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Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

A) True
B) False

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Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?


A) $158,750
B) $166,688
C) $175,022
D) $183,773
E) $192,962

F) A) and E)
G) C) and D)

Correct Answer

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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

F) A) and B)
G) A) and C)

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Wie Corp's sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?


A) $201,934
B) $212,563
C) $223,750
D) $234,938
E) $246,684

F) B) and D)
G) None of the above

Correct Answer

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Which of the following statements is CORRECT?


A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
C) The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
D) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin.
E) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.

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

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The days sales outstanding tells us how long it takes, on average, to collect 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

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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%

F) A) and C)
G) A) and B)

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


A) Increase accounts receivable while holding sales constant.
B) Increase EBIT while holding sales and assets constant.
C) Increase accounts payable while holding sales constant.
D) Increase notes payable while holding sales constant.
E) Increase inventories while holding sales constant.

F) C) and D)
G) B) and E)

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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-assets ratio was 45.0%. Based on the DuPont equation, what was the ROE?


A) 13.82%
B) 14.51%
C) 15.23%
D) 16.00%
E) 16.80%

F) C) and D)
G) A) and C)

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What is the firm's profit margin?


A) 1.51%
B) 1.67%
C) 1.86%
D) 2.07%
E) 2.27%

F) B) and C)
G) None of the above

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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) Without more information, we cannot tell if HD or LD would have a higher or lower net income.
B) HD would have the lower equity multiplier for use in the DuPont equation.
C) HD would have to pay more in income taxes.
D) HD would have the lower net income as shown on the income statement.
E) HD would have the higher operating margin.

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

Correct Answer

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Which of the following statements is CORRECT?


A) A reduction in inventories would have no effect on the current ratio.
B) An increase in inventories would have no effect on the current ratio.
C) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
D) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
E) If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.

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

Correct Answer

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The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

A) True
B) False

Correct Answer

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

A) True
B) False

Correct Answer

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What is the firm's book value per share?


A) $22.29
B) $23.47
C) $24.70
D) $26.00
E) $27.30

F) B) and D)
G) B) and C)

Correct Answer

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Garcia Industries has sales of $200,000 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?


A) $241.45
B) $254.16
C) $267.54
D) $281.62
E) $296.44

F) All of the above
G) B) and C)

Correct Answer

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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.

A) True
B) False

Correct Answer

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Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?


A) 3.71%
B) 4.08%
C) 4.48%
D) 4.93%
E) 5.18%

F) A) and B)
G) C) and D)

Correct Answer

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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

Correct Answer

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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.

A) True
B) False

Correct Answer

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