
B) Division A is much larger (in terms of equity capital employed) than Division B.
C) Division A has less debt than Division B.
D) Statements a and b are correct.
E) All of the statements above are correct.

Question 63

Which of the following statements is most correct?

A) If Company A has a higher debt ratio than Company B, then we can be sure that A will have a lower times-interest-earned ratio than B.
B) Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets. However, Company A uses more debt than Company B; that is, Company A has a higher debt ratio. Under these conditions, we would expect B's profit margin to be higher than A's.
C) The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA.
D) Statements a, b, and c are true.
E) Statements a, b, and c are false.

Question 64

Last year, Quayle Energy had sales of $200 million, and its inventory turnover ratio was 5.0. The company's current assets totaled $100 million, and its current ratio was 1.2. What was the company's quick ratio?

A) 1.20
B) 1.39
C) 0.72
D) 0.55
E) 2.49

Question 65

A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times-interest-earned ratio?

A) 16
B) 10
C) 7
D) 11
E) 20

Question 66

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; 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

Question 67

Daggy Corporation has the following simplified balance sheet: Cash $ 25,000 Current liabilities $200,000
Inventory 190,000
Accounts receivable 125,000 Long-term debt 300,000
Net fixed assets 360,000 Common equity 200,000
Total $700,000 Total $700,000
The company has been advised that their credit policy is too generous and that they should reduce their days' sales outstanding to 36.5 days (assume a 365-day year). The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company's long-term debt. The interest rate on long-term debt is 10 percent and the company's tax rate is 30 percent. The tighter credit policy is expected to reduce the company's sales to $750,000 and result in EBIT of $70,000. What is the company's expected ROE after the change in credit policy?

A) 14.88%
B) 16.63%
C) 15.75%
D) 18.38%
E) 16.25%

Question 68

Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal to 1.2. The company has $2 million in sales and its current liabilities are $1 million. What is the company's inventory turnover ratio?

A) 5.0
B) 5.2
C) 5.5
D) 6.0
E) 6.3

Question 69

A firm has a profit margin of 15 percent 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 percent, what is the firm's ROA?

A) 8.4%
B) 10.9%
C) 12.0%
D) 13.3%
E) 15.1%

Question 70

Cleveland Corporation has 100,000 shares of common stock outstanding. The company's 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

Question 71

Ruth Company currently has $1,000,000 in accounts receivable. Its days sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a 365-day year. 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 percent. Assuming that the company adopts this change and succeeds in reducing its DSO to 32 days and does lose 10 percent of its sales, what will be the level of accounts receivable following the change?

A) $576,000
B) $676,667
C) $776,000
D) $900,000
E) $976,667

Question 72

You are an analyst following two companies, Company X and Company Y. You have collected the following information: • The two companies have the same total assets.
• Company X has a higher total assets turnover than Company Y.
• Company X has a higher profit margin than Company Y.
• Company Y has a higher inventory turnover ratio than Company X.
• Company Y has a higher current ratio than Company X.
Which of the following statements is most correct?

A) Company X must have a higher net income.
B) Company X must have a higher ROE.
C) Company Y must have a higher quick ratio.
D) Statements a and b are correct.
E) Statements a and c are correct.

Question 73

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent 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 percent, 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 percent (assume a 365-day year). If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need?

A) $ 41,664
B) $ 51,370
C) $ 47,359
D) $106,471
E) $ 93,750

Question 74

Perry Technologies Inc. had the following financial information for the past year: Inventory turnover = 8
Quick ratio = 1.5
Sales = $860,000
Current ratio = 1.75
What were Perry's current liabilities?

A) $430,000
B) $500,000
C) $107,500
D) $ 61,429
E) $573,333

Question 75

You have collected the following information regarding Companies C and D: • The two companies have the same total assets.
• The two companies have the same operating income (EBIT)• The two companies have the same tax rate.
• Company C has a higher debt ratio and a higher interest expense than Company D.
• Company C has a lower profit margin than Company D.
Based on this information, which of the following statements is most correct?

A) Company C must have a higher level of sales.
B) Company C must have a lower ROE.
C) Company C must have a higher times-interest-earned (TIE) ratio.
D) Company C must have a lower ROA.
E) Company C must have a higher basic earning power (BEP) ratio.

Question 76

An analyst has obtained the following information regarding two companies, Company X and Company Y: • Company X and Company Y have the same total assets.
• Company X has a higher interest expense than Company Y.
• Company X has a lower operating income (EBIT)• Company X and Company Y have the same return on equity (ROE)• Company X and Company Y have the same total assets turnover (TATO)• Company X and Company Y have the same tax rate.
Based on this information, which of the following statements is most correct?

A) Company X has a higher times-interest-earned (TIE) ratio.
B) Company X and Company Y have the same debt ratio.
C) Company X has a higher return on assets (ROA).
D) Company X has a lower profit margin.
E) Company X has a higher basic earning power (BEP) ratio.

Question 77

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%

Question 78

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio?

A) 2.4
B) 3.4
C) 3.6
D) 4.0
E) 5.0

Question 79

Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and that its return on assets (ROA) was 9 percent. 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

Question 80

The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax 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 which is publicly traded had a price/earnings ratio 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