Finance Chapter 4

A high current ratio is always a good indication of a well-managed liquidity position. a. True b. False

F

Identify the true statement about sales promotions.

They are short-term efforts directed to the consumer or retailer to achieve such specific objectives as consumer product trials.

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. a. True b. False

True

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. a. True b. False

True

Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's total debt to total capital ratio? a. 42.75% b. 37.50% c. 25.00% d. 45.00% e. 30.33%

B

Cutler Enterprises has current assets equal to $4.5 million. The company's current ratio is 1.25. What is the firm's level of current liabilities (in millions)? a. $3.6 b. $0.8 c. $2.9 d. $2.4 e. $1.8 Hide Feedback

A

Southeast Jewelers Inc. sells only on credit. Its days sales outstanding is 73 days, and its average accounts receivable balance is $500,000. What are its sales for the year? Assume a 365-day year. a. $2,500,000 b. $2,750,000 c. $1,500,000 d. $2,000,000 e. $3,000,000

A

A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40%, and a profit margin of 6%. What is the firm's times-interest-earned ratio? a. 13 b. 11 c. 12 d. 10 e. 14

B

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? a. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. b. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. c. Use cash to increase inventory holdings. d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. e. Use cash to repurchase some of the company's own stock.

B

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations. a. 18.13 b. 22.38 c. 17.46 d. 26.86 e. 17.01

B

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations. a. 18.13 b. 22.38 c. 17.46 d. 26.86 e. 17.01

B

22) . Brookman Inc.'s latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding, and its debt/total invested capital ratio was 44%. The firm finances using only debt and common equity and its total assets equal total invested capital. How much debt was outstanding? a. $4,827,557 b. $5,081,639 c. $5,630,625 d. $5,349,094 e. $4,586,179

C

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 15.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations. a. 11.09% b. 8.85% c. 8.94% d. 7.42% e. 9.03%

C

Two companies—Davis & Associates and Matrix Enterprises—each reported the same earnings per share (EPS), but Davis & Associates' stock trades at a higher price. Which of the following statements is CORRECT? a. Davis & Associates is probably judged by investors to be riskier. b. Davis & Associates must have a higher market-to-book ratio. c. Davis & Associates trades at a higher P/E ratio. d. Davis & Associates must pay a lower dividend. e. Davis & Associates probably has fewer growth opportunities. Hide Feedback

C

Lewis Inc. has sales of $2 million per year, all of which are credit sales. Its days sales outstanding is 42 days. What is its average accounts receivable balance? Assume a 365-day year. a. $266,667 b. $366,750 c. $333,333 d. $230,137 e. $350,000

D

Which of the following statements about ratio analysis is CORRECT? a. 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." b. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." c. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. d. 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." e. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

D

Which of the following statements is CORRECT? a. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. b. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes. c. The use of debt financing will tend to lower the basic earning power ratio, other things held constant. d. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. e. All else equal, increasing the total debt to total capital ratio will increase the ROA.

D

Which of the following statements is CORRECT? a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be. b. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin. c. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. d. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. e. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

D

#21 . Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? a. 10.94% b. 9.93% c. 10.42% d. 11.49% e. 9.45%

E

23) Jericho Motors has $4 billion in total assets. The other side of its balance sheet consists of $0.4 billion in current liabilities, $1.2 billion in long-term debt, and $2.4 billion in common equity. The company has 500 million shares of common stock outstanding, and its stock price is $25 per share. What is Jericho's market-to-book ratio? a. 2.00 b. 4.27 c. 3.57 d. 1.42 e. 5.21

E

28) Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's equity multiplier? a. 1.00 b. 0.50 c. 0.75 d. 1.50 e. 2.00

E

Companies with high P/E and high M/B ratios generally are regarded as being relatively risky and/or having relatively poor growth prospects, according to investors. a. True b. False

F

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. a. True b. False

F - The FA turnover is Sales/FA, and it gives an indication of how effectively the firm utilizes its FA. The proportion of FA to TA is not relevant to this usage.

The equity multiplier can be found as ROE/ROA. a. True b. False

F ROE/ROA = NI/E NI/A = NI/E × A/NI = A/E = Equity multiplier.

International Appliances Inc. has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? a. Sell some of the existing inventory at cost. b. Purchase additional inventory on credit (accounts payable). c. Use cash to pay off current liabilities. d. Collect some of the current accounts receivable. e. Use cash to pay off some long-term debt.

Purchase additional inventory on credit (accounts payable).

International Appliances has a current ratio of 1.2. Which of the following actions would improve (increase) this ratio? Use cash to pay off current liabilities. Purchase additional inventory on credit (accounts payable). Use cash to pay off some long-term debt. Collect some of the current accounts receivable. Use cash to pay for some fixed assets. Hide Feedback

Purchase additional inventory on credit (accounts payable).

Analyzing financial statements to help appraise a firm's financial position and strength is called "ratio analysis." a. True b. False

T

Days sales outstanding (DSO) can be used to determine how long it takes, on average, to collect payment after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time. a. True b. False

T

Due to significant variations in accounting methods among firms, meaningful ratio comparisons between firms is more difficult than it would be if all firms used the same or similar accounting methods. a. True b. False

T

If the current ratio is high and the inventory turnover ratio is low, relative to industry norms, then the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

T

The basic earning power ratio (BEP) is a better means of judging a company's operating efficiency than the return on total assets because the BEP does not reflect the effects of debt and taxes. a. True b. False

T

Trend analysis is one method of examining changes in a firm's performance over time, which the analysis of only one year's ratios will not show. a. True b. False

T

You are looking at two firms in the same industry. High Performance Tire Co. has a profit margin of 10% and All-Year Tires has a profit margin of 8%. High Performance Tire Co.'s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus one of 20% for All-Year Tires. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of High Performance Tire Co.'s higher profit margin. a. True b. False

T