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A firm wants to strengthen its financial position. Which of the following

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1. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? (Points : 5)

a. 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.
b. Issue new common stock and use the proceeds to increase inventories.
c. Speed up the collection of receivables and use the cash generated to increase inventories.
d. Use some of its cash to purchase additional inventories.
e. Issue new common stock and use the proceeds to acquire additional fixed assets.

2. Which of the following statements is CORRECT? (Points : 5)

a. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
b. Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2006 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
c. The maximum federal tax rate on corporate income in 2006 was 50%.
d. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.
e. The maximum federal tax rate on personal income in 2006 was 50%.

3. If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. (Points : 5)

The division's basic earning power ratio is above the average of other firms in its industry.
The division's total assets turnover ratio is below the average for other firms in its industry.
The division's debt ratio is above the average for other firms in the industry.
The division's inventory turnover is 6, whereas the average for its competitors is 8.
The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.

4. Other things held constant, which of the following alternatives would increase a company's cash flow for the current year? (Points : 5)

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.

5. 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? (Points : 5)

Company HD pays less in taxes.
Company HD has a lower equity multiplier.
Company HD has a higher ROA.
Company HD has a higher times interest earned (TIE) ratio.
Company HD has more net income.

6. Companies HD and LD have the same tax rate, sales, 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? (Points : 5)

Company HD has a lower equity multiplier.
Company HD has more net income.
Company HD pays more in taxes.
Company HD has a lower ROE.
Company HD has a lower times interest earned (TIE) ratio.

7. Which of the following statements is CORRECT? (Points : 5)

The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
MVA gives us an idea about how much value a firm's management has added during the last year.
MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows: EVA = EBIT(1-T) - (Investor-supplied op. capital) x (A-T cost of capital).
EVA gives us an idea about how much value a firm's management has added over the firm's life.

8. Assume that Pappas Company commenced operations on January 1, 2007, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2007 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2007 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements? (Points : 5)

The firm's reported net fixed assets would increase.
The firm's EBIT would increase.
The firm's reported 2007 earnings per share would increase.
The firm's cash position in 2007 and 2008 would increase.
The firm's net liabilities would increase.

9. On its 2007 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? (Points : 5)

If the company lost money in 2007, they must have paid dividends.
The company must have had zero net income in 2007.
The company must have paid out half of its earnings as dividends.
The company must have paid no dividends in 2007.
Dividends could have been paid in 2007, but they would have had to equal the earnings for the year.

10. Last year, Tucker Technologies had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? (Points : 5)

The company had a sharp increase in its inventories.
The company had a sharp increase in its accrued liabilities.
The company sold a new issue of common stock.
The company made a large capital investment early in the year.
The company had a sharp increase in its depreciation and amortization expenses.

11. A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? (Points : 5)

a. The firm’s operating income (EBIT) would increase.
b. The firm’s taxable income would increase.
c. The firm’s net cash flow would increase.
d. The firm’s tax payments would increase.
e. The firm’s reported net income would increase. 12. Below is the common equity section (in millions) of Teweles Technology's last two year-end balance sheets:


12. Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? (Points : 5)

The company's net income in 2006 was higher than in 2005.
Teweles issued common stock in 2006.
The market price of Teweles' stock doubled in 2006.
Teweles had positive net income in both 2005 and 2006, but the company's net income in 2006 was lower than it was in 2005.
The company has more equity than debt on its balance sheet.

13. A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger? (Points : 5)

Increase accounts receivable while holding sales constant.
Increase EBIT while holding sales constant.
Increase accounts payable while holding sales constant.
Increase notes payable while holding sales constant.
Increase inventories while holding sales constant.

14. 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? (Points : 5)

The company's current ratio increased.
The company's times interest earned ratio decreased.
The company's basic earning power ratio increased.
The company's equity multiplier increased.
The company's debt ratio increased.

15. Which of the following statements is CORRECT? (Points : 5)

The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.
The income statement for a given year, say 2006, is designed to give us an idea of how much the firm earned during that year.

16. Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio? (Points : 5)

Borrow using short-term notes payable and use the proceeds to reduce accruals.
Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
Use cash to reduce accruals.
Use cash to reduce short-term notes payable.
Use cash to reduce accounts payable.

17. Which of the following statements is CORRECT? (Points : 5)

The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.
All else equal, increasing the debt ratio will increase the ROA.

18. Which of the following statements is CORRECT? (Points : 5)

If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
A firm's use of debt will have no effect on its profit margin on sales.
If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates--but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
If two firms differ only in their use of debt--i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.

19. Walter Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio? (Points : 5)

Borrow using short-term notes payable and use the cash to increase inventories.
Use cash to reduce accruals.
Use cash to reduce accounts payable.
Use cash to reduce short-term notes payable.
Use cash to reduce long-term bonds outstanding.

20. Which of the following statements is CORRECT? (Points : 5)

If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.
If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.
If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

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