University of New Haven

FINC 2213

Quiz 5 (practice)

True/False

Indicate whether the statement is true or false.

1)In general, it is better to have a low inventory turnover ratio than a high one.

 

                2. 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.

 

                3. The more conservative a firm's management is, the higher its debt ratio is likely to be.

 

                4. The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

 

                5. The profit margin measures net income per dollar of sales.

 

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

 

7. Two firms with the same EBIT must have the same ROA.

 

 

 

                8. Other things held constant, the more debt a firm uses, the lower its profit margin will be.

 

                9. A firm with too many assets such as manufacturing facilities will have a hard time adjusting to a big increase in demand.

 

                10. A company that is using debt to finance its projects is using leverage.

 

Multiple Choice

Identify the choice that best completes the statement or answers the question.

 

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

a.            An increase in net fixed assets.

b.            An increase in accrued liabilities.

c.             An increase in notes payable.

d.            An increase in accounts receivable.

e.            An increase in accounts payable.

 

 

 

                  12. If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

a.            The lower the company's inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm.

b.            Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge.

c.             Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge.

d.            The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge.

e.            Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

 

                  13. Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

a.            The ROA will decline.

b.            Taxable income will decline.

c.             The tax bill will increase.

d.            Net income will decrease.

e.            The times-interest-earned ratio will decrease.

 

                  14. 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%

 

 

                  15. 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

 

 

                  16. Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

a.            $2.14

b.   $2.26

c.             $2.38

d.   $2.50

e.            $2.63

 

 

 

 

                  17. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

a.            10.94%

b.   11.49%

c.             9.93%

d. 10.42%

e.            9.45%

 

 

 

 

                  18. Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She 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?

a.            $43,405

b.   $41,234

c.             $45,689

d.   $50,625

e.            $48,094

 

                  19. 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%   

 

                  20. 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% 

                  21. 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

 

 

 

 

                  22. 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

 

                  23. 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.            5.80

b.   4.72

c.             4.97

d.   5.51

e.            5.23       

                  24. 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.            2.49

b.   2.14

c.             2.26

d.   2.04

e.            2.38

 

                  25. 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.   8.21%

c.             8.63%

d.   7.80%

e.            9.06%