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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.

A) True
B) False

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Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. 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) 4.36%
B) 4.57%
C) 4.80%
D) 5.04%
E) 5.30%

F) B) and E)
G) A) and C)

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If the CEO of a large, diversified, 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 receive a better grade? In all cases, assume that other things are held constant.


A) The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.
B) The division's basic earning power ratio is above the average of other firms in its industry.
C) The division's total assets turnover ratio is below the average for other firms in its industry.
D) The division's debt ratio is above the average for other firms in the industry.
E) The division's inventory turnover is 6, whereas the average for its competitors is 8.

F) A) and E)
G) D) and E)

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LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt) . Its sales for the last year were $620,000, and its net income after taxes was $24,655. 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 LeCompte need in order to achieve the 15% ROE, holding everything else constant?


A) 7.57%
B) 7.95%
C) 8.35%
D) 8.76%
E) 9.20%

F) None of the above
G) A) and D)

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Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to the data for Pettijohn Inc.What is the firm's current ratio? A) 0.97 B) 1.08 C) 1.20 D) 1.33 E) 1.47 -Refer to the data for Pettijohn Inc.What is the firm's current ratio?


A) 0.97
B) 1.08
C) 1.20
D) 1.33
E) 1.47

F) A) and E)
G) B) and E)

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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%

F) B) and C)
G) All of the above

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High current and quick ratios always indicate that a firm is managing its liquidity position well.

A) True
B) False

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For the coming year, Crane Inc. is considering two financial plans. Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming 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) 3.83%
B) 4.02%
C) 4.22%
D) 4.43%
E) 4.65%

F) B) and D)
G) A) and D)

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Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to the data for Pettijohn Inc. What is the firm's debt ratio (i.e., debt-to-assets ratio) ? A) 33.87% B) 35.00% C) 36.40% D) 38.00% E) 40.00% -Refer to the data for Pettijohn Inc. What is the firm's debt ratio (i.e., debt-to-assets ratio) ?


A) 33.87%
B) 35.00%
C) 36.40%
D) 38.00%
E) 40.00%

F) C) and D)
G) B) and E)

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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.

F) D) and E)
G) A) and D)

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A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management 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-to-assets 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) 47.33%
B) 49.82%
C) 52.45%
D) 55.21%
E) 58.11%

F) D) and E)
G) B) and C)

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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 inventories while holding sales and cost of goods sold constant.
B) Increase accounts receivable while holding sales constant.
C) Increase EBIT while holding sales constant.
D) Increase accounts payable while holding sales constant.
E) Increase notes payable while holding sales constant.

F) A) and B)
G) A) and C)

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Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to the data for Pettijohn Inc. What is the firm's total assets turnover? A) 0.90 B) 1.12 C) 1.40 D) 1.68 E) 2.02 -Refer to the data for Pettijohn Inc. What is the firm's total assets turnover?


A) 0.90
B) 1.12
C) 1.40
D) 1.68
E) 2.02

F) A) and B)
G) A) and C)

Correct Answer

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The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

A) True
B) False

Correct Answer

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Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to the data for Pettijohn Inc. What is the firm's cash flow per share? A) $10.06 B) $10.59 C) $11.15 D) $11.74 E) $12.35 -Refer to the data for Pettijohn Inc. What is the firm's cash flow per share?


A) $10.06
B) $10.59
C) $11.15
D) $11.74
E) $12.35

F) B) and E)
G) A) and C)

Correct Answer

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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, 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.
B) 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.
C) A firm's use of debt will have no effect on its profit margin on sales.
D) 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.
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.

F) All of the above
G) B) and C)

Correct Answer

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Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -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 -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

F) A) and B)
G) C) and D)

Correct Answer

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Amram 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 accounts payable.
B) Borrow using short-term notes payable and use the proceeds to reduce accruals.
C) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
D) Use cash to reduce accruals.
E) Use cash to reduce short-term notes payable.

F) A) and B)
G) All of the above

Correct Answer

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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.

A) True
B) False

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Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP) ?


A) 18.49%
B) 19.47%
C) 20.49%
D) 21.52%
E) 22.59%

F) A) and C)
G) B) and D)

Correct Answer

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Showing 41 - 60 of 104

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