MAN 303B – Quiz 2
Fall 2005
November 15, 2005
Name:
Student No:
Honor Pledge: I have neither given nor received an unauthorized aid on this assignment.
Signature:...............................
PART 1: Multiple Choice Questions. (9 pts each)
(1) Ebersoll Manufacturing Company has $6 million in Sales. Its ROE is 12 percent and its
total assets turnover is 3.2. The company is 50% equity financed. What is the company’s
net income?
a.
b.
c.
d.
e.
$6,000,000.00
$187,500.00
$112,500.00
$150,000.00
None of the numbers above are correct.
(2) Bedford Hotels and Breezewood Hotels both have $100 million in total assets and a 10
percent return on assets (ROA). Each company has a 40 percent tax rate. Bedford,
however, has a higher debt ratio and higher interest expense. Which of the following
statements is most correct?
a. The two companies have the same basic earning power (BEP).
b. Bedford has a higher return on equity (ROE).
c. Bedford has a lower level of operating income (EBIT).
d. Statements a and b are correct.
e. All of the statements above are correct.
(3) Company J and Company K each recently reported the same earnings per share (EPS).
Company J’s stock, however, trades at a higher price. Which of the following statements is
most correct?
a. Company J must have a higher P/E ratio.
b. Company J must have a higher market to book ratio.
c. Company J must be riskier.
d. Company J must have fewer growth opportunities.
e. All of the statements above are correct.
(4) Some key financial data and ratios are reported in the table below for Hemmingway
Hotels and for its competitor, Fitzgerald Hotels:
Ratio
Hemmingway Hotels
Fitzgerald Hotels
Profit margin
4%
3%
ROA
9%
8%
Total assets
$2.0 billion
$1.5 billion
BEP
20%
20%
ROE
18%
24%
On the basis of the information above, which of the following state-ments is most
correct?
a. Hemmingway has a higher total assets turnover than Fitzgerald.
b. Hemmingway has a higher debt ratio than Fitzgerald.
c. Hemmingway has higher net income than Fitzgerald.
d. Statements a and b are correct.
e. All of the statements above are correct.
(5) Russell Securities has $100 million in total assets and its corporate tax rate is 40
percent. The company recently reported that its basic earning power (BEP) ratio was 15
percent and its return on assets (ROA) was 9 percent. What was the company’s interest
expense?
a. $
0
b.
$ 2,000,000 c.
$ 6,000,000
d. $15,000,000
e.
$18,000,000
(6) You are given the following information: Stockholders’ equity = $1,250;
price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5.
the market price of a share of the company’s stock.
a. $ 33.33
b. $ 75.00
c. $ 10.00
d. $166.67
e. $133.32
Calculate
(7) A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has
debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total
debt of 5 percent, what is the firm’s ROA?
a. 8.4%
b. 10.9%
c. 12.0%
d. 13.3%
e. 15.1%
(8) The Wilson Corporation has the following relationships:
Sales/Total assets
2.0
Return on assets (ROA)
4.0%
Return on equity (ROE)
6.0%
What is Wilson’s profit margin and debt ratio?
a. 2%; 0.33
b. 4%; 0.33
c. 4%; 0.67
d. 2%; 0.67
e. 4%; 0.50
(9) 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%
(10) Aaron Aviation recently reported the following information:

Net income = $500,000.

ROA = 10%.

Interest expense = $200,000.
Assume the company did not pay any taxes.
What is the company’s basic earning
power (BEP)?
a. 14.00%
b. 16.67%
c. 17.33%
d. 20.67%
e. 22.50%
PART 2: Short answer question. (10 pts)
(11) If a firm has an equity multiplier of 4.0, what will be the debt ratio? (10 points)