University of West Georgia

FINC MISC

Chapter 3

1)Cordelion Communications 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 Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

2. A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.
3. 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.
4. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.
5. To create a common size income statement, one divides each entry on the income statement by:
6. Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

7. The sources and uses of cash over a stated period of time are reflected on the:
8. In 2003, the Lo-Grow Company had $15 million in equity, a net income of $1,800,000. Lo-Grow paid out 60% of its net income as dividends. The ROE and retained earnings for Lo-Grow are
9. Thomas Corp. has the following simplified balance sheet: Cash=$50,000, Inventory=150,000, Accounts receivable=100,000, Net fixed assets=200,000, Total Assets=$500,000, Current liabilities=$125,000, Long-term debt=175,000, Common equity=200,000, Total Liabilties and Equity=$500,000 . Sales for the year totaled $600,000. The company president believes the company carries excess inventory. She would like the inventory turnover ratio to be 8 and would use the freed up cash to reduce current liabilities. If the company follows the president's recommendation and sales remain the same, the new quick ratio would be:
10. Manufacturer's Inc. estimates that its interest charges for this year will be $700 and that its net income will be $3,000. Assuming its average tax rate is 30 percent, what is the company's estimated times-interest-earned ratio?
11. Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?
12. Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?
13. A firm has a profit margin of 15 percent 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 percent, what is the firm's ROA?
14. problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.
15. The times-interest-earned ratio is one of ratio indicatiors of a firm's ability to meet its long-term and short-term debt obligations.
16. A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of:
17. Activities of a firm which require the spending of cash are known as:
18. 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?
19. If a company increases its debt ratio, but leaves its operating income (EBIT) and total assets unchanged, which of the following is most likely to occur:

20. The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relationship of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.
21. In 2004, TimeNow Corporation had fixed assets of $1,345, current assets of $260, current liabilities of $180 and shareholders' equity of $775. What was the net working capital for TimeNow in 2004?

22. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?
23. Bonner Corp.'s sales last year were $415,000, 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. Bonner'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?

24. Hutchinson Corporation has zero debt¾it 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?
25. hwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
26. Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?
27. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?
28. To create a common size income statement, one divides each entry on the income statement by:
29. The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax 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 which is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock.
30. If the equity multiplier is 2.0, the debt ratio must be 0.5.
31. Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.)
32. Companies A and B each have the same level of total assets, the same tax rate, same interest rate on debt, and the same earnings before interest and taxes (EBIT). Company A, however, has a higher debt ratio. Which of the following statements is most correct?
33. Relationships determined from a firm's financial information and used for comparison purposes are known as:
34. 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?
35. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?
36. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?
37. Lindley 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?
38. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?
39. Aurillo Equipment Company (AEC) projected that its ROE for next year would be just 6 percent. However, the financial staff has determined that the firm can increase its ROE by refinancing some high interest bonds currently outstanding. The firm's total debt will remain at $200,000 and the debt ratio will hold constant at 80 percent, but the interest rate on the refinanced debt will be 10 percent. The rate on the old debt is 14 percent. Refinancing will not affect sales which are projected to be $300,000. EBIT will be 11 percent of sales, and the firm's tax rate is 40 percent. If AEC refinances its high interest bonds, what will be its projected new ROE?
40. A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
41. The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.
42. Which one of the following is a source of cash?
43. Which one of the following statements is correct?
44. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.
45. We can use the fixed assets turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.
46. Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common stock. The stock currently trades 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?

47. The Amer Company has the following characteristics: Sales = $1,000, Total assets = $1,000. Total debt/Total assets =35%, Basic Earning Power (BEP) ratio = 20%, Tax rate = 40%, Interest rate on total debt = 4.57%. What is Amer's ROE?
48. In 2004, TimeNow Corporation had current assets of $260 and current liabilities of $180. In 2003, current assets were $220 and current liabilities were $160. What was the change in net working capital for TimeNow in 2004?
49. If a firm has a debt-equity ratio of 0.9, then what is its total debt ratio? Show your answer to the nearest .01%. Do not use the % sign in your answer. thus if the answer is 56.43%, enter your answer as 56.43 rather than .5643 or 56.4 or 56.43%.
50. The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax 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 which is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock.
51. If a company that is in a 34 % tax bracket invests in assets that increase its depreciation expense by $ 734 per year, its change in cash flow is . Enter your answer to the nearest $.01. Be sure to use a negative sign, if the answer is negative. Do not use $ or , signs in your answer.
52. According to the Statement of Cash Flows, a decrease in accounts receivable will                                          the cash flow from                                                                                                                                          activities.
53. Dean Brothers Inc. recently reported net income of $1,500,000. The company has 300,000 shares of common stock. The stock currently trades 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