Question 1

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425,000,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.Assume all sales to be on credit.Do not round your intermediate calculations.
A) 5.16
B) 8.10
C) 6.20
D) 6.53
E) 6.73

Accepted Answer

11ea856c_8bf3_6de9_9aec_637f2bce3182_TB1222_00

Question 2

Royce Corp's sales last year were $250,000,and its net income was $23,000.What was its profit margin?
A) 9.57%
B) 8.37%
C) 9.20%
D) 11.32%
E) 9.38%

Accepted Answer

? 11ea856c_8bf2_5c6d_9aec_3599c3530146_TB1222_00

Question 3

River Corp's total assets at the end of last year were $390,000 and its net income was $32,750.What was its return on total assets?
A) 6.97%
B) 8.82%
C) 8.40%
D) 8.99%
E) 7.31%

Accepted Answer

11ea856c_8bf2_837e_9aec_392c4a1d70d1_TB1222_00

Question 4

Precision Aviation had a profit margin of 6.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?
A) 17.72%
B) 20.93%
C) 14.34%
D) 13.84%
E) 16.88%

Accepted Answer

11ea856c_8bf2_f8b5_9aec_63bc9d58803c_TB1222_00

Question 5

Herring Corporation has operating income of $270,000 and a 40% tax rate.The firm has short-term debt of $119,000,long-term debt of $316,000,and common equity of $435,000.What is its return on invested capital?
A) 17.37%
B) 17.95%
C) 18.62%
D) 19.87%
E) 20.72%

Accepted Answer

? 11ea856c_8bf2_d1a2_9aec_19038b6fa096_TB1222_00

Question 6

Hoagland Corp's stock price at the end of last year was $20.50,and its book value per share was $25.00.What was its market/book ratio?
A) 0.94
B) 0.82
C) 0.69
D) 0.87
E) 0.67

Accepted Answer

11ea856c_8bf2_f8b4_9aec_23c56b2005ee_TB1222_00

Question 7

Safeco's current assets total to $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 these transactions?
A) The transactions would improve Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
B) The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
C) The transactions would have no effect on the firms' financial strength as measured by their current ratios.
D) The transactions would lower both firms' financial strength as measured by their current ratios.
E) The transactions would improve both firms' financial strength as measured by their current ratios.

Accepted Answer

The key here is to recognize that if the CR is less than 1.0,then a given increase to both current assets and current liabilities will increase the CR,while the reverse will hold if the initial CR is greater than 1.0.Thus,the transactions would make Risco look stronger but Safeco look weaker.Here's an illustration:
Safeco: 11ea856c_8bf1_9918_9aec_650fe3342d61_TB1222_00 Risco: 11ea856c_8bf1_9919_9aec_73ebfbd1f91d_TB1222_00 All of the statements except b are incorrect.

Question 8

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.

Accepted Answer

The companies have the same EBIT and assets,hence the same BEP ratio.If the interest rate is less than the BEP,then using more debt will raise the ROE.Therefore,statement e is correct.The others are all incorrect.

Question 9

Han Corp's sales last year were $440,000,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.
A) 11.65
B) 12.74
C) 12.33
D) 13.55
E) 15.58

Accepted Answer

11ea856c_8bf3_94fa_9aec_c51045fe4a3c_TB1222_00

Question 10

Ryngard Corp's sales last year were $43,000,and its total assets were $16,000.What was its total assets turnover ratio (TATO)?
A) 2.50
B) 2.28
C) 2.71
D) 3.06
E) 2.69

Accepted Answer

11ea856c_8bf2_0e4a_9aec_db7b6acda5e1_TB1222_00

Question 11

Helmuth Inc's latest net income was $1,500,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare? Do not round your intermediate calculations.
A) $3.24
B) $2.31
C) $3.21
D) $2.28
E) $3.00

Accepted Answer

11ea856c_8bf3_46d7_9aec_415f1e99be1d_TB1222_00

Question 12

Beranek Corp has $855,000 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?
A) $287,280
B) $342,000
C) $318,060
D) $403,560
E) $277,020

Accepted Answer

? 11ea856c_8bf2_355b_9aec_b53ba919002c_TB1222_00

Question 13

Song Corp's stock price at the end of last year was $28.75 and its earnings per share for the year were $1.30.What was its P/E ratio?
A) 23.00
B) 18.80
C) 27.64
D) 22.12
E) 17.69

Accepted Answer

? 11ea856c_8bf2_d1a3_9aec_673956b7dbf4_TB1222_00

Question 14

Garcia Industries has sales of $187,500 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.
A) $333.37
B) $311.15
C) $370.41
D) $422.27
E) $459.31

Accepted Answer

11ea856c_8bf3_46d8_9aec_a54ccc99c365_TB1222_00

Question 15

Which of the following statements is CORRECT?
A) Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than B's.
B) Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.
C) Since the 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.
D) Suppose all firms follow similar financing policies,face similar risks,have equal access to capital,and operate in competitive product and capital markets.However,firms face different operating conditions because,for example,the grocery store industry is different from the airline industry.Under these conditions,firms with high profit margins will tend to have high asset turnover ratios,and firms with low profit margins will tend to have low turnover ratios.
E) Klein Cosmetics has a profit margin of 5.0%,a total assets turnover ratio of 1.5 times,no debt and therefore an equity multiplier of 1.0,and an ROE of 7.5%.The CFO recommends that the firm borrow funds using long-term debt,use the funds to buy back stock,and raise the equity multiplier to 2.0.The size of the firm (assets)would not change.She thinks that operations would not be affected,but interest on the new debt would lower the profit margin to 4.5%.This would probably not be a good move,as it would decrease the ROE from 7.5% to 6.5%.

Accepted Answer

The statement in option B accurately describes how a firm can determine the amount of sales required to achieve a target TIE ratio, given information on debt, interest rate, tax rate, and operating costs. The other options contain inaccuracies or do not provide useful information.

Question 16

Meyer Inc's total invested capital is $610,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?
A) $164,045
B) $150,500
C) $115,885
D) $165,550
E) $185,115

Accepted Answer

11ea856c_8bf3_1fc6_9aec_b3e291f336ea_TB1222_00

Question 17

Zero Corp's total common equity at the end of last year was $350,000 and its net income was $70,000.What was its ROE?
A) 17.00%
B) 20.00%
C) 17.40%
D) 24.20%
E) 19.40%

Accepted Answer

? 11ea856c_8bf2_aa90_9aec_19d76ea8e1e8_TB1222_00

Question 18

X-1 Corp's total assets at the end of last year were $395,000 and its EBIT was $52,500.What was its basic earning power (BEP)ratio?
A) 11.30%
B) 15.55%
C) 11.70%
D) 16.35%
E) 13.29%

Accepted Answer

? 11ea856c_8bf2_837f_9aec_23ae08383101_TB1222_00

Question 19

Ajax Corp's sales last year were $400,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times-interest-earned (TIE)ratio?
A) 3.00
B) 3.66
C) 2.46
D) 2.61
E) 3.48

Accepted Answer

? 11ea856c_8bf2_5c6c_9aec_35bff57abca5_TB1222_00

Question 20

Your sister is thinking about starting a new business.The company would require $300,000 of assets,and it would be financed entirely with common stock.She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?
A) $38,475
B) $44,145
C) $33,210
D) $40,500
E) $41,310

Accepted Answer

? 11ea856c_8bf2_aa91_9aec_83a484092dd1_TB1222_00

Quiz 4: Analysis of Financial Statements

Royce Corp's sales last year were $250,000,and its net income was $23,000.What was its profit margin?

River Corp's total assets at the end of last year were $390,000 and its net income was $32,750.What was its return on total assets?

Precision Aviation had a profit margin of 6.25%,a total assets turnover of 1.5,and an equity multiplier of 1.8.What was the firm's ROE?

Herring Corporation has operating income of $270,000 and a 40% tax rate.The firm has short-term debt of $119,000,long-term debt of $316,000,and common equity of $435,000.What is its return on invested capital?

Hoagland Corp's stock price at the end of last year was $20.50,and its book value per share was $25.00.What was its market/book ratio?

Ryngard Corp's sales last year were $43,000,and its total assets were $16,000.What was its total assets turnover ratio (TATO) ?

Helmuth Inc's latest net income was $1,500,000,and it had 225,000 shares outstanding.The company wants to pay out 45% of its income.What dividend per share should it declare? Do not round your intermediate calculations.

Song Corp's stock price at the end of last year was $28.75 and its earnings per share for the year were $1.30.What was its P/E ratio?

Which of the following statements is CORRECT?

Meyer Inc's total invested capital is $610,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?

Zero Corp's total common equity at the end of last year was $350,000 and its net income was $70,000.What was its ROE?

X-1 Corp's total assets at the end of last year were $395,000 and its EBIT was $52,500.What was its basic earning power (BEP) ratio?

Ajax Corp's sales last year were $400,000,its operating costs were $362,500,and its interest charges were $12,500.What was the firm's times-interest-earned (TIE) ratio?