Question [i]. Which of the following statements is CORRECT?

29 Jun Question [i]. Which of the following statements is CORRECT?

Question
[i]. Which of the following statements is CORRECT?

a.An increase in the DSO, other things held constant, could be expected to increase the ROE.

b.An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.

c.An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.

d.The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.

e.If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.

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

a.HD would have the higher net income as shown on the income statement.

b.HD would have the lower net income as shown on the income statement.

c.Without more information, we cannot tell if HD or LD would have a higher or lower net income.

d.HD would have to pay more in income taxes.

e.HD would have the lower equity multiplier for use in the Du Pont equation.

[iii]. Other things held constant, which of the following alternatives would increase a company’s cash flow for the current year?

a.Reduce the days’ sales outstanding (DSO) without reducing sales.

b.Increase the number of years over which fixed assets are depreciated.

c.Decrease the accounts payable balance.

d.Reduce the inventory turnover ratio without affecting sales.

e.Decrease the accrued wages balance.

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

a.Company HD has a higher ROA.

b.Company HD has a higher times interest earned (TIE) ratio.

c.Company HD has more net income.

d.Company HD pays less in taxes.

e.Company HD has a lower equity multiplier.

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

a.Company HD has a lower ROE.

b.Company HD has a lower times interest earned (TIE) ratio.

c.Company HD has more net income.

d.Company HD pays more in taxes.

e.Company HD has a lower equity multiplier.

[vi]. 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 return on assets must be above the industry average.

b.Its total assets turnover must be above the industry average.

c.Its total assets turnover must be below the industry average.

d.Its total assets turnover must equal the industry average.

e.Its return on assets must equal the industry average.

[vii]. Which of the following statements is CORRECT?

a.If Firms A and B have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.

b.If Firms A and B have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

c.If Firms A and B have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

d.If Firms A and B have the same P/E ratios, then their market-to-book ratios must also be the same.

e.If Firm A’s P/E ratio exceeds that of Firm B, then B is likely to be less risky and also to be expected to grow at a faster rate.

[viii].CompaniesHD andLD have the same total assets,sales, and operating costs, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

a.Company LD has a higher basic earning power ratio (BEP).

b.Company HD has a higher basic earning power ratio (BEP).

c.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.

d.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.

e.Given this information, LD must have the higher ROE.

[ix]. If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT?

a.The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

b.The lower the company’s EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.

c.Other things held constant, the lower the current asset ratio, the lower the interest rate the bank would charge the firm.

d.Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

e.Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.

[x]. Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would INCREASE 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 cash to increase inventories.

d.Use cash to reduce long-term bonds outstanding.

e.Use cash to reduce accruals.

[xi]. Safeco’s total current assets are $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 this transaction?

a.The transaction would have no effect on the firm’ financial strength as measured by their current ratios.

b.The transaction would improve both firms’ financial strength as measured by their current ratios.

c.The transaction would lower both firm’ financial strength as measured by their current ratios.

d.The transactions would lower Safeco’s financial strength as measured by its current ratio but raise Risco’s current ratio.

e.The transaction would raise Safeco’s financial strength as measured by its current ratio but lower Risco’s current ratio.

PART II – Questions and Problems from Prior Test Bank not used in Part I

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

[xiii].You are given the following information: Stockholders’ equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and 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

[xiv]. Meyersdale Office Supplies has common equity of $40 million. The company’s stock price is $80 per share and its market/book ratio is 4.0. How many shares of stock does the company have outstanding?

a. 500,000

b. 125,000

c. 2,000,000

d.800,000,000

e.Insufficient information.

[xv]. Strack Houseware Supplies Inc. has $2 billion in total assets, $0.2 billion in current liabilities, $0.6 billion in long-term debt, and $1.2 billion in common equity. The company’s 300 million shares of common stock are selling at $20 per share. What is Strack’s market/book ratio?

a.1.25

b.2.65

c.3.15

d.4.40

e.5.00

[xvi]. A firm has a profit margin of 15% on sales of $20,000,000. If the firm has debt of $7,500,000, total assets o