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Exam 3: Analysis of Financial Statements

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Question 31

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Last year Urbana Corp.had $197,500 of assets,$307,500 of sales,$19,575 of net income,and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.Assets,sales,and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?

A) 9.32%
B) 9.82%
C) 10.33%
D) 10.88%
E) 11.42%

F) All of the above
G) A) and E)

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Question 32

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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 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.

F) A) and E)
G) B) and D)

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Question 33

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The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically,depending on the time of year when the financial statements are constructed.

Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1,250,000,and it had 225,000 shares outstanding.What dividend per share should it declare?

Although a full liquidity analysis requires the use of a cash budget,the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

An investor is considering starting a new business.The company would require $475,000 of assets,and it would be financed entirely with common stock.The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital,which means that the firm must have an ROE of 13.5%.How much net income must be expected to warrant starting the business?

Exhibit 3.1 The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to Exhibit 3.1.What is the firm's days sales outstanding? Assume a 360-day year for this calculation.

Suppose firms follow similar financing policies,face similar risks,have equal access to capital,and operate in competitive product and capital markets.Under these conditions,then firms that have high profit margins will tend to have high asset turnover ratios,and firms with low profit margins will tend to have low turnover ratios.

Hutchinson Corporation has zero debt-it is financed only with common equity.Its total assets are $410,000.The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%,using the proceeds from the borrowing to buy back common stock at its book value.How much must the firm borrow to achieve the target debt ratio?

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?

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?

Rappaport Corp.'s sales last year were $320,000,and its net income after taxes was $23,000.What was its profit margin on sales?

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than that of B.

Considered alone,which of the following would increase a company's current ratio?

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?

Exhibit 3.1 The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. -Refer to Exhibit 3.1.What is the firm's profit margin?

A firm's new president wants to strengthen the company's financial position.Which of the following actions would make it financially stronger?

Lofland's has $20 million in current assets and $10 million in current liabilities,while Smaland'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 each plans 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 these transactions?

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?

LeCompte Corp.has $312,900 of assets,and it uses only common equity capital (zero debt) .Its sales for the last year were $620,000,and its net income after taxes was $24,655.Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%.What profit margin would LeCompte need in order to achieve the 15% ROE,holding everything else constant?