ch03 test bank 3-31-10

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CHAPTER 3

ANALYSIS OF FINANCIAL STATEMENTS

Please see the preface for information on the AACSB letter indicators (F, M,

etc.) on the subject lines.

True/False

Easy:

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: a EASY

1. Ratio analsis involves anal!ing financial statements in order to

appraise a firm"s financial position and strength.

a. #rue

b. $alse

(3.2) Liquidity ratios F K Answer: a EASY

2. #he current ratio and inventor turnover ratios both help us measure the

firm"s liquidit. #he current ratio measures the relationship of a

firm"s current assets to its current liabilities, while the inventor

turnover ratio gives us an indication of how long it takes the firm to

convert its inventor into cash.

a. #rue

b. $alse

(3.2) Liquidity ratios F K Answer: a EASY

%. &lthough a full liquidit analsis requires the use of a cash budget,

the current and quick ratios provide fast and eas'to'use measures of a

firm"s liquidit position.

a. #rue

b. $alse

211 *engage +earning. &ll Rights Reserved. a not be scanned, copied or duplicated, or posted

to a publicl accessible website, in whole or in part.

Chapter 3: Financial Analysis True/False

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(3.2) Current ratio F K Answer: EASY

-. igh current and quick ratios alwas indicate that a firm is managing

its liquidit position well.

a. #rue

b. $alse

(3.3) Asset !ana"e!ent ratios F K Answer: a EASY

/. #he inventor turnover ratio and das sales outstanding (0) are two

ratios that are used to assess how effectivel a firm is managing its

assets.

a. #rue

b. $alse

(3.3) #n$entory turno$er ratio F K Answer: EASY

3. & decline in a firm"s inventor turnover ratio suggests that it is

managing its inventor more efficientl and also that its liquidit

position is improving, i.e., it is becoming more liquid.

a. #rue

b. $alse

(3.%) &et !ana"e!ent ratios F K Answer: a EASY

4. 0ebt management ratios show the e5tent to which a firm"s managers are

attempting to magnif returns on owners" capital through the use of

financial leverage.

a. #rue

b. $alse

(3.%) '#E ratio F K Answer: a EASY

6. #he times'interest'earned ratio is one, but not the onl, indication of

a firm"s abilit to meet its long'term and short'term debt obligations.

a. #rue

b. $alse

(3.) ro*itaility ratios F K Answer: a EASY

7. 8rofitabilit ratios show the combined effects of liquidit, asset

management, and debt management on operating results.

a. #rue

b. $alse



True/False Chapter 3: Financial Analysis

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(3.+) ,ar-et $alue ratios F K Answer: a EASY

1. arket value ratios provide management with an indication of how

investors view the firm"s past performance and especiall its future

prospects.

a. #rueb. $alse

(3.) 'rend analysis F K Answer: a EASY

11. 0etermining whether a firm"s financial position is improving or

deteriorating requires anal!ing more than the ratios for a given ear.

#rend analsis is one method of measuring changes in a firm"s

performance over time.

a. #rue

b. $alse

(3.1/) 0alane seet an"es F K Answer: a EASY

12. #he 9apparent,9 but not the 9true,9 financial position of a compan

whose sales are seasonal can differ dramaticall, depending on the time

of ear when the financial statements are constructed.

a. #rue

b. $alse

(3.1/) Li!itations o* ratio analysis F K Answer: a EASY1%. ignificant variations in accounting methods among firms make meaningful

ratio comparisons between firms more difficult than if all firms used

similar accounting methods.

a. #rue

b. $alse

Easy/Medium:

(3.) 0asi earnin" ower ratio F K Answer: EASY4,E&#5,

1-. #he basic earning power ratio (:;8) reflects the earning power of a

firm"s assets after giving consideration to financial leverage and ta5

effects.

a. #rue

b. $alse




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Medium:

(3.3) #n$entory turno$er ratio F K Answer: a ,E&#5,

1/. #he inventor turnover and current ratio are related. #he combination

of a high current ratio and a low inventor turnover ratio, relative to

industr norms, suggests that the firm has an above'average inventorlevel and<or that part of the inventor is obsolete or damaged.

a. #rue

b. $alse

(3.3) Fi6ed assets turno$er F K Answer: ,E&#5,

13

. =t is appropriate to use the fi5ed assets turnover ratio to appraisefirms" effectiveness in managing their fi5ed assets if and onl if all

the firms being compared have the same proportion of fi5ed assets to

total assets.

a. #rue

b. $alse

(3.) R7A F K Answer: ,E&#5,

14. ince the R& measures the firm"s effective utili!ation of assets

(without considering how these assets are financed), two firms with the

same ;:=# must have the same R&.

a. #rueb. $alse

(3.8) &u ont equation F K Answer: ,E&#5,

16. uppose firms follow similar financing policies, face similar risks,

have equal access to capital, and operate in competitive product and

capital markets. >nder 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. #rue

b. $alse




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Hard:

(3.2) Liquidity ratios F K Answer: 9AR&

17. ;ven though $irm &"s current ratio e5ceeds that of $irm :, $irm :"s

quick ratio might e5ceed that of &. owever, if &"s quick ratio e5ceeds

:"s, then we can be certain that &"s current ratio is also larger thanthat of :.

a. #rue

b. $alse

(3.2) Liquidity ratios F K Answer: 9AR&2. $irms & and : have the same current ratio, .4/, the same amount of

sales, and the same amount of current liabilities. owever, $irm & has

a higher inventor turnover ratio than :. #herefore, we can conclude

that &"s quick ratio must be smaller than :"s.

a. #rue

b. $alse

(3.%) '#E ratio F K Answer: a 9AR&

21. uppose a firm wants to maintain a specific #=; ratio. =t knows the

amount of its debt, the interest rate on that debt, the applicable ta5

rate, and its operating costs. With this information, the firm can

calculate the amount of sales required to achieve its target #=; ratio.

a. #rue

b. $alse

(3.) 0E and R7E F K Answer: a 9AR&

22. uppose $irms & and : have the same amount of assets, pa the same

interest rate on their debt, have the same basic earning power (:;8),

and have the same ta5 rate. owever, $irm & has a higher debt ratio.

=f :;8 is greater than the interest rate on debt, $irm & will have a

higher R; as a result of its higher debt ratio.

a. #rue

b. $alse




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(3.8) Equity !ultilier F K Answer: a 9AR&

2%. =f a firm finances with onl debt and common equit, and if its equit

multiplier is %., then its debt ratio must be .334.

a. #rue

b. $alse

(3.1/) Li!itations o* ratio analysis F K Answer: 9AR&

2-. ne problem with ratio analsis is that relationships can be

manipulated. $or e5ample, if our current ratio is greater than 1./,

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. #rue

b. $alse

(3.1/) Li!itations o* ratio analysis F K Answer: 9AR&

2/. ne problem with ratio analsis is that relationships can be

manipulated. $or e5ample, we know that if our current ratio is less

than 1., then using some of our cash to pa off some of our current

liabilities would cause the current ratio to increase and thus make the

firm look stronger.

a. #rueb. $alse




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Multiple Choice: Coceptual

Easy:

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 isuseful to make up illustrative data to help see what would happen.

(3.2) Current ratio C K Answer: d EASY

23. *onsidered alone, which of the following would increase a compan?s

current ratio@

a. &n increase in net fi5ed assets.

b. &n increase in accrued liabilities.

c. &n increase in notes paable.

d. &n increase in accounts receivable.

e. &n increase in accounts paable.

(3.2) Current ratio C K Answer: EASY24. Which of the following would, generall, indicate an improvement in a

compan?s financial position, holding other things constant@

a. #he #=; declines.

b. #he 0 increases.

c. #he ;:=#0& coverage ratio increases.

d. #he current and quick ratios both decline.

e. #he total assets turnover decreases.

(3.2) Current ratio C K Answer: d EASY

26. & firm wants to strengthen its financial position. Which of the

following actions would increase its current ratio@

a. Reduce the compan?s das? sales outstanding to the industr

average and use the resulting cash savings to purchase plant and

equipment.

b. >se cash to repurchase some of the compan?s own stock.

c. :orrow using short'term debt and use the proceeds to repa debt

that has a maturit of more than one ear.

d. =ssue new stock and then use some of the proceeds to purchase

additional inventor and hold the remainder as cash.

e. >se cash to increase inventor holdings.




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(3.3) #n$entories C K Answer: EASY

27. Which of the following statements is *RR;*#@

a. & reduction in inventories held would have no effect on the current

ratio.

b. &n increase in inventories would have no effect on the currentratio.

c. =f a firm increases its sales while holding its inventories

constant, then, other things held constant, its inventor turnover

ratio will increase.

d. & reduction in the inventor turnover ratio will generall lead to

an increase in the R;.

e. =f a firm increases its sales while holding its inventories

constant, then, other things held constant, its inventor turnover

ratio will decrease.

(3.+) Finanial state!ent analysis C K Answer: e EASY

%. *ompanies ; and 8 each reported the same earnings per share (;8), but

*ompan ;?s stock trades at a higher price. Which of the followingstatements is *RR;*#@

a. *ompan ; probabl has fewer growth opportunities.

b. *ompan ; is probabl Audged b investors to be riskier.

c. *ompan ; must have a higher market'to'book ratio.

d. *ompan ; must pa a lower dividend.

e. *ompan ; trades at a higher 8<; ratio.

(3.+) ,ar-et $alue ratios C K Answer: d EASY

%1. Which of the following statements is *RR;*#@

a. =f a firm has the highest price<earnings ratio of an firm in its

industr, then, other things held constant, this suggests that theboard of directors should fire the president.

b. =f a firm has the highest market<book ratio of an firm in its

industr, then, other things held constant, this suggests that the

board of directors should fire the president.

c. ther things held constant, the higher a firm?s e5pected future

growth rate, the lower its 8<; ratio is likel to be.

d. #he higher the market<book ratio, then, other things held constant,

the higher one would e5pect to find the arket Balue &dded (B&).

e. =f a firm has a histor of high ;conomic Balue &dded (;B&) numbers

each ear, and if investors e5pect this situation to continue, then

its market<book ratio and B& are both likel to be below average.




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(3.1/) indow dressin" C K Answer: EASY

%2. Which of the following statements is *RR;*#@

a. :orrowing b using short'term notes paable and then using the

proceeds to retire long'term debt is an e5ample of Cwindowdressing.D ffering discounts to customers who pa with cash rather

than bu on credit and then using the funds that come in quicker to

purchase additional inventories is another e5ample of Cwindow

dressing.D

b. :orrowing 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 e5ample of Cwindow dressing.D

c. ffering discounts to customers who pa with cash rather than bu

on credit and then using the funds that come in quicker to purchase

additional inventories is an e5ample of Cwindow dressing.D

d. >sing some of the firm?s cash to reduce long'term debt is an

e5ample of Cwindow dressing.D

e. CWindow dressingD is an action that improves a firm?s fundamental,

long'run position and thus increases its intrinsic value.

(Co!: 3.2;3.%<3.+) ,isellaneous ratios C K Answer: a EASY

%%. *ase *ommunications recentl issued new common stock and used the

proceeds to pa off some of its short'term notes paable. #his action

had no effect on the compan?s total assets or operating income. Which

of the following effects would occur as a result of this action@

a. #he compan?s current ratio increased.

b. #he compan?s times interest earned ratio decreased.

c. #he compan?s basic earning power ratio increased.

d. #he compan?s equit multiplier increased.

e. #he compan?s debt ratio increased.

(Co!: 3.2;3.3;3.) ,isellaneous ratios C K Answer: EASY

%-. & firm?s new president wants to strengthen the compan?s financial position.

Which of the following actions would make it financiall stronger@

a. =ncrease accounts receivable while holding sales constant.

b. =ncrease ;:=# while holding sales constant.

c. =ncrease accounts paable while holding sales constant.

d. =ncrease notes paable while holding sales constant.

e. =ncrease inventories while holding sales constant.




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(Co!: 3.3<3.) ,isellaneous ratios C K Answer: a EASY

%/. =f the *; of a large, diversified, firm were filling out a fitness

report on a division manager (i.e., CgradingD the manager), which of thefollowing situations would be likel to cause the manager to receive a

better grade@ =n all cases, assume that other things are held constant.

a. #he division?s basic earning power ratio is above the average of

other firms in its industr.

b. #he division?s total assets turnover ratio is below the average for

other firms in its industr.

c. #he division?s debt ratio is above the average for other firms in

the industr.

d. #he division?s inventor turnover is 3, whereas the average for its

competitors is 6.

e. #he division?s 0 (das? sales outstanding) is -, whereas the

average for its competitors is %.

(Co!: 3.2<3.) ,isellaneous ratios C K Answer: e EASY

%3. Which of the following would indicate an improvement in a compan?s

financial position, holding other things constant@

a. #he inventor and total assets turnover ratios both decline.

b. #he debt ratio increases.

c. #he profit margin declines.

d. #he ;:=#0& coverage ratio declines.

e. #he current and quick ratios both increase.

(Co!: 3.2;3.%) ,isellaneous ratios C K Answer: EASY

%4

. =f a bank loan officer were considering a compan?s request for a loan,which of the following statements would ou consider to be *RR;*#@

a. #he lower the compan?s ;:=#0& coverage ratio, other things held

constant, the lower the interest rate the bank would charge the

firm.

b. ther things held constant, the higher the debt ratio, the lower

the interest rate the bank would charge the firm.

c. ther things held constant, the lower the debt ratio, the lower the

interest rate the bank would charge the firm.

d. #he lower the compan?s #=; ratio, other things held constant, the

lower the interest rate the bank would charge the firm.

e. ther things held constant, the lower the current ratio, the lower

the interest rate the bank would charge the firm.



Page 1 True/False Chapter 3: Financial Analysis

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(Co!: 3.%;3.;3.8) E**ets o* le$era"e C K Answer: EASY

%6

. Which of the following statements is *RR;*#@

a. #he use of debt financing will tend to lower the basic earning

power ratio, other things held constant.

b. & firm that emplos financial leverage will have a higher equit

multiplier than an otherwise identical firm that has no debt in its

capital structure.

c. =f two firms have identical sales, interest rates paid, operating

costs, and assets, but differ in the wa the are financed, the

firm with less debt will generall have the higher e5pected R;.

d. olding bonds is better than holding stock for investors because

income from bonds is ta5ed on a more favorable basis than income

from stock.

e. &ll else equal, increasing the debt ratio will increase the R&.

Easy/Medium:

(3.2) =ui- ratio C K Answer: a EASY4,E&#5,

%7. & firm wants to strengthen its financial position. Which of the

following actions would increase its quick ratio@

a. ffer price reductions along with generous credit terms that would

(1) enable the firm to sell some of its e5cess inventor and

(2)lead to an increase in accounts receivable.

b. =ssue new common stock and use the proceeds to increase

inventories.

c. peed up the collection of receivables and use the cash generated

to increase inventories.

d. >se some of its cash to purchase additional inventories.

e. =ssue new common stock and use the proceeds to acquire additional

fi5ed assets.

Medium:

(3.2) Current ratio C K Answer: ,E&#5,

-. &mram *ompan?s current ratio is 1.7. *onsidered alone, which of the

following actions would reduce the compan?s current ratio@

a. :orrow using short'term notes paable and use the proceeds to

reduce accruals.b. :orrow using short'term notes paable and use the proceeds to

reduce long'term debt.

c. >se cash to reduce accruals.

d. >se cash to reduce short'term notes paable.




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e. >se cash to reduce accounts paable.

(3.3) Aounts reei$ale C K Answer: e ,E&#5,

-1. Which of the following statements is *RR;*#@

a. =f a securit analst saw that a firm?s das? sales outstanding

(0) was higher than the industr average and was also increasing

and trending still higher, this would be interpreted as a sign of

strength.

b. =f a firm increases its sales while holding its accounts receivable

constant, then, other things held constant, its das? sales

outstanding (0) will increase.

c. #here is no relationship between the das? sales outstanding (0)

and the average collection period (&*8). #hese ratios measure

entirel different things.d. & reduction in accounts receivable would have no effect on the

current ratio, but it would lead to an increase in the quick ratio.

e. =f a firm increases its sales while holding its accounts receivable

constant, then, other things held constant, its das? sales

outstanding will decline.

(3.%) Le$era"e e**ets> det !ana"e!ent C K Answer: ,E&#5, -2. Which of the following statements is *RR;*#@

a. =f 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 #=;

ratio, as that ratio depends entirel on the amount of debt a firm

uses.b. & firm?s use of debt will have no effect on its profit margin on

sales.

c. =f two firms differ onl in their use of debtEi.e., the have

identical assets, sales, operating costs, interest rates on their

debt, and ta5 ratesEbut one firm has a higher debt ratio, the firm

that uses more debt will have a lower profit margin on sales.

d. #he debt ratio as it is generall calculated makes an adAustment

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. =f two firms differ onl in their use of debtEi.e., the have

identical assets, sales, operating costs, and ta5 ratesEbut one

firm has a higher debt ratio, the firm that uses more debt will

have a higher profit margin on sales.




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(3.+) ,ar-et $alue ratios C K Answer: ,E&#5,

-%. Which of the following statements is *RR;*#@

a. =f $irms F and G have the same 8<; ratios, then their market'to'

book ratios must also be the same.

b. =f $irms F and G have the same net income, number of shares

outstanding, and price per share, then their 8<; ratios must also

be the same.

c. =f $irms F and G have the same earnings per share and market'to'

book ratio, the must have the same price earnings ratio.

d. =f $irm F?s 8<; ratio e5ceeds that of $irm G, then G is likel tobe less risk and also to be e5pected to grow at a faster rate.

e. =f $irms F and G 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) &u ont analysis C K Answer: a ,E&#5,

--. Which of the following statements is *RR;*#@

a. uppose a firm?s total assets turnover ratio falls from 1. to .7,

but at the same time its profit margin rises from 7H to 1H and its

debt increases from -H of total assets to 3H. >nder these

conditions, the R; will increase.

b. uppose a firm?s total assets turnover ratio falls from 1. to .7,but at the same time its profit margin rises from 7H to 1H and its

debt increases from -H of total assets to 3H. Without additional

information, we cannot tell what will happen to the R;.

c. #he modified 0u 8ont equation provides information about how

operations affect the R;, but the equation does not include the

effects of debt on the R;.

d. ther things held constant, an increase in the debt ratio will

result in an increase in the profit margin on sales.

e. uppose a firm?s total assets turnover ratio falls from 1. to .7,

but at the same time its profit margin rises from 7H to 1H, and

its debt increases from -H of total assets to 3H. >nder these

conditions, the R; will decrease.




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(3.8) &u ont analysis C K Answer: a ,E&#5,

-/. Gou observe that a firm?s R; is above the industr average, but its

profit margin and debt ratio are both below the industr average. Whichof the following statements is *RR;*#@

a. =ts total assets turnover must be above the industr average.

b. =ts return on assets must equal the industr average.

c. =ts #=; ratio must be below the industr average.

d. =ts total assets turnover must be below the industr average.

e. =ts total assets turnover must equal the industr average.

(3.8) &u ont analysis C K Answer: d ,E&#5,

-3. *ompanies 0 and +0 are both profitable, and the have the same total

assets (#&), ales (), return on assets (R&), and profit margin (8).

owever, *ompan 0 has the higher debt ratio. Which of the following

statements is *RR;*#@

a. *ompan 0 has a lower total assets turnover than *ompan +0.

b. *ompan 0 has a lower equit multiplier than *ompan +0.

c. *ompan 0 has a higher fi5ed assets turnover than *ompan :.

d. *ompan 0 has a higher R; than *ompan +0.

e. *ompan 0 has a lower operating income (;:=#) than *ompan +0.

(Co!: 3.%;3.) Finanial state!ent analysis C K Answer: ,E&#5,

-4. #aggart #echnologies is considering issuing new common stock and using

the proceeds to reduce its outstanding debt. #he stock issue would have

no effect on total assets, the interest rate #aggart pas, ;:=#, or the

ta5 rate. Which of the following is likel to occur if the compan goes

ahead with the stock issue@

a. #he R& will decline.

b. #a5able income will decrease.

c. #he ta5 bill will increase.

d. Iet income will decrease.

e. #he times interest earned ratio will decrease.




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(Co!: 3.3<3.) Finanial state!ent analysis C K Answer: e ,E&#5,

-6. Which of the following statements is *RR;*#@

a. #he ratio of long'term debt to total capital is more likel toe5perience seasonal fluctuations than is either the 0 or the

inventor turnover ratio.

b. =f two firms have the same R&, the firm with the most debt can be

e5pected to have the lower R;.

c. &n increase in the 0, other things held constant, could be

e5pected to increase the total assets turnover ratio.

d. &n increase in the 0, other things held constant, could be

e5pected to increase the R;.

e. &n increase in a firm?s debt ratio, with no changes in its sales or

operating costs, could be e5pected to lower the profit margin.

(Co!: 3.%;3.;3.8) Finanial state!ent analysis C K Answer: d ,E&#5,

-7. 0 *orp. and +0 *orp. have identical assets, sales, interest rates paid

on their debt, ta5 rates, and ;:=#. owever, 0 uses more debt than +0.Which of the following statements is *RR;*#@

a. Without more information, we cannot tell if 0 or +0 would have a

higher or lower net income.

b. 0 would have the lower equit multiplier for use in the 0u 8ont

equation.

c. 0 would have to pa more in income ta5es.

d. 0 would have the lower net income as shown on the income

statement.

e. 0 would have the higher net income as shown on the income

statement.




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(Co!: 3.2;3.3) Cas *lows C K Answer: ,E&#5,

/

. ther things held constant, which of the following alternatives wouldincrease a compan?s cash flow for the current ear@

a. =ncrease the number of ears over which fi5ed assets are

depreciated for ta5 purposes.

b. 8a down the accounts paables.

c. Reduce the das? sales outstanding (0) without affecting sales or

operating costs.

d. 8a workers more frequentl to decrease the accrued wages balance.

e. Reduce the inventor turnover ratio without affecting sales or

operating costs.

(Co!: 3.%;3.;3.8) Le$era"e; ta6es; and ratios C K Answer: a ,E&#5,

/1

. *ompanies 0 and +0 have the same sales, ta5 rate, interest rate ontheir debt, total assets, and basic earning power. :oth companies have

positive net incomes. *ompan 0 has a higher debt ratio and,

therefore, a higher interest e5pense. Which of the following statements

is *RR;*#@

a. *ompan 0 pas less in ta5es.

b. *ompan 0 has a lower equit multiplier.

c. *ompan 0 has a higher R&.

d. *ompan 0 has a higher times interest earned (#=;) ratio.

e. *ompan 0 has more net income.

(Co!: 3.%;3.;3.8) Le$era"e; ta6es; and ratios C K Answer: e ,E&#5,

/2

. *ompanies 0 and +0 have the same ta5 rate, sales, total assets, andbasic earning power. :oth companies have positive net incomes. *ompan

0 has a higher debt ratio and, therefore, a higher interest e5pense.

Which of the following statements is *RR;*#@

a. *ompan 0 has a lower equit multiplier.

b. *ompan 0 has more net income.

c. *ompan 0 pas more in ta5es.

d. *ompan 0 has a lower R;.

e. *ompan 0 has a lower times interest earned (#=;) ratio.

Medium/Hard:

(3.2) Current ratio C K Answer: a ,E&#5,49AR&

/%. Walter =ndustries? current ratio is ./. *onsidered alone, which of the

following actions would increase the compan?s current ratio@

a. :orrow using short'term notes paable and use the cash to increase

inventories.




7/25/2019 Ch03 Test Bank 3-31-10


b. >se cash to reduce accruals.

c. >se cash to reduce accounts paable.

d. >se cash to reduce short'term notes paable.

e. >se cash to reduce long'term bonds outstanding.

(3.2) Current ratio C K Answer: ,E&#5,49AR&

/-

. afeco?s current assets total to J2 million versus J1 million ofcurrent liabilities, while Risco?s current assets are J1 million versus

J2 million of current liabilities. :oth firms would like to Cwindow

dressD their end'of'ear financial statements, and to do so the

tentativel plan to borrow J1 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. #he transactions would raise afeco?s financial strength as

measured b its current ratio but lower Risco?s current ratio.

b. #he transactions would lower afeco?s financial strength as

measured b its current ratio but raise Risco?s current ratio.

c. #he transaction would have no effect on the firm? financial

strength as measured b their current ratios.

d. #he transaction would lower both firm? financial strength as

measured b their current ratios.

e. #he transaction would improve both firms? financial strength as

measured b their current ratios.

(Co!:3.%;3.)E**ets o* *inanial le$era"e C K Answer: e ,E&#5,49AR&

//. *ompanies 0 and +0 have the same total assets, sales, operating costs,

and ta5 rates, and the pa the same interest rate on their debt.

owever, compan 0 has a higher debt ratio. Which of the following

statements is *RR;*#@

a. Kiven this information, +0 must have the higher R;.

b. *ompan +0 has a higher basic earning power ratio (:;8).

c. *ompan 0 has a higher basic earning power ratio (:;8).d. =f the interest rate the companies pa on their debt is more than

their basic earning power (:;8), then *ompan 0 will have the

higher R;.

e. =f the interest rate the companies pa on their debt is less than

their basic earning power (:;8), then *ompan 0 will have the

higher R;.




7/25/2019 Ch03 Test Bank 3-31-10


Multiple Choice: Pro!le"s

& good bit of relativel 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. &lso, 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 e5ams, using the relevant sections of

&ppendi5 0 at the end of the te5t.

#he difficult of the problems depends on (1) whether or not students are

provided with a formula sheet and (2) the amount of time the have to work

the problems. ur difficult assessments assume that the have a formula

sheet and a 9reasonable9 amount of time for the test. Iote that some

problems are triviall eas if students have formula sheets.

#o work some of the problems, students must transpose equations and solve for

items that are normall inputs. $or e5ample, the equation for the profit

margin is given as 8rofit margin L Iet income<ales. 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 e5plain to students in class before the e5am thatthe will have to transpose terms in the formulas to work some problems.

8roblems /4 to 63 are all stand'alone problems with individuali!ed data, but

problems 64 through 1/ are all based on a common set of data, and the

require students to calculate ratios and find items like ;8, #=;, and the

like using this data set. #he statements can be changed algorithmicall, and

this changes the calculated ratios and other items.

Easy:

(3.3) 'otal assets turno$er C K Answer: d EASY

/3. &rshadi *orp."s sales last ear were J/2,, and its total assets were

J22,. What was its total assets turnover ratio (#&#)@

a. 2.%

b. 2.1%

c. 2.2/

d. 2.%3

e. 2.-6



Pr!"le#s Chapter 3: Financial Analysis

7/25/2019 Ch03 Test Bank 3-31-10


(3.%) &et ratio:*ind te det; "i$en te &4A ratio C K Answer: EASY

/4. :eranek *orp. has J-1, of assets, and it uses no debt''it is financed

onl with common equit. #he new *$ wants to emplo enough debt to

bring the debt<assets ratio to -H, using the proceeds from the

borrowing to bu back common stock at its book value. ow much must the

firm borrow to achieve the target debt ratio@

a. J1//,6

b. J13-,

c. J142,2

d. J16,61

e. J167,6/1

(3.%) 'i!es interest earned C K Answer: e EASY

/6. rono *orp."s sales last ear were J-%/,, its operating costs were

J%32,/, and its interest charges were J12,/. What was the firm"s

times interest earned (#=;) ratio@

a. -.42

b. -.74

c. /.2%d. /./1

e. /.6

(3.) ro*it !ar"in on sales C K Answer: EASY

/7. Rappaport *orp."s sales last ear were J%2,, and its net income after

ta5es was J2%,. What was its profit margin on sales@

a. 3.-7H

b. 3.6%H

c. 4.17H

d. 4.//H

e. 4.72H

(3.) Return on total assets (R7A) C K Answer: a EASY3. :ranch *orp."s total assets at the end of last ear were J%1/, and its

net income after ta5es was J22,4/. What was its return on total assets@

a. 4.22H

b. 4./6H

c. 4.73H

d. 6.%3H

e. 6.46H



Chapter 3: Financial Analysis Pr!"le#s

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(3.) 0asi earnin" ower (0E) C K Answer: EASY

31. *hambliss *orp."s total assets at the end of last ear were J%/, and

its ;:=# was 32,/. What was its basic earning power (:;8)@

a. 16.-7H

b. 17.-4H

c. 2.-7Hd. 21./2H

e. 22./7H

(3.) Return on equity (R7E) C K Answer: d EASY

32. Iikko *orp."s total common equit at the end of last ear was J%/,

and its net income after ta5es was J3,. What was its R;@

a. 13.64H

b. 14.4/H

c. 16.37H

d. 17.34H

e. 2.33H

(3.) Return on equity (R7E): *indin" net ino!e C K Answer: e EASY

3%. &n investor is considering starting a new business. #he compan would

require J-4/, of assets, and it would be financed entirel with

common stock. #he investor will go forward onl if she thinks the firm

can provide a 1%./H return on the invested capital, which means that the

firm must have an R; of 1%./H. ow much net income must be e5pected to

warrant starting the business@

a. J/2,2%

b. J/-,747

c. J/4,64%

d. J3,717e. J3-,12/

(3.+) rie4Earnin"s ratio (4E) C K Answer: EASY

3-. Bang *orp."s stock price at the end of last ear was J%%./ and its

earnings per share for the ear were J2.%. What was its 8<; ratio@

a. 1%.6-

b. 1-./4

c. 1/.27

d. 13.3

e. 13.63



Page 2 Pr!"le#s Chapter 3: Financial Analysis

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(3.+) rie4Earnin"s ratio (4E) C K Answer: a EASY

3/. +indle *orp."s stock price at the end of last ear was J%%./, and its

book value per share was J2/.. What was its market<book ratio@

a. 1.%-

b. 1.-1

c. 1.-6d. 1.//

e. 1.3%

(3.8) &u ont equation: asi alulation C K Answer: EASY

33. Iorthwest +umber had a profit margin of /.2/H, a total assets turnover of

1./, and an equit multiplier of 1.6. What was the firm"s R;@

a. 12.47H

b. 1%.-4H

c. 1-.16H

d. 1-.66H

e. 1/.3%H




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Easy/Medium:

(3.%) &et ratio C K Answer: a EASY4,E&#5,

34. 8ace *orp."s assets are J32/,, and its total debt outstanding is

J16/,. #he new *$ wants to emplo a debt ratio of //H. ow much

debt must the compan add or subtract to achieve the target debt ratio@

a. J1/6,4/

b. J133,366

c. J14/,22

d. J16%,44%

e. J172,732

(3.+) ES; &S; and ayout C K Answer: d EASY4,E&#5,

36. elmuth =nc."s latest net income was J1,2/,, and it had 22/,

shares outstanding. #he compan wants to pa out -/H of its income.

What dividend per share should it declare@

a. J2.1-

b. J2.23c. J2.%6

d. J2./

e. J2.3%

Medium:

(3.3) E**et o* lowerin" te &S7 on net ino!e C K Answer: e ,E&#5,

37. &!i! =ndustries has sales of J1, and accounts receivable of J11,/,

and it gives its customers % das to pa. #he industr average 0 is 24

das, based on a %3/'da ear. =f the compan changes its credit and

collection polic sufficientl to cause its 0 to fall to the industr

average, and if it earns 6.H on an cash freed'up b this change, how

would that affect its net income, assuming other things are held constant@

a. J234.%-

b. J261.-1

c. J273.22

d. J%11.61

e. J%26.22




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(3.3) &ays sales outstandin" (&S7) C K Answer: ,E&#5,

4. eaton *orp. sells on terms that allow customers -/ das to pa for

merchandise. =ts sales last ear were J-2/,, and its ear'end

receivables were J3,. =f its 0 is less than the -/'da credit

period, then customers are paing on time. therwise, the are painglate. : how much are customers paing earl or late@ :ase our answer

on this equationM 0 ' *redit period L das earl or late, and use a

%3/'da ear when calculating the 0. & positive answer indicates late

paments, while a negative answer indicates earl paments.

a. 3.2

b. 3./%

c. 3.63

d. 4.2

e. 4./3

(3.3) &S7: days o* *ree redit C K Answer: d ,E&#5,

41

. arper *orp."s sales last ear were J%7/,, and its ear'endreceivables were J-2,/. arper sells on terms that call for customers

to pa % das after the purchase, but man dela pament beond 0a %.

n average, how man das late do customers pa@ :ase our answer on

this equationM 0 ' &llowed credit period L &verage das late, and use

a %3/'da ear when calculating the 0.

a. 4.7/

b. 6.%4

c. 6.61

d. 7.24

e. 7.4-

(3.3) 'otal assets turno$er ratio ('A'7) C K Answer: ,E&#5,

42. :onner *orp."s sales last ear were J-1/,, and its ear'end total

assets were J%//,. #he average firm in the industr has a total

assets turnover ratio (#&#) of 2.-. :onner"s new *$ believes the firm

has e5cess assets that can be sold so as to bring the #&# down to the

industr average without affecting sales. : how much must the assets

be reduced to bring the #&# to the industr average, holding sales

constant@

a. J13-,%%

b. J142,747

c. J162,6%

d. J171,166

e. J2,4-4




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(3.%),a6 det ratio onsistent wit "i$en '#E ratioCK

Answer: e ,E&#5,

4%. & new firm is developing its business plan. =t will require J/3/, of

assets, and it proAects J-/2,6 of sales and J%/-,% of operating

costs for the first ear. anagement is quite sure of these numbers

because of contracts with its customers and suppliers. =t can borrow at

a rate of 4./H, but the bank requires it to have a #=; of at least -.,

and if the #=; falls below this level the bank will call in the loan and

the firm will go bankrupt. What is the ma5imum debt ratio the firm can

use@ (intM $ind the ma5imum dollars of interest, then the debt that

produces that interest, and then the related debt ratio.)

a. -4.%%H

b. -7.62H

c. /2.-/H

d. //.21H

e. /6.11H

(3.%) E0#'&A o$era"e C K Answer: ,E&#5,

4-. Niebart *orp."s ;:=#0& last ear was J%7, (L ;:=# O depreciation O

amorti!ation), its interest charges were J7,/, it had to repa J23,

of long'term debt, and it had to make a pament of J14,- under a long'

term lease. #he firm had no amorti!ation charges. What was the ;:=#0&

coverage ratio@

a. 4.%2

b. 4.4

c. 6.7

d. 6.-7

e. 6.72

(3.) ro*it !ar"in and R7E C K Answer: a ,E&#5,

4/. +e*ompte *orp. has J%12,7 of assets, and it uses onl common equit

capital (!ero debt). =ts sales for the last ear were J32,, and its

net income after ta5es was J2-,3//. tockholders recentl voted in a

new management team that has promised to lower costs and get the return

on equit up to 1/H. What profit margin would +e*ompte need in order to

achieve the 1/H R;, holding everthing else constant@

a. 4./4H

b. 4.7/H

c. 6.%/H

d. 6.43H

e. 7.2H




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(3.) E**et o* reduin" osts on te R7E C K Answer: d ,E&#5,

43

. +ast ear >rbana *orp. had J174,/ of assets, J%4,/ of sales, J17,/4/of net income, and a debt'to'total'assets ratio of %4./H. #he new *$

believes a new computer program will enable it to reduce costs and thus

raise net income to J%%,. &ssets, sales, and the debt ratio would

not be affected. : how much would the cost reduction improve the R;@

a. 7.%2H

b. 7.62H

c. 1.%%H

d. 1.66H

e. 11.-2H

(3.+) ES; oo- $alue; and det ratio C K Answer: e ,E&#5,

44

. tewart =nc."s latest ;8 was J%./, its book value per share wasJ22.4/, it had 21/, shares outstanding, and its debt ratio was -3H.

ow much debt was outstanding@

a. J%,%7%,4%6

b. J%,/42,%/3

c. J%,43,%4/

d. J%,7/6,267

e. J-,133,32

(3.8) &u ont equation: asi alulation C K Answer: a ,E&#5,

46. +ast ear Baughn *orp. had sales of J%1/, and a net income of J14,6%2,

and its ear'end assets were J21,. #he firm"s total'debt'to'total'

assets ratio was -2./H. :ased on the 0u 8ont equation, what wasBaughn"s R;@

a. 1-.44H

b. 1/./1H

c. 13.26H

d. 14.1H

e. 14.7/H




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(3.8) &u ont eqn: e**et o* reduin" assets on R7ECK

Answer: ,E&#5,

47. +ast ear *entral *hemicals had sales of J2/,, assets of J124,/, a

profit margin of /.%H, and an equit multiplier of 1.2. #he *$

believes that the compan could reduce its assets b J21, without

affecting either sales or costs. ad it reduced its assets in this

amount, and had the debt ratio, sales, and costs remained constant, b

how much would the R; have changed@

a. 1.61H

b. 2.2H

c. 2.22H

d. 2.--H

e. 2.36H

(3.8) &u ont eqn: e**et o* reduin" osts on R7E CK Answer: ,E&#5,

6. +ast ear ason =nc. had a total assets turnover of 1.%% and an equit

multiplier of 1.4/. =ts sales were J17/, and its net income was

J1,/-7. #he *$ believes that the compan could have operated more

efficientl, lowered its costs, and increased its net income b J/,2/

without changing its sales, assets, or capital structure. ad it cut

costs and increased its net income in this amount, b how much would the

R; have changed@

a. /.33H

b. /.7/H

c. 3.24H

d. 3./6H

e. 3.71H

(3.8) &u ont equation: an"in" te det ratio C K Answer: a ,E&#5, 61. +ast ear Rosenberg *orp. had J17/, of assets, J16,44/ of net income,

and a debt'to'total'assets ratio of %2H. Iow suppose the new *$

convinces the president to increase the debt ratio to -6H. ales and

total assets will not be affected, but interest e5penses would increase.

owever, the *$ believes that better cost controls would be sufficient

to offset the higher interest e5pense and thus keep net income

unchanged. : how much would the change in the capital structure

improve the R;@

a. -.%3H

b. -./4H

c. -.6H

d. /.-He. /.%H




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(Co!: 3.3<3.) Asset redution: turno$er and R7E C K Answer: ,E&#5,

62. +ast ear &ltman *orp. had J2/, of assets, J%%,/ of sales, J16,2/

of net income, and a debt'to'total'assets ratio of -1H. #he new *$

believes the firm has e5cessive fi5ed assets and inventor that could be

sold, enabling it to reduce its total assets to J1/2,/. ales, costs,

and net income would not be affected, and the firm would maintain the -1H

debt ratio. : how much would the reduction in assets improve the R;@

a. -.37H

b. -.7%H

c. /.17H

d. /.-/H

e. /.4%H




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Hard:

(3.3) &S7 and its e**et on net ino!e C K Answer: 9AR&

6%. uscarella =nc. has the following balance sheet and income statement dataM

*ash J 1-, &ccounts paable J -2,

Receivables 4, ther current liabilities 26,=nventories 21, #otal *+ J 4,

#otal *& J27-, +ong'term debt 4,

Iet fi5ed assets 123, *ommon equit 26,

#otal assets J-2, #otal liab. and equit J-2,

ales J26,

Iet income J 21,

#he new *$ thinks that inventories are e5cessive and could be lowered

sufficientl to cause the current ratio to equal the industr average,

2.4, without affecting either sales or net income. &ssuming 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 bu back

common stock at book value, b how much would the R; change@

a. -.26H

b. -./H

c. -.4%H

d. -.73H

e. /.21H

(Co!: 3.%;3.) R7E an"in" wit det ratio C K Answer: d 9AR&

6-. +ast ear wensen *orp. had sales of J%%,22/, operating costs of

J234,/, and ear'end assets of J17/,. #he debt'to'total'assets

ratio was 24H, the interest rate on the debt was 6.2H, and the firm"s

ta5 rate was %4H. #he new *$ wants to see how the R; would have been

affected if the firm had used a -/H debt ratio. &ssume that sales and

total assets would not be affected, and that the interest rate and ta5

rate would both remain constant. : how much would the R; change in

response to the change in the capital structure@

a. 2.6H

b. 2.%2H

c. 2./4H

d. 2.63H

e. %.1-H




7/25/2019 Ch03 Test Bank 3-31-10


(Co!: 3.%;3.) ,a6i!u! det onstrained y '#E C K Answer: a 9AR&

6/. Puigle =nc. is considering two financial plans for the coming ear.

anagement e5pects sales to be J%1,44, operating costs to be J233,/-/,

assets to be J2,, and its ta5 rate to be %/H. >nder 8lan & it

would use 2/H debt and 4/H common equit. #he interest rate on the debt

would be 6.6H, but the #=; ratio would have to be kept at -. or more.>nder 8lan : the ma5imum debt that met the #=; constraint would be

emploed. &ssuming that sales, operating costs, assets, the interest

rate, and the ta5 rate would all remain constant, b how much would the

R; change in response to the change in the capital structure@

a. %.6%H

b. -.2H

c. -.22H

d. -.-%H

e. -.3/H




7/25/2019 Ch03 Test Bank 3-31-10


Multi-part:

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

#he balance sheet and income statement shown below are for 8ettiAohn =nc. Iote

that the firm has no amorti!ation charges, it does not lease an assets, none

of its debt must be retired during the ne5t / ears, and the notes paable will

be rolled over.

0alane Seet (,illions o* ?) Assets 21

*ash and securities J1,//-.

&ccounts receivable 7,33.

=nventories 1%,--.

#otal current assets J2-,3/-.

Iet plant and equipment 14,%-3.

#otal assets J-2,.

Liailities and Equity&ccounts paable J4,76.

Iotes paable /,66.

&ccruals -,32.#otal current liabilities J16,-6.

+ong'term bonds 1,72.

#otal debt J27,-.

*ommon stock %,%3.

Retained earnings 7,2-.

#otal common equit J12,3.

#otal liabilities and equit J-2,.

#no!e State!ent (,illions o* ?) 21

Iet salesJ/6,6.

perating costs e5cept depr?n J/-,746.

0epreciation J1,27.

;arnings bef int and ta5es (;:=#) J2,47%.+ess interest 1,/.

;arnings before ta5es (;:#) J1,4-%.

#a5es J31.1

Iet income J1,1%%.

7ter data:hares outstanding (millions) 14/.

*ommon dividends J/7.6%

=nt rate on notes paable Q +'# bonds 3.2/H

$ederal plus state income ta5 rate %/H

Gear'end stock price J44.37

(3.2) Calulatin" ratios "i$en *inanial st!ts CK Answer: d ,E&#5,

63. What is the firm"s current ratio@

a. .74

b. 1.6

c. 1.2

d. 1.%% 211 *engage +earning. &ll Rights Reserved. a not be scanned, copied or duplicated, or posted


Page 3 Pr!"le#s Chapter 3: Financial Analysis

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e. 1.-4

(3.2) Calulatin" ratios "i$en *inanial st!ts CK Answer: ,E&#5,

64. What is the firm"s quick ratio@

a. .-7

b. .31c. .4%

d. .64

e. 1./

(3.3) Calulatin" ratios "i$en *inanial st!ts CK Answer: e ,E&#5,

66. What is the firm"s das sales outstanding@ &ssume a %3'da ear for

this calculation.

a. -6.14

b. /.41

c. /%.%6

d. /3.17

e. /7.1-

(3.3) Calulatin" ratios "i$en *inanial st!ts CK Answer: ,E&#5,

67. What is the firm"s total assets turnover@

a. .7

b. 1.12

c. 1.-

d. 1.36

e. 2.2

(3.3) Calulatin" ratios "i$en *inanial st!ts CK Answer: a ,E&#5,

7. What is the firm"s inventor turnover ratio@

a. -.%6

b. -./7

c. -.62

d. /.3

e. /.%2

(3.%) Calulatin" ratios "i$en *inanial st!ts CK Answer: d ,E&#5,

71. What is the firm"s #=;@

a. 1.7-

b. 2.1/

c. 2.%7d. 2.33

e. 2.7%




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(3.%) Calulatin" ratios "i$en *inanial st!ts CK Answer: ,E&#5,

72. What is the firm"s ;:=#0& coverage@

a. %.27b. %.-3

c. %.3-

d. %.62

e. -.1

(3.%) Calulatin" ratios "i$en *inanial st!ts CK Answer: e ,E&#5,

7%. What is the firm"s debt ratio@

a. -/.7%H

b. /1.%H

c. /3.4H

d. 3%.H

e. 4.H

(3.) Calulatin" ratios "i$en *inanial st!ts CK Answer: a ,E&#5,

7-. What is the firm"s R&@

a. 2.4H

b. 2.74H

c. %.23H

d. %./7H

e. %.7/H

(3.) Calulatin" ratios "i$en *inanial st!ts CK Answer: ,E&#5,

7/. What is the firm"s R;@

a. 6./-H

b. 6.77H

c. 7.--H

d. 7.71H

e. 1.-1H


73. What is the firm"s :;8@

a. 3.H

b. 3.%2Hc. 3.3/H

d. 3.76H

e. 4.%%H




7/25/2019 Ch03 Test Bank 3-31-10


(3.) Calulatin" ratios "i$en *inanial st!ts CK Answer: d ,E&#5,

74. What is the firm"s profit margin@

a. 1.-H

b. 1./3H

c. 1.4%H

d. 1.7%H

e. 2.12H


76. What is the firm"s dividends per share@

a. J2.32

b. J2.71

c. J%.2

d. J%./%e. J%.66

(3.) Calulatin" ratios "i$en *inanial st!ts CK Answer: e ,E&#5,

77. What is the firm"s cash flow per share@

a. J1.3

b. J1./7

c. J11.1/

d. J11.4-

e. J12.%/

(3.+) Calulatin" ratios "i$en *inanial st!ts CK Answer: ,E&#5,

1. What is the firm"s ;8@

a. J/.6-

b. J3.1/

c. J3.-4

d. J3.6

e. J4.1-

(3.+) Calulatin" ratios "i$en *inanial st!ts CK Answer: a ,E&#5,

11. What is the firm"s 8<; ratio@

a. 12.b. 12.3

c. 1%.2

d. 1%.7

e. 1-.3




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(3.+) Calulatin" ratios "i$en *inanial st!ts CK Answer: d ,E&#5,

12

. What is the firm"s book value per share@

a. J31.4%

b. J3-.76

c. J36.-

d. J42.

e. J4/.3

(3.+) Calulatin" ratios "i$en *inanial st!ts CK Answer: e ,E&#5,

1%. What is the firm"s market'to'book ratio@

a. ./3

b. .33

c. .46d. .72

e. 1.6

(3.8) Calulatin" ratios "i$en *inanial st!ts CK Answer: a ,E&#5,

1-. What is the firm"s equit multiplier@

a. %.%%

b. %./

c. %.36

d. %.63

e. -./




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CHAPTER 3

ANS#ERS AN$ SOL%TIONS



Chapter 3: Financial Analysis Ans$ers

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1.(%.1) Ratio analsis $ &nswerM a ;&G

2.(%.2) +iquidit ratios $ &nswerM a ;&G

%.(%.2) +iquidit ratios $ &nswerM a ;&G

-.(%.2) *urrent ratio $ &nswerM b ;&G

/.(%.%) &sset management ratios $ &nswerM a ;&G

3.(%.%) =nventor turnover ratio $ &nswerM b ;&G

4.(%.-) 0ebt management ratios $ &nswerM a ;&G

6.(%.-) #=; ratio $ &nswerM a ;&G

7.(%./) 8rofitabilit ratios $ &nswerM a ;&G1.(%.3) arket value ratios $ &nswerM a ;&G

11.(%.4) #rend analsis $ &nswerM a ;&G

12.(%.1) :alance sheet changes $ &nswerM a ;&GMany of the ratios show sales

over some past period such as the last 12 months divided by an asset such as inventories as of a specific date.Assets like inventories vary at different times of the year for a seasonal business, thus leading to big changes in theratio.

1%.(%.1) +imitations of ratio analsis $ &nswerM a ;&G

1-.(3.) 0asi earnin" ower ratio F K Answer: EASY4,E&#5, BE !

EB"#$Assets. #his is before the effects of leverage %interest& and ta'es, so the statement is false.

1/.(%.%) =nventor turnover ratio $ &nswerM a ;0=>A high current ratio is

consistent with a lot of inventory. A low inventory turnover is also consistent with a lot of inventory. "f the ()e'ceeds industry norms and the turnover is below the norms, then the firm has more inventory than most otherfirms, given its sales. "t could *ust be carrying a lot of good inventory, but it might also have a normal amount of+good+ inventory plus some +bad+ inventory that has not been written off. o the statement is true.

13.(%.%) $i5ed assets turnover $ &nswerM b ;0=>#he -A turnover is

ales$-A, and it gives an indication of how effectively the firm utilies its -A. #he proportion of -A to #A is notrelevant to this usage.

14.(%./) R& $ &nswerM b ;0=>EB"# ! ales revenues /

0perating costs

et income ! EB"# / "nterest / #a'es ! %EB"# / "nterest& × %1 / #&

)0A ! et income after ta'es$Assets

#wo firms could have identical EB"#s but very different amounts of interest, different ta' rates, and differentassets, and thus very different )0As.

16.(%.6) 0u 8ont equation $ &nswerM b ;0=>#hink about the u ont

e3uation4 )0E ! M×

#A#0×

E3uity multiplier. imilar financing policies will lead to similar E3uitymultipliers. Moreover, competition in the capital markets will cause )0Es to be similar, because otherwise capitalwould flow to industries with high )0Es and drive returns down toward the average, given similar risks. #o havesimilar )0Es, firms with relatively high Ms must have relatively low #A#0s, and vice versa. #herefore, thestatement is false.

17.(%.2) +iquidit ratios $ &nswerM b &R0#his 3uestion can be answered

by thinking carefully about the ratios4

emonstration that the () ! ( 5 A$) 5 "nv A 6 B 7) ! ( 5 A$) B 6 A

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first sentence is true4 (8 (8A4 1 5 1 5 9 1.:; 1 5 1 <.:;

7)%B& 6 7)%A& 9 9B4 1 5 1 5 1 1.=< 1 5 1 1.<<

2 2

emonstration that the () ! ( 5 A$) 5 "nv A 6 B 7) ! ( 5 A$) B 6 Asecond sentence (8 (8

is false4 A4 1 5 1 5 1 1.< 1 5 1 <.:;7)%B& > 7)%A& 9 9

B4 1 5 1 5 ? 1.= 1 5 1 <.=<? ?

#he key is inventory, which is in the () but not in the 7). #he firm with more inventory can have the higher () but the lower 7).

2.(%.2) +iquidit ratios $ &nswerM b &R0-irm A has the higher

inventory turnover, so given the same sales, it must have less inventory. #hus, since the two firms have the same(), then A must have the higher 7), not the lower one. #herefore, the statement is false.

21.(%.-) #=; ratio $ &nswerM a &R0#"E ! EB"#$"nterest ! %ales

/ 0p cost&$%ebt × "nterest rate&. "f we know the op. costs, the amount of debt, and the interest rate, then we can

solve for the sales level re3uired to achieve the target #"E.

22.(%./) :;8 and R; $ &nswerM a &R0#he easiest way to think

about this is to realie that you can borrow at a cost of 1<@ and invest the proceeds to earn 11@, youll earn asurplus. "f you were previously earning an )0E of 1<@, then after raising and investing additional funds, yourincome will be higher, your e3uity will be the same, and thus your )0E will increase. imilarly, if a firm earns

more on assets than the interest rate, there will be a surplus after paying interest on the debt that will go to thee3uity, thus increasing the )0E. o, if BE 6 r d, then the firm can increase its e'pected )0E by using more debtleverage.

#he answer can also be seen by working out an e'ample. #he one below shows that leverage increases )0E ifBE 6 r d, but it could be varied to show no difference in )0E if interest rates and BE are the same, and areduction in )0E if the interest rate e'ceeds the BE.

-irm A -irm BAssets 1<<@ Assets 1<<@ebt :<@ ebt <@E3uity ?<@ E3uity 1<<@BE &'( BE &'(

"nterest rate, r d 1<@ "nterest rate, r d 1<@#a' rate ?<@ #a' rate ?<@

EB"# ! BE× Assets 1=.< EB"# ! BE × Assets 1=.<

"nterest :.< "nterest <#a'able income .< #a'able income 1=.<#a'es 9.: #a'es :.< " =.? " .<)0E &3)'*( )0E +)**(

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2%.(%.6) ;quit multiplier $ &nswerM a &R0E3uity multiplier !

Assets$E3uity ! 9.<, so Assets$E3uity ! 1$9.< ! <.999.By definition, E3uity$Assets 5 ebt$Assets ! 1.<<, so<.999 5 ebt$Assets ! 1.<.#herefore, ebt$Assets ! 1.< / <.999 ! <.::;. #hus, the statement is true.

2-.(%.1) +imitations of ratio analsis $ &nswerM b &R0#he key here is to

recognie that if the () is greater than 1.<, then a given increase in both current assets and current liabilities wouldlead to a decrease in the (). #he reverse would hold if the initial () were less than 1.<. Cere the initial () isgreater than 1.<, so borrowing on a shortDterm basis to build the cash account would lower the (). -or e'ample4

0riginal ew(A$(8 lus 1 (A$(8 0ld () ew ()

9$2 1$1 ?$9 1.=< 1.99 () falls if initial () is greater than 1.<

2$9 1$1 9$? <.:; <.;= () rises if initial () is less than 1.<

2/.(%.1) +imitations of ratio analsis $ &nswerM b &R0#he key here is to

recognie that if the () is less than 1.<, then a given reduction in both current assets and current liabilities wouldlead to a decrease in the (). #he reverse would hold if the initial () were greater than 1.<. "n the 3uestion, theinitial () is less than 1.<, so using cash to reduce current liabilities would lower the (). "f the () were greaterthan 1.<, the statement would have been true. Ceres an illustration4

0riginal ew(A$(8 8ess 1 (A$(8 0ld () ew ()

2$9 D1$D1 1$2 <.:; <.=< () falls if initial () is less than 1.<

9$2 D1$D1 2$1 1.= 2.< () rises if initial () is greater than 1.<

23.(%.2) *urrent ratio * &nswerM d ;&G

24.(%.2) *urrent ratio * &nswerM c ;&G

26.(%.2) *urrent ratio * &nswerM d ;&G

27.(%.%) =nventories * &nswerM c ;&G

%.(%.3) $inancial statement analsis * &nswerM e ;&G

%1.(%.3) arket value ratios * &nswerM d ;&G

%2.(%.1) Window dressing * &nswerM b ;&G

%%.(*ompM %.2,%.-'%.3) iscellaneous ratios * &nswerM a ;&G

%-.(*ompM %.2,%.%,%./) iscellaneous ratios * &nswerM b ;&G

%/.(*ompM %.%'%./) iscellaneous ratios * &nswerM a ;&G

%3.(*ompM %.2'%./) iscellaneous ratios * &nswerM e ;&G

%4.(*ompM %.2,%.-) iscellaneous ratios * &nswerM c ;&G

%6.(*ompM %.-,%./,%.6) ;ffects of leverage * &nswerM b ;&G

%7.(3.2) =ui- ratio C K Answer: a EASY4,E&#5,

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-.(%.2) *urrent ratio * &nswerM b ;0=>a would leave the ()

unchanged. b would indeed reduce the ().c is false, given that the initial () 6 1.<.d is false, given that the initial () 6 1.<.e is false, given that the initial () 6 1.<.

0riginal ew

(A$(8 Minus .= (A$(8 0ld () ew () 1.$1 <$<.= 1.$1.= 1.< 1.2; () falls if initial () is greater than 1.<

-1.(%.%) &ccounts receivable * &nswerM e ;0=>

-2.(%.-) +everage effectsS debt management * &nswerM c ;0=>a is false, because

the #"E also depends on the interest rate and EB"#. b is false, because interest affects the profit margin.c is correct, because the more interest the lower the profits, hence the lower the profit margin.d is simply incorrect.e is incorrect. #he reverse is true.

-%.(%.3) arket value ratios * &nswerM b ;0=> o reason for a to be true. b must be true, as E and will be the same. o reason for c to be true.Frong, because high risk and low growth lead to low $Es. o reason for e to be true.

--.(%.6) 0u 8ont analsis * &nswerM a ;0=> M × #A#0

× E3 mult. ! )0E

0ld @ 1.< 1.:::::; 1=@ ew 1<@ <. 2.= 29@

Fe see that a is true, thus b must be false.Fe can also see that c, d, and e are all false.

-/.(%.6) 0u 8ont analsis * &nswerM a ;0=>#hinking through

the u ont e3uation, we can see that if the firms M and E3uity multiplier are below the industry average, theonly way its )0E can e'ceed the industry average is if its e3uity multiplier e'ceeds the industry average. #hefollowing data illustrate this point4

)0E ! M × #A#0 × E3 mult. )0A

-irm 9<@ @ 2.< 1.:; 1G@"ndustry 2=@ 1<@ 1 2.=< 1<@

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#he above demonstrates that a is correct, and that makes d and e incorrect.

ow consider the following4 "$Assets ! "$ales × ales$Assets)0A ! M × #A#0

"f its )0A were e3ual to the industry average, then with its low debt ratio %hence low e3uity multiplier& its )0E

would also be below the industry average. o b is incorrect. Fith its debt ratio below the industry average, itsinterest charges should also be low, which would increase its #"E ratio, making c incorrect.

-3.(%.6) 0u 8ont analsis * &nswerM d

;0=>)ule out all answers e'cept d because they are false.

Alternative answer e'planation using the u ont e3uation4

)0E ! M × #A#0 × E3 mult.

)0E ! "$ × $#A × #A$E3uity

#he first two terms are the same, but C has higher e3uity multiplier, hence higher )0E.

-4.(*ompM %.-,%./) $inancial statement analsis * &nswerM c ;0=>a is false

because reducing debt will lower interest, raise income, and thus raise )0A. b is false for the above reason.c is true for the above reason.d is false.

#he #"E will increase, not decrease.

-6.(*ompM %.%'%./) $inancial statement analsis * &nswerM e ;0=>a. ales

fluctuations would have more effects on the 0 and $"nventory ratios.

b. )0E ! )0A × E3uity multiplier, so more debt, higher )0E for given )0A.

c. 0 ! )eceivables$ales per day. Fith sales constant, an increase in 0 would mean an increase in

receivables, hence a decline, not a rise, in the #A#0.d. An increase in the 0 might increase or decrease )0E, depending on how it affected sales and costs.e. ore debt would mean more interest, hence a lower ", given a constant EB"#. #his would lower the profitmargin ! "$ales.

-7.(*ompM %.-,%./,%.6) $inancial statement analsis * &nswerM d

;0=>More debt would mean more interest, hence a lower ", given a constant EB"#, so d is correct. Also, we

can rule out a and e, and C would also have the higher multiplier, which rules out b. And with more interest, Cwould have to pay less ta'es, not more.

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/.(*ompM %.2,%.%) *ash flows * &nswerM c ;0=>a. 8engthening

depreciable lives would lower depreciation, increase ta'able income and ta'es, and thus lower cash flow. b. aying down accounts payable would use cash and thus reduce cash flow.c. )educing the 0 would re3uire collecting receivables faster, which would indeed increase cash flow.d. ecreasing accruals would lower cash flow.e. )educing inventory turnover would mean increasing inventories, which would use cash.

/1.(*ompM %.-,%./,%.6) +everage, ta5es, and ratios * &nswerM a

;0=>Hnder the stated conditions, C would have more interest charges, thus lower ta'able income and ta'es.

#hus, a is correct. All of the other statements are incorrect.

/2.(*ompM %.-,%./,%.6) +everage, ta5es, and ratios * &nswerM e

;0=>C has higher interest charges. Basic earning power e3uals EB"#$Assets, and since assets are e3ual,

EB"#

must also be e3ual. #"E ! EB"#$"nterest. #herefore, Cs higher interest charges means that its #"E must belower. #hus, e is correct. All of the other statements are incorrect.

/%.(%.2) *urrent ratio * &nswerM a ;0=><&R0#he key here is to

recognie that if the () is less than 1.<, then a given increase in both current assets andcurrent liabilities would lead to an increase in the (). #he reverse would hold if the initial () were greater than1.<. Cere the initial () is less than 1.<, so borrowing on a shortDterm basis to build inventories would increase the(). -or e'ample4

0riginal ew(A$(8 lus 1 (A$(8 0ld () ew ()

1$2 1$1 2$9 <.=< <.:; () rises if initial () is less than 1.<

All of the other statements are incorrect, although b, c, and d would be correct if the initial () had been 61.<.

/-.(%.2) *urrent ratio * &nswerM b ;0=><&R0#he key here is to

recognie that if the () is less than 1.<, then a given increase to both current assets and current liabilities willincrease the (), while the reverse will hold if the initial () is greater than 1.<. #hus, the transaction would make)isco look stronger but afeco look weaker. Ceres an illustration4

0riginal ew(A$(8 lus 1< (A$(8 0ld () ew ()

afeco 2<$1< 1<$1< 9<$2< 2.<< 1.=< () falls because initial () is greater than 1.<

0riginal ew(A$(8 lus 1< (A$(8 0ld () ew ()

)isco 1<$2< 1<$1< 2<$9< <.=< <.:; () rises because initial () is less than 1.<

All of the statements e'cept b are incorrect.

//.(*ompM %.-,%./) ;ffects of financial leverage * &nswerM e

;0=><&R0#he companies have the same EB"# and assets, hence the same BE ratio. "f the interest rate is

less than the BE, then using more debt will raise the )0E. #herefore, statement e is correct. #he others are allincorrect.

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/3.(%.%) #otal assets turnover * &nswerM d ;&Gales =2,<<<

#otal assets 22,<<<#A#0 ,)3-

/4.(%.-) 0ebt ratioM find the debt, given the 0<& ratio * &nswerM b

;&G#otal assets ?1<,<<<#arget debt ratio ?<@ebt to achieve target ratio ! amount borrowed .&-0***

/6.(%.-) #imes interest earned * &nswerM e ;&Gales ?9=,<<<

0perating costs 9:2,=<<0perating income %EB"#& ;2,=<<"nterest charges 12,=<<#"E ratio ')1*

/7.(%./) 8rofit margin on sales * &nswerM c ;&Gales

92<,<<< et income 29,<<<rofit margin 2)&+(

3.(%./) Return on total assets (R&) * &nswerM a ;&G#otal assets

91=,<<< et income 22,;=<)0A 2),,(

31.(%./) :asic earning power (:;8) * &nswerM c ;&G#otal assets

9<=,<<<EB"# :2,=<<BE ,*)+(

32.(%./) Return on equit (R;) * &nswerM d ;&G(ommon e3uity

9<=,<<< et income :<,<<<)0E &+)-2(

3%.(%./) Return on equit (R;)M finding net income * &nswerM e

;&GAssets ! e3uity ?;=,<<<

#arget )0E 19.=@)e3uired net income .-0&,'

3-.(%.3) 8rice<;arnings ratio (8<;) * &nswerM b ;&Gtock price 99.=<

E 2.9<$E &)'2

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3/.(%.3) 8rice<;arnings ratio (8<;) * &nswerM a ;&Gtock price 99.=<

Book value per share 2=.<<M$B ratio &)3

33.(%.6) 0u 8ont equationM basic calculation * &nswerM c ;&Grofitmargin =.2=@#A#0 1.=<E3uity multiplier 1.G<)0E &)&1(

34.(%.-) 0ebt ratio * &nswerM a ;&G<;0=>#otal assets:2=,<<<

resent debt 1G=,<<<#arget debt ratio ==@#arget amount of debt 9?9,;=<(hange in amount of debt outstanding .&'102'*

36.(%.3) ;8, 08, and paout * &nswerM d ;&G<;0=> et

income 1,2=<,<<<hares outstanding 22=,<<<ayout ratio ?=@E =.=:

.,)'*

37.(%.%) ;ffect of lowering the 0 on net income * &nswerM e ;0=>)ate of

return on cash generated G.<@ales 1<<,<<<A$) 11,=<<ays in year 9:=ales$day 2;9.;(ompany 0 ?2.<"ndustry 0 2;.<E'cess 0 1=.<(ash flow from reducing the 0 ?,1<2.;?

Alternative calculation4A$) at industry 0 ;,9;.2:(hange in A$) ?,1<2.;?Additional et "ncome .3,1),,

4.(%.%) 0as sales outstanding (0) * &nswerM b ;0=>(redit period ?=

ales ?2=,<<<ales$ay 1,1:?)eceivables :<,<<<

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0 =1.=9(redit period / 0 ! ays early %5& or late %/& -)'3

41.(%.%) 0M das of free credit * &nswerM d ;0=>ales

9=,<<<ales$ay 1,<G2)eceivables ?2,=<<0 9.2;(redit period 9<(redit period D 0 ! ays late +),2

42.(%.%) #otal assets turnover ratio (#&#) * &nswerM c ;0=>ales

?1=,<<<#otal assets 9==,<<<#arget #A#0 2.?<#arget assets ! ales $ #arget #A#0 1;2,1;Asset reduction .&1,0*13

4%.(%.-) a5 debt ratio consistent with given #=; ratio * &nswerM e

;0=>Assets =:=,<<<

ales ?=2,G<<

0perating costs 9=?,9<<0perating income %EB"#& G,=<<#"E ?.<<Ma'imum interest e'pense ! EB"#$#"E 2?,:2="nterest rate ;.=<@Ma'. debt ! Ma' interest$"nterest rate 92G,999Ma'imum debt ratio ! ebt$Assets '1)&&(

4-.(%.-) ;:=#0& coverage * &nswerM b ;0=>EB"#A

9<,<<<"nterest charges ,=<<)epayment of principal 2:,<<<8ease payments 1;,?<<#otal financial charges =2,<<-unds avail for fin charges %EB"#A 5 8ease pmts& ?<;,?<<EB"#A coverage 2)2*

4/.(%./) 8rofit margin and R; * &nswerM a ;0=>#otal assets !

e3uity 912,<<ales :2<,<<< et income 2?,:==#arget )0E 1=.<<@

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et income re3d to achieve target )0E ?:,9=rofit margin needed to achieve target )0E 2)'2(

43.(%./) ;ffect of reducing costs on the R; * &nswerM d ;0=>Assets

1;,=<<ebt ratio 9;.=@ebt ;?,<:9E3uity 129,?9Gales 9<;,=<<0ld net income 1,=;= ew net income 99,<<< ew )0E 2:.;9?@0ld )0E 1=.G=G@"ncrease in )0E &*)11(

44.(%.3) ;8, book value, and debt ratio * &nswerM e ;0=>E

9.=<BI 22.;=hares outstanding 21=,<<<ebt ratio ?:.<@#otal e3uity ?,G1,2=<#otal assets ,<=;,G;<#otal debt .0&--0-,*

46.(%.6) 0u 8ont equationM basic calculation * &nswerM a ;0=>ales

91=,<<<

Assets 21<,<<< et income 1;,G92ebt ratio ?2.=@ebt G,2=<E3uity 12<,;=<rofit margin =.::@#A#0 1.=<E3uity multiplier 1.;?)0E &)22(

47.(%.6) 0u 8ont eqnM effect of reducing assets on R; * &nswerM b ;0=>

0ld ewales 2<=,<<< 2<=,<<<0riginal assets 12;,=<<)eduction in assets 21,<<< ew assets 1<:,=<<#A#0 1.:1 1.2rofit margin =.9<@ =.9<@E3uity multiplier 1.2< 1.2<)0E 1<.29@ 12.2?@(hange in )0E ,)*,(

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6.(%.6) 0u 8ont eqnM effect of reducing costs on R; * &nswerM c ;0=>

0ld ewales 1=,<<< 1=,<<<0riginal net income 1<,=? 1<,=?

"ncrease in net income < =,2=< ew net income 1<,=? 1=,;rofit margin =.?1@ G.1<@#A#0 1.99 1.99E3uity multiplier 1.;= 1.;=)0E 12.=@ 1G.G:@(hange in )0E -),2(

61.(%.6) 0u 8ont equationM changing the debt ratio * &nswerM a

;0=>Assets 1=,<<<

0ld debt ratio 92@0ld debt :2,?<<

0ld e3uity 192,:<< ew debt ratio ?G@ ew debt 9,:<< ew E3uity 1<1,?<< et income 1G,;;= ew )0E 1G.=2@0ld )0E 1?.1:@"ncrease in )0E )3-(

62.(*ompM %.%'%./) &sset reductionM turnover and R; * &nswerM c ;0=>

0ld ewAssets 2<=,<<< 1=2,=<<

ales 9<9,=<< 9<9,=<< et income 1G,2=< 1G,2=<ebt ratio ?1.<<@ ?1.<<@ebt G?,<=< :2,=2=E3uity 12<,=< G,;=)0E 1=.<G@ 2<.2G9@"ncrease in )0E ')&+(

6%.(%.%) 0 and its effect on net income * &nswerM b &R0ales

2G<,<<<

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et income 21,<<<Actual current ratio ?.2<#arget current ratio 2.;<

0)"J"A8 BA8A(E CEE#(ash 1?,<<< Accounts payable ?2,<<<)eceivables ;<,<<< 0ther current liabilities 2G,<<<"nventories 21<,<<< 8ongDterm debt ;<,<<<

et fi'ed assets 12:,<<< (ommon e3uity 2G<,<<< #otal assets ?2<,<<< #otal liab. and e3uity ?2<,<<<

"$E3uity ! )0E4 ;.=<@"nv. at target () 1<=,<<<)eduction in inv K e3uity 1<=,<<< ! inventories and common e3uity decrease by this amount ew common e3uity 1;=,<<< ew )0E 12.<<@L )0E )'*(

6-.(*ompM %.-,%./) R; changing with debt ratio * &nswerM d &R0

0ld ew

"nterest rate G.2@ G.2@#a' rate 9;@ 9;@Assets 1=,<<< 1=,<<<ebt ratio 2;@ ?=@ebt =2,:=< G;,;=<E3uity 1?2,9=< 1<;,2=<

ales 9<9,22= 9<9,22=0perating costs 2:;,=<< 2:;,=<<EB"# 9=,;2= 9=,;2="nterest paid ?,91; ;,1:#a'able income 91,?<G 2G,=9<#a'es 11,:21 1<,==:

et income 1,;G; 1;,;?)0E 19.<@ 1:.;:@(hange in )0E ,)1-(

6/.(*ompM %.-,%./) a5imum debt constrained b #=; * &nswerM a

&R0Answer4 Fork down the lan A column, find the Ma' ebt, then use it to complete lan B and the )0Es.

lan A lan B"nterest rate G.G<@ G.G<@#a' rate 9=@ 9=@Assets 2<<,<<< 2<<,<<<ebt ratio 2=@

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ebt =<,<<< 1<<,<;1E3uity 1=<,<<< ,2

ales 9<1,;;< 9<1,;;< (onstant0perating costs 2::,=?= 2::,=?= (onstantEB"# 9=,22= 9=,22= (onstant"nterest ?,?<< G,G<:#a'able income 9<,G2= 2:,?1

#a'es 1<,;G ,2?; et income 2<,<9: 1;,1;2)0E 19.9:@ 1;.1G@#"E G.<1Minimum #"E ?.<<

"nterest consistent withminimum #"E ! EB"#$Min #"E G,G<:

Ma' debt ! "nterest$interest rate 1<<,<;1(hange in )0E 3)13(

63.(%.2) *alculating ratios given financial stmts * &nswerM d

;0=>(urrent ratio ! (urrent assets$(urrent liabilities ! &)33

64.(%.2) *alculating ratios given financial stmts * &nswerM b

;0=> 7uick ratio ! %(A / "nventory&$(8 ! *)-&

66.(%.%) *alculating ratios given financial stmts *

&nswerM e ;0=>0 ! Accounts receivable$%ales$9:<& ! '+)&

67.(%.%) *alculating ratios given financial stmts *

&nswerM c ;0=>#otal assets turnover ratio ! ales$#otal assets ! &)*

7.(%.%) *alculating ratios given financial stmts * &nswerM a

;0=>"nventory turnover ratio ! ales$"nventory ! )31

71.(%.-) *alculating ratios given financial stmts * &nswerM d

;0=>#"E ! EB"#$"nterest charges ! ,)--

72.(%.-) *alculating ratios given financial stmts *

&nswerM c ;0=>EB"#A covg !%EB"#A 5 lease&$%"nt 5 principal 5 lease& ! 3)-

7%.(%.-) *alculating ratios given financial stmts * &nswerM e ;0=>ebt

ratio ! #otal debt$#otal assets ! 2*)*(

7/25/2019 Ch03 Test Bank 3-31-10


7-.(%./) *alculating ratios given financial stmts * &nswerM a ;0=>)0A !

et income$#otal assets ! ,)2*(

7/.(%./) *alculating ratios given financial stmts * &nswerM b ;0=>)0E !

et income$(ommon e3uity ! 1)++(

73.(%./) *alculating ratios given financial stmts * &nswerM c ;0=>BE !EB"#$#otal assets ! -)-'(

74.(%./) *alculating ratios given financial stmts * &nswerM d ;0=>rofit

margin ! et income$ales ! &)+3(

76.(%./) *alculating ratios given financial stmts * &nswerM b ;0=> !

(ommon dividends paid$hares outstanding ! .,)+&

77.(%./) *alculating ratios given financial stmts * &nswerM e ;0=>(- !

%et income 5 epreciation&$hares outstanding ! .&,)3'

1.(%.3) *alculating ratios given financial stmts * &nswerM c

;0=>E ! et income$common shares outstanding ! .-)2

11.(%.3) *alculating ratios given financial stmts * &nswerM a

;0=>$E ratio ! rice per share$Earnings per share ! &,)*

12.(%.3) *alculating ratios given financial stmts * &nswerM d

;0=>BI ! (ommon e3uity$hares outstanding ! .2,)**

1%.(%.3) *alculating ratios given financial stmts * &nswerM e

;0=>Market$book ratio %M$B& ! rice per share$BI ! &)*1

1-.(%.6) *alculating ratios given financial stmts * &nswerM a

;0=>E3uity multiplier ! #otal assets$(ommon e3uity ! 3)33

ch03 test bank 3-31-10

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