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Exam 3: Financial Analysis

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Question 1

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LeCompte Corp.has $312,900 of assets, and it uses only common equity capital 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) 7.57%
B) 7.95%
C) 8.35%
D) 8.76%
E) 9.20%

F) None of the above
G) A) and C)

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Question 2

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Which of the following statements is CORRECT?

A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Under these conditions, the ROE will increase.
B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Without additional information, we cannot tell what will happen to the ROE.
C) The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
D) Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.
E) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%.Under these conditions, the ROE will decrease.

F) D) and E)
G) B) and D)

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Question 3

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is the firm's ROE?

is the firm's inventory turnover ratio?

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?

Amram Company's current ratio is 1.9.Considered alone, which of the following actions would reduce the company's current ratio?

investor is considering starting a new business.The company would require $475,000 of assets, and it would be financed entirely with common stock.The investor 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?

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power.Both companies have positive net incomes.Company HD has a higher debt ratio and, therefore, a higher interest expense.Which of the following statements is CORRECT?

is the firm's P/E ratio?

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000.What was its total assets turnover ratio (TATO) ?

Casey Communications 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?

is the firm's dividends per share?

Muscarella Inc.has the following balance sheet and income statement data: 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?

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?

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?

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.

is the firm's TIE?

is the firm's total assets turnover?

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.