Managerial Finance Problem Review Set Financial Analysis

1.)
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that part of the inventory is obsolete or damaged.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.
b.

True
False

2.)
Since the 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.
a.
b.

True
False

3.)
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.
a.
b.

True
False

4.)
One 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.
a.
b.

True
False

5.)
Companies HD and LD are both profitable, and they have the same total assets
(TA), Sales (S), return on assets (ROA), and profit margin (PM). However,
Company HD has the higher debt ratio. Which of the following statements is
CORRECT?
a.
b.
c.
d.
e.

Company
Company
Company
Company
Company

HD
HD
HD
HD
HD

has
has
has
has
has

a
a
a
a
a

lower total assets turnover than Company LD.

lower equity multiplier than Company LD.
higher fixed assets turnover than Company B.
higher ROE than Company LD.
lower operating income (EBIT) than Company LD.

6.)
A firm wants to strengthen its financial position.
actions would increase its quick ratio?
a.
b.
c.
d.
e.

Which of the following

Offer price reductions along with generous credit terms that would (1)
enable the firm to sell some of its excess inventory and (2)lead to an
increase in accounts receivable.
Issue new common stock and use the proceeds to increase inventories.
Speed up the collection of receivables and use the cash generated to
increase inventories.
Use some of its cash to purchase additional inventories.
Issue new common stock and use the proceeds to acquire additional fixed
assets.

7.)
Other things held constant, which of the following alternatives would
increase a companys cash flow for the current year?
a.
b.
c.
d.
e.

Increase the number of years over which fixed assets are depreciated for
tax purposes.
Pay down the accounts payables.
Reduce the days sales outstanding (DSO) without affecting sales or
operating costs.
Pay workers more frequently to decrease the accrued wages balance.
Reduce the inventory turnover ratio without affecting sales or operating
costs.

8.)
Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000.
The new CFO wants to employ a debt ratio of 55%. How much debt must the
company add or subtract to achieve the target debt ratio?
a.
b.
c.
d.
e.

$158,750
$166,688
$175,022
$183,773
$192,962

9.)
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?
a.
b.
c.
d.
e.

$164,330
$172,979
$182,083
$191,188
$200,747

10.)
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?
a.
b.
c.
d.
e.

7.57%
7.95%
8.35%
8.76%
9.20%

11.)
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.
b.
c.
d.
e.

9.32%
9.82%
10.33%
10.88%
11.42%

12.)
Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and
its year-end assets were $210,000. The firm's total-debt-to-total-assets
ratio was 42.5%. Based on the Du Pont equation, what was Vaughn's ROE?
a.
b.
c.
d.
e.

14.77%
15.51%
16.28%
17.10%
17.95%

13.)
Last year Central Chemicals had sales of $205,000, assets of $127,500, a
profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes
that the company could reduce its assets by $21,000 without affecting either
sales or costs. Had it reduced its assets in this amount, and had the debt
ratio, sales, and costs remained constant, by how much would the ROE have
changed?
a.
b.
c.
d.
e.

1.81%
2.02%
2.22%
2.44%
2.68%

14.)
Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of
net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the
firm has excessive fixed assets and inventory that could be sold, enabling it
to reduce its total assets to $152,500. Sales, costs, and net income would not
be affected, and the firm would maintain the 41% debt ratio. By how much would
the reduction in assets improve the ROE?
a.
b.
c.
d.
e.

4.69%
4.93%
5.19%
5.45%
5.73%

15.)
Muscarella Inc. has the following balance sheet and income statement data:
Cash
Receivables
Inventories
Total CA
Net fixed assets
Total assets
Sales
Net income

$ 14,000
70,000
210,000
$294,000
126,000
$420,000
$280,000
$ 21,000

Accounts payable
Other current liabilities
Total CL
Long-term debt
Common equity
Total liab. and equity

$ 42,000
28,000
$ 70,000
70,000
280,000
$420,000

The new CFO thinks that inventories are excessive and could be lowered
sufficiently to cause the current ratio to equal the industry average,
2.70, without affecting either sales or net income. Assuming that
inventories are sold off and not replaced to get the current ratio to
the target level, and that the funds generated are used to buy back
common stock at book value, by how much would the ROE change?
a.
b.
c.
d.
e.

4.28%
4.50%
4.73%
4.96%
5.21%

16.)
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500,
and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the
interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new
CFO wants to see how the ROE would have been affected if the firm had used a
45% debt ratio. Assume that sales and total assets would not be affected,
and that the interest rate and tax rate would both remain constant. By how
much would the ROE change in response to the change in the capital structure?
a.
b.
c.
d.
e.

2.08%
2.32%
2.57%
2.86%
3.14%

Solutions
1.)
2.)
3.)
4.)
5.)
6.)
7.)
8.)
9.)
10.)
11.)
12.)
13.)
14.)
15.)
16.)

a
b
b
b
d
a
c
a
c
a
d
a
b
c
b
d