Chapter 4
Chapter 4
Chapter 4
1. HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax
rates, and EBIT. Both firms finance using only debt and common equity and total assets equal
total invested capital. 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.
d. HD would have the lower net income as shown on the income statement.
ANSWER: d
RATIONALE: More debt would mean more interest, hence a lower NI, given a constant EBIT,
so d is correct. Also, we can rule out a and e, and HD would also have the higher multiplier,
which rules out b. And with more interest, HD would have to pay less taxes, not more.
2. Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets,
and basic earning power. Both firms finance using only debt and common equity and total assets
equal total invested capital. Both companies have positive net incomes. Company HD has a
higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the
following statements is CORRECT?
ANSWER: a
RATIONALE: Under the stated conditions, HD would have more interest charges, thus lower
taxable income and taxes. Thus, a is correct. All of the other statements are incorrect.
3. Companies HD and LD have the same tax rate, sales, total assets, and basic earning power.
Both companies have positive net incomes. Both firms finance using only debt and common
equity and total assets equal total invested capital. Company HD has a higher total debt to total
invested capital ratio and, therefore, a higher interest expense. Which of the following statements
is CORRECT?
ANSWER: e
RATIONALE: HD has higher interest charges. Basic earning power equals EBIT/Assets, and
since assets and BEP are equal, EBIT must also be equal. TIE = EBIT/Interest. Therefore, HDs
higher interest charges means that its TIE must be lower. Thus, e is correct. All of the other
statements are incorrect.
a. If a firm has high current and quick ratios, this always indicate that the firm is managing its
liquidity position well.
b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio
would probably not change much, but its quick ratio would decline.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but
its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that
either its current or quick ratio would change.
e. 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.
ANSWER: e
a. A decline in a firms inventory turnover ratio suggests that it is improving both its inventory
management and its liquidity position, i.e., that it is becoming more liquid.
b. In general, its better to have a low inventory turnover ratio than a high one, as a low one
indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose
sales as a result of running out of stock.
c. If a firms fixed assets turnover ratio is significantly lower than its industry average, this
could indicate that it uses its fixed assets very efficiently or is operating at over capacity and
should probably add fixed assets.
d. The more conservative a firms management is, the higher its total debt to total capital ratio is
likely to be.
e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is
made. The DSO can be compared with the firms credit terms to get an idea of whether
customers are paying on time.
ANSWER: e
a. Other things held constant, the more debt a firm uses, the higher its operating margin will be.
b. Debt management ratios show the extent to which a firms managers are attempting to
magnify returns on owners capital through the use of financial leverage.
c. Other things held constant, the more debt a firm uses, the higher its profit margin will be.
d. Other things held constant, the higher a firms total debt to total capital ratio, the higher its
TIE ratio will be.
e. Debt management ratios show the extent to which a firms managers are attempting to reduce
risk through the use of financial leverage. The higher the total debt to total capital ratio, the
lower the risk.
ANSWER: b
a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
b. The advantage of the basic earning power ratio (BEP) over the return on total assets for
judging a companys operating efficiency is that the BEP does not reflect the effects of debt and
taxes.
c. The return on common equity (ROE) is generally regarded as being less significant, from a
stockholders viewpoint, than the return on total assets (ROA).
d. 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 more
risky and/or less likely to enjoy higher future growth.
e. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10%
versus a margin of 8% for Firm B. Firm As total debt to total capital ratio is 70% versus 20%
for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is
better managed, because the difference in debt, not better management, could be the cause of
Firm As higher profit margin.
ANSWER: b
b. The basic earning power ratio (BEP) reflects the earning power of a firms assets after giving
consideration to financial leverage and tax effects.
c. 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.
d. The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of
accounting book value. In general, investors regard companies with higher M/B ratios as being
more risky and/or less likely to enjoy higher future growth.
e. It is appropriate to use the fixed assets turnover ratio to appraise firms effectiveness in
managing their fixed assets if and only if all the firms being compared have the same proportion
of fixed assets to total assets.
ANSWER: c
9. Walter Industries current ratio is 0.5. Considered alone, which of the following actions
would increase the companys current ratio?
a. Borrow using short-term notes payable and use the cash to increase inventories.
ANSWER: a
RATIONALE: The following equation can be used. If you add equal amounts to the numerator
and denominator, then if Orig CR = or > 1.0, CR will decline, but if Orig CR < 1.0, CR will
increase. Obviously, if you add to one but not the other, CR will increase or decrease in a
predictable manner. We see that a is correct.
Example:
CA/CL $1 CA/CL CR CR
10. Safecos current assets total to $20 million versus $10 million of current liabilities, while
Riscos current assets are $10 million versus $20 million of current liabilities. Both firms would
like to window dress their end-of-year financial statements, and to do so they tentatively plan
to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash
accounts. Which of the statements below best describes the results of these transactions?
a. The transactions would improve Safecos financial strength as measured by its current ratio
but lower Riscos current ratio.
b. The transactions would lower Safecos financial strength as measured by its current ratio but
raise Riscos current ratio.
c. The transactions would have no effect on the firm financial strength as measured by their
current ratios.
d. The transactions would lower both firm financial strength as measured by their current ratios.
e. The transactions would improve both firms financial strength as measured by their current
ratios.
ANSWER: b
RATIONALE: The key here is to recognize that if the CR is less than 1.0, then a given increase
to both current assets and current liabilities will increase the CR, while the reverse will hold if
the initial CR is greater than 1.0. Thus, the transactions would make Risco look stronger but
Safeco look weaker. Heres an illustration:
Safeco:
Risco:
11. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and
they pay the same interest rate on their debt. Both firms finance using only debt and common
equity and total assets equal total invested capital. However, company HD has a higher total debt
to total capital ratio. Which of the following statements is CORRECT?
d. If the interest rate the companies pay on their debt is more than their basic earning power
(BEP), then Company HD will have the higher ROE.
e. If the interest rate the companies pay on their debt is less than their basic earning power
(BEP), then Company HD will have the higher ROE.
ANSWER: e
RATIONALE: The companies have the same EBIT and assets, hence the same BEP ratio. If the
interest rate is less than the BEP, then using more debt will raise the ROE. Therefore, statement e
is correct. The others are all incorrect.
a. Even though Firm As current ratio exceeds that of Firm B, Firm Bs quick ratio might exceed
that of A. However, if As quick ratio exceeds Bs, then we can be certain that As current ratio
is also larger than Bs.
b. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the
interest rate on that debt, the applicable tax rate, and its operating costs. With this information,
the firm can calculate the amount of sales required to achieve its target TIE ratio.
c. Since the ROA measures the firms effective utilization of assets without considering how
these assets are financed, two firms with the same EBIT must have the same ROA.
d. Suppose all firms follow similar financing policies, face similar risks, have equal access to
capital, and operate in competitive product and capital markets. However, firms face different
operating conditions because, for example, the grocery store industry is different from the airline
industry. Under these conditions, firms with high profit margins will tend to have high asset
turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
e. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt
and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the
firm borrow funds using long-term debt, use the funds to buy back stock, and raise the equity
multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations
would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This
would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%.
ANSWER: b
A good bit of relatively simple algebra is involved in these problems, and although the
calculations are simple, it will take students some time to set up the problems and do the
arithmetic. We allow for this when assigning problems for a timed test. Also, note that students
must know the definitions of a number of ratios to answer the questions. We provide our students
with a formula sheet on exams, using the relevant sections of Appendix C at the then of the
text. Otherwise, they spend too much time trying to memorize thing rather than trying to
understand the issues.
The difficulty of the problems depends on (1) whether or not students are provided with a
formula sheet and (2) the amount of time they have to work the problems. Out difficulty
assessments assume that they have a formula sheet and areasonable amount of time for the test.
Note that a few of the problems are trivially easy if students have formula sheets.
To work some of the problems, students must transpose equations and solve for items that are
normally inputs. For example, the equation for the profit margin is given as Profit margin = Net
income/Sales. We might have a problem where sales and the profit margin are given and then
require students to find the firms net income. We explain to our students in class before the
exam that they will have to transpose terms in the formulas to work some problems.
Problems 84 through 114 are all stand-along problems with individualized data. Problems 115
through 133 are all based on a common set of financial statements, and they require students to
calculate ratios and find items like EPS, TIE, and the like using this data set. The financial
statements can be changed algorithmically, and this changes the calculated ratios and other
items.
13. Ryngard Corps sales last year were $38,000, and its total assets were $16,000. What was its
total assets turnover ratio (TATO)?
a. 2.04
b. 2.14
c. 2.26
d. 2.38
e. 2.49
ANSWER: d
14. Beranek Corp has $720,000 of assets (which equal total invested capital), and it uses no
debtit is financed only with common equity. The new CFO wants to employ enough debt to
raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back
common stock at its book value. How much must the firm borrow to achieve the target debt
ratio?
a. $273,600
b. $288,000
c. $302,400
d. $317,520
e. $333,396
ANSWER: b
15. Ajax Corps sales last year were $435,000, its operating costs were $362,500, and its interest
charges were
a. 4.72
b. 4.97
c. 5.23
d. 5.51
e. 5.80
ANSWER: e
16. Royce Corps sales last year were $280,000, and its net income was $23,000. What was its
profit margin?
a. 7.41%
b. 7.80%
c. 8.21%
d. 8.63%
e. 9.06%
ANSWER: c
17. River Corps 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%
ANSWER: a
18. X-1 Corps 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%
ANSWER: c
EBIT $52,500
19. Zero Corps 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%
ANSWER: d
20. 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. $41,234
b. $43,405
c. $45,689
d. $48,094
e. $50,625
ANSWER: e
21. Herring Corporation has operating income of $225,000 and a 40% tax rate. The firm has
short-term debt of $120,000, long-term debt of $330,000, and common equity of $450,000. What
is its return on invested capital?
a. 13.75%
b. 14.33%
c. 15.00%
d. 16.25%
e. 17.10%
EBIT $225,000
ANSWER: c
RATIONALE:
22. Song Corps 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
ANSWER: b
EPS $1.30
23. Hoagland Corps 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
ANSWER: a
24. 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 firms ROE?
a. 15.23%
b. 16.03%
c. 16.88%
d. 17.72%
e. 18.60%
TATO 1.50
ANSWER: c
RATIONALE:
25. Meyer Incs total invested capital is $625,000, and its total debt outstanding is $185,000.
The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm
will not change. How much debt must the company add or subtract to achieve the target debt to
capital ratio?
a. $158,750
b. $166,688
c. $175,022
d. $183,773
e. $192,962
ANSWER: a
26. Helmuth Incs 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
ANSWER: d
a. $241.45
b. $254.16
c. $267.54
d. $281.62
e. $296.44
8.0%
Sales $200,000
A/R $18,500
ANSWER: RATIONALE:
28. Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last
year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day
credit period, then customers are paying on time. Otherwise, they are paying late. By how much
are customers paying early or late? Base your answer on this equation: DSO Credit Period =
Days early or late, and use a 365-day year when calculating the DSO. A positive answer
indicates late payments, while a negative answer indicates early payments.
a. 21.27
b. 22.38
c. 23.50
d. 24.68
e. 25.91
ANSWER: b
RATIONALE:Credit period 45
Sales $325,000
Receivables $60,000
29. Han Corps sales last year were $425,000, and its year-end receivables were $52,500. The
firm sells on terms that call for customers to pay 30 days after the purchase, but some delay
payment beyond Day 30. On average, how many days late do customers pay? Base your answer
on this equation: DSO Allowed credit period = Average days late, and use a 365-day year
when calculating the DSO.
a. 12.94
b. 13.62
c. 14.33
d. 15.09
e. 15.84
ANSWER: d
Receivables $52,500
Credit period 30
30. Wie Corps 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 firms 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
ANSWER: c
31. A new firm is developing its business plan. It will require $615,000 of assets (which
equals total invested capital), and it projects $450,000 of sales and $355,000 of operating costs
for the first year. Management is reasonably sure of these numbers because of contracts with its
customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of
at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go
bankrupt. The firm will use only debt and common equity for financing. What is
the maximum debt to capital ratio (measured as debt/total invested capital) the firm can use?
(Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then
the related debt to capital ratio.)
a. 41.94%
b. 44.15%
c. 46.47%
d. 48.92%
e. 51.49%
$615,000
Sales $450,000
ANSWER: RATIONALE:
32. Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting
only of accounts payable and accruals) of $125,000. Duffert finances using only long-term debt
and common equity. The interest rate on its debt is 8% and its tax rate is 40%. The firms basic
earning power ratio is 15% and its debt-to capital rate is 40%. What are Dufferts ROE and
ROIC?
a. 12.00%; 10.29%
b. 12.57%; 10.29%
c. 13.94%; 9.86%
d. 13.94%; 10.29%
e. 13.94%; 11.50%
ANSWER: d
RATIONALE:
Balance sheet:
Current liabilities $ 125,000
Debt 350,000
D/(D + E) = 0.4
D = $350,000
EBIT = $150,000
EBIT $150,000
EBT $122,000
NI $ 73,200
a. 9.45%
b. 9.93%
c. 10.42%
d. 10.94%
e. 11.49%
ANSWER: a
Sales $595,000
34. Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital),
$305,000 of sales, $20,000 of net income, and a debt-to-total-capital 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. The firm finances using only debt and common equity. Assets, total invested capital,
sales, and the debt to capital ratio would not be affected. By how much would the cost reduction
improve the ROE?
a. 11.51%
b. 12.11%
c. 12.75%
d. 13.42%
e. 14.09%
$155,000
Sales $305,000
ANSWER:RATIONALE:
35. Brookman Incs latest EPS was $2.75, its book value per share was $22.75, it had 315,000
shares outstanding, and its debt/total invested capital ratio was 44%. The firm finances using
only debt and common equity and its total assets equal total invested capital. How much debt
was outstanding?
a. $4,586,179
b. $4,827,557
c. $5,081,639
d. $5,349,094
e. $5,630,625
ANSWER: e
BVPS $22.75
36. 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 firms total-debt-to-total-capital ratio was 45.0%. The firm finances using only
debt and common equity and its total assets equal total invested capital. Based on the DuPont
equation, what was the ROE?
a. 13.82%
b. 14.51%
c. 15.23%
d. 16.00%
e. 16.80%
a Sales
$325,000
ROE 13.82%
ANSWER: RATIONALE:
37. Last year Rennie Industries had sales of $305,000, assets of $175,000 (which equals total
invested capital), a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that
the company could reduce its assets by $51,000 without affecting either sales or costs. The firm
finances using only debt and common equity. Had it reduced its assets by this amount, and had
the debt/total invested capital ratio, sales, and costs remained constant, how much would the
ROE have changed?
a. 4.10%
b. 4.56%
c. 5.01%
d. 5.52%
e. 6.07%
Old New
ANSWER: RATIONALE:
38. Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its
sales were $295,000 and its net income was $10,600. The firm finances using only debt and
common equity and its total assets equal total invested capital. The CFO believes that the
company could have operated more efficiently, lowered its costs, and increased its net income by
$10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its
net income by this amount, how much would the ROE have changed?
a. 6.55%
b. 7.28%
c. 8.09%
d. 8.90%
e. 9.79%
c
Old New
ANSWER: RATIONALE:
39. Last year Jandik Corp. had $295,000 of assets (which is equal to its total invested capital),
$18,750 of net income, and a debt-to-total-capital ratio of 37%. Now suppose the new CFO
convinces the president to increase the debt- to-total-capital ratio to 48%. Sales, total assets, and
total invested capital 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?
a. 2.13%
b. 2.35%
c. 2.58%
d. 2.84%
e. 3.12%
$295,000
ANSWER: RATIONALE:
40. Last year Kruse Corp had $305,000 of assets (which is equal to its total invested capital),
$403,000 of sales,
$28,250 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm
has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets
and total invested capital to $252,500.
The firm finances using only debt and common equity. Sales, costs, and net income would not be
affected, and the firm would maintain the same capital structure (but with less total debt). By
how much would the reduction in assets improve the ROE?
a. 2.85%
b. 3.00%
c. 3.16%
d. 3.31%
e. 3.48%
ANSWER: c
RATIONALE: Original New
41. Jordan Inc has the following balance sheet and income statement data:
Sales $280,000
The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the
current ratio to equal the industry average, 2.75, 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. 11.26%
b. 11.85%
c. 12.45%
d. 13.07%
e. 13.72%
ANSWER: b
RATIONALE:
Original balance sheet and income statement data:
Sales $280,000
ROE = 11.85%
42. Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end
assets (which is equal to its total invested capital) of $395,000. The debt-to-total-capital ratio was
17%, the interest rate on the debt was 7.5%, and the firms tax rate was 35%. The new CFO
wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-
capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax
rate would not be affected, but the interest rate would rise to 8.0%. By how much would the
ROE change in response to the change in the capital structure?
a. 1.71%
b. 1.90%
c. 2.11%
d. 2.34%
e. 2.58%
d
Old New
ANSWER: RATIONALE:
43. 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 (which is equal to its total invested
capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firm using
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, total invested capital, 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%
ANSWER: a
RATIONALE: Work down the Plan A column, find the Max Debt, then use it to complete Plan
B and the ROEs.
Plan A Plan B
= EBIT/Min. TIE =
$8,750
Exhibit 4.1
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has
no amortization charges, it does not lease any assets, none of its debt must be retired during the
next 5 years, and the notes payable will be rolled over.
Assets 2014
Cash and securities $ 2,500
Inventories 16,000
$ 9,500
Accruals 5,500
Taxes 973
Other data:
500.00
a. 0.99
b. 1.10
c. 1.23
d. 1.36
e. 1.50
ANSWER: d
45. Refer to Exhibit 4.1. What is the firms quick ratio? a. 0.51
b. 0.64
c. 0.76
d. 0.92
e. 1.10
ANSWER: b
46. Refer to Exhibit 4.1. What is the firms days sales outstanding? Assume a 365-day year for
this calculation.
a. 39.07
b. 41.13
c. 43.29
d. 45.57
e. 47.97
ANSWER: e
47. Refer to Exhibit 4.1. What is the firms total assets turnover? a. 1.12
b. 1.40
c. 1.75
d. 2.10
e. 2.52
ANSWER: c
48. Refer to Exhibit 4.1. What is the firms inventory turnover ratio? a. 5.47
b. 5.74
c. 6.03
d. 6.33
e. 6.65
ANSWER: a
a. 2.20
b. 2.45
c. 2.72
d. 3.02
e. 3.33
ANSWER: d
50. Refer to Exhibit 4.1. What is the firms total debt to total capital ratio?
a. 48.55%
b. 53.95%
c. 59.94%
d. 62.80%
e. 68.11%
ANSWER: d
a. 3.62%
b. 3.98%
c. 4.37%
d. 4.81%
e. 5.29%
ANSWER: a
a. 13.21%
b. 13.91%
c. 14.60%
d. 15.33%
e. 16.10%
ANSWER: b
a. 7.50%
b. 7.90%
c. 8.31%
d. 8.73%
e. 9.16%
ANSWER: c
a. 1.51%
b. 1.67%
c. 1.86%
d. 2.07%
e. 2.27%
ANSWER: d
a. 3.12%
b. 3.46%
c. 3.85%
d. 4.28%
e. 4.75%
ANSWER: e
56. Refer to Exhibit 4.1. What is the firms return on invested capital?
a. 4.25%
b. 5.67%
c. 7.72%
d. 9.33%
e. 11.87%
ANSWER: c
RATIONALE: Return on invested capital = [EBIT(1 T)]/Total invested capital = 7.72%
57. Refer to Exhibit 4.1. What is the firms dividends per share?
a. $1.14
b. $1.27
c. $1.39 d.
$1.53
e. $1.68
ANSWER: b
a. $3.26
b. $3.43
c. $3.62
d. $3.80
e. $3.99
ANSWER: c
a. 12.0
b. 12.6
c. 13.2
d. 13.9
e. 14.6
ANSWER: a
RATIONALE: P/E ratio = Price per share/Earnings per share = 12.0 We actually fixed the P/E
ratio at 12 in order to get a stock price. Either the price or the P/E ratio must be fixed or the
model becomes very complicated and a stock pricing equation is required.
60. Refer to Exhibit 4.1. What is the firms book value per share?
a. $22.29
b. $23.47
c. $24.70
d. $26.00
e. $27.30
ANSWER: d
a. 0.87
b. 1.02
c. 1.21
d. 1.42
e. 1.67
ANSWER: e
RATIONALE: Market/book ratio (M/B) = Price per share/BVPS = 1.67
a. 3.85
b. 4.04
c. 4.24
d. 4.45
e. 4.68
ANSWER: a