Saturday, July 20, 2013

FIN 534 Week 3 Quiz 2 Chapter 2 and 3

FIN 534 Week 3 Quiz 2 Chapter 2 and 3
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Strayer FIN 534 Quiz Chapter and 3 Week 3
FIN 534 Chapter 2 and Chapter 3 Quiz 3 Week 3
CHAPTER 2
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

True/False

:

                (2.1) Annual report                                         F K          Answer:              
 .              The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.1) Annual report and expectations     F K          Answer:              
 .              The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.2) Retained earnings versus cash                         C K          Answer:              
 .              Consider the balance sheet of Wilkes Industries as shown below.  Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.
                                                                                                                               
                Cash      $   50,000                              Accounts payable                            $  100,000
                Inventory            200,000                 Accruals                                  100,000
                Accounts receivable          250,000                              Total CL                                $  200,000
                Total CA               $  500,000                            Debt                      200,000
                Net fixed assets               $  900,000                            Common stock                  200,000
                                                                Retained earnings                              800,000
                Total assets        $1,400,000                           Total L & E                           $1,400,000
                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.2) Balance sheet                                         F K          Answer:              
 .              On the balance sheet, total assets must always equal total liabilities and equity.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               


                (2.2) Balance sheet: non-cash assets       F K          Answer:              
 .              Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.3) Income statement                                                                F K          Answer:              
 .              The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time.  However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays.  Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.7) Net operating working capital                          F K          Answer:              
 .              Net operating working capital is equal to operating current assets minus operating current liabilities.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.7) Total net operating capital                 F K          Answer:              
 .              Total net operating capital is equal to net fixed assets.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.7) Net operating profit after taxes (NOPAT)   F K          Answer:              
 .              Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
               






                                                                                                               
                (2.9) Federal income taxes:  interest income       F K          Answer:              
 .              The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               



                (2.9) Federal income taxes:  interest expense    F K          Answer:              
 .              If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.9) Federal income taxes:int expense and dividends FK              Answer:              
 .              The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (Comp: 2.2,2.3) Financial statements      F K          Answer:              
 .              The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     

:

                (2.4) Retained earnings                                 F K          Answer:              
 .              Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.  Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
               
                                                                                                               
                (2.4) Retained earnings                                 F K          Answer:              
 .              The retained earnings account on the balance sheet does not represent cash.  Rather, it represents part of stockholders' claims against the firm's existing assets.  This implies that retained earnings are in fact stockholders' reinvested earnings.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               





                (2.5) Cash flow and net income F K          Answer:              
 .              In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles.  In finance, the primary emphasis is also on net income because that is what investors use to value the firm.  However, a secondary financial consideration is cash flow, because cash is needed to operate the business.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.6) Statement of cash flows                     F K          Answer:              
 .              To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.7) Future cash flows                                  F K          Answer:              
 .              The current cash flow from existing assets is highly relevant to the investor.  However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (2.9) Federal income taxes:int exp and dividends F K       Answer:              
 .              Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible.  This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     
                                                                                                                               
                (Comp: 2.1-2.3,2.6)Financial stmts:time dimension FK     Answer:              
 .              The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.
                                                                                                                               
                a.            True                                                                                      
                b.            False                                                                                     





Multiple Choice:  Conceptual

:

                (2.1) Financial statements            C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity.
                b.            The balance sheet gives us a picture of the firm’s financial position at a point in time.
                c.             The income statement gives us a picture of the firm’s financial position at a point in time.
                d.            The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
                e.            The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
                                                                                                               
                (2.2) Balance sheet                         C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The balance sheet for a given year, say 2008, is designed to give us an idea of what happened to the firm during that year.
                b.            The balance sheet for a given year, say 2008, tells us how much money the company earned during that year.
                c.             The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
                d.            For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
                e.            A typical industrial company’s balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.
                                                                                                               
                (2.2) Balance sheet                                         C K          Answer:              
 .              Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?
                                                                                                               
                a.            The company repurchases common stock.
                b.            The company pays a dividend.
                c.             The company issues new common stock.
                d.            The company gives customers more time to pay their bills.
                e.            The company purchases a new piece of equipment.
                                                                                                               





                (2.2) Current assets                                        C K          Answer:              
 .              Which of the following items is NOT included in current assets?
                                                                                                               
                a.            Accounts receivable.
                b.            Inventory.
                c.             Bonds.
                d.            Cash.
                e.            Short-term, highly liquid, marketable securities.
                                                                                                               
                (2.2) Current liabilities                    C K          Answer:              
 .              Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
                                                                                                               
                a.            Accounts payable.
                b.            Short-term notes payable to the bank.
                c.             Accrued wages.
                d.            Cost of goods sold.
                e.            Accrued payroll taxes.
                                                                                                               
                (2.3) Income statement                                                C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The focal point of the income statement is the cash account, because that account cannot be manipulated by “accounting tricks.”
                b.            The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
                c.             The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
                d.            If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.
                e.            The income statement for a given year, say 2007, is designed to give us an idea of how much the firm earned during that year.


:

                (2.2) Balance sheet                                         C K          Answer:              
 .              Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:
                                                                                                               
                Assets:                                 2009                       2008      
                Cash                                      $    200,000                          $  170,000           
                Accounts receivable                            864,000                               700,000             
                Inventories                            2,000,000                          1,400,000           
                  Total current assets                      $  3,064,000                         $2,270,000          
                Net fixed assets                                  6,000,000                          5,600,000           
                Total assets                        $  9,064,000                         $7,870,000          
                                                                                                               
                Liabilities and equity:                                                                     
                Accounts payable                            $  1,400,000                         $1,090,000          
                Notes payable                      1,600,000                          1,800,000           
                  Total current liabilities  $  3,000,000                         $2,890,000          
                Long-term debt                                   2,400,000                          2,400,000           
                Common stock                     3,000,000                          2,000,000           
                Retained earnings                                664,000                               580,000             
                  Total common equity                   $  3,664,000                         $2,580,000          
                Total liabilities and equity             $  9,064,000                         $7,870,000          
                                                                                                               
                Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2008.  As of the end of 2009, none of the principal on this debt had been repaid.  Assume that the company’s sales in 2008 and 2009 were the same.  Which of the following statements must be CORRECT?
                                                                                                               
                a.            Wolken increased its short-term bank debt in 2009.                        
                b.            Wolken issued long-term debt in 2009.                 
                c.             Wolken issued new common stock in 2009.                        
                d.            Wolken repurchased some common stock in 2009.                         
                e.            Wolken had negative net income in 2009.                            
                                                                                                               
                (3.2) Balance sheet                                         C K          Answer:              
 .              On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year.  Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
                                                                                                               
                a.            If the company lost money in 2010, they must have paid dividends.
                b.            The company must have had zero net income in 2010.
                c.             The company must have paid out half of its earnings as dividends.
                d.            The company must have paid no dividends in 2010.
                e.            Dividends could have been paid in 2010, but they would have had to equal the earnings for the year.
                                                                                                               


                (2.2) Balance sheet                                         C K          Answer:              
 .              Below is the common equity section (in millions) of Teweles Technology’s last two year-end balance sheets:
                                                                                                               
                                                                2009                       2008      
                Common stock                  $2,000                   $1,000  
                Retained earnings                           2,000                    2,340

                Total common equity                     $4,000                   $3,340  
                                                                                                               
                Teweles has never paid a dividend to its common stockholders.  Which of the following statements is CORRECT?
                                                                                                               
                a.            The company’s net income in 2009 was higher than in 2008.
                b.            Teweles issued common stock in 2009.
                c.             The market price of Teweles' stock doubled in 2009.
                d.            Teweles had positive net income in both 2008 and 2009, but the company’s net income in 2009 was lower than it was in 2008.
                e.            The company has more equity than debt on its balance sheet.
                                                                                                               
                (2.3) EPS, DPS, BVPS, and stock price      C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            Typically, a firm’s DPS should exceed its EPS.
                b.            Typically, a firm’s EBIT should exceed its EBITDA.
                c.             If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.
                d.            If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
                e.            The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
                                                                                                               
                (2.5) Depreciation,amortization,and net cash flow CK     Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The more depreciation a firm reports, the higher its tax bill, other things held constant.
                b.            People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line.”
                c.             Depreciation reduces a firm’s cash balance, so an increase in depreciation would normally lead to a reduction in the firm’s net cash flow.
                d.            Net cash flow (NCF) is often defined as follows:
                                Net Cash Flow = Net Income + Depreciation and Amortization Charges.
                e.            Depreciation and amortization are not cash charges, so neither of them has an effect on a firm’s reported profits.
                                                                                                               



                (2.5) Changes in depreciation                     C K          Answer:              
 .              Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives?  Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
                                                                                                               
                a.            Companies’ net operating profits after taxes (NOPAT) would decline.
                b.            Companies’ physical stocks of fixed assets would increase.
                c.             Companies’ net cash flows would increase.
                d.            Companies’ cash positions would decline.
                e.            Companies’ reported net incomes would decline.
                                                                                                               
                (2.6) Net cash flow                                          C K          Answer:              
 .              Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?
                                                                                                               
                a.            The company sold a new issue of bonds.
                b.            The company made a large investment in new plant and equipment.
                c.             The company paid a large dividend.
                d.            The company had high amortization expenses.
                e.            The company repurchased 20% of its common stock.
                                                                                                               
                (2.6) Net cash flow                                          C K          Answer:              
 .              Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
                                                                                                               
                a.            The company cut its dividend.
                b.            The company made a large investment in a profitable new plant.
                c.             The company sold a division and received cash in return.
                d.            The company issued new common stock.
                e.            The company issued new long-term debt.
                                                                                                               















                (2.6) Net cash flow and net income                         C K          Answer:              
 .              A security analyst obtained the following information from Prestopino Products’ financial statements:
                                                                                                               
                •             Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.
                •             The company does not pay dividends.
                •             The company’s depreciation expense is its only non-cash expense; it has no amortization charges.
                •             The company has no non-cash revenues.
                •             The company’s net cash flow (NCF) for 2010 was $150,000.
                                                                                                               
                On the basis of this information, which of the following statements is CORRECT?
                                                                                                               
                a.            Prestopino had negative net income in 2010.

                b.            Prestopino’s depreciation expense in 2010 was less than $150,000.
                c.             Prestopino had positive net income in 2010, but its income was less than its 2009 income.
                d.            Prestopino's NCF in 2010 must be higher than its NCF in 2009.
                e.            Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.
                                                                                                               
                (2.6) Net cash flow and net income                         C K          Answer:              
 .              Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined.  Which of the following could explain this performance?
                                                                                                               
                a.            The company’s operating income declined.
                b.            The company’s expenditures on fixed assets declined.
                c.             The company’s cost of goods sold increased.
                d.            The company’s depreciation and amortization expenses declined.
                e.            The company’s interest expense increased.
               












                                                                                               
                (2.6) Statement of cash flows                                     C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
                b.            The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
                c.             The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
                d.            The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
                e.            The statement of cash flows shows how much the firm’s cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.

                (2.6) Statement of cash flows                     C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
                b.            Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
                c.             In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
                d.            In the statement of cash flows, depreciation charges are reported as a use of cash.
                e.            In the statement of cash flows, a decrease in inventories is reported as a use of cash.
               

















                                                                                               
                (2.7) Modifying acct data for managerial purposes CK     Answer:              
 .              For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?
                                                                                                               
                a.            The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
                b.            The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period.  However, for valuation purposes we need to discount cash flows, not accounting income.  Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions’ performance, not that of the entire firm, information that focuses on the divisions is needed.  These factors have led to the development of information that is focused on cash flows and the operations of individual units.
                c.             The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.
                d.            The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.
                e.            The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm.  Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
                                                                                                               




                (2.7)Depreciation,amortization,and free cash flow CK     Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            Operating cash flow (OCF) is defined as follows:
                                OCF = EBIT(1-T) - Depreciation and Amortization.
                b.            Changes in working capital have no effect on free cash flow.
                c.             Free cash flow (FCF) is defined as follows:
                                FCF =     EBIT(1 - T)                                           
                                                + Depreciation and Amortization             
                                                - Capital expenditures required to sustain operations
                                                - Required changes in net operating working capital.
                d.            Free cash flow (FCF) is defined as follows:
                                FCF = EBIT(1-T)+ Depreciation and Amortization + Capital expenditures.
                e.            Operating cash flow is the same as free cash flow (FCF).
                                                                                                               
                (2.8) MVA and EVA                                         C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
                b.            MVA gives us an idea about how much value a firm’s management has added during the last year.
                c.             MVA stands for market value added, and it is defined as follows:
                                MVA = (Shares outstanding)(Stock price) + Book value of common equity.
                d.            EVA stands for economic value added, and it is defined as follows:
                                EVA = EBIT(1-T) – (Investor-supplied op. capital) x (A-T cost of capital).
                e.            EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
                                                                                                               
                (2.9) Federal income tax system                               C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.
                b.            Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
                c.             The maximum federal tax rate on corporate income in 2008 was 50%.
                d.            Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings.  The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock.  Both of these costs are deductible from income when calculating income for tax purposes.
                e.            The maximum federal tax rate on personal income in 2008 was 50%.
               













                                                                                               

                (2.9) Federal income tax system                               C K          Answer:              
 .              Which of the following statements is CORRECT?                               
                                                                                                               
                a.            The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes.  Thus, the federal government receives no tax revenue from these businesses.
                b.            All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
                c.             Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm’s income as personal income and pay taxes on that income.
                d.            Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.
                e.            All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
                                                                                                               
                (Comp: 2.6,2.7) NCF, FCF, and cash                          C K          Answer:              
 .              Last year, Tucker Technologies had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet.  Which of the following factors could explain this situation?
                                                                                                               
                a.            The company had a sharp increase in its inventories.
                b.            The company had a sharp increase in its accrued liabilities.
                c.             The company sold a new issue of common stock.
                d.            The company made a large capital investment early in the year.
                e.            The company had a sharp increase in its depreciation and amortization expenses.
                                                                                                               
                (Comp: 2.2,2.3,2.6,2.9) Changes in depreciation C K         Answer:              
 .              Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BBI’s net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI’s financial statements versus the statements without the provision?  Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
                                                                                                               
                a.            The provision will reduce the company’s net cash flow.
                b.            The provision will increase the company’s tax payments.
                c.             Net fixed assets on the balance sheet will increase.
                d.            The provision will increase the company’s net income.
                e.            Net fixed assets on the balance sheet will decrease.
                                                                                                               

                (Comp: 2.2,2.3,2.6,2.9) Changes in depreciation C K         Answer:              
 .              The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years.  Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
                                                                                                               
                a.            Nantell’s taxable income will be lower.
                b.            Nantell’s net fixed assets as shown on the balance sheet will be higher at the end of the year.
                c.             Nantell’s cash position will improve (increase).
                d.            Nantell’s reported net income after taxes for the year will be lower.
                e.            Nantell’s tax liability for the year will be lower.
                                                                                                               
                (Comp: 2.2,2.3,2.6) Changes in depreciation        C K          Answer:              
 .              Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.  The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2010 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?
                                                                                                               
                a.            The firm’s reported net fixed assets would increase.
                b.            The firm’s EBIT would increase.
                c.             The firm's reported 2010 earnings per share would increase.
                d.            The firm's cash position in 2010 and 2011 would increase.
                e.            The firm’s net liabilities would increase.
                                                                                                               
                (Comp: 2.2,2.3,2.9) Changes in depreciation        C K          Answer:              
 .              A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
                                                                                                               
                a.            The firm’s operating income (EBIT) would increase.
                b.            The firm’s taxable income would increase.
                c.             The firm’s net cash flow would increase.
                d.            The firm’s tax payments would increase.
                e.            The firm’s reported net income would increase.
                                                                                                               





                (Comp: 2.1-2.3,2.6) Financial statements               C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            Dividends paid reduce the net income that is reported on a company’s income statement.
                b.            If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
                c.             If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.
                d.            Accounts receivable are reported as a current liability on the balance sheet.
                e.            If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.
                                                                                                               
                (Comp: 2.5,2.6,2.8) EVA, CF, and net income       C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.
                b.            If a firm reports positive net income, its EVA must also be positive.
                c.             One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
                d.            One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
                e.            Actions that increase reported net income will always increase net cash flow.
                                                                                                               
                (Comp: 2.2,2.3,2.6) Retained earnings    C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                               
                a.            Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
                b.            A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
                c.             Common equity includes common stock and retained earnings, less accumulated depreciation.
                d.            The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.
                e.            If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
                                                                                                               


/:

                (Comp: 2.2,2.3,2.9) Changes in leverage                C K          Answer:               /
 .              The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds.  Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
                                                                                                               
                a.            The company’s taxable income would fall.
                b.            The company’s interest expense would remain constant.
                c.             The company would have less common equity than before.
                d.            The company’s net income would increase.
                e.            The company would have to pay less taxes.

:

                (2.6) Net cash flow                                          C K          Answer:              
 .              Last year Roussakis Company’s operations provided a negative net cash flow, yet the cash shown on its balance sheet increased.  Which of the following statements could explain the increase in cash, assuming the company’s financial statements were prepared under generally accepted accounting principles?
                                                                                                               
                a.            The company repurchased some of its common stock.
                b.            The company dramatically increased its capital expenditures.
                c.             The company retired a large amount of its long-term debt.
                d.            The company sold some of its fixed assets.
                e.            The company had high depreciation expenses.






Multiple Choice:  Problems

:

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students some time to set up the problem and do the arithmetic.  We allow for this when assigning problems for a timed test.  Also, students must use a number of definitions to answer some of the questions, and to avoid excessive memorization, we provide students with a list of formulas and definitions for use on exams.
                                                               
                (2.2) Balance sheet: market value vs. book value  C K      Answer:              
 .              Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.  The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.  By how much do the firm's market and book values per share differ?
                                                                                                                               
                a.            $27.50                                                                                  
                b.            $28.88                                                                                  
                c.             $30.32                                                                                  
                d.            $31.83                                                                                  
                e.            $33.43                                                                                  
                                                                                                                               
                (2.2) Balance sheet:change in BVPS from RE addition CK                Answer:              
 .              Hunter Manufacturing Inc.'s December 31, 2009 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.  During 2010, Hunter had $250,000 of net income, and it paid out $100,000 as dividends.   What was the book value per share at 12/31/10, assuming that Hunter neither issued nor retired any common stock during 2010?
                                                                                                                               
                a.            $20.90                                                                                  
                b.            $22.00                                                                                  
                c.             $23.10                                                                                  
                d.            $24.26                                                                                  
                e.            $25.47                                                                                  
               













                                                                                                               
                (2.3) Income statement: EBIT                                     C K          Answer:              
 .              Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income.  Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation.  The company had no amortization charges and no non-operating income.  It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%.  How much was Lindley's operating income, or EBIT?
                                                                                                                               
                a.            $3,462                                                                                  
                b.            $3,644                                                                                  
                c.             $3,836                                                                                  
                d.            $4,038                                                                                  
                e.            $4,250
                                                                                               
                (2.3) Income statement: taxable income               C K          Answer:              
 .              Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation.  The company had no amortization charges and no non-operating income.  It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%.  How much was the firm's taxable income, or earnings before taxes (EBT)?
                                                                                                                               
                a.            $3,230.00                                                                                            
                b.            $3,400.00                                                                                            
                c.             $3,570.00                                                                                            
                d.            $3,748.50                                                                                            
                e.            $3,935.93                                                                                            
                                                                                                                               
                (2.5) Net cash flow                                          C K          Answer:              
 .              JBS Inc. recently reported net income of $4,750 and depreciation of $885.  How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets.
                                                                                                                               
                a.            $4,831.31                                                                                            
                b.            $5,085.59                                                                                            
                c.             $5,353.25                                                                                            
                d.            $5,635.00                                                                                            
                e.            $5,916.75









                                                                                               
                                                                                                                               
                (2.7) Net operating working capital                          C K          Answer:              
 .              Swinnerton Clothing Company's balance sheet showed total current assets of $2,250, all of which were required in operations.  Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes.  What was its net operating working capital that was financed by investors?
                                                                                                                               
                a.            $1,454                                                                                  
                b.            $1,530                                                                                  
                c.             $1,607                                                                                  
                d.            $1,687                                                                                  
                e.            $1,771                                                                                  
                                                                                                                               
                (2.8) MVA                                                                           C K          Answer:              
 .              Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.  The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share.  How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA?
                                                                                                                               
                a.            $21,788                                                                                                
                b.            $22,935                                                                                                
                c.             $24,142                                                                                                
                d.            $25,413                                                                                                
                e.            $26,750                                                                                                
:

                (2.3) Income statement:net after-tax income C K             Answer:              
 .              Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation.  The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.   How much was the firm's net income after taxes?  Meric uses the same depreciation expense for tax and stockholder reporting purposes.
                                                                                                                               
                a.            $3,284.55                                                                                            
                b.            $3,457.42                                                                                            
                c.             $3,639.39                                                                                            
                d.            $3,830.94                                                                                            
                e.            $4,022.48                                                                                            
               






                                                                                                               
                (2.4) Statement of stockholders’ equity: dividends                                                                          C K          Answer:              
 .              On 12/31/10, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/09, the company had reported $555,000 of retained earnings. No shares were repurchased during 2010. How much in dividends did Heaton pay during 2010?
                                                                                                                               
                a.            $47,381                                                                                                
                b.            $49,875                                                                                                
                c.             $52,500                                                                                                
                d.            $55,125                                                                                                
                e.            $57,881                                                                                                
                                                                                                                               
                (2.4) Statement of stockholders’ equity: NI  CK  Answer:              
 .              During the year, Bascom Bakery Inc. paid out $21,750 of common dividends.  It ended the year with $187,500 of retained earnings versus the prior year’s retained earnings of $132,250.  How much net income did the firm earn during the year?
                                                                                                                               
                a.            $77,000                                                                                                
                b.            $80,850                                                                                                
                c.             $84,893                                                                                                
                d.            $89,137                                                                                                
                e.            $93,594                                                                                                
                                                                                                                               










                (2.7) Total operating capital                         C K          Answer:              
 .              NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets.  All of these assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes.  Its remaining capital consisted of long-term debt and common equity.  What was NNR's total investor-provided operating capital?
                                                                                                                               
                a.            $4,694,128                                                                                          
                b.            $4,941,188                                                                                          
                c.             $5,201,250                                                                                          
                d.            $5,475,000                                                                                          
                e.            $5,748,750                                                                                          

:

                (2.3) Income statement: change in net income  C K          Answer:              
 .              Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation.  The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%.  This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750.  By how much will net after-tax income change as a result of the change in depreciation?  The company uses the same depreciation calculations for tax and stockholder reporting purposes.
                                                                                                                               
                a.            -463.13                                                                                
                b.            -487.50                                                                                
                c.             -511.88                                                                                
                d.            -537.47                                                                                
                e.            -564.34                                                                                
                                                                                                                               
                (2.7) Free cash flow                                        C K          Answer:              
 .              TSW Inc. had the following data for last year:  Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000.  Information for the just-completed year is as follows:  Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500.  How much free cash flow did the firm generate during the just-completed year?
                                                                                                                               
                a.            $383                                                                                      
                b.            $425                                                                                      
                c.             $468                                                                                      
                d.            $514                                                                                      
                e.            $566                                                                                      
                                                                                                                               



















                (2.7) Net operating working capital                          C K          Answer:              
 .              Rao Corporation has the following balance sheet.  How much net operating working capital does the firm have?
                                                                                                                               
                Cash                                      $ 10         Accounts payable                           $ 20
                Short-term investments                               Accruals                                                20
                Accounts receivable         50          Notes payable                    50
                Inventory              40            Current liabilities           $ 90
                  Current assets                 $130        Long-term debt                                  0
                Net fixed assets                               100         Common equity                                30
                                                                                 Retained earnings                            50
                Total assets                        $230        Total liab. & equity                         $230
                                                                                                                               
                a.            $54.00                                                                                  
                b.            $60.00                                                                                  
                c.             $66.00                                                                                  
                d.            $72.60                                                                                  
                e.            $79.86                                                                                  
                                                                                                                               
                (2.7) Net operating profit after taxes (NOPAT)   C K          Answer:              
 .              Bae Inc. has the following income statement.  How much net operating profit after taxes (NOPAT) does the firm have?
                                                                                                                               
                Sales                                      $2,000.00                                                            
                Costs                                     1,200.00                                                              
                Depreciation                         100.00                                                               
                EBIT                                       $  700.00                                                              
                Interest expense                                200.00                                                               
                EBT                                         $  500.00                                                              
                Taxes (35%)                           175.00                                                               
                Net income                        $  325.00                                                              
                                                                                                                               
                a.            $370.60                                                                                                
                b.            $390.11                                                                                                
                c.             $410.64                                                                                                
                d.            $432.25                                                                                                
                e.            $455.00                                                                                                
                                                                                                                               














                (2.7) Net operating profit after taxes (NOPAT)   C K          Answer:              
 .
EP Enterprises has the following income statement.  How much net operating profit after taxes (NOPAT) does the firm have?
                                                                                                                               
                Sales                                                      $1,800.00                                            
                Costs                                                     1,400.00                                              
                Depreciation                                         250.00                                               
                EBIT                                                       $  150.00                                              
                Interest expense                                                 70.00                                
                EBT                                                         $   80.00                                               
                Taxes (40%)                                            32.00                                
                Net income                                        $   48.00                                               
                                                                                                                               
                a.            $81.23                                                                                  
                b.            $85.50                                                                                  
                c.             $90.00                                                                                  
                d.            $94.50                                                                                  
                e.            $99.23                                                                                  
                                                                                                                               
                (2.7) Return on invested capital (ROIC)  C K          Answer:              
 .              Tibbs Inc. had the following data for the year ending 12/31/07:  Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300.  What was its return on invested capital (ROIC)?
                                                                                                                               
                a.            14.91%                                                                                 
                b.            15.70%                                                                                 
                c.             16.52%                                                                                 
                d.            17.39%                                                                                 
                e.            18.26%                                                                                 
               
















                                                                                                               
                (2.7) Total operating capital                                         C K          Answer:              
 .              Zumbahlen Inc. has the following balance sheet.  How much total operating capital does the firm have?
                                                                                                                               
                Cash                                      $ 20.00  Accounts payable                           $ 30.00
                Short-term investments               50.00      Accruals                                              50.00
                Accounts receivable       20.00      Notes payable                    30.00
                Inventory              60.00      Current liabilities           $110.00
                  Current assets                 $150.00                  Long-term debt                               70.00
                Gross fixed assets           $140.00                  Common stock                 30.00
                Accumulated deprec.       40.00    Retained earnings                            40.00
                Net fixed assets                               $100.00                  Total common equity                    $ 70.00
                Total assets                        $250.00                  Total liab. & equity                         $250.00
                                                                                                                               
                a.            $114.00                                                                                
                b.            $120.00                                                                                
                c.             $126.00                                                                                
                d.            $132.30                                                                                
                e.            $138.92                                                                                
                                                                                                                               
                (2.8) Economic Value Added (EVA)                          C K          Answer:              
 .              Barnes’ Brothers has the following data for the year ending 12/31/10:  Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100.  Barnes' weighted average cost of capital is 10%.  What is its economic value added (EVA)?
                                                                                                                               
                a.            $399.11                                                                                
                b.            $420.11                                                                                
                c.             $442.23                                                                                
                d.            $465.50                                                                                
                e.            $490.00                                                                                
                                                                                                                               
                (Comp: 2.3,2.5) Income statement: net cash flow C K      Answer:              
 .              Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.  The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.  How much was its net cash flow?
                                                                                                                               
                a.            $3,284.75                                                                            
                b.            $3,457.63                                                                            
                c.             $3,639.61                                                                            
                d.            $3,831.17                                                                            
                e.            $4,032.81                                                                            
               


                               

(Comp: 2.3,2.7) Income statement:free cash flow C K     Answer:              
 .              Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation.  The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%.  In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.  How much free cash flow did Wells generate?
                                                                                               
                a.            $1,770.00                                                            
                b.            $1,858.50                                                            
                c.             $1,951.43                                                            
                d.            $2,049.00                                                            
                e.            $2,151.45                                                            


:

                (2.8) EVA                                                             C K          Answer:              
 .              HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation).  The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 40%.  What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?
                                                                                                               
                a.            $1,357.13                                                                            
                b.            $1,428.56                                                                            
                c.             $1,503.75                                                                            
                d.            $1,578.94                                                                            
                e.            $1,657.88                                                                            
                                                                                                                               
                (Comp: 2.3,2.7) Changes in net income and NCF  C K        Answer:              
 .              Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation.  The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%.  This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725.  By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change?  Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.
                                                                                                                               
                a.            -$383.84; $206.68                                                                            
                b.            -$404.04; $217.56                                                                            
                c.             -$425.30; $229.01                                                                            
                d.            -$447.69; $241.06                                                                            
                e.            -$471.25; $253.75                                                                            
                                                                                                               
 .              (Comp: 2.3,2.7) Income stmt: FCF vs. net income  C K      Answer:              
                Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation.  The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%.  In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital.  By how much did the firm's net income exceed its free cash flow?
                                                                                                               
                a.            $673.27                                                                                
                b.            $708.70                                                                                
                c.             $746.00                                                                                
                d.            $783.30                                                                                
                e.            $822.47                




CHAPTER 3
ANALYSIS OF FINANCIAL STATEMENTS

Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines
TrueFalse

:
We tell our students (1) that to answer some of these questions it is useful to write out the relevant ratio or ratios, then think about how the ratios would change if the accounting data changed, and (2) that sometimes it is useful to make up illustrative data to help see what would happen.
                                               
                (3.1) Ratio analysis                                           F K          Answer:              
 .              Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.2) Liquidity ratios                                        F K          Answer:              
 .              The current ratio and inventory turnover ratios both help us measure the firm's liquidity.  The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.2) Liquidity ratios                                        F K          Answer:              
 .              Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and -to-use measures of a firm's liquidity position.
                                                                                                                                               
a.            True                                                                                                                      
b.            False





                                                                                                                               
                                                                                                                                               
                (3.2) Current ratio                                            F K          Answer:              
 .              High current and quick ratios always indicate that a firm is managing its liquidity position well.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               





                (3.3) Asset management ratios                  F K          Answer:              
 .              The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.3) Inventory turnover ratio    F K          Answer:              
 .              A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.4) Debt management ratios                   F K          Answer:              
 .              Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.4) TIE ratio                                                     F K          Answer:              
 .              The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.5) Profitability ratios                  F K          Answer:              
 .              Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.6) Market value ratios                              F K          Answer:              
 .              Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               






                (3.7) Trend analysis                                         F K          Answer:              
 .              Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year.  Trend analysis is one method of measuring changes in a firm's performance over time.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.10) Balance sheet changes                     F K          Answer:              
 .              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                                                                                                     
                                                                                                                                               
                (3.10) Limitations of ratio analysis             F K          Answer:              
 .              Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     

:

                (3.5) Basic earning power ratio   F K          Answer:              
 .              The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     


:

                (3.3) Inventory turnover ratio    F K          Answer:              
 .              The inventory turnover and current ratio are related.  The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level andor that part of the inventory is obsolete or damaged.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               






                (3.3) Fixed assets turnover                          F K          Answer:              
 .              It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.5) ROA                                                                             F K          Answer:              
 .              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                                                                                                     
                                                                                                                                               
                (3.8) Du Pont equation                                  F K          Answer:              
 .              Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets.  Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     








:

                (3.2) Liquidity ratios                                        F K          Answer:              
 .              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 that of B.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               







                (3.2) Liquidity ratios                                        F K          Answer:              
 .              Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities.  However, Firm A has a higher inventory turnover ratio than B.  Therefore, we can conclude that A's quick ratio must be smaller than B's.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.4) TIE ratio                                                     F K          Answer:              
 .              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                                                                                                     
                                                                                                                                               
                (3.5) BEP and ROE                                                            F K          Answer:              
 .              Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate.  However, Firm A has a higher debt ratio.  If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
               



                                                                                                                               
                (3.8) Equity multiplier                                     F K          Answer:              
 .              If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               
                (3.10) Limitations of ratio analysis             F K          Answer:              
 .              One problem with ratio analysis is that relationships can be manipulated.  For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     
                                                                                                                                               









                (3.10) Limitations of ratio analysis             F K          Answer:              
 .              One problem with ratio analysis is that relationships can be manipulated.  For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.
                                                                                                                                               
                a.            True                                                                                                      
                b.            False                                                                                                     


















Multiple Choice:  Conceptual

:

We tell our students (1) that to answer some of these questions it is useful to write out the relevant ratio or ratios, then think about how the ratios would change if the accounting data changed, and (2) that sometimes it is useful to make up illustrative data to help see what would happen.
                                                                                                                                               
                (3.2) Current ratio                                            C K          Answer:              
 .              Considered alone, which of the following would increase a company’s current ratio?
                                                                                                                                               
                a.            An increase in net fixed assets.
                b.            An increase in accrued liabilities.
                c.             An increase in notes payable.
                d.            An increase in accounts receivable.
                e.            An increase in accounts payable.
                                                                                                                                               
                (3.2) Current ratio                                            C K          Answer:              
 .              Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?
                                                                                                                                               
                a.            The TIE declines.
                b.            The DSO increases.
                c.             The EBITDA coverage ratio increases.
                d.            The current and quick ratios both decline.
                e.            The total assets turnover decreases.
                                                                                                                                               
                (3.2) Current ratio                                            C K          Answer:              
 .              A firm wants to strengthen its financial position.  Which of the following actions would increase its current ratio?
                                                                                                                                               
                a.            Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
                b.            Use cash to repurchase some of the company’s own stock.
                c.             Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
                d.            Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
                e.            Use cash to increase inventory holdings.









                (3.3) Inventories                                              C K          Answer:              
 .              Which of the following statements is CORRECT?                               
                                                                                                                                               
                a.            A reduction in inventories held would have no effect on the current ratio.
                b.            An increase in inventories would have no effect on the current ratio.
                c.             If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
                d.            A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
                e.            If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.
                                                                                                                                               
                (3.6) Financial statement analysis                             C K          Answer:              
 .              Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT?
                                                                                                                                               
                a.            Company E probably has fewer growth opportunities.
                b.            Company E is probably judged by investors to be riskier.
                c.             Company E must have a higher market-to-book ratio.
                d.            Company E must pay a lower dividend.
                e.            Company E trades at a higher PE ratio.
                                                                                                                                               
                (3.6) Market value ratios                                              C K          Answer:              
 .              Which of the following statements is CORRECT?                               
                                                                                                                                               
                a.            If a firm has the highest priceearnings 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 marketbook ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.
                c.             Other things held constant, the higher a firm’s expected future growth rate, the lower its PE ratio is likely to be.
                d.            The higher the marketbook ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).
                e.            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 marketbook ratio and MVA are both likely to be below average.
                                                                                                                                               









                (3.10) Window dressing                                                C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            Borrowing by using short-term notes payable and then 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 another example of “window dressing.”
                b.            Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
                c.             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.            Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”
                e.            “Window dressing” is any action that improves a firm’s fundamental, long-run position and thus increases its intrinsic value.
                                                                                                                                               
                (Comp: 3.2,3.4-3.6) Miscellaneous ratios                               C K          Answer:              
 .              Casey Communications recently issued new common stock and used the proceeds to pay 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 effects would occur as a result of this action?
                                                                                                                                               
                a.            The company’s current ratio increased.
                b.            The company’s times interest earned ratio decreased.
                c.             The company’s basic earning power ratio increased.
                d.            The company’s equity multiplier increased.
                e.            The company’s debt ratio increased.
                                                                                                                                               
                (Comp: 3.2,3.3,3.5) Miscellaneous ratios                               C K          Answer:              
 .              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 receivable while holding sales constant.
                b.            Increase EBIT while holding sales constant.
                c.             Increase accounts payable while holding sales constant.
                d.            Increase notes payable while holding sales constant.
                e.            Increase inventories while holding sales constant.
                                                                                                                                               











                (Comp: 3.3-3.5) Miscellaneous ratios      C K          Answer:              
 .              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 basic earning power ratio is above the average of other firms in its industry.
                b.            The division’s total assets turnover ratio is below the average for other firms in its industry.
                c.             The division’s debt ratio is above the average for other firms in the industry.
                d.            The division’s inventory turnover is 6, whereas the average for its competitors is 8.
                e.            The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30.
                                                                                                                                               
                (Comp: 3.2-3.5) Miscellaneous ratios      C K          Answer:              
 .              Which of the following would indicate an improvement in a company’s financial position, holding other things constant?
                                                                                                                                               
                a.            The inventory and total assets turnover ratios both decline.
                b.            The debt ratio increases.
                c.             The profit margin declines.
                d.            The EBITDA coverage ratio declines.
                e.            The current and quick ratios both increase.
                                                                                                                                               
                (Comp: 3.2,3.4) Miscellaneous ratios       C K          Answer:              
 .              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 EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
                b.            Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
                c.             Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
                d.            The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.
                e.            Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
               










                (Comp: 3.4,3.5,3.8) Effects of leverage   C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
                b.            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.
                c.             If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
                d.            Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
                e.            All else equal, increasing the debt ratio will increase the ROA.

:

                (3.2) Quick ratio                                                C K          Answer:              
 .              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 would (1) enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable.
                b.            Issue new common stock and use the proceeds to increase inventories.
                c.             Speed up the collection of receivables and use the cash generated to increase inventories.
                d.            Use some of its cash to purchase additional inventories.
                e.            Issue new common stock and use the proceeds to acquire additional fixed assets.

:

                (3.2) Current ratio                            C K          Answer:              
 .              Amram Company’s current ratio is 1.9.  Considered alone, which of the following actions would reduce the company’s current ratio?
                                                                                                                                               
                a.            Borrow using short-term notes payable and use the proceeds to reduce accruals.
                b.            Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
                c.             Use cash to reduce accruals.
                d.            Use cash to reduce short-term notes payable.
                e.            Use cash to reduce accounts payable.
                                                                                                                                               






                (3.3) Accounts receivable                             C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
                b.            If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.
                c.             There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP).  These ratios measure entirely different things.
                d.            A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
                e.            If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
                                                                                                                                               
                (3.4) Leverage effects; debt management           C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            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.
                b.            A firm’s use of debt will have no effect on its profit margin on sales.
                c.             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.
                d.            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.
                e.            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.
                                                                                                                                               













                (3.6) Market value ratios                              C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            If Firms X and Y have the same PE ratios, then their market-to-book ratios must also be the same.
                b.            If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their PE ratios must also be the same.
                c.             If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
                d.            If Firm X’s PE ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.
                e.            If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
                                                                                                                                               
                (3.8) Du Pont analysis                                     C K          Answer:              
 .              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 increase.
                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%.  Without additional information, we cannot tell what will happen to the ROE.
                c.             The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
                d.            Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
                e.            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.
               







                                                                                                                               
                (3.8) Du Pont analysis                                     C K          Answer:              
 .              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 total assets turnover must be above the industry average.
                b.            Its return on assets must equal the industry average.
                c.             Its TIE ratio must be below the industry average.
                d.            Its total assets turnover must be below the industry average.
                e.            Its total assets turnover must equal the industry average.
                                                                                                                                               





                (3.8) Du Pont analysis                                     C K          Answer:              
 .              Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio.  Which of the following statements is CORRECT?
                                                                                                                                               
                a.            Company HD has a lower total assets turnover than Company LD.
                b.            Company HD has a lower equity multiplier than Company LD.
                c.             Company HD has a higher fixed assets turnover than Company B.
                d.            Company HD has a higher ROE than Company LD.
                e.            Company HD has a lower operating income (EBIT) than Company LD.
                                                                                                                                               
                (Comp: 3.4,3.5) Financial statement analysis        C K          Answer:              
 .              Taggart Technologies 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 Taggart pays, EBIT, or the tax rate.  Which of the following is likely to occur if the company goes ahead with the stock issue?
                                                                                                                                               
                a.            The ROA will decline.
                b.            Taxable income will decrease.
                c.             The tax bill will increase.
                d.            Net income will decrease.
                e.            The times interest earned ratio will decrease.










                                                                                                                                               
                (Comp: 3.3-3.5) Financial statement analysis       C K          Answer:              
 .              Which of the following statements is CORRECT?
                                                                                                                                               
                a.            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.
                b.            If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
                c.             An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
                d.            An increase in the DSO, other things held constant, could be expected to increase the ROE.
                e.            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.
                                                                                                                                                               













                (Comp: 3.4,3.5,3.8) Financial statement analysis C K         Answer:              
 .              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.            Without more information, we cannot tell if HD or LD would have a higher or lower net income.
                b.            HD would have the lower equity multiplier for use in the Du Pont equation.
                c.             HD would have to pay more in income taxes.
                d.            HD would have the lower net income as shown on the income statement.
                e.            HD would have the higher net income as shown on the income statement.
                                                               









                                                                               
                (Comp: 3.2,3.3) Cash flows                          C K          Answer:              
 .              Other things held constant, which of the following alternatives would increase a company’s cash flow for the current year?
                                                                                                                                               
                a.            Increase the number of years over which fixed assets are depreciated for tax purposes.
                b.            Pay down the accounts payables.
                c.             Reduce the days’ sales outstanding (DSO) without affecting sales or operating costs.
                d.            Pay workers more frequently to decrease the accrued wages balance.
                e.            Reduce the inventory turnover ratio without affecting sales or operating costs.
               
                (Comp: 3.4,3.5,3.8) Leverage, taxes, and ratios  C K          Answer:              
 .              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 pays less in taxes.
                b.            Company HD has a lower equity multiplier.
                c.             Company HD has a higher ROA.
                d.            Company HD has a higher times interest earned (TIE) ratio.
                e.            Company HD has more net income.
                                                                                                                                               
                (Comp: 3.4,3.5,3.8) Leverage, taxes, and ratios  C K          Answer:              
 .              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 equity multiplier.
                b.            Company HD has more net income.
                c.             Company HD pays more in taxes.
                d.            Company HD has a lower ROE.
                e.            Company HD has a lower times interest earned (TIE) ratio.

:

                (3.2) Current ratio                                            C K          Answer:              
 .              Walter Industries’ current ratio is 0.5.  Considered alone, which of the following actions would increase the company’s current ratio?
                                                                                                                                               
                a.            Borrow using short-term notes payable and use the cash to increase inventories.
                b.            Use cash to reduce accruals.
                c.             Use cash to reduce accounts payable.
                d.            Use cash to reduce short-term notes payable.
                e.            Use cash to reduce long-term bonds outstanding.
                                                                                                                                               
                (3.2) Current ratio                                            C K          Answer:              
 .              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 raise 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 transaction would have no effect on the firm’ financial strength as measured by their current ratios.
                d.            The transaction would lower both firm’ financial strength as measured by their current ratios.
                e.            The transaction would improve both firms’ financial strength as measured by their current ratios.
                                                                                                                                               
                (Comp:3.4,3.5)Effects of financial leverage C K   Answer:              
 .              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.  However, company HD has a higher debt 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.
               




Multiple Choice:  Problems

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students time to set up the problems and do the arithmetic.  We allow for this when assigning problems for a timed test.  Also, note that students must know the definitions of a number of ratios to answer the questions.  We provide our students with a formula sheet on exams, using the relevant sections of Appendix D at the end of the text.

The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the amount of time they have to work the problems.  Our difficulty assessments assume that they have a formula sheet and a "reasonable" amount of time for the test.  Note that some problems are trivially  if students have formula sheets.

To work some of the problems, students must transpose equations and solve for items that are normally inputs.  For example, the equation for the profit margin is given as Profit margin = Net incomeSales.  We might have a problem where sales and the profit margin are given and then require students to find the firm's net income.  We explain to students in class before the exam that they will have to transpose terms in the formulas to work some problems.

Problems 57 to 86 are all stand-alone problems with individualized data, but problems 87 through 105 are all based on a common set of data, and they require students to calculate ratios and find items like EPS, TIE, and the like using this data set.  The statements can be changed algorithmically, and this changes the calculated ratios and other items.

:

                (3.3) Total assets turnover                           C K          Answer:              
 .              Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.  What was its total assets turnover ratio (TATO)?
                                                                                                               
                a.            2.03                                                                       
                b.            2.13                                                                       
                c.             2.25                                                                       
                d.            2.36                                                                       
                e.            2.48                                                                       
                               










                                                                               
                (3.4) Debt ratio:find the debt, given the DA ratio C K       Answer:              
 .              Beranek Corp. has $410,000 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 debtassets ratio to 40%, 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.            $155,800                                                                             
                b.            $164,000                                                                             
                c.             $172,200                                                                             
                d.            $180,810                                                                             
                e.            $189,851                                                                             
                (3.4) Times interest earned                         C K          Answer:              
 .              Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500.  What was the firm's times interest earned (TIE) ratio?
                                                                                                               
                a.            4.72                                                                       
                b.            4.97                                                                       
                c.             5.23                                                                       
                d.            5.51                                                                       
                e.            5.80                                                                       
                                                                               
                (3.5) Profit margin on sales                          C K          Answer:              
 .              Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000.  What was its profit margin on sales?
                                                                                                               
                a.            6.49%                                                                   
                b.            6.83%                                                                   
                c.             7.19%                                                                   
                d.            7.55%                                                                   
                e.            7.92%                                                                   
                                                               
                (3.5) Return on total assets (ROA)            C K          Answer:              
 .              Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750.  What was its return on total assets?
                                                                                                               
                a.            7.22%                                                                   
                b.            7.58%                                                                   
                c.             7.96%                                                                   
                d.            8.36%                                                                   
                e.            8.78%                                                                   
                               







                                                                               
                (3.5) Basic earning power (BEP) C K          Answer:              
 .              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%                                                                 
                                                                                                               
                (3.5) Return on equity (ROE)                       C K          Answer:              
 .              Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000.  What was its ROE?
                                                                                                               
                a.            16.87%                                                                 
                b.            17.75%                                                                 
                c.             18.69%                                                                 
                d.            19.67%                                                                 
                e.            20.66%                                                                 
                                               

                (3.5) Return on equity (ROE): finding net income C K       Answer:              
 .              An investor is considering starting a new business.  The company would require $475,000 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 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.            $52,230                                                                
                b.            $54,979                                                                
                c.             $57,873                                                                
                d.            $60,919                                                                
                e.            $64,125                                                                
                                                                                                               
                (3.6) PriceEarnings ratio (PE)                       C K          Answer:              
 .              Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30.  What was its PE ratio?
                                                                                                               
                a.            13.84                                                                    
                b.            14.57                                                                    
                c.             15.29                                                                    
                d.            16.06                                                                    
                e.            16.86                                                                    
                               





                                                                               
                (3.6) PriceEarnings ratio (PE)                       C K          Answer:              
 .              Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00.  What was its marketbook ratio?
                                                                                                               
                a.            1.34                                                                       
                b.            1.41                                                                       
                c.             1.48                                                                       
                d.            1.55                                                                       
                e.            1.63                                                                       
                                                                                                               
                (3.8) Du Pont equation: basic calculation C K        Answer:              
 .              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%                                                                 


:

                (3.4) Debt ratio                                                 C K          Answer:              
 .              Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000.  The new CFO wants to employ a debt ratio of 55%.  How much debt must the company add or subtract to achieve the target debt ratio?
                                                                                                               
                a.            $158,750                                                                             
                b.            $166,688                                                                             
                c.             $175,022                                                                             
                d.            $183,773                                                                             
                e.            $192,962                                                                             
                                                                                                               
                (3.6) EPS, DPS, and payout                           C K          Answer:              
 .              Helmuth Inc.'s latest net income was $1,250,000, and it had 225,000 shares outstanding.  The company wants to pay out 45% of its income.  What dividend per share should it declare?
                                                                                                               
                a.            $2.14                                                                    
                b.            $2.26                                                                    
                c.             $2.38                                                                    
                d.            $2.50                                                                    
                e.            $2.63                                                                    

:

                (3.3) Effect of lowering the DSO on net income C K          Answer:              
 .              Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 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?
                                                                                                               
                a.            $267.34                                                                
                b.            $281.41                                                                
                c.             $296.22                                                                
                d.            $311.81                                                                
                e.            $328.22                                                                
                                                                                                               













                (3.3) Days sales outstanding (DSO)                           C K          Answer:              
 .              Heaton 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.
                                                                                                               
                a.            6.20                                                                       
                b.            6.53                                                                       
                c.             6.86                                                                       
                d.            7.20                                                                       
                e.            7.56                                                                       
                                                                                                               
                (3.3) DSO: days of free credit                      C K          Answer:              
 .              Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500.  Harper sells on terms that call for customers to pay 30 days after the purchase, but many 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.
                                                                                                               
                a.            7.95                                                                       
                b.            8.37                                                                       
                c.             8.81                                                                       
                d.            9.27                                                                       
                e.            9.74                                                                       
                                                                                                               
                (3.3) Total assets turnover ratio (TATO) C K          Answer:              
 .              Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000.  The average firm in the industry has a total assets turnover ratio (TATO) of 2.4.  Bonner's 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, holding sales constant?
                                                                                                               
                a.            $164,330                                                                             
                b.            $172,979                                                                             
                c.             $182,083                                                                             
                d.            $191,188                                                                             
                e.            $200,747                                                                             
                                                                                                               








                (3.4)Max debt ratio consistent with given TIE ratio CK     Answer:              
 .              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 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%                                                                 
                                                                                                               
                (3.4) EBITDA coverage                                   C K          Answer:              
 .              Ziebart Corp.'s EBITDA last year was $390,000 (= EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease.  The firm had no amortization charges.  What was the EBITDA coverage ratio?
                                                                                                               
                a.            7.32                                                                       
                b.            7.70                                                                       
                c.             8.09                                                                       
                d.            8.49                                                                       
                e.            8.92                                                                       
                                                                                                               
                (3.5) Profit margin and ROE                         C K          Answer:              
 .              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%                                                                   
                                                                                                               









                (3.5) Effect of reducing costs on the ROE               C K          Answer:              
 .              Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%.  The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.  Assets, sales, and the debt ratio would not be affected.  By how much would the cost reduction improve the ROE?
                                                                                                               
                a.            9.32%                                                                   
                b.            9.82%                                                                   
                c.             10.33%                                                                 
                d.            10.88%                                                                 
                e.            11.42%                                                                 
                                                                                                               
                (3.6) EPS, book value, and debt ratio       C K          Answer:              
 .              Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt ratio was 46%.  How much debt was outstanding?
                                                                                                               
                a.            $3,393,738                                                                          
                b.            $3,572,356                                                                          
                c.             $3,760,375                                                                          
                d.            $3,958,289                                                                          
                e.            $4,166,620                                                                          
                                                                                                               
                (3.8) Du Pont equation: basic calculation               C K          Answer:              
 .              Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000.  The firm's total-debt-to-total-assets ratio was 42.5%.  Based on the Du Pont equation, what was Vaughn's ROE?
                                                                                                               
                a.            14.77%                                                                 
                b.            15.51%                                                                 
                c.             16.28%                                                                 
                d.            17.10%                                                                 
                e.            17.95%                                                                 
               









                                                                                               
                (3.8) Du Pont eqn: effect of reducing assets on ROE CK  Answer:              
 .              Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2.  The CFO believes that the company could reduce its assets by $21,000 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.            1.81%                                                                   
                b.            2.02%                                                                   
                c.             2.22%                                                                   
                d.            2.44%                                                                   
                e.            2.68%                                                                   
                                                                                                               



                (3.8) Du Pont eqn: effect of reducing costs on ROE CK    Answer:              
 .              Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75.  Its sales were $195,000 and its net income was $10,549.  The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 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.            5.66%                                                                   
                b.            5.95%                                                                   
                c.             6.27%                                                                   
                d.            6.58%                                                                   
                e.            6.91%                                                                   
                                                                                                               
                (3.8) Du Pont equation: changing the debt ratio C K         Answer:              
 .              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%                                                                   
                               


                                                                               
                (Comp: 3.3-3.5) Asset reduction: turnover and ROE C K  Answer:              
 .              Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%.  The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500.  Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio.  By how much would the reduction in assets improve the ROE?
                                                                                                               
                a.            4.69%                                                                   
                b.            4.93%                                                                   
                c.             5.19%                                                                   
                d.            5.45%                                                                   
                e.            5.73%                                                                   


:

                (3.3) DSO and its effect on net income   C K          Answer:              
 .              Muscarella Inc. has the following balance sheet and income statement data:
                                                                                                               
                Cash      $ 14,000                                Accounts payable            $ 42,000
                Receivables        70,000                   Other current liabilities    28,000
                Inventories         210,000                                  Total CL              $ 70,000
                  Total CA             $294,000                              Long-term debt                70,000
                Net fixed assets               126,000                                Common equity               280,000
                  Total assets      $420,000                                Total liab. and equity    $420,000
                Sales      $280,000                                             
                Net income        $ 21,000                                               
                                                                                               
                The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income.  Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?
                                                                                                               
                a.            4.28%                                                                   
                b.            4.50%                                                                   
                c.             4.73%                                                                   
                d.            4.96%                                                                   
                e.            5.21%                                                                   
                                                                                                               
                (Comp: 3.4,3.5) ROE changing with debt ratio      C K          Answer:              
 .              Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000.  The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%.  The new CFO wants to see how the ROE would have been affected if the firm had used a 45% 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.            2.08%                                                                   
                b.            2.32%                                                                   
                c.             2.57%                                                                   
                d.            2.86%                                                                   
                e.            3.14%                                                                   
                                                                                                               










                (Comp: 3.4,3.5) Maximum debt constrained by TIE           C K          Answer:              
 .              Quigley Inc. is considering two financial plans for the coming year.  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%                                                                   

Multi-part:

(The following data apply to Problems 87 through 105.)

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.
                                                                               
Balance Sheet (Millions of $)
                                                               
Assets   2010                                                      
Cash and securities         $1,554.0                                                              
Accounts receivable       9,660.0                                                 
Inventories         13,440.0                                                              
Total current assets        $24,654.0                                                            
Net plant and equipment             17,346.0                                                              
Total assets        $42,000.0                                                            
Liabilities and Equity                                                                      
Accounts payable            $7,980.0                                                              
Notes payable   5,880.0                                                 
Accruals               4,620.0                                                 
Total current liabilities    $18,480.0                                                            
Long-term bonds             10,920.0                                                              
Total debt           $29,400.0                                                            
Common stock  3,360.0                                                 
Retained earnings           9,240.0                                                 
Total common equity     $12,600.0                                                            
Total liabilities and equity             $42,000.0                                                            
                                                                               
Income Statement (Millions of $)             2010                                                      
Net sales             $58,800.00                                                          
Operating costs except depr’n   $54,978.0                                                            
Depreciation      $1,029.0                                                              
Earnings bef int and taxes (EBIT)               $2,793.0                                                              
Less interest      1,050.0                                                 
Earnings before taxes (EBT)        $1,743.0                                                              
Taxes    $610.1                                                  
Net income        $1,133.0                                                              
Other data:                                                                        
Shares outstanding (millions)     175.00                                                  
Common dividends         $509.83                                                
Int rate on notes payable & L-T bonds    6.25%                                                   
Federal plus state income tax rate           35%                                                       
Year-end stock price       $77.69                                                  
                                                                               
                (3.2) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's current ratio?
                                                                                                               
                a.            0.97                                                                       
                b.            1.08                                                                       
                c.             1.20                                                                       
                d.            1.33                                                                       
                e.            1.47                                                                       
                                                                                                               
                (3.2) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's quick ratio?
                                                                                                               
                a.            0.49                                                                       
                b.            0.61                                                                       
                c.             0.73                                                                       
                d.            0.87                                                                       
                e.            1.05                                                                       
                                                                                                               
                (3.3) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's days sales outstanding?  Assume a 360-day year for this calculation.
                                                                                                               
                a.            48.17                                                                    
                b.            50.71                                                                    
                c.             53.38                                                                    
                d.            56.19                                                                    
                e.            59.14                                                                    
                                                                                                               
                (3.3) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's total assets turnover?
                                                                                                               
                a.            0.90                                                                       
                b.            1.12                                                                       
                c.             1.40                                                                       
                d.            1.68                                                                       
                e.            2.02                                                                       
                                                                                                               

                (3.3) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's inventory turnover ratio?
                                                                                                               
                a.            4.38                                                                       
                b.            4.59                                                                       
                c.             4.82                                                                       
                d.            5.06                                                                       
                e.            5.32                                                                       
                                                                                                               
                (3.4) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's TIE?  
                                                                                                               
                a.            1.94                                                                       
                b.            2.15                                                                       
                c.             2.39                                                                       
                d.            2.66                                                                       
                e.            2.93




                                                                               
                                                                               
                (3.4) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's EBITDA coverage?
                                                                                                               
                a.            3.29                                                                       
                b.            3.46                                                                       
                c.             3.64                                                                       
                d.            3.82                                                                       
                e.            4.01                                                                       
                                               
                (3.4) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's debt ratio?
                                                                                                               
                a.            45.93%                                                                 
                b.            51.03%                                                                 
                c.             56.70%                                                                 
                d.            63.00%                                                                 
                e.            70.00%                                                                 
                                                                                                               
                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's ROA?
                                                                                                               
                a.            2.70%                                                                   
                b.            2.97%                                                                   
                c.             3.26%                                                                   
                d.            3.59%                                                                   
                e.            3.95%                                                                   
                                                                                                               

                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's ROE?
                                                                                                               
                a.            8.54%                                                                   
                b.            8.99%                                                                   
                c.             9.44%                                                                   
                d.            9.91%                                                                   
                e.            10.41%                                                                 
                                                                                                               
                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's BEP?
                                                                                                               
                a.            6.00%                                                                   
                b.            6.32%                                                                   
                c.             6.65%                                                                   
                d.            6.98%                                                                   
                e.            7.33%




                                                                               
                                                                                                               
                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's profit margin?
                                                                                                               
                a.            1.40%                                                                   
                b.            1.56%                                                                   
                c.             1.73%                                                                   
                d.            1.93%                                                                   
                e.            2.12%                                                                   
                                                                                                               
                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's dividends per share?
                                                                                                               
                a.            $2.62                                                                    
                b.            $2.91                                                                    
                c.             $3.20                                                                    
                d.            $3.53                                                                    
                e.            $3.88                                                                    
                                                                                                               
                (3.5) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's cash flow per share?
                                                                                                               
                a.            $10.06                                                                  
                b.            $10.59                                                                  
                c.             $11.15                                                                  
                d.            $11.74                                                                  
                e.            $12.35                                                                  
                                                                                                               

                (3.6) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's EPS?
                                                                                                               
                a.            $5.84                                                                    
                b.            $6.15                                                                    
                c.             $6.47                                                                    
                d.            $6.80                                                                    
                e.            $7.14                                                                    
                                                                                                               
                (3.6) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's PE ratio?
                                                                                                               
                a.            12.0                                                                       
                b.            12.6                                                                       
                c.             13.2                                                                       
                d.            13.9                                                                       
                e.            14.6




                                                                               
                                                                                                               
                (3.6) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's book value per share?
                                                                                                               
                a.            $61.73                                                                  
                b.            $64.98                                                                  
                c.             $68.40                                                                  
                d.            $72.00                                                                  
                e.            $75.60                                                                  
                                                                                                               
                (3.6) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's market-to-book ratio?
                                                                                                               
                a.            0.56                                                                       
                b.            0.66                                                                       
                c.             0.78                                                                       
                d.            0.92                                                                       
                e.            1.08                                                                       
                                                                                                               
                (3.8) Calculating ratios given financial stmts CK   Answer:              
 .              What is the firm's equity multiplier?
                                                                                                               
                a.            3.33                                                                       
                b.            3.50                                                                       
                c.             3.68                                                                       
                d.            3.86                                                                       
                e.            4.05                                                                       

                                                                

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