fin335 questions fin335 questions

Subject: Business / Finance Question

Chapter 4
[i]. Ramala Corp’s sales last year were $48,000, and its total assets were $25,500. What was its total assets turnover ratio (TATO)?
a.1.88
b.1.99
c.1.10
d.1.21
e.1.32
[ii]. Ruby Corp’s sales last year were $435,500, its operating costs were $350,000, and its interest charges were $10,000. What was the firm’s times interest earned (TIE) ratio?
a.8.29
b.8.42
c.8.55
d.8.68
e.8.81
[iii]. Roberts Corp’s sales last year were $300,000, and its net income after taxes was $25,000. What was its profit margin on sales?
a.7.65%
b.7.82%
c.7.99%
d.8.16%
e.8.33%
[iv]. Reynolds Corp’s total assets at the end of last year were $300,000 and its net income after taxes was $25,000. What was its return on total assets?
a.8.15%
b.8.33%
c.8.51%
d.8.69%
e.8.87%
[v]. Rollins Corp’s total assets at the end of last year were $300,000 and its EBIT was $75,000. What was its basic earning power (BEP)?
a.17.50%
b.20.00%
c.22.50%
d.25.00%
e.27.50%
[vi]. Raleigh Corp’s total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE?
a.18.33%
b.18.67%
c.19.00%
d.19.33%
e.19.67%
[vii]. Rutland Corp’s stock price at the end of last year was $30.25 and its earnings per share for the year were $2.45. What was its P/E ratio?
a.11.65
b.12.00
c.12.35
d.12.70
e.13.05
[viii].Rand Corp’s stock price at the end of last year was $40.00, and its book value per share was $24.50. What was its Market/Book ratio?
a.1.03
b.1.18
c.1.33
d.1.48
e.1.63
[ix]. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firm’s ROE?
a.14.39%
b.14.69%
c.14.99%
d.15.29%
e.15.59%
[x]. An investor is considering starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 15.0% return on the invested capital, which means that the firm must have an ROE of 15.0%. How much net income must be expected to warrant starting the business?
a.$45,000
b.$55,000
c.$65,000
d.$75,000
e.$85,000
[xi]. Rolle Corp has $500,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to bring the Debt/Assets ratio to 45%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
a.$225,000
b.$240,000
c.$255,000
d.$270,000
e.$285,000
[xii]. Rull Corp’s assets are $500,000, and its total debt outstanding is $200,000. The new CFO wants to employ a debt ratio of 60%. How much debt must the company add or subtract to achieve the target debt ratio?
a.$ 80,000
b.$ 90,000
c.$100,000
d.$110,000
e.$120,000
[xiii].Collins Inc’s latest net income was $1 million, and it had 200,000 shares outstanding. The company wants to pay out 40% of its income. What dividend per share should the company declare?
a.$1.60
b.$1.70
c.$1.80
d.$1.90
e.$2.00
[xiv]. Cooper Inc’s latest EPS was $4.00, its book value per share was $20.00, it had 200,000 shares outstanding, and its debt ratio was 40%. How much debt was outstanding?
a.$2,333,333
b.$2,666,667
c.$3,000,000
d.$3,333,333
e.$3,666,667
[xv]. Kirby Industries has sales of $110,000 and accounts receivable of $12,500, and it gives its customers 30 days to pay. The industry average DSO is 25.5 days, based on a 365-day year. If the company changes its credit and collection policy sufficient to cause its DSO to fall to the industry average, and if it earns 9.5% on any cash freed-up by this change, how would that affect the firm’s net income, assuming other things are held constant?
a.$422.12
b.$435.43
c.$447.86
d.$457.43
e.$469.93
[xvi]. Rangala Corp sells on terms that allow customers 30 days to pay for merchandise. Its sales last year were $450,000, and its year-end receivables were $45,000. If its DSO is less than the 30-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.
a.6.50
b.6.75
c.7.00
d.7.25
e.7.50
[xvii].Regan Corp’s sales last year were $450,000, and its year-end receivables were $45,000. On average, Regan’s customers pay 10 days late (and thus they are charged a penalty). How many days of “free” credit does Regan give its customers before they are late and thus assessed a penalty? Base your answer on this equation: DSO – Average days late = Days of free credit, use a 365-day year when calculating the DSO, and round to the closest whole number.
a.23 days
b.25 days
c.27 days
d.29 days
e.31 days
[xviii]. Rangoon Corp’s sales last year were $400,000, and its year-end total assets were $300,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.5. The new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average?
a.$100,000
b.$110,000
c.$120,000
d.$130,000
e.$140,000
[xix]. A new firm is developing its business plan. It will require $600,000 of assets, and it projects $435,000 of sales and $350,000 of operating costs for the first year. The firm is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)
a.46.1%
b.47.2%
c.48.6%
d.50.5%
e.51.9%
[xx]. Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income after taxes was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant?
a. 8.00%
b. 9.50%
c.11.00%
d.12.50%
e.14.00%
[xxi]. Rex Corp’s EBITDA last year was $385,000 (= EBIT + depreciation + amortization), its interest charges were $10,000, it had to repay $25,000 of long term debt, and it had to make a payment of $20,000 under a long term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?
a.7.36
b.7.69
c.7.91
d.8.25
e.8.42
[xxii].Last year Southern Chemicals had sales of $200,000, assets of $125,000, a profit margin of 5.15%, and an equity multiplier of 1.85. The CFO believes that the company could reduce its assets by $25,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt ratio, sales, and costs remained constant, by how much would the ROE have changed?
a.2.75%
b.3.03%
c.3.81%
d.4.11%
e.4.37%
[xxiii]. During the latest year Ruth Corp. had sales of $300,000 and a net income of $20,000, and its year-end assets were $200,000. The firm’s total debt to total assets ratio was 40%. Based on the Du Pont equation, what was the firm’s ROE?
a.15.33%
b.15.67%
c.16.00%
d.16.33%
e.16.67%
[xxiv].Last year Oliver Inc had a total assets turnover of 1.60 and an equity multiplier of 1.85. Its sales were $200,000 and its net income was $10,000. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,000 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?
a.7.20%
b.7.40%
c.7.60%
d.7.80%
e.8.00%
[xxv]. Last year Bell Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $150,000. Sales, costs, and net income would not be affected, and the firm would maintain the 40% debt ratio. By how much would the reduction in assets improve the ROE?
a.4.66%
b.4.96%
c.5.26%
d.5.56%
e.5.86%
[xxvi].Last year, Candle Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $30,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?
a.8.33%
b.8.67%
c.9.00%
d.9.33%
e.9.67%
[xxvii]. Last year Chantler Corp. had $200,000 of assets, $20,000 of net income, and a debt-to-total-assets ratio of 30%. Now suppose the new CFO convinces the president to increase the debt ratio to 45%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?
a.3.51%
b.3.68%
c.3.90%
d.4.13%
e.4.47%
[xxviii]. Last year Charter Corp. had sales of $300,000, operating costs of $265,000, and year-end assets of $200,000. The debt-to-total-assets ratio was 25%, the interest rate on the debt was 10%, and the firm’s tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 60% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?
a.5.01%
b.5.20%
c.5.35%
d.5.57%
e.5.69%
[xxix].Cooper Inc. expects sales next year to be $300,000 and operating costs to be $270,000. The company will have $200,000 of assets, and under the current plan they will be financed with 30% debt and 70% common equity. The interest rate on the debt will be 10%, but the TIE ratio must be kept at 4.0 or more. The firm’s tax rate is 40%. The new CFO wants to see how the ROE would be affected if the firm increased its debt ratio to the maximum consistent with the required TIE ratio. Assume that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant. By how much would the ROE change in response to the change in the capital structure?
a.0.33%
b.0.51%
c.0.82%
d.1.17%
e.1.39%
[xxx]. Ingram Inc has the following balance sheet:
Cash
$10,000
Accounts payable
$30,000
Receivables
50,000
Other current liabilities
20,000
Inventories
150,000
Long-term debt
50,000
Net fixed assets
90,000
Common equity
200,000
Total assets
$300,000
Total liabilities & equity
$300,000
Last year the firm had $15,000 of net income on $200,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio toequal the industry average, 2.5, without affecting either sales or net income. Assume inventories are sold off and not replaced to get the current ratio to 2.5, and the funds generated are used to buy back common stock at book value without changing anything else. By how much will the ROE change?
a.4.70%
b.4.96%
c.5.28%
d.5.54%
e.5.91%
Multi-part Problem
The balance sheet and income statement shown below are for Byrd Inc, and the data are to be used for the following questions. Note that the firm has no amortization charges, it does not lease any assets, and none of its debt must be retired during the next 5 years (notes payable will be rolled over). Assume a 360-day year.
BALANCE SHEET (millions of dollars)
Cash
$ 140.0
Accounts payable
$ 800.0
Accts. receivable
880.0
Notes payable
600.0
Inventories
1,320.0
Accruals
400.0
Total current assets
$2,340.0
Total current liabilities
$1,800.0
Long-term bonds
1,000.0
Total debt
$2,800.0
Common stock
200.0
Retained earnings
1,000.0
Net plant & equip.
1,660.0
Total common equity
$1,200.0
Total assets
$4,000.0
Total liabilities & equity
$4,000.0
INCOME STATEMENT (millions of dollars)
Net sales
$ 6,000.0
Operating costs
5,599.8
Depreciation
100.2
EBIT
$ 300.0
Less: Interest
96.0
EBT
$ 204.0
Less: Taxes
81.6
Net income
$ 122.4
OTHER DATA
Shares outstanding (millions)
60.00
Common dividends (millions)
$42.8
Interest rate on N/P and long-term bonds
6.0%
Federal plus state income tax rate
40%
Year-end stock price
$30.60
[xxxi].What is the firm’s EPS?
a.$2.04
b.$2.11
c.$2.25
d.$2.39
e.$2.50
[xxxii]. What is the firm’s current ratio?
a.1.10
b.1.20
c.1.30
d.1.40
e.1.50
[xxxiii]. What is the firm’s quick ratio?
a.0.25
b.0.33
c.0.41
d.0.49
e.0.57
[xxxiv]. What is the firm’s ROA?
a.2.90%
b.3.06%
c.3.24%
d.3.41%
e.3.65%
[xxxv].What is the firm’s ROE?
a. 9.45%
b. 9.63%
c. 9.84%
d.10.20%
e.10.43%
[xxxvi]. What is the firm’s BEP?
a.7.50%
b.7.75%
c.8.00%
d.8.25%
e.8.50%
[xxxvii]. What is the firm’s TIE?
a.2.82
b.2.98
c.3.13
d.3.30
e.3.49
[xxxviii]. What is the firm’s EBITDA coverage?
a.3.51
b.3.69
c.3.88
d.4.04
e.4.17
[xxxix]. What is the firm’s days sales outstanding? Assume a 360-day year.
a.51.30 days
b.52.80 days
c.53.90 days
d.54.80 days
e.55.50 days
[xl]. What is the firm’s total assets turnover?
a.1.10
b.1.20
c.1.30
d.1.40
e.1.50
[xli]. What is the firm’s profit margin?
a.2.04%
b.2.16%
c.2.28%
d.2.40%
e.2.52%
[xlii].What is the firm’s debt ratio?
a.60.0%
b.65.0%
c.70.0%
d.75.0%
e.80.0%
[xliii]. What is the firm’s equity multiplier?
a.2.67
b.2.84
c.3.00
d.3.16
e.3.33
[xliv].What is the firm’s inventory turnover?
a.4.41
b.4.55
c.4.69
d.4.83
e.4.97
[xlv]. What is the firm’s dividends per share?
a.$0.31
b.$0.41
c.$0.51
d.$0.61
e.$0.71
[xlvi].What is the firm’s cash flow per share?
a.$3.71
b.$3.86
c.$4.01
d.$4.16
e.$4.31
[xlvii]. What is the firm’s P/E ratio?
a.10.0
b.12.5
c.15.0
d.17.5
e.20.0
[xlviii]. What is the firm’s book value per share?
a.$16.00
b.$17.00
c.$18.00
d.$19.00
e.$20.00
[xlix].What is the firm’s market-to-book ratio?
a.1.38
b.1.53
c.1.68
d.1.83
e.1.98
Multiple Choice: Conceptual
[l]. Considered alone, which of the following would increase a company’s current ratio?
a.An increase in accounts receivable.
b.An increase in accounts payable.
c.An increase in net fixed assets.
d.An increase in notes payable.
e.An increase in accrued liabilities.
[li]. A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?
a.Increase accounts payable while holding sales constant.
b.Increase accounts receivable while holding sales constant.
c.Increase inventories while holding sales constant.
d.Increase EBIT while holding sales constant.
e.Increase notes payable while holding sales constant.
[lii]. If the CEO of a firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to get a BETTER GRADE? In all cases, assume that other things are held constant.
a.The division’s total assets turnover ratio is below the average for other firms in the industry.
b.The division’s DSO (days’ sales outstanding) is 40, whereas the average for competitors is 30.
c.The division’s inventory turnover is 6, whereas the average for competitors is 8.
d.The division’s debt ratio is above the average for other firms in the industry.
e.The division’s basic earning power ratio is above the average of other firms in the industry.
[liii].Which of the following would indicate an improvement in a company’s financial position, holding other things constant?
a.The current and quick ratios both decline.
b.The EBITDA coverage ratio increases.
c.The total assets turnover decreases.
d.The TIE declines.
e.The DSO increases.
[liv]. Which of the following would indicate an improvement in a company’s financial position, holding other things constant?
a.The current and quick ratios both increase.
b.The EBITDA coverage ratio declines.
c.The debt ratio increases.
d.The inventory and total assets turnover ratios both decline.
e.The profit margin declines.
[lv]. Which of the following statements is correct?
a.“Window dressing” is any action that improves a firm’s fundamental long-run position and thus increases its intrinsic value.
b.Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”
c.Borrowing using short-term notes payable and using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of “window dressing.”
d.Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of “window dressing.”
e.Borrowing on a long-term basis and using the proceeds to retire short-term debt could be an example of window dressing.
[lvi]. Which of the following statements is correct?
a.If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
b.If a firm has the highest price/earning ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
c.The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).
d.If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are likely to be below average.
e.Other things held constant, the higher a firm’s expected future growth rate, the lower its P/E ratio is likely to be.
[lvii].Which of the following statements is correct?
a.Other things held constant, a reduction in the inventory turnover ratio will increase the ROE.
b.If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
c.A reduction in inventories held would have no effect on the current ratio.
d.An increase in inventories held would have no effect on the current ratio.
e.If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

[lviii]. Companies J and K each reported the same earnings per share (EPS), but Company J’s stock trades at a higher price. Which of the following statements is 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.Company J must pay a lower dividend.
[lix]. Maple Furniture recently issued new common stock and used the proceeds topay off some of its short-term notes payable. This action had no effect on the company’s total assets or operating income.Which of the following effectswould occur as a result of this action?
a.The company’s equity multiplier increased.
b.The company’s basic earning power ratio increased.
c.The company’s times interest earned ratio decreased.
d.The company’s debt ratio increased.
e.The company’s current ratio increased.
[lx]. Which of the following statements is CORRECT?
a.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.
b.Bond financing is better than stock financing for investors because income from bonds is taxed on a more favorable basis than income from stock.
c.The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
d.All else equal, increasing the debt ratio will increase the ROA.
e.If two firms have identical sales, interest rate paid, operating costs, and assets, but they differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.

[lxi]. A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?
a.Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
b.Reduce the company’s days’ sales outstanding ratio to the industry average and use the resulting cash savings to purchase plant and equipment.
c.Use cash to increase inventory holdings.
d.Use cash to repurchase some of the company’s own stock.
e.Issue new stock and use some of the proceeds to purchase additional inventory and hold the remainder of the funds received as cash.
[lxii].Which of the following statements is correct?
a.If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.
b.If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
c.A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
d.If a securities analyst saw that a firm’s days’ sales outstanding was increasing and was higher than the industry average and was trending still higher, this would be interpreted as a sign of strength.
e.There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure different things.

[lxiii]. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?
a.Offer price reductions along with generous credit terms that (1) enabled the firm to sell some of its excess inventory and (2) led to an increase in accounts receivable.
b.Collect some of its receivables and use the cash generated to increase its inventories.
c.Use some of its cash to purchase additional inventories.
d.Issue new common stock and use the proceeds to acquire additional fixed assets.
e.Issue new common stock and use the proceeds to increase inventories.
[lxiv].Nelson Automotive is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Nelson pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?
a.Net income will decrease.
b.The times interest earned ratio will decrease.
c.The ROA will decrease.
d.The tax bill will increase.
e.Taxable income will decrease.
[lxv]. Companies HD and LDare both profitable, and they have the sametotal assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, CompanyHD hasthe higher debt ratio.Which of the following statements is correct?
a.Company HD has a higher ROE than Company LD.
b.Company HD has a lower total assets turnover than Company LD.
c.Company HD has a lower operating income (EBIT) than Company LD.
d.Company HD has a lower equity multiplier than Company LD.
e.Company HD has a higher fixed assets turnover than Company B.

[lxvi].Van Buren Company’s current ratio is 1.9. Considered alone, which of the following actions would REDUCE the company’s current ratio?
a.Use cash to reduce short-term notes payable.
b.Use cash to reduce accounts payable.
c.Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
d.Borrow using short-term notes payable and use the proceeds to reduce accruals.
e.Use cash to reduce accruals.
[lxvii]. Which of the following statements is correct?
a.Suppose a firm’s total assets turnover ratio falls from 10% to 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 10% to 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 10% to 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 Du Pont equation provides information about how operations affect the ROE, but the equation does 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.
[lxviii]. Which of the following statements is correct?
a.If two firms differ only in their use of debt—i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
b.If two firms differ only in their use of debt—i.e., they have identical assets, sales, operating costs, and tax rates—but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
c.A firm’s use of debt will have no effect on its profit margin on sales.
d.If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
e.The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

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