Finance CHPT 4

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects

False

The more conservative a firm's management is, the higher its total capital ration [measured as(short-term debt + Long-term debt)/(debt+preferred stock+common equity)] is likely to be

False

The operating margin measures operating income per dollar of assets

False

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)

False

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?

Other things held constant, the lower the total debt to total capital ratio the lower the interest rate the bank would charge

A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

False

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

False

Other things held constant the higher a firm's total debt to total capital ratio [measured as(short-term debt + Long-term debt)/(debt+preferred stock+common equity)], the higher its TIE ration will be

False

Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio? a. 1.34 b. 1.41 c. 1.48 d. 1.55 e. 1.63

1.34

X-1 Corp's total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio? a. 11.70% b. 12.31% c. 12.96% d. 13.61% e. 14.29%

12.96

Herring Corporation has operating income of $235,000 and a 40% tax rate. The firm has short-term debt of $115,000, long-term debt of $321,000, and common equity of $436,000. What is its return on invested capital?

15%

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE? a. 15.23% b. 16.03% c. 16.88% d. 17.72% e. 18.60%

16.88

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE? a. 14.82% b. 15.60% c. 16.42% d. 17.28% e. 18.15%

17.28

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio? a. 17.17 b. 18.08 c. 18.98 d. 19.93 e. 20.93

18.08

Ryngard Corp's sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)? a. 2.04 b. 2.14 c. 2.26 d. 2.38 e. 2.49

2.38. TATO=Sales/total assets 38000/16000=2.38

Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio? a. 4.72 b. 4.97 c. 5.23 d. 5.51 e. 5.80

5.80

River Corp's total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets? a. 7.89% b. 8.29% c. 8.70% d. 9.14% e. 9.59%

7.89

Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin? a. 7.41% b. 7.80% c. 8.21% d. 8.63% e. 9.06%

8.21

Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?

Company E trades at a higher P/E ratio

A firm wants to strength its financial position. Which following actions would increase its current ratio?

Issue new stock then use some of the proceeds to purchase additional inventory and hold the remainder as cash

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) led to an increase in accounts receivable

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength

True

Which of the following would indicate an improvement in a company's financial position, holding other things constant

The current and quick ratios both increase

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.

The divisions basic earning power ratio is above the average of other firm's in its industry

Which of the following would, generally indicate an improvement in a company's financial position, holding other things constant

The quick ratio increases

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time

True

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

True

Other things held constant, the more debt a firm uses, the lower its return on total assets will be

True

Profitability ratios show the combined effects of liquidity, asset management and debt management on a firm's operating results

True

The advantage of the basic earning power ration (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

True

The current and quick rations both help us measure a firms liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the scale of inventories

True

The days sales outstanding tells us how long it takes on average to collect after a scale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time

True

The inventory turnover ratio and days sales outstanding (DSO) are 2 rations that are used to assess how effectively a firm is managing it current assets

True

The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future

True

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 less risky and/or more likely to enjoy higher growth in the future

True

The profit margin measures net income per dollar of sales

True

The times interest earned ratio measure the extent to which operating income can decline before the firm is unable to meet its annual interest costs

True

In general, its better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock

false