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Company J and Company K each recently reported the same

earnings per share (EPS). Company J’s stock, however, trades at a higher price.

Which of the following statements is correct?

A. a. Company J must

have a higher P/E ratio.

B. b. Company J must

have a higher market to book ratio.

C. c. Company J must

be riskier

D. d. Company J must

have fewer growth opportunities.

E. e. All of the

statements above are correct.

Question 2 of 20

Which of the following statements is correct?

A. a. Many large firms

operate different divisions in different industries, and this makes it hard to

develop a meaningful set of industry benchmarks for these types of firms.

B. b. Financial

ratios should be interpreted with caution because there exist seasonal and

accounting differences that can reduce their comparability.

C. c. Financial

ratios should be interpreted with caution because it may be difficult to say

with certainty what is a “good” value. For example, in the case of

the current ratio, a “good” value is neither high nor low.

D. d. Ratio analysis

facilitates comparisons by standardizing numbers.

E. e. All of the

statements above are correct.

Question 3 of 20

Which of the following actions can a firm take to increase

its current ratio?

A. a. Issue

short-term debt and use the proceeds to buy back long-term debt with a maturity

of more than one year.

B. b. Reduce the

company’s days sales outstanding to the industry average and use the resulting

cash savings to purchase plant and equipment.

C. c. Use cash to

purchase additional inventory.

D. d. Statements a

and b are correct.

E. e. None of the

statements above is correct.

Question 4 of 20

Which of the following actions will cause an increase in the

quick ratio in the short run?

A. a. $1,000 worth of

inventory is sold, and an account receivable is created. The receivable exceeds

the inventory by the amount of profit on the sale, which is added to retained

earnings.

B. b. A small

subsidiary which was acquired for $100,000 two years ago and which was

generating profits at the rate of 10 percent is sold for $100,000 cash.

(Average company profits are 15 percent of assets.)

C. c. Marketable

securities are sold at cost.

D. d. All of the

answers above.

E. e. Answers a and b

above.

Question 5 of 20

Company A is financed with 90 percent debt, whereas Company

B, which has the same amount of total assets, is financed entirely with equity.

Both companies have a marginal tax rate of 35 percent. Which of the following

statements is correct?

A. a. If the two

companies have the same basic earning power (BEP), Company B will have a higher

return on assets.

B. b. If the two

companies have the same return on assets, Company B will have a higher return

on equity.

C. c. If the two

companies have the same level of sales and basic earning power (BEP), Company B

will have a lower profit margin.

D. d. All of the

answers above are correct.

E. e. None of the

answers above is correct.

Question 6 of 20

The Wilson Corporation has the following relationships:

Sales/Total assets 2.0

Return on assets (ROA) 4%

Return on equity (ROE) 6%

What is Wilson’s profit margin and debt ratio?

A. a. 2% and 0.33

B. b. 4% and 0.33

C. c. 4% and 0.67

D. d. 2% and 0.67

E. e. 4% and 0.50

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Question 7 of 20

Q Corp. has a basic earnings power (BEP) ratio of 15

percent, and has a times interest earned (TIE) ratio of 6. Total assets are

$100,000. The corporate tax rate is 40 percent. What is Q Corp.’s return on

assets (ROA)?

A. a. 7.5%

B. b. 10.0%

C. c. 12.2%

D. d. 13.1%

E. e. 14.5%

Question 8 of 20

Kansas Office Supply had $24,000,000 in sales last year. The

company’s net income was $400,000. Its total assets turnover was 6.0. The

company’s ROE was 15 percent. The company is financed entirely with debt and

common equity. What is the company’s debt ratio?

A. a. 0.20

B. b. 0.30

C. c. 0.33

D. d. 0.60

E. e. 0.66

Question 9 of 20 Given the following information, calculate

the market price per share of WAM Inc.

Net income = $200,000

Earnings per share = $2.00

Stockholders’ equity = $2,000,000

Market/Book ratio = 0.20

A. a. $20.00

B. b. $ 8.00

C. c. $ 4.00

D. d. $ 2.00

E. e. $ 1.00

Question 10 of 20

Taft Technologies has the following relationships:

annual sales $1,200,000

current liabilities $375,000

days sales outstanding(DSO)(360-day year) 40

Inventory Turnover Ratio 4.8

current ratio 1.2

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. $ 66,667

C. $125,000

D. $200,000

E. $316,667

Question 11 of 20

Info Technics Inc. has an equity multiplier of 2.50. The

company’s assets are financed with some combination of long-term debt and

common equity. What is the company’s debt ratio?

A. a. 51.20%

B. b. 26.00%

C. c. 39.36%

D. d. 65.00%

E. e. 60.00%

Question 12 of 20

Cutler Enterprises has current assets equal to $5 million.

The company’s current ratio is 1.25, and its quick ratio is 0.75. What is the

firm’s level of current liabilities (in millions)?

A. a. $2.85

B. b. $3.0

C. c. $4.0

D. d. $0.9

E. e. 1.9

Question 13 of 20

Lewis Inc. has sales of $3,600,000 per year, all of which

are credit sales. Its days sales outstanding is 42 days. What is its average

accounts receivable balance? Assume 360 days per year.

A. a. $238,090

B. b. $420,000

C. c. $280,000

D. d. $386,000

E. e. $400,000

Question 14 of 20

A firm has total interest charges of $20,000 per year, sales

of $2,800,000, a tax rate of 40 percent, and a profit margin of 6 percent. What

is the firm’s times-interest-earned ratio?

A. a. 15

B. b. 12.5

C. c. 11.5

D. d. 15.8

E. e. 16

Question 15 of 20

A fire has destroyed many of the financial records at

Anderson Associates. You are assigned to piece together information to prepare

a financial report. You have found that the firm’s return on equity is 12

percent and its debt ratio is 0.20. What is its return on assets?

A. a. 6.40%

B. b. 4.85%

C. c. 9.60%

D. d. 8.50%

E. e. 6.90%

Question 16 of 20

Rowe and Company has a debt ratio of 0.20, a total assets

turnover of 0.25, and a profit margin of 10 percent. The president is unhappy

with the current return on equity, and he thinks it could be doubled. This

could be accomplished (1) by increasing the profit margin to 14 percent and (2)

by increasing debt utilization. Total assets turnover will not change. What new

debt ratio, along with the 14 percent profit margin, is required to double the

return on equity?

A. a. 0.50

B. b. 0.56

C. c. 0.88

D. d. 0.78

E. e. 0.44

Question 17 of 20

Pinkerton Packaging’s ROE last year was 4.5 percent, but its

management has developed a new operating plan designed to improve things. The

new plan calls for a total debt ratio of 50 percent, which will result in

interest charges of $240 per year. Management projects an EBIT of $800 on sales

of $8,000, and it expects to have a total assets turnover ratio of 1.6. Under

these conditions, the federal-plus-state tax rate will be 40 percent. If the

changes are made, what return on equity will Pinkerton earn?

A. a. 2.50%

B. b. 13.44%

C. c. 13.00%

D. d. 14.02%

E. e. 14.57%

Question 18 of 20

Examining the ratios of a particular firm against the same

measures for a small group of firms from the same industry, at a point in time,

is an example of

A. a. Trend analysis.

B. b. Benchmarking.

C. c. Du Pont

analysis.

D. d. Simple ratio

analysis.

E. e. Industry

analysis.

Question 19 of 20

Which of the following statements is correct?

A. a. Having a high

current ratio and a high quick ratio is always a good indication that a firm is

managing its liquidity position well.

B. b. A decline in

the inventory turnover ratio suggests that the firm’s liquidity position is

improving.

C. c. If a firm’s

times-interest-earned ratio is relatively high, then this is one indication

that the firm should be able to meet its debt obligations.

D. d. Since ROA

measures the firm’s effective utilization of assets (without considering how

these assets are financed), two firms with the same EBIT must have the same

ROA.

E. e. If, through

specific managerial actions, a firm has been able to increase its ROA, then,

because of the fixed mathematical relationship between ROA and ROE, it must

also have increased its ROE.

Question 20 of 20

Which of the following statements is correct?

A. a. Suppose two

firms with the same amount of assets pay the same interest rate on their debt

and earn the same rate of return on their assets and that ROA is positive. However,

one firm has a higher debt ratio. Under these conditions, the firm with the

higher debt ratio will also have a higher rate of return on common equity.

B. b. One of the

problems of ratio analysis is that the relationships are subject to

manipulation. For example, we know that if we use some cash to pay off some of

our current liabilities, the current ratio will always increase, especially if

the current ratio is weak initially, for example, below 1.0.

C. c. Generally,

firms with high profit margins have high asset turnover ratios and firms with

low profit margins have low turnover ratios; this result is exactly as

predicted by the extended Du Pont equation.

D. d. Firms A and B

have identical earnings and identical dividend payout ratios. If Firm A’s

growth rate is higher than Firm Bs, then Firm A’s P/E ratio must be greater

than Firm B’s P/E ratio.

E. e. Each of the

above statements is false.