FIN370 - Midterm Exam 1
Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT? A) Company A trades at a higher P/E ratio B) Company A probably has fewer growth opportunities C) Company A is probably judged by investors to be riskier D) Company A must have a higher market-to-book ratio E) Company A must pay a lower dividend
A) Company A trades at a higher P/E ratio
Which of the following statements is correct? A) A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first and then goes down to list the firm's longest-lived assets last B) The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year C) The balance sheet for a given year tells us how much money the company earned during the year D) 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 stockholder's equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP) E) For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet
A) A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first and then goes down to list the firm's longest-lived assets last
Which of the following statements is CORRECT? A) 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 B) 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 C) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE D) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio E) An increase in the DSO, other things held constant, could be expected to increase the ROE
A) 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
On its 2021 balance sheet, Barngrover Books showed $520 million of retained earnings, and exactly that same amount was shown the following year in 2022. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? A) Dividends could have been paid in 2022, but they would have had to equal the earnings for the year B) If the company lost money in 2022, they must have paid dividends C) The company must have had zero net income in 2022 D) The company must have paid out half of its earnings as dividends E) The company must have paid no dividends in 2022
A) Dividends could have been paid in 2022, but they would have had to equal the earnings for the year
Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? A) Heidee has a lower times interest earned (TIE) ratio than Leaudy B) Heidee has a lower equity multiplier than Leaudy C) Heidee has more net income than Leaudy D) Heidee pays more in taxes than Leaudy E) Heidee has a lower ROE than Leaudy
A) Heidee has a lower times interest earned (TIE) ratio than Leaudy
Which of the following statements is CORRECT? A) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline B) 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 C) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase D) There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things E) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio
A) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline
Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT? A) If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE B) Given this information, Leaudy must have the higher ROE C) Company Leaudy has a higher basic earning power ratio (BEP) D) Company Heidee has a higher basic earning power ratio (BEP) E) If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE
A) If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE
Which of the following would indicate an improvement in a company's financial position, holding other things constant? A) The current and quick ratios both increase B)The inventory and total assets turnover ratios both decline C) The debt ratio increases D) The profit margin declines E) The EBITDA coverage ratio declines
A) The current and quick ratios both increase
Which of the following statements is CORRECT? A) The income statement for a given year is designed to give us an idea of how much the firm earned during the year B) The focal point of the income statement is the cash account, because the account cannot be manipulated by "accounting tricks" C) The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP) D) 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) E) If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash provided (used) by operating activities
A) The income statement for a given year is designed to give us an idea of how much the firm earned during the year
Which of the following statements is CORRECT? A) 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 B) The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets C) 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 D) The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital E) The statement of cash flows reflected cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock
A) 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
Frederickson Office Supplies recently reported $12,500 of sales, $7,250 or operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It has $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%. How much was the firm's taxable income, or earnings before taxes (EBIT)? A) $3,230.00 B) $3,400.00 C) $3,570.00 D) $3,748.50 E) $3,935.93
B) $3,400.00
Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? A) Heidee has more net income than Leaudy B) Heidee pays less in taxes than Leaudy C) Heidee has a lower equity multiplier than Leaudy D) Heidee has a higher ROA than Leaudy E) Heidee has a higher times interest earned (TIE) ratio than Leaudy
B) Heidee pays less in taxes than Leaudy
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 equal the industry average B) Its total assets turnover must be above the industry average C) Its return on assets must equal the industry average D) Its TIE ratio must be below the industry average E) Its total assets turnover must be below the industry average
B) Its total assets turnover must be above the industry average
A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? A) Issue new common stock and use the proceeds to acquire additional fixed assets B) 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 C) Issue new common stock and use the proceeds to increase inventories D) Speed up the collection of receivables and use the cash generated to increase inventories E) Use some of its cash to purchase additional inventories
B) 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
Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets: 2022 2021 Common Stock $2,000 $1,000 Retained Earnings $2,000 $2,340 Total Common Equity $4,000 $3,340 The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? A) The company's net income in 2021 was higher than in 2022 B) The company issued common stock in 2022 C) The market price of the company's stock doubled in 2022 D) The company has positive net income in both 2021 and 2022, but the company's net income in 2021 was lower than it was in 2022 E) The company has more equity than debt on its balance sheet
B) The company issued common stock in 2022
Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash provided (used) by operations year, even though the cash on its balance sheet increased? A) The company repurchased 20% of its common stock B) The company sold a new issue of bonds C) The company made a large investment in new plant and equipment D) The company paid a large dividend E) The company issued preferred stock
B) The company sold a new issue of bonds
The Cavendish Company 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 debt ratio increased. B) The company's current ratio increased C) The company's times interest earned ratio decreased D) The company's basic earning power ratio increased E) The company's equity multiplier increased
B) The company's current ratio increased
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. A) The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30 B) The division's basic earning power ratio is above the average of other firms in its industry C) The division's total assets turnover ratio is below the average for other firms in its industry D) The division's debt ratio is above the average for other firms in the industry E) The division's inventory turnover is 6, whereas the average for its competitors is 8
B) The division's basic earning power ratio is above the average of other firms in its industry
Which of the following statements is CORRECT? A) If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative B) Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant C) A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments D) Common equity includes common stock and retained earnings, less accumulated depreciation E) The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends
C) A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments
Which of the following statements is CORRECT? A) "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value B) 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." C) 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." D) Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." E) Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
C) 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"
Which of the following statements is CORRECT? A) A shortcut to calculate free cash flow (FCF) is defined as follows: FCF = Net Income + 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) Net cash provided (used) by operations is the same as free cash flow (FCF)
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
Which of the following statements is CORRECT? A) 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 B) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same C) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same D) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio E) If Firm X's P/E 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
C) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same
A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger? A) Increase inventories while holding sales and cost of goods sold constant B) Increase accounts receivable while holding sales constant C) Increase EBIT while holding sales constant D) Increase accounts payable while holding sales constant E) Increase notes payable while holding sales constant
C) Increase EBIT while holding sales constant
Which of the following statements is CORRECT? A) The maximum federal tax rate on personal income can exceed 50% B) 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 C) Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20% D) The maximum federal tax rate on corporate income is 50% E) 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
C) Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20%
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 account's payables C) Reduce the days' sales outstanding (DSO) without affecting sales or operating costs D) Pay workers more frequently to decrease the balance of the accrued wages E) Reduce the inventory turnover ratio without affecting sales or operating costs
C) Reduce the days' sales outstanding (DSO) without affecting sales or operating costs
Which of the following statements is CORRECT? A) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year B) The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholder's equity C) The balance sheet gives us a picture of the firm's financial position at a point in time D) The income statement gives us a picture of the firm's financial position at a point in time E) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits
C) The balance sheet gives us a picture of the firm's financial position at a point in time
Analysts following Armstrong Products recently noted that the company's net cash provided (used) by operations was positive over the prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? A) The company issued new long-term debt B) The company cut its dividend C) The company made a large investment in a profitable new plant D) The company sold a division and received cash in return E) The company issued new common stock
C) The company made a large investment in a profitable new plant
Which of the following items is NOT included in current assets? A) Short-term, highly liquid, marketable securities B) Accounts receivable C) Inventory D) Bonds E) Cash
D) Bonds
Which of the following statements is CORRECT? A) If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease B) A reduction in inventories held would have no effect on the current ratio C) An increase in inventories would have no effect on the current ratio D) If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase E) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE
D) If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase
Which of the following statements is CORRECT? A) The more depreciation a firm has in a given year, the higher its EPS, other things held constant B) Typically, a firm's DPS should exceed its EPS C) Typically, a firm's EBIT should exceed its EBITDA D) 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 E) 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
D) 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
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 from operations
D) One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital
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) Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm B) The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm C) Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm D) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm E) The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm
D) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm
Which of the following statements is CORRECT? A) 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 B) 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 C) All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code D) 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 E) Congress recently changes 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 stockholder's were taxed again on the income when it was paid to them as dividends
D) 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
Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant? A) The total assets turnover decreases B) The TIE declines C) The DSO increases D) The EBITDA coverage ratio increases E) The current and quick ratios both decline
D) The EBITDA coverage ratio increases
Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? A) The company purchases a new piece of equipment B) The company repurchases common stock C) The company pays a dividend D) The company issues new common stock E) The company gives customers more time to pay their bills
D) The company issues new common stock
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
D) The company's depreciation and amortization expenses declined
DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. 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 legislations becomes law, which of the following would occur in the year following the change? A) The firm's reported net income would increase B) The firm's operating income (EBIT) would increase C) The firm's taxable income would increase D) The firm's net cash provided (used) by operations would increase E) The firm's tax payments would increase
D) The firm's net cash provided (used) by operations would increase
Which of the following statements is CORRECT? A) If a firm has the highest price/earnings 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 market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president C) Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be D) The higher the market/book 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 it's market/book ratio and MVA are both likely to be below average.
D) The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA)
Cordelion Communications 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 Cordelion 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 times interest earned ratio will decrease B) The ROA will decline C) Taxable income will decrease D) The tax bill will increase E) Net income will decrease
D) The tax bill will increase
Considered alone, which of the following would increase a company's current ratio? A) An increase in accounts payable B) An increase in net fixed assets C) An increase in accrued liabilities D) An increase in notes payable E) An increase in accounts receivable
E) An increase in accounts receivable
Which of the following items cannot be found on a firm's balance sheet under current liabilities? A) Accrued payroll taxes B) Accounts payable C) Short-term notes payable to the bank D) Accrued wages E) Cost of goods sold
E) Cost of goods sold
Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT? A) Heidee has lower operating income (EBIT) than Leaudy B) Heidee has a lower total assets turnover ratio than Leaudy C) Heidee has a lower equity multiplier than Leaudy D) Heidee has a higher fixed assets turnover ratio than Leaudy E) Heidee has a higher ROE than Leaudy
E) Heidee has a higher ROE than Leaudy
Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT? A) Heidee would have higher net income as shown on the income statement than Leaudy B) Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income C) Heidee would have a lower equity multiplier for use in the DuPont equation than Leaudy D) Heidee would have to pay more in income taxes than Leaudy E) Heidee would have lower net income as shown on the income statement than Leaudy
E) Heidee would have lower net income as shown on the income statement than Leaudy
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? A) Use cash to increase inventory holdings B) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment C) Use cash to repurchase some of the company's own stock D) Borrow using short-term debt and use the proceeds to repay the debt that has a maturity of more than one year E) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash
E) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash
Which of the following statements is CORRECT? A) Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits B) The more depreciation a firm reports, the higher its tax bill, other things held constant C) People sometimes talk about the firm's net cash provided (used) by operations, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line" D) 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 E) Net cash provided (used) by operations is often defined as follows: Net cash provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments
E) Net cash provided (used) by operations is often defined as follows: Net cash provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments
Jessie's Bobcat Rentals' cash flow from operations was negative last year, 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 had high depreciation expenses B) The company repurchased some of its common stock C) The company dramatically increased its capital expenditures D) The company retired a large amount of its long-term debt E) The company sold some of its fixed assets
E) The company sold some of its fixed assets