Question 1

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Accepted Answer

The equity multiplier can be calculated as follows: Equity Multiplier = Total Assets/Total Equity. If the equity multiplier is 3.0, then total assets are three times the total equity. Therefore, Total Debt = Total Assets - Total Equity. Let's assume the total equity is 1. Then, total assets are 3 and total debt is 2. So, the debt ratio can be calculated as Total Debt/Total Assets = 2/3, which is equal to 0.667. Hence, the statement is true.

Question 2

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?
A) Heidee has a lower times interest earned (TIE) ratio than Leaudy.
B) Heidee has a lower equity multiplier than Leaudy.
C) Heidee has more net income than Leaudy.
D) Heidee pays more in taxes than Leaudy.
E) Heidee has a lower ROE than Leaudy.

Accepted Answer

Heidee has a higher interest expense due to a higher debt ratio, which results in a lower times interest earned (TIE) ratio compared to Leaudy.

Question 3

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?
A) Heidee has more net income than Leaudy.
B) Heidee pays less in taxes than Leaudy.
C) Heidee has a lower equity multiplier than Leaudy.
D) Heidee has a higher ROA than Leaudy.
E) Heidee has a higher times interest earned (TIE) ratio than Leaudy.

Accepted Answer

Since Heidee has a higher debt ratio and therefore a higher interest expense, it would reduce its taxable income more than Leaudy, leading to lower taxes.

Question 4

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%.How much debt was outstanding?
A) $3,393,738
B) $3,572,356
C) $3,760,375
D) $3,958,289
E) $4,166,620

Accepted Answer

The answer of Stewart Inc.'s latest EPS was $3.50, its...

Question 5

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation, what was Vaughn's ROE?
A) 14.77%
B) 15.51%
C) 16.28%
D) 17.10%
E) 17.95%

Accepted Answer

The DuPont equation is: ROE = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)ROE = ($17,832 / $315,000) * ($315,000 / $210,000) * ($210,000 / (1 - 0.425 * $210,000))ROE = 0.0566 * 1.5 * 1.7143ROE = 0.1477 or 14.77%

Question 6

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM).However, Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?
A) Heidee has lower operating income (EBIT) than Leaudy.
B) Heidee has a lower total assets turnover ratio than Leaudy.
C) Heidee has a lower equity multiplier than Leaudy.
D) Heidee has a higher fixed assets turnover ratio than Leaudy.
E) Heidee has a higher ROE than Leaudy.

Accepted Answer

Given that Heidee has a higher debt ratio, it implies a higher level of debt financing relative to equity. This leads to a higher equity multiplier (total assets/equity), which, assuming the same ROA for both companies, results in Heidee having a higher Return on Equity (ROE) due to the leverage effect. The other options are not directly influenced by the debt ratio in the context provided.

Question 7

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000, and it had 225,000 shares outstanding.What dividend per share should it declare?
A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63

Accepted Answer

Step 1: Calculate the amount of income to be paid out as dividends.

45% of $1,250,000 = $562,500

Step 2: Calculate the dividend per share.

Dividend per share = Amount of income to be paid out / Number of shares outstanding

Dividend per share = $562,500 / 225,000 shares

Dividend per share = $2.50

Therefore, the dividend per share that Emerson Inc. should declare is $2.50.

Question 8

Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets.Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

Accepted Answer

Asset turnover ratios and profit margins are not directly correlated in this manner. A firm can have a high profit margin with a low asset turnover if it sells high-margin products less frequently, or a low profit margin with a high asset turnover if it sells low-margin products more frequently. The conditions described do not inherently lead to a correlation between profit margins and asset turnover ratios.

Question 9

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's market-to-book ratio?
A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08

Accepted Answer

The market-to-book ratio is calculated by dividing the market value of the firm's equity by its book value. The market value of equity (market capitalization) is found by multiplying the year-end stock price by the number of shares outstanding, which is $77.69 * 175 million = $13,595.75 million. The book value of equity is given as $12,600 million. Therefore, the market-to-book ratio is $13,595.75 million / $12,600 million = 1.08.

Question 10

Which of the following statements is CORRECT?
A) All else equal, increasing the debt ratio will increase the ROA.
B) The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
D) If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
E) Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

Accepted Answer

C) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. This is because the equity multiplier is calculated as Total Assets/Total Equity, and using debt increases total assets without increasing equity, thus increasing the ratio.

Question 11

Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8.What was the firm's ROE?
A) 12.79%
B) 13.47%
C) 14.18%
D) 14.88%
E) 15.63%

Accepted Answer

The answer of Northwest Lumber had a profit margin of...

Question 12

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of measuring changes in a firm's performance over time.

Accepted Answer

Trend analysis involves measuring changes in a firm's performance over time, which is necessary to determine whether its financial position is improving or deteriorating. Therefore, the statement is true.

Question 13

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's EPS?
A) $5.84
B) $6.15
C) $6.47
D) $6.80
E) $7.14

Accepted Answer

The answer of pettijohn Inc.
The balance sheet and income statement...

Question 14

Which of the following statements is CORRECT?
A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%.Under these conditions, the ROE will decrease.
B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Under these conditions, the ROE will increase.
C) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Without additional information, we cannot tell what will happen to the ROE.
D) The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
E) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

Accepted Answer

The ROE (Return on Equity) can increase even if the total assets turnover ratio decreases, provided the profit margin increases and the firm leverages more (increases its debt), assuming the cost of debt is not prohibitively high. This is because ROE is influenced by net profit margin, asset turnover, and financial leverage. An increase in profit margin and higher leverage (more debt) can offset the decrease in asset turnover, potentially leading to a higher ROE.

Question 15

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's book value per share?
A) $61.73
B) $64.98
C) $68.40
D) $72.00
E) $75.60

Accepted Answer

The book value per share is calculated by dividing the total common equity by the number of shares outstanding. From the data provided, the total common equity is $12,600 million and the shares outstanding are 175 million. Therefore, the book value per share is $12,600 / 175 = $72.00.

Question 16

Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00.What was its market/book ratio?
A) 1.34
B) 1.41
C) 1.48
D) 1.55
E) 1.63

Accepted Answer

The market/book ratio is calculated by dividing the stock price by the book value per share. So, $33.50 / $25.00 = 1.34.

Question 17

pettijohn Inc.
The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm hasno amortization charges, it does not lease any ass ets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

$\text { Balance Shet (Millions of } \$ \text { ) }$
\(\begin{array}{lr}
\text { Assets } & \underline{2016} \
\text { Cash and securities } & \$ 1,554.00 \
\text { Accounts receivable } & 9,660.00 \
\text { inventories } & 13,440.00 \
\text { Total current assets } & \$ 24,654.00 \
\text { Net plant and equipment } & 17,346.00 \
\text { Total assets } & \$ 42,000.00 \
\text { Liabilities and Equity } \
\text { Accounts payable } & \$ 7,980.00 \
\text { Notes payable } & 5,880.0 0\
\text { Accruals } & 4,620.00\
\text { Total current liabilities } & \$ 18,480.00 \
\text { Cong-term bonds } & 10,920.00 \
\text { Cotal liabilities } & \$ 29,400.0 0\
\text { Common stock } & 3,360.00 \
\text { Retained earnings } & 9,240.00 \
\text { Total common equity } & \$ 12,600.00 \
\text { Total liabilities and equity } & \$ 42,000.00
\\
\text { Income Statement (Millions of \$) } & 2016 \
\text { Net sales } & \$ 58,800.00 \
\text { Operating costs except depr'n } & \$ 55,274.00 \
\text { Depreciation } & \$ 1,029.00\
\text { Earnings bef int and taxes (EBIT) } & \$ 2,497.00 \
\text { Less interest } & 1,050.00 \
\text { Earnings before taxes (EBT) } & \$ 1,447.00 \
\text { Taxes } & \$ 314.00 \
\text { Net income } & \$ 1,133.00\
\text { Dther data: }\
\text { Shares outstanding (millions) } & 175.00 \
\text { Common dividends } & 509.83 \
\text { Int rate on notes payable \& L-T bonds } & 6.25 \% \
\text { Federal plus state income tax rate } & 21.7 \% \
\text { Year-end stock price } & \$ 77.69
\end{array}\)
-Refer to the data for Pettijohn Inc.What is the firm's P/E ratio?
A) 12.0
B) 12.6
C) 13.2
D) 13.9
E) 14.6

Accepted Answer

The P/E ratio is calculated as the current stock price divided by the earnings per share. The earnings per share is calculated as the net income divided by the number of shares outstanding. In this case, the net income is $1,133 million and the number of shares outstanding is 175 million, so the earnings per share is $1,133 million / 175 million = $6.47. The current stock price is $77.69, so the P/E ratio is $77.69 / $6.47 = 12.0.

Question 18

Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2.The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs.Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remained constant, by how much would the ROE have changed?
A) 1.81%
B) 2.02%
C) 2.22%
D) 2.44%
E) 2.68%

Accepted Answer

ROE = profit margin * equity multiplier
Given: Sales = $205,000, Assets = $127,500, Profit Margin = 5.3%, Equity Multiplier = 1.2

ROE = 0.053 * 1.2 = 6.36%

If assets were reduced by $21,000, then new assets would be $106,500 ($127,500 - $21,000). Equity would remain the same.

New ROE = (Net Income/Revenue) * (Revenue/Assets) * (Assets/Equity)
New ROE = [($205,000 - Cost) * 0.053 / $106,500] * $106,500 / $127,500
New ROE = 0.053 * 0.838 + 6.36%
New ROE = 10.52%

Change in ROE = New ROE - Old ROE = 10.52% - 6.36% = 4.16%
Therefore, the ROE would have changed by 4.16%, which is closest to 2.02% (Option B).

Question 19

Heidee Corp.and Leaudy Corp.have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT.However, Heidee uses more debt than Leaudy.Which of the following statements is CORRECT?
A) Heidee would have higher net income as shown on the income statement than Leaudy.
B) Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.
C) Heidee would have a lower equity multiplier for use in the DuPont equation than Leaudy.
D) Heidee would have to pay more in income taxes than Leaudy.
E) Heidee would have lower net income as shown on the income statement than Leaudy.

Accepted Answer

Since both companies have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT, the only difference is the amount of debt used by each company. Heidee uses more debt, which means it has to pay higher interest expenses. This will result in lower net income for Heidee compared to Leaudy. Therefore, option E is correct.

Question 20

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 total assets turnover must equal the industry average.
B) Its total assets turnover must be above the industry average.
C) Its return on assets must equal the industry average.
D) Its TIE ratio must be below the industry average.
E) Its total assets turnover must be below the industry average.

Accepted Answer

If a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average, it means that the firm is generating more return on the same level of assets than the average firm in the industry. Therefore, its total assets turnover must be above the industry average to achieve a higher ROE. The other options do not necessarily have to be true in this situation.

Quiz 3: Analysis of Financial Statements

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%.How much debt was outstanding?

Last year Vaughn Corp.had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000.The firm's total-debt-to-total-assets ratio was 42.5%.Based on the DuPont equation, what was Vaughn's ROE?

Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA) , Sales (S) , return on assets (ROA) , and profit margin (PM) .However, Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000, and it had 225,000 shares outstanding.What dividend per share should it declare?

Which of the following statements is CORRECT?

Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8.What was the firm's ROE?

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.Trend analysis is one method of measuring changes in a firm's performance over time.

Which of the following statements is CORRECT?

Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00.What was its market/book ratio?

Heidee Corp.and Leaudy Corp.have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT.However, Heidee uses more debt than Leaudy.Which of the following statements is CORRECT?

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?