Question_testbank_12Dec_2nd

41. Tapley Dental Supply Company has the following data:
Net income: $240 Sales: $10,000 Total assets: $6,000
Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2
BEP ratio: 13.33%
If Tapley could streamline operations, cut operating costs, and raise
net income to $300, without affecting sales or the balance sheet (the
additional profits will be paid out as dividends), by how much would
its ROE increase?
a. 3.00%
b. 3.50%
c. 4.00%
d. 4.25%
e. 5.50%
42. Your company had the following balance sheet and income statement
information for 2003:
Balance sheet:
Cash $ 20
A/R 1,000
Inventories 5,000
Total C.A. $ 6,020 Debt $ 4,000
Net F.A. 2,980 Equity 5,000
Total Assets $ 9,000 Total claims $ 9,000
Income statement:
Sales $10,000
Cost of goods sold 9,200
EBIT $ 800
Interest (10%) 400
EBT $ 400
Taxes (40%) 160
Net Income $ 240
The industry average inventory turnover is 5. You think you can change
your inventory control system so as to cause your turnover to equal
the industry average, and this change is expected to have no effect on
either sales or cost of goods sold. The cash generated from reducing
inventories will be used to buy tax-exempt securities which have a 7
percent rate of return. What will your profit margin be after the
change in inventories is reflected in the income statement?
a. 2.1%
b. 2.4%
c. 4.5%
d. 5.3%
e. 6.7%
Medium:
43. Ruth Company currently has $1,000,000 in accounts receivable. Its days
sales outstanding (DSO) is 50 days (based on a 365-day year). Assume a
365-day year. The company wants to reduce its DSO to the industry
average of 32 days by pressuring more of its customers to pay their
bills on time. The company's CFO estimates that if this policy is
adopted the company's average sales will fall by 10 percent. Assuming
that the company adopts this change and succeeds in reducing its DSO to
32 days and does lose 10 percent of its sales, what will be the level
of accounts receivable following the change?
a. $576,000
b. $676,667
c. $776,000
d. $900,000
e. $976,667
44. The Meryl Corporation's common stock is currently selling at $100 per
share, which represents a P/E ratio of 10. If the firm has 100 shares
of common stock outstanding, a return on equity of 20 percent, and a
debt ratio of 60 percent, what is its return on total assets (ROA)?
a. 8.0%
b. 10.0%
c. 12.0%
d. 16.7%
e. 20.0%
45. Q Corp. has a basic earnings power (BEP) ratio of 15 percent, and has a
times interest earned (TIE) ratio of 6. Total assets are $100,000.
The corporate tax rate is 40 percent. What is Q Corp.'s return on
assets (ROA)?
a. 7.5%
b. 10.0%
c. 12.2%
d. 13.1%
e. 14.5%
46. Humphrey Hotels’ operating income (EBIT) is $40 million. The company’s
times-interest-earned (TIE) ratio is 8.0, its tax rate is 40 percent,
and its basic earning power (BEP) ratio is 10 percent. What is the
company’s return on assets (ROA)?
a. 6.45%
b. 5.97%
c. 4.33%
d. 8.56%
e. 5.25%
47. Selzer Inc. sells all its merchandise on credit. It has a profit
margin of 4 percent, days sales outstanding equal to 60 days (based on
a 365-day year), receivables of $147,945.2, total assets of $3 million,
and a debt ratio of 0.64. What is the firm's return on equity (ROE)?
a. 7.1%
b. 33.3%
c. 3.3%
d. 71.0%
e. 8.1%
48. You are considering adding a new product to your firm's existing
product line. It should cause a 15 percent increase in your profit
margin (i.e., new PM = old PM × 1.15), but it will also require a 50
percent increase in total assets (i.e., new TA = old TA × 1.5). You
expect to finance this asset growth entirely by debt. If the following
ratios were computed before the change, what will be the new ROE if the
new product is added and sales remain constant?
Ratios before new product
Profit margin = 0.10
Total assets turnover = 2.00
Equity multiplier = 2.00
a. 11%
b. 46%
c. 40%
d. 20%
e. 53%
49. Assume Meyer Corporation is 100 percent equity financed. Calculate the
return on equity, given the following information:
(1) Earnings before taxes = $1,500
(2) Sales = $5,000
(3) Dividend payout ratio = 60%
(4) Total assets turnover = 2.0
(5) Applicable tax rate = 30%
a. 25%
b. 30%
c. 35%
d. 42%
e. 50%
50. Oliver Incorporated has a current ratio = 1.6, and a quick ratio equal
to 1.2. The company has $2 million in sales and its current
liabilities are $1 million. What is the company’s inventory turnover
ratio?
a. 5.0
b. 5.2
c. 5.5
d. 6.0
e. 6.3
51. Kansas Office Supply had $24,000,000 in sales last year. The company’s
net income was $400,000. Its total assets turnover was 6.0. The
company’s ROE was 15 percent. The company is financed entirely with
debt and common equity. What is the company’s debt ratio?
a. 0.20
b. 0.30
c. 0.33
d. 0.60
e. 0.66
52. The Merriam Company has determined that its return on equity is 15
percent. Management is interested in the various components that went
into this calculation. You are given the following information: total
debt/total assets = 0.35 and total assets turnover = 2.8. What is the
profit margin?
a. 3.48%
b. 5.42%
c. 6.96%
d. 2.45%
e. 12.82%
53. Harvey Supplies Inc. has a current ratio of 3.0, a quick ratio of 2.4,
and an inventory turnover ratio of 6. Harvey's total assets are $1
million and its debt ratio is 0.20. The firm has no long-term debt.
What is Harvey's sales figure?
a. $ 720,000
b. $ 120,000
c. $1,620,000
d. $ 360,000
e. $ 880,000
54. Collins Company had the following partial balance sheet and complete
annual income statement:
Partial Balance Sheet:
Cash $ 20
A/R 1,000
Inventories 2,000
Total current assets $ 3,020
Net fixed assets 2,980
Total assets $ 6,000
Income Statement:
Sales $10,000
Cost of goods sold 9,200
EBIT $ 800
Interest (10%) 400
EBT $ 400
Taxes (40%) 160
Net Income $ 240
The industry average DSO is 30 (based on a 365-day year). Collins
plans to change its credit policy so as to cause its DSO to equal
the industry average, and this change is expected to have no effect
on either sales or cost of goods sold. If the cash generated from
reducing receivables is used to retire debt (which was outstanding all
last year and which has a 10 percent interest rate), what will Collins'
debt ratio (Total debt/Total assets) be after the change in DSO is
reflected in the balance sheet?
a. 33.33%
b. 45.28%
c. 52.75%
d. 60.00%
e. 65.71%
55. Taft Technologies has the following relationships:
Annual sales $1,200,000
Current liabilities $ 375,000
Days sales outstanding (DSO) (365-day year) 40
Inventory Turnover ratio 4.8
Current ratio 1.2
The company’s current assets consist of cash, inventories, and accounts
receivable. How much cash does Taft have on its balance sheet?
a. -$ 8,333
b. $ 68,493
c. $125,000
d. $200,000
e. $316,667
Answer: c
56. Last year, Quayle Energy had sales of $200 million, and its inventory
turnover ratio was 5.0. The company’s current assets totaled $100
million, and its current ratio was 1.2. What was the company’s quick
ratio?
a. 1.20
b. 1.39
c. 0.72
d. 0.55
e. 2.49
57. Thomas Corp. has the following simplified balance sheet:
Cash $ 50,000 Current liabilities $125,000
Inventory 150,000
Accounts receivable 100,000 Long-term debt 175,000
Net fixed assets 200,000 Common equity 200,000
Total $500,000 Total $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:
a. 2.4
b. 4.0
c. 4.5
d. 1.2
e. 3.0
Answer: b
58. Mondale Motors has forecasted the following year-end balance sheet:
Assets:
Cash and marketable securities $ 300
Inventories 500
Accounts receivable 700
Total current assets $1,500
Net fixed assets 5,000
Total assets $6,500
Liabilities and Equity:
Notes payable $ 800
Accounts payable 400
Total current liabilities $1,200
Long-term debt 3,000
Stockholders’ equity 2,300
Total liabilities and equity $6,500
The company also forecasts that its days sales outstanding (DSO) on a
365-day basis will be 35.486 days.
Now, assume instead that Mondale is able to reduce its DSO to the
industry average of 30.417 days without reducing its sales. Under this
scenario, the reduction in accounts receivable would generate
additional cash. This additional cash would be used to reduce its
notes payable. If this scenario were to occur, what would be the
company’s current ratio?
a. 1.35
b. 1.27
c. 1.00
d. 1.17
e. 2.45
59. Perry Technologies Inc. had the following financial information for the
past year:
Inventory turnover = 8×
Quick ratio = 1.5
Sales = $860,000
Current ratio = 1.75
What were Perry’s current liabilities?
a. $430,000
b. $500,000
c. $107,500
d. $ 61,429
e. $573,333
Tough:
60. Southeast Packaging's ROE last year was only 5 percent, but its
management has developed a new operating plan designed to improve
things. The new plan calls for a total debt ratio of 60 percent, which
will result in interest charges of $8,000 per year. Management
projects an EBIT of $26,000 on sales of $240,000, and it expects to
have a total assets turnover ratio of 2.0. Under these conditions, the
average tax rate will be 40 percent. If the changes are made, what
return on equity will Southeast earn?
a. 9.00%
b. 11.25%
c. 17.50%
d. 22.50%
e. 35.00%
61. Roland & Company has a new management team that has developed an
operating plan to improve upon last year's ROE. The new plan would
place the debt ratio at 55 percent which will result in interest
charges of $7,000 per year. EBIT is projected to be $25,000 on sales
of $270,000, and it expects to have a total assets turnover ratio of
3.0. The average tax rate will be 40 percent. What does Roland &
Company expect return on equity to be following the changes?
a. 17.65%
b. 21.82%
c. 26.67%
d. 44.44%
e. 51.25%
62. Georgia Electric reported the following income statement and balance
sheet for the previous year:
Balance sheet:
Assets Liabilities & Equity
Cash $ 100,000
Inventory 1,000,000
Accounts receivable 500,000
Current assets $1,600,000
Net fixed assets 4,400,000 Total equity 2,000,000
Total assets $6,000,000 Total claims $6,000,000
Income Statement:
Sales $3,000,000
Operating costs 1,600,000
Operating income (EBIT) $1,400,000
Interest expense 400,000
Taxable income (EBT) $1,000,000
Taxes (40%) 400,000
Net income $ 600,000
The company’s interest cost is 10 percent, so the company’s interest
expense each year is 10 percent of its total debt.
While the company’s financial performance is quite strong, its CFO
(Chief Financial Officer) is always looking for ways to improve.
The CFO has noticed that the company’s inventory turnover ratio is
considerably weaker than the industry average which is 6.0. As an
exercise, the CFO asks what would the company’s ROE have been last year
if the following had occurred:
(1) The company maintained the same level of sales, but was able to
(2) The cash that was generated from the reduction in inventory was
reduce inventory enough to achieve the industry average inventory
turnover ratio.
used to reduce part of the company’s outstanding debt. So, the
company’s total debt would have been $4 million less the cash
freed up from the improvement in inventory policy. The company’s
interest expense would have been 10 percent of the new level of
total debt.
(3) Assume equity does not change. (The company pays all net income
Under this scenario, what would have been the company’s ROE last year?
a. 27.0%
b. 29.5%
c. 30.3%
d. 31.5%
e. 33.0%

63. Vance Motors has current assets of $1.2 million. The company’s current
ratio is 1.2, its quick ratio is 0.7, and its inventory turnover ratio
is 4. The company would like to increase its inventory turnover ratio
to the industry average, which is 5, without reducing its sales. Any
reductions in inventory will be used to reduce the company’s current
liabilities. What will be the company’s current ratio, assuming that
it is successful in improving its inventory turnover ratio to 5?
a. 1.33
b. 1.67
c. 1.22
d. 0.75
e. 2.26
as dividends.)
64. A company has just been taken over by new management which believes
that it can raise earnings before taxes (EBT) from $600 to $1,000,
merely by cutting overtime pay and thus reducing the cost of goods
sold. Prior to the change, the following data applied:
Total assets: $8,000 Debt ratio: 45%
Tax rate: 35% BEP ratio: 13.3125%
EBT: $600 Sales: $15,000
These data have been constant for several years, and all income is paid
out as dividends. Sales, the tax rate, and the balance sheet will
remain constant. What is the company's cost of debt? (Hint: Work
only with old data.)
a. 12.92%
b. 13.23%
c. 13.51%
d. 13.75%
e. 14.00%
65. Lone Star Plastics has the following data:
Assets: $100,000; Profit margin: 6.0%; Tax rate: 40%; Debt ratio:
40.0%; Interest rate: 8.0%: Total assets turnover: 3.0.
What is Lone Star's EBIT?
a. $ 3,200
b. $12,000
c. $18,000
d. $30,000
e. $33,200