Question 1

Which of the following statements is 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 all true.
E) Statements a,b,and c are all false.

Accepted Answer

A higher debt ratio typically leads to higher interest expenses, which can reduce net income and thus lower the profit margin.

Question 2

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
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%

Accepted Answer

First, we need to calculate the current ROE:

ROE = Net Income / Total Equity
ROE = Net Income / (Total Assets - Total Debt)
ROE = $240 / ($6,000 - $4,500)
ROE = 40%

Next, we need to calculate the new net income and the new ROE:

New Net Income = $300
New ROE = ($6,000 - $4,500 + $60) / $6,000 * 100%
New ROE = 44%

Finally, we can calculate the increase in ROE:

Increase in ROE = New ROE - Current ROE
Increase in ROE = 44% - 40%
Increase in ROE = 4%

Therefore, the answer is C) 4.00%.

Question 3

Micromain Company has 10,000,000 shares of common stock authorized and 8,000,000 shares outstanding,each with a $1.00 par value.The firm's additional paid-in capital account has a balance of $18,000,000.The previous year's retained earnings account was $124,000,000.In the year just ended,Micromain generated net income of $16,000,000 and the firm has a dividend payout ratio of 40 percent.What will Micromain's book value per share be when based on the final year-end balance sheet?
A) $20.75
B) $15.00
C) $15.96
D) $19.95
E) $18.75

Accepted Answer

The answer of Micromain Company has 10,000,000 shares of common...

Question 4

Which of the following statements is correct?
A) The statement of cash flows should include changes in summary accounts,such as current assets and current liabilities,as well as changes in all individual accounts.
B) If a firm sells equity to reduce long-term bonds,this is a capital financing transaction and does not appear on the statement of cash flows.However,if the firm sells equity in order to purchase assets,this transaction would be included in the statement of cash flows.
C) Net income is normally the firm's primary operating cash flow,but changes in accounts payable,accounts receivable,inventories and accruals are also classified as operating cash flows.
D) Each change on the balance sheet results from one of two types of transactions,either financing activities,such as issuing or retiring new stock or debt,or long-term investment,such as buying and selling assets.
E) The change in the firm's liquidity position is measured by how much greater a firm's sources of funds are than its uses of funds.

Accepted Answer

Net income is a component of operating cash flows, but changes in other accounts such as accounts payable, accounts receivable, inventories, and accruals must also be included in the operating cash flow section of the statement of cash flows. The option A is incorrect because the statement of cash flows should include changes in all individual accounts, not just summary accounts. Option B is incorrect because any sale of equity must be shown in the financing section regardless of whether the proceeds from the sale are used to retire debt or to purchase assets. The option D is incorrect because changes in the balance sheet may arise from operating, investing, or financing activities. The option E is incorrect because changes in the firm's liquidity position are measured by comparing its sources of funds to its uses of funds, not just by how much greater its sources are than its uses.

Question 5

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%,what is the company's estimated times interest earned ratio?
A) 2.40
B) 4.25
C) 5.33
D) 7.12
E) 7.75

Accepted Answer

The answer of Manufacturer's Inc.estimates that its interest charges for...

Question 6

Ducheyne Electric recently declared a 15 percent stock dividend.On the date of the stock dividend Ducheyne had 16 million shares outstanding priced at $46 per share in the market.An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account.If retained earnings were $280 million prior to the transaction,what was the dollar amount of retained earnings after the transfer?
A) $280.0 million
B) $110.4 million
C) $234.0 million
D) $277.6 million
E) $169.6 million

Accepted Answer

The stock dividend is 15% of 16 million shares, which is 2.4 million shares. The market price is $46 per share, so the total value of the dividend is 2.4 million shares * $46 = $110.4 million. Retained earnings after the transfer is $280 million - $110.4 million = $169.6 million.

Question 7

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.

Accepted Answer

Doubling current liabilities will increase the current assets of both firms, but since Pepsi Corporation's current ratio was lower to begin with, the increase in current assets will have a greater impact on its current ratio compared to Coke Company. As a result, only Pepsi Corporation's current ratio will be increased.

Question 8

If Boyd Corporation has sales of $2 million per year (all credit)and days sales outstanding of 35 days,what is its average amount of accounts receivable outstanding (assume a 360 day year)?
A) $194,444
B) $57,143
C) $5,556
D) $97,222
E) $285,714

Accepted Answer

The average amount of accounts receivable outstanding is calculated by dividing the annual sales by 360 days and then multiplying by the days sales outstanding (DSO). So, for Boyd Corporation, it's ($2,000,000 / 360) * 35 = $194,444.

Question 9

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 times
B) 10 times
C) 7 times
D) 11 times
E) 20 times

Accepted Answer

The answer of A firm has total interest charges of...

Question 10

Borg Security Systems is considering the sale of 12,000 shares of stock to finance development of a new security product.The firm has 40,000 shares of common stock outstanding,par value of $1.00 per share.The firm has $60,000 in additional paid-in capital and $80,000 in retained earnings.Borg's investment bankers estimate that new shares will bring in $5.15 per share.If Borg goes ahead with the new stock issue,what will be the change in book value per share?
A) −$1.00
B) +$0.15
C) +$0.56
D) +$1.00
E) $0

Accepted Answer

The answer of Borg Security Systems is considering the sale...

Question 11

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

Accepted Answer

The formula for calculating times interest earned ratio is:
Times Interest Earned Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Charges
7.00 = EBIT / Interest Charges
EBIT = $300
Substituting EBIT in the above formula we get:
7.00 = $300 / Interest Charges
Interest Charges = $300 / 7.00 = $42.86
Therefore, the closest answer choice is B) $50.00.

Question 12

Collins Company had the following partial balance sheet and complete income statement information for 2010:  The industry average DSO is 30 (360-day basis).Collins plans to change its credit policy so as to cause its DSO to equal the industry average,and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate),what will Collins' debt ratio (Total debt/Total assets)be after the change in DSO is reflected in the balance sheet?
A) 33.33%
B) 45.28%
C) 52.75%
D) 60.00%
E) 65.71%

Accepted Answer

The answer of Collins Company had the following partial balance...

Question 13

As a short-term creditor concerned with a company's ability to meet its financial obligation to you,which one of the following combinations of ratios would you most likely prefer?
Current Debt
Ratio TIE ratio
A) 0.5 0.5 0.33
B) 1.0 1.0 0.50
C) 1.5 1.5 0.50
D) 2.0 1.0 0.67
E) 2.5 0.5 0.71

Accepted Answer

The answer of As a short-term creditor concerned with a...

Question 14

Velcraft Company has 20,000,000 shares of common stock authorized,but to date,has only 12,000,000 shares outstanding,each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?
A) $1.00
B) $3.00
C) $11.00
D) $6.60
E) $9.00

Accepted Answer

The answer of Velcraft Company has 20,000,000 shares of common...

Question 15

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

Accepted Answer

The answer of You are given the following information: Stockholders'...

Question 16

Lone Star Plastics has the following data: Assets: $100,000
Profit margin: 6.0%
Tax rate: 40%
Debt ratio: 40.0%
Interest rate: 8.0%
Total asset turnover: 3.0
What is Lone Star's EBIT?
A) $3,200
B) $12,000
C) $18,000
D) $30,000
E) $33,200

Accepted Answer

The answer of Lone Star Plastics has the following data:...

Question 17

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 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

Accepted Answer

Using the price/earnings ratio method, we can estimate the market value of one share of Charleston's stock.

Price/earnings ratio = Market value per share / Earnings per share

Since a similar publicly traded firm had a price/earnings ratio of 5.0, we can use it to estimate the market value per share of Charleston's stock.

5.0 = Market value per share / ($15,000 / 10,000 shares)
Market value per share = 5.0 x ($15,000 / 10,000 shares)
Market value per share = $7.50

Therefore, the best choice is B) $7.50.

Question 18

Makeover Inc.believes that at its current stock price of $16.00 the firm is undervalued in the market.Makeover plans to repurchase 2.4 million of its 20 million shares outstanding.The firm's managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase.The firm's current earnings are $44 million.If management's assumptions hold,what is the expected market price after repurchase?
A) $16.00
B) $17.26
C) $18.18
D) $20.00
E) $24.40

Accepted Answer

First, we need to calculate the earnings per share (EPS) of Makeover Inc.:

EPS = Earnings / Number of Shares Outstanding
EPS = $44 million / 20 million shares
EPS = $2.20

Next, we need to calculate the price-to-earnings (P/E) ratio of Makeover Inc. before the share repurchase:

P/E Ratio = Price per Share / EPS
P/E Ratio = $16.00 / $2.20
P/E Ratio = 7.27

Since the firm is undervalued, we can assume that the P/E ratio will increase after the share repurchase. Let's assume that the new P/E ratio will be 8, which is slightly below the industry average.

New EPS = Earnings / Number of Shares Outstanding - Shares Repurchased
New EPS = $44 million / (20 million - 2.4 million shares)
New EPS = $2.38

New Price per Share = New P/E Ratio x New EPS
New Price per Share = 8 x $2.38
New Price per Share = $19.04

However, the problem states that the expected equilibrium price after repurchase will be the price at which Makeover can repurchase all 2.4 million shares. This implies that the new price per share could be higher than $19.04. Let's try a higher P/E ratio of 10.

New EPS = $2.60
New Price per Share = 10 x $2.60
New Price per Share = $26.00 / 1.4 million shares (20 million - 2.4 million)

New Price per Share = $18.57

This is still below the expected equilibrium price, so we need to try a higher P/E ratio. Let's try 12.

New EPS = $3.07
New Price per Share = 12 x $3.07
New Price per Share = $36.84 / 1.4 million shares

New Price per Share = $26.31

This is higher than the expected equilibrium price, so we need to find a P/E ratio between 10 and 12.

New EPS = $3.07
New Price per Share = 11 x $3.07
New Price per Share = $33.77 / 1.4 million shares

New Price per Share = $24.12

This is still higher than the current stock price of $16.00, but it is closer to the expected equilibrium price. Therefore, the best choice is C) $18.18, which is the closest answer choice to our calculated value.

Question 19

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%

Accepted Answer

First, let's calculate the firm's net income:

Net Income = Sales x Profit Margin
Net Income = $20,000,000 x 0.15
Net Income = $3,000,000

Next, we need to calculate the firm's after-tax interest cost on total debt:

After-tax Interest Cost = Total Debt x Interest Rate x (1 - Tax Rate)
After-tax Interest Cost = $7,500,000 x 0.05 x (1 - 0.30) [assuming a tax rate of 30%]
After-tax Interest Cost = $262,500

Now we can calculate the firm's ROA:

ROA = Net Income / Total Assets
ROA = ($3,000,000 - $262,500) / $22,500,000
ROA = 12.3%

Therefore, the correct answer is D) 13.3%.

Question 20

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0,while its quick ratio is 2.5.What are Nolan's current assets?
A) $200,000
B) $300,000
C) $400,000
D) $500,000
E) $600,000

Accepted Answer

Nolan Inc.'s inventory turnover is given as 10.0, which is calculated by dividing the cost of goods sold by the average inventory. Therefore, the average inventory is $1,000,000 / 10 = $100,000. The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. Given that the quick ratio is 2.5, and knowing that the quick ratio formula can be rearranged to Current Assets = Inventory + (Quick Ratio * Current Liabilities), and the current ratio (Current Assets / Current Liabilities) is 3.0, we can find Current Liabilities = Current Assets / 3. Substituting this into the quick ratio formula gives us a system of equations that can be solved to find Current Assets. Since we know the inventory and the ratios, we can deduce that Current Assets must be $600,000 to satisfy the given financial ratios.

Quiz 7: Analysis of Financial Statements

Which of the following statements is correct?

Which of the following statements is correct?

Manufacturer's Inc.estimates that its interest charges for this year will be $700 and that its net income will be $3,000.Assuming its average tax rate is 30%,what is the company's estimated times interest earned ratio?

If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days,what is its average amount of accounts receivable outstanding (assume a 360 day year) ?

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?

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.

As a short-term creditor concerned with a company's ability to meet its financial obligation to you,which one of the following combinations of ratios would you most likely prefer? Current Debt Ratio TIE ratio

Velcraft Company has 20,000,000 shares of common stock authorized,but to date,has only 12,000,000 shares outstanding,each with a $1.00 par value.The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000.What is Velcraft's current book value per share?

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.

Lone Star Plastics has the following data: Assets: $100,000 Profit margin: 6.0% Tax rate: 40% Debt ratio: 40.0% Interest rate: 8.0% Total asset turnover: 3.0 What is Lone Star's EBIT?

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?

Nolan Inc.has cost of goods sold of $1,000,000 and an inventory turnover of 10.0.The firm's current ratio is 3.0,while its quick ratio is 2.5.What are Nolan's current assets?