fin 335 problems

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[i]. Which of
the following statements is CORRECT?

a.An
increase in the DSO, other things held constant, could be expected to increase
the ROE.

b.An
increase in the DSO, other things held constant, could be expected to increase
the total assets turnover ratio.

c.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.

d.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.

e.If two
firms have the same ROA, the firm with the most debt can be expected to have
the lower ROE.

[ii]. HD Corp
and LD Corp have identical assets, sales, interest rates paid on their debt,
tax rates, and EBIT. However, HD uses
more debt than LD. Which of the
following statements is CORRECT?

a.HD would
have the higher net income as shown on the income statement.

b.HD would
have the lower net income as shown on the income statement.

c.Without
more information, we cannot tell if HD or LD would have a higher or lower net
income.

d.HD would
have to pay more in income taxes.

e.HD would have the lower equity multiplier for
use in the Du Pont equation.

[iii]. Other
things held constant, which of the following alternatives would increase a
company’s cash flow for the current year?

a.Reduce the
days’ sales outstanding (DSO) without reducing sales.

b.Increase
the number of years over which fixed assets are depreciated.

c.Decrease
the accounts payable balance.

d.Reduce the
inventory turnover ratio without affecting sales.

e.Decrease
the accrued wages balance.

[iv]. Companies
HD and LD have the same sales, tax rate, interest rate on their debt, total
assets, and basic earning power. Both
companies have positive net incomes.
Company HD has a higher debt ratio and, therefore, a higher interest
expense. Which of the following statements is CORRECT?

a.Company
HD has a higher ROA.

b.Company HD has a higher times interest earned (TIE) ratio.

c.Company
HD has more net income.

d.Company
HD pays less in taxes.

e.Company
HD has a lower equity multiplier.

[v]. Companies
HD and LD have the same tax rate, sales, total assets, and basic earning
power. Both companies have positive net
incomes. Company HD has a higher debt
ratio and, therefore, a higher interest expense. Which of the following
statements is CORRECT?

a.Company
HD has a lower ROE.

b.Company HD has a lower times interest earned (TIE) ratio.

c.Company
HD has more net income.

d.Company
HD pays more in taxes.

e.Company
HD has a lower equity multiplier.

[vi]. 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 return
on assets must be above the industry average.

b.Its total
assets turnover must be above the industry average.

c.Its total
assets turnover must be below the industry average.

d.Its total
assets turnover must equal the industry average.

e.Its return
on assets must equal the industry average.

[vii]. Which of
the following statements is CORRECT?

a.If Firms A
and B have the same earnings per share and market-to-book ratio, they must have
the same price earnings ratio.

b.If Firms A
and B have the same net income, number of shares outstanding, and price per
share, then their market-to-book ratios must also be the same.

c.If Firms A
and B 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 A
and B have the same P/E ratios, then their market-to-book ratios must also be
the same.

e.If Firm
A’s P/E ratio exceeds that of Firm B, then B is likely to be less risky and
also to be expected to grow at a faster rate.

[viii].CompaniesHD andLD
have the same total assets,sales, and operating costs, and they
pay the same interest rate on their debt.
However, company HD has a higher debt ratio.
Which of the following statements is CORRECT?

a.Company LD
has a higher basic earning power ratio (BEP).

b.Company HD
has a higher basic earning power ratio (BEP).

c.If the
interest rate the companies pay on their debt is more than their basic
earning power (BEP), then Company HD will have the higher ROE.

d.If the
interest rate the companies pay on their debt is less than their basic
earning power (BEP), then Company HD will have the higher ROE.

e.Given this
information, LD must have the higher ROE.

[ix]. If a bank
loan officer were considering a company’s request for a loan, which of the
following statements would you consider to be CORRECT?

a.The lower
the company’s TIE ratio, other
things held constant, 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 lower the current asset 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.Other
things held constant, the higher the debt ratio, the lower the interest rate
the bank would charge the firm.

[x]. Walter
Industries’ current ratio is 0.5.
Considered alone, which of the following actions would INCREASE
the company’s current ratio?

a.Use cash
to reduce short-term notes payable.

b.Use cash
to reduce accounts payable.

c.Borrow
using short-term notes payable and use the cash to increase inventories.

d.Use cash
to reduce long-term bonds outstanding.

e.Use cash
to reduce accruals.

[xi]. Safeco’s
total current assets are $20 million versus $10 million of current liabilities,
while Risco’s current assets are $10 million versus $20 million of current
liabilities. Both firms would like to
“window dress” their end-of-year financial statements, and to do so they
tentatively plan to borrow $10 million on a short-term basis and to then hold
the borrowed funds in their cash accounts. Which of the statements below best
describes the results of this transaction?

a.The
transaction would have no effect on the firm’ financial strength as measured by
their current ratios.

b.The
transaction would improve both firms’ financial strength as measured by their
current ratios.

c.The
transaction would lower both firm’ financial strength as measured by their
current ratios.

d.The transactions
would lower Safeco’s financial strength as measured by its current ratio but
raise Risco’s current ratio.

e.The transaction would raise Safeco’s financial
strength as measured by its current ratio but lower Risco’s current ratio.

PART II – Questions
and Problems from Prior Test Bank not used in Part I

[xii]. Russell
Securities has $100 million in total assets and its corporate tax rate is
40%. The company recently reported that
its basic earning power (BEP) ratio was 15% and its return on assets (ROA) was
9%. What was the company’s interest
expense?

a.$
0

b.$ 2,000,000

c.$ 6,000,000

d.$15,000,000

e.$18,000,000

[xiii].You are
given the following information:
Stockholders’ equity = $1,250; price/earnings ratio = 5; shares outstanding
= 25; and market/book ratio = 1.5.
Calculate the market price of a share of the company’s stock.

a.$ 33.33

b.$ 75.00

c.$ 10.00

d.$166.67

e.$133.32

[xiv]. Meyersdale
Office Supplies has common equity of $40 million. The company’s stock price is $80 per share
and its market/book ratio is 4.0. How
many shares of stock does the company have outstanding?

a. 500,000

b. 125,000

c. 2,000,000

d.800,000,000

e.Insufficient
information.

[xv]. Strack
Houseware Supplies Inc. has $2 billion in total assets, $0.2 billion in current
liabilities, $0.6 billion in long-term debt, and $1.2 billion in common
equity. The company’s 300 million shares
of common stock are selling at $20 per share.
What is Strack’s market/book ratio?

a.1.25

b.2.65

c.3.15

d.4.40

e.5.00

[xvi]. A firm has
a profit margin of 15% on sales of $20,000,000.
If the firm has debt of $7,500,000, total assets of $22,500,000, and an
after-tax interest cost on total debt of 5%, what is the firm’s ROA?

a. 8.4%

b.10.9%

c.12.0%

d.13.3%

e.15.1%

[xvii].Culver Inc.
has EBT of $300. The company’s times
interest earned ratio is 7.00. Calculate
the company’s interest charges.

a.$42.86

b.$50.00

c.$40.00

d.$60.00

e.$57.93

[xviii]. Tapley
Dental Supply Company has the following data:

Net income $240

Sales $10,000

Total assets
$6,000

Debt ratio 75%

TIE ratio 2.0

Current ratio 1.2

BEP ratio
13.33%

If Tapley could streamline operations, cut
operating costs, and raise net income to $300 without affecting sales or the
balance sheet (the additional profits will be paid out as dividends), by how
much would its ROE increase?

a.3.00%

b.3.50%

c.4.00%

d.4.25%

e.5.50%

[xix]. A firm
that has an equity multiplier of 4.0 will have a debt ratio of

a.4.00

b.3.00

c.1.00

d.0.75

e.0.25

[xx]. Your
company had the following balance sheet and income statement information for
2005:

Balance Sheet:

Cash $ 20

A/R
1,000

Inventories
5,000

Total current assets $6,020 Debt $4,000

Net fixed assets
2,980
Equity 5,000

Total assets $9,000 Total
claims $9,000

Income Statement:

Sales $10,000

Cost of goods sold 9,200

EBIT $ 800

Interest (10%) 400

EBT $ 400

Taxes (40%) 160

Net income $ 240

The industry average inventory turnover is 5. You think you can change your inventory
control system and steer your turnover to the industry average. This change will have no effect on either
sales or cost of goods sold. The cash
generated from reducing inventories will be invested in tax-exempt securities
that yield 7%. What will your profit
margin be after the change in inventories is reflected in the income statement?

a.2.1%

b.2.4%

c.4.5%

d.5.3%

e.6.7%

[xxi]. The Wilson
Corporation has the following results:

Sales/Total assets 2.0´

Return on assets (ROA) 4.0%

Return on equity (ROE) 6.0%

What is Wilson’s profit margin and debt ratio?

a.2%; 0.33

b.4%; 0.33

c.4%; 0.67

d.2%; 0.67

e.4%; 0.50

[xxii].The
Charleston Company is a relatively small, privately owned firm. Last year the company had net income of
$15,000 and 10,000 shares were outstanding.
The owners were trying to determine the equilibrium market value for the
stock prior to taking the company public.
A similar firm that is publicly traded had a price/earnings ratio (P/E)
of 5.0. Using only the information
given, estimate the market value of one share of Charleston’s stock.

a.$10.00

b.$ 7.50

c.$ 5.00

d.$ 2.50

e.$ 1.50

[xxiii]. Cleveland
Corporation has 100,000 shares of common stock outstanding, its net income is
$750,000, and its P/E is 8. What is the
company’s stock price?

a.$20.00

b.$30.00

c.$40.00

d.$50.00

e.$60.00

[xxiv].Iken Berry Farms has $5 million in current
assets, $3 million in current liabilities, and its initial inventory level is
$1 million. The company plans to
increase its inventory, funded by additional short-term debt (notes
payable). Assume that the value of the
remaining current assets will not change.
The company’s bond covenants require a current ratio greater than or
equal to 1.5. How much inventory can be
purchased before the covenants are violated?

a.$0.50
million

b.$1.00
million

c.$1.33
million

d.$1.66
million

e.$2.33
million

[xxv]. Cannon
Company has enjoyed a rapid increase in sales in recent years, following a
decision to sell on credit. However, the
firm has noticed an increase in its collection period. Last year, total sales were $1 million, and
$250,000 of these sales were on credit.
During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in
the forthcoming year by 50%, and, while credit sales should continue to be the
same proportion of total sales, it is expected that the days sales outstanding
will also increase by 50%. If the
resulting increase in accounts receivable must be financed externally, how much
external funding will Cannon need?

a.$ 41,096

b.$ 51,370

c.$ 47,359

d.$106,471

e.$ 92,466

[xxvi].Ruth
Company currently has $1,000,000 in accounts receivable, and its days sales
outstanding (DSO) is 50 days. The
company wants to reduce its DSO to the industry average of 32 days by
pressuring more of its customers to pay their bills on time. The company’s CFO estimates that if this
policy is adopted the company’s average sales will fall by 10%. Assuming that
the company adopts this change and succeeds in reducing its DSO to 32 days,
what will be the level of accounts receivable following the change?

a.$576,000

b.$633,333

c.$750,000

d.$900,000

e.$966,667

[xxvii]. The
Carter Co.’s return on equity (ROE) is 18%.
If sales were $4 million, the debt ratio was 40%, and total liabilities
were $2 million, what would be Carter’s return on assets (ROA)?

a.10.80%

b. 0.80%

c. 1.25%

d.12.60%

e.Insufficient
information.

[xxviii]. Humphrey Hotels’ operating income (EBIT) is $40
million. The company’s times interest
earned (TIE) ratio is 8.0, its tax rate is 40%, and its basic earning power
(BEP) ratio is 10%. What is the
company’s return on assets (ROA)?

a.6.45%

b.5.97%

c.4.33%

d.8.56%

e.5.25%

[xxix].Selzer Inc.
sells all its merchandise on credit. It
has a profit margin of 4%, days sales outstanding equal to 60 days, receivables
of $150,000, total assets of $3 million, and a debt ratio of 64%. What is the firm’s return on equity
(ROE)? Assume a 365-day year.

a. 7.1%

b.33.4%

c. 3.4%

d.71.0%

e. 8.1%

[xxx]. A firm has
a debt ratio of 50%. Currently, its
interest expense is $500,000 on $5,000,000 of total debt outstanding. Its tax
rate is 40%. If the firm’s ROA is 6%, by
how many percentage points is the firm’s ROE greater than its ROA?

a.0.0%

b.6.0%

c.5.2%

d.7.4%

e.9.0%

[xxxi].Assume
Meyer Corporation is 100% equity financed.
Calculate the return on equity (ROE), given the following information:

Earnings before taxes $1,500

Sales $5,000

Dividend payout ratio 60%

Total assets turnover 2.0

Tax rate 30%

a.25%

b.30%

c.35%

d.42%

e.50%

[xxxii]. Alumbat
Corporation has $800,000 of debt outstanding, on which it pays 10% annual
interest. Alumbat’s annual sales are
$3,200,000, its average tax rate is 40%, and its net profit margin is 6%. The company must maintain a TIE ratio of at
least 4 times or its bank will refuse to renew its loan, resulting in bankruptcy. What is Alumbat’s current TIE ratio?

a.2.4

b.3.4

c.3.6

d.4.0

e.5.0

[xxxiii]. Moss
Motors has $8 billion in assets, and its tax rate is 40%. The company’s basic
earning power (BEP) ratio is 12%, and its return on assets (ROA) is 3%. What is Moss’ times interest earned (TIE)
ratio?

a.2.25

b.1.71

c.1.00

d.1.33

e.2.50

[xxxiv]. Lancaster
Motors has total assets of $20 million. Its basic earning power is 25%, its
return on assets (ROA) is 10%, and the company’s tax rate is 40%. What is Lancaster’s TIE ratio?

a.2.5

b.3.0

c.1.5

d.1.2

e.0.6

[xxxv].Peterson
Packaging Corp. has a basic earning power of (BEP) of 9% on $9 billion of total
assets, and its times interest earned (TIE) ratio is 3.0. Peterson’s depreciation and amortization
expense totals $1 billion. It has $0.6 billion in lease payments and $0.3
billion must go towards principal payments on outstanding loans and long-term
debt. What is Peterson’s EBITDA coverage
ratio?

a.2.06

b.1.52

c.2.25

d.1.10

e.2.77

[xxxvi]. Last
year, Kansas Office Supply had $400,000 of net income on $24,000,000 of sales,
its total assets turnover was 6.0, and the company’s ROE was 15%. If the company only finances with debt and
equity, what is the company’s debt ratio?

a.0.20

b.0.30

c.0.33

d.0.60

e.0.66

[xxxvii]. The
Merriam Company has determined that its return on equity (ROE) is 15%. If its
debt ratio is 0.35 and its total assets turnover is 2.8, what is the profit
margin?

a. 3.48%

b. 5.42%

c. 6.96%

d. 2.45%

e.12.82%

[xxxviii].Collins
Company had the following partial balance sheet and complete income statement information
for 2005:

Partial Balance Sheet:

Cash $ 20

A/R 1,000

Inventories 2,000

Total current assets $ 3,020

Net fixed assets 2,980

Total assets $ 6,000

Income Statement:

Sales $10,000

Cost of goods sold 9,200

EBIT $ 800

Interest (10%) 400

EBT $ 400

Taxes (40%) 160

Net income $ 240

The industry average DSO is 30. Collins wants to lower its DSO to equal the
industry average, which is expected to have no effect on either sales or cost
of goods sold. If the cash generated from
reducing receivables is used to retire debt (which was outstanding all last
year and has a 10% interest rate), what will Collins’ new debt ratio be?

a.33.33%

b.45.28%

c.52.75%

d.60.00%

e.65.65%

[xxxix]. Taft
Technologies has the following relationships:

Annual sales $1,200,000.00

Current liabilities $ 375,000.00

Days sales outstanding (DSO)
(365-day year) 40.00

Inventory turnover ratio 4.80

Current ratio 1.20

The company’s current assets consist of cash,
inventories, and accounts receivable.
How much cash does Taft have on its balance sheet?

a.-$ 8,333

b. $ 68,493

c. $125,000

d. $200,000

e. $316,667

[xl]. Aaron
Aviation recently reported the following information:

Net income $500,000

ROA 10%

Interest expense $200,000

The company’s average tax rate is 40%. What is the company’s basic earning power
(BEP)?

a.14.12%

b.16.67%

c.17.33%

d.20.67%

e.22.50%

[xli]. Dean
Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common
stock, which currently trade at $60 a share. The company continues to expand
and anticipates that one year from now its net income will be $2,500,000. Over the next year the company also
anticipates issuing an additional 100,000 shares of stock, so that one year
from now the company will have 400,000 shares of common stock. Assuming the company’s price/earnings ratio
remains at its current level, what will be the company’s stock price one year
from now?

a.$55

b.$60

c.$65

d.$70

e.$75

[xlii].Parcells
Jets has the following balance sheet (in millions):

Cash $ 100 Notes
payable $ 100

Inventories 300 Accounts payable 200

Accounts receivable 400 Accruals 100

Total current assets $ 800 Total current liabilities $
400

Net fixed assets 1,200 Long-term bonds 600

Total
debt $1,000

______ Total common equity 1,000

Total assets $2,000 Total
liabilities and equity $2,000

Parcells’ DSO is 40, which exceeds the industry
average of 30. Assume that Parcells is
able to reduce its DSO to the industry average without reducing sales, and the
company uses freed-up cash to reduce its outstanding long-term bonds. What will
be the new current ratio?

a.1.75

b.1.33

c.2.33

d.1.25

e.1.67

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