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Financial Management - Chapter 3 Flashcards | Quizlet
Financial Management - Chapter 3
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Terms in this set (79)
Which of the following
c. Borrowing on a long-term basis and
statements is
using the proceeds to retire short-term
CORRECT?
debt would improve the current ratio and
a. "Window dressing" is
thus could be considered to be an
any action that
example of "window dressing."
improves a firm's
fundamental, long-run
position and thus
increases its intrinsic
value.
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b. Borrowing by using
short-term notes
payable and then using
the proceeds to retire
long-term debt is an
example of "window
dressing." Offering
discounts to customers
who pay with cash
rather than buy on
credit and then using
the funds that come in
quicker to purchase
additional inventories is
another example of
"window dressing."
c. Borrowing on a longterm basis and using the
proceeds to retire
short-term debt would
improve the current
ratio and thus could be
considered to be an
example of "window
dressing."
d. Offering discounts to
customers who pay with
cash rather than buy on
credit and then using
the funds that come in
quicker to purchase
additional inventories is
an example of "window
dressing."
e. Using some of the
firm's cash to reduce
long-term debt is an
example of "window
dressing."
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Considered alone,
e. An increase in accounts receivable
which of the following
would increase a
company's current
ratio?
a. An increase in
accounts payable.
b. An increase in net
fixed assets.
c. An increase in
accrued liabilities.
d. An increase in notes
payable.
e. An increase in
accounts receivable.
Which of the following
d. The EBITDA coverage ratio increases.
would, generally,
indicate an
improvement in a
company's financial
position, holding other
things constant?
a. The total assets
turnover decreases.
b. The TIE declines.
c. The DSO increases.
d. The EBITDA coverage
ratio increases.
e. The current and quick
ratios both decline.
A firm wants to
.
strengthen its financial
e. Issue new stock and then use some of
position. Which of the
the proceeds to purchase additional
following actions would
inventory and hold the remainder as
increase its current
cash.
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ratio?
a. Use cash to increase
inventory holdings.
b. Reduce the
company's days' sales
outstanding to the
industry average and
use the resulting cash
savings to purchase
plant and equipment.
c. Use cash to
repurchase some of the
company's own stock.
d. Borrow using shortterm debt and use the
proceeds to repay debt
that has a maturity of
more than one year.
e. Issue new stock and
then use some of the
proceeds to purchase
additional inventory and
hold the remainder as
cash.
A firm wants to
b. Offer price reductions along with
strengthen its financial
generous credit terms that would (1)
position. Which of the
enable the firm to sell some of its excess
following actions would
inventory and (2) lead to an increase in
increase its quick ratio?
accounts receivable.
a. Issue new common
stock and use the
proceeds to acquire
additional fixed assets.
b. Offer price
reductions along with
generous credit terms
that would (1) enable
the firm to sell some of
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its excess inventory and
(2) lead to an increase
in accounts receivable.
c. Issue new common
stock and use the
proceeds to increase
inventories.
d. Speed up the
collection of
receivables and use the
cash generated to
increase inventories.
e. Use some of its cash
to purchase additional
inventories.
Amram Company's
c. Borrow using short-term notes
current ratio is 1.9.
payable and use the proceeds to reduce
Considered alone,
long-term debt.
which of the following
actions would reduce
the company's current
ratio?
a. Use cash to reduce
accounts payable.
b. Borrow using shortterm notes payable and
use the proceeds to
reduce accruals.
c. Borrow using shortterm notes payable and
use the proceeds to
reduce long-term debt.
d. Use cash to reduce
accruals.
e. Use cash to reduce
short-term notes
payable.
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Lincoln Industries'
b. Borrow using short-term notes
current ratio is 0.5.
payable and use the cash to increase
Considered alone,
inventories.
which of the following
actions would increase
the company's current
ratio?
a. Use cash to reduce
long-term bonds
outstanding.
b. Borrow using shortterm notes payable and
use the cash to increase
inventories.
c. Use cash to reduce
accruals.
d. Use cash to reduce
accounts payable.
e. Use cash to reduce
short-term notes
payable.
Lofland's has $20 million
c. The transactions would lower Lofland's
in current assets and
financial strength as measured by its
$10 million in current
current ratio but raise Smaland's current
liabilities, while
ratio.
Smaland's 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 each plans to
borrow $10 million on a
short-term basis and to
then hold the borrowed
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funds in their cash
accounts. Which of the
statements below best
describes the results of
these transactions?
a. The transaction would
improve both firms'
financial strength as
measured by their
current ratios.
b. The transactions
would raise Lofland's
financial strength as
measured by its current
ratio but lower
Smaland's current ratio.
c. The transactions
would lower Lofland's
financial strength as
measured by its current
ratio but raise Smaland's
current ratio.
d. The transaction
would have no effect
on the firm' financial
strength as measured
by their current ratios.
e. The transaction would
lower both firm'
financial strength as
measured by their
current ratios.
Pettijohn Inc.
d. 1.33
The balance sheet and
income statement
shown below are for
Pettijohn Inc. Note that
the firm has no
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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.
Balance Sheet (Millions
of $)
Assets 2016
Cash and securities $
1,554.0
Accounts receivable
9,660.0
Inventories 13,440.0
Total current assets
$24,654.0
Net plant and
equipment 17,346.0
Total assets $42,000.0
Liabilities and Equity
Accounts payable $
7,980.0
Notes payable 5,880.0
Accruals 4,620.0
Total current liabilities
$18,480.0
Long-term bonds
10,920.0
Total debt $29,400.0
Common stock 3,360.0
Retained earnings
9,240.0
Total common equity
$12,600.0
Total liabilities and
equity $42,000.0
Income Statement
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(Millions of $) 2016
Net sales $58,800.0
Operating costs except
depr'n $54,978.0
Depreciation $ 1,029.0
Earnings bef int and
taxes (EBIT) $ 2,793.0
Less interest 1,050.0
Earnings before taxes
(EBT) $ 1,743.0
Taxes $ 610.1
Net income $ 1,133.0
Other data:
Shares outstanding
(millions) 175.00
Common dividends $
509.83
Int rate on notes
payable & L-T bonds
6.25%
Federal plus state
income tax rate 35%
Year-end stock price
$77.69
19. Refer to the data for
Pettijohn Inc.What is the
firm's current ratio?
a. 0.97
b. 1.08
c. 1.20
d. 1.33
e. 1.47
Refer to the data for
b) 0.61
Pettijohn Inc. What is
the firm's quick ratio?
a. 0.49
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b. 0.61
c. 0.73
d. 0.87
e. 1.05
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