財務報表分析（英文版·第11版）測試題TestBank Chap010 Credit Analysis

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Chapter10

CreditAnalysis

MultipleChoiceQuestions

1.

Whichofthefollowingbestdescribesthecurrentratio?

A.

Debtratio

B.

Operatingperformanceratio

C.

Liquidityratio

D.

Efficiencyratio

2.

Whichofthefollowingisnotlikelytobeusedtomeasureacompany'sliquidity?

A.

Workingcapital

B.

Financialleverage

C.

Currentratio

D.

Acid-test(quick)ratio

3.

Whichofthefollowingislikelytobeusedtomeasureacompany'ssolvency?

A.

Netoperatingprofitmargin

B.

Currentratio

C.

Financialleverage

D.

Cashtocurrentliabilitiesratio

4.

Whichofthefollowingitemswouldnottypicallybeincludedinthecomponentsofthecurrentratio?

A.

Inventory

B.

Accountspayable

C.

Capitalizedsoftwaredevelopmentcosts

D.

Deferredcharges

5.

ImagineFASBpassesanewrulethatrequiredthecapitalizationofR&D.Theeffectforadrugcompanywouldbeto:

A.

increaseitscurrentratio.

B.

decreasedebttoequityratio.

C.

decreaseworkingcapital.

D.

improveassetturnover.

6.

Whichofthefollowingincreaseswhenaccountsreceivableissold?

A.

Currentratio

B.

Accountsreceivableturnover

C.

Debt-to-equityratio

D.

Days'salesinreceivables

7.

Whichofthefollowingisnotlikelytobethecauseofacompany'slowaccountsreceivableturnover?

A.

Poorcollectionefforts

B.

Lowpriceofproduct

C.

Customersinfinancialdistress

D.

Delaysincustomerpayments

8.

Whichofthefollowingisnotameasureofacompany'ssolvency?

A.

Totaldebttoequitycapitalratio

B.

Short-termdebttototaldebtratio

C.

Salestoassetsratio

D.

Long-termdebttoequitycapitalratio

9.

UsingLIFOratherthanFIFOinatimeofrisingprices:

I.lowersthecurrentratio.

II.increasesinventoryturnover.

III.increasesprofitmargin.

IV.increasesdebttoequityratio.

A.

I,II,andIV

B.

IandII

C.

IIandIII

D.

Ionly

10.

Whichofthefollowingstatementsconcerningthecurrentratioistrue?

I.Itisalwayslargerthantheacid-test(quick)ratio.

II.Companiescanwindow-dresstheircurrentratios.

III.Inisolationthecurrentratiohaslittlemeaning.

IV.Itisagoodindicatorofsolvencyofacompany.

A.

I,II,III,andIV

B.

I,II,andIII

C.

II,III,andIV

D.

I,II,andIV

11.

Whichofthefollowingwouldbeleastlikelytoaffectthequalityofreceivables?

A.

Creditpolicy

B.

Rightofreturnpolicy

C.

Collectionprocedures

D.

Salescommissions

12.

Whichofthefollowingindustrieswouldyouexpecttohavethelongestoperatingcycle?

A.

Fastfoodindustry

B.

Aerospaceindustry

C.

Discountretailstoreindustry

D.

Utilityindustry

13.

Whichofthefollowingindustrieswouldyouexpecttohavethehighestinventoryturnover?

A.

Restaurant

B.

Cardealer

C.

Jewelrystore

D.

Departmentstore

14.

Whichofthefollowingdoesnotrepresentfutureexpectedcashinflows?

A.

Accountsreceivable

B.

Prepaidexpenses

C.

Inventory

D.

Notesreceivable

SellographCorporationreportssalesof$10millionforYear2,withagrossprofitmarginof40%.20%ofSellograph'ssalesareoncredit.

15.

AccountsreceivabledaysoutstandingattheendofYear2isclosestto:

A.

30.6days.

B.

26.0days.

C.

27.0days.

D.

6.1days.

16.

AccountspayabledaysoutstandingattheendofYear2isclosestto:

A.

57.0days.

B.

66.0days.

C.

72.0days.

D.

43.2days.

17.

DaysininventoryattheendofYear2isclosestto:

A.

60.0days.

B.

69.0days.

C.

66.0days.

D.

54.0days.

18.

Whichofthefollowingwillnotaffectthecalculationofleverageratios?

A.

Existenceofoperatingleases

B.

Existenceofassetswherefairvalueismuchlowerthanbookvalue

C.

Existenceofsignificantdebtcovenants

D.

Existenceofpensionliabilitieswhereprojectedbenefitliabilityismuchgreaterthanplanassetsandaccumulatedbenefitobligation

19.

Ananalystshouldtreatpreferredstockonafirm'sbalancesheetasdebtwhencalculatingleverageratiosifthepreferredstockis:

A.

redeemablebyshareholders.

B.

convertibleintocommonstock.

C.

issuedatavariabledividendrate.

D.

callablebytheissuer.

20.

Ifafirmcapitalizesaleaseinsteadoftreatingtheleaseasanoperatinglease,theeffectonthecurrentratioandthedebt-to-equityratiowillbe:

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

21.

Ifacompany'scurrentratioincreasesfrom1.1to1.3fromoneyeartothenext,itcanbeconcludedthat:

A.

theliquidityhasincreased.

B.

thecurrentassetshaveincreased.

C.

thecurrentliabilitieshavedecreased.

D.

Noneoftheabove

22.

Ifacompany'scurrentratioincreasesfrom1.2to1.4fromoneyeartothenext,anditsquickratiodecreasesfrom0.2to0.15overthesametimeperiod,thisindicates:

A.

theliquiditymusthaveincreased.

B.

theaccountsreceivablehavedecreased.

C.

theinventorymanagementshouldbefurtherexamined.

D.

thecurrentliabilitieshavedecreased.

23.

Ifacompanywishestoincreaseitscurrentratio,itcould:

A.

takeoutashort-termloan.

B.

decreaseinvestmentsinfixedassets.

C.

increaseusefullifeofmachinery.

D.

sellafixedasset.

24.

Theshort-termliquidityofacompany:

A.

isonlyofconcerntoinvestors,notcreditors,ofacompany.

B.

isdeterminablebylookingatdebttoequityratio.

C.

dependslargelyuponprospectivecashflows.

D.

isdeterminablebycalculatingcashtocurrentliabilitiesratio.

25.

Whichofthefollowingisleastlikelytoincreasetheoverallriskofacompany?

A.

Increasedsalesvariability

B.

Increaseddebtlevels

C.

Increasedvariablecostswhiledecreasingfixedcosts

D.

Increasedinterestrates

26.

Twocompanies,AandB,bothhave$1millioninassets,earningsbeforeinterestandtaxes(EBIT)of$160,000,andthesametaxrate.CompanyAisallequityfinanced,andCompanyBis50%debtfinancedand50%equityfinanced.IfCompanyB'spretaxcostofdebtis8%,thenCompanyAwillhaveaROAthatis_____andaROEthatis_____thanCompanyB's.

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

27.

WhichofthefollowingisnotincludedinthecomputationofAltman'sZ-score?

A.

Liquidity

B.

Trendline

C.

Capitalturnoverrate

D.

Profitability

28.

Whichofthefollowingstatementsistrue?

I.Pretaxcostofdebtisgenerallyhigherthanthepretaxcostofequity.

II.Interestistaxdeductible.

III.Preferreddividendsaretaxdeductible.

IV.Totalcostofcapitalisalwaysgreaterthanorequaltocostofequity.

A.

IIandIV

B.

II,III,andIV

C.

I,II,andIV

D.

IIonly

29.

Allotherthingsbeingequal,whichofthefollowingactionswillachieveacompany'swishtoincreaseitsfinancialleverage?

I.Repurchasestock

II.Issuemoredividends

III.Sellaccountsreceivableatfacevalue

IV.Splitstock2for1

A.

I,II,andIII

B.

IandII

C.

IandIV

D.

I,II,andIV

30.

ABCCompanyisplanningamajorexpansionforwhichitneeds$5millioninexternalfunding.Ithasvariousoptionsashowtofinancethisexpansion.Whichofthefollowingiscorrect?

A.

FutureROAwillbehigherifitusesallequityfinancingthanifitusessomedebtfinancing

B.

Futurenetincomewillbehigherifitusescommonstockratherthanpreferredstocktofinanceexpansion

C.

FutureROAisindependentoftheformoffinancing

D.

Futurenetincomeisindependentoftheformoffinancing

31.

Allotherthingsbeingequal,ifacompanyincreaseditsdividendpayments,whatwouldhappentothefollowingratios?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

32.

Whichofthefollowingstatementsiscorrectwithrespecttothetimesinterestearnedratio?

I.Itisindependentofoperatingincome.

II.Itisindependentoftheinterestratepaidondebt.

III.Itisindependentofthetaxrate.

IV.Itisindependentoftheamountofdividendspaid.

A.

I,II,andIII

B.

IandIII

C.

IandIV

D.

IIIandIV

33.

Theearningstofixedchargesratio:

A.

indicateshowefficientlyassetsareused.

B.

typicallyincludesdepreciationinthedenominator.

C.

typicallyexcludesextraordinarygainsandlossesfromthenumerator.

D.

indicatestheproportionofdebtusedtofinanceacompany.

34.

Allotherthingsbeingequal,ifacompanyissuesa1%stockdividend,whatistheeffectonthefollowingratios?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

Belowisinformationforyearended12/31/05forCompanyAandCompanyB.

35.

ReturnonassetsforCompanyAandBfor2005are:

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

36.

FinancialleverageratioforCompanyAandBfor2005are:

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

37.

CompanyAcapitalized$100ininterestcosts,thepensionobligation,duringtheyear.Timesinterestearnedratio,afternecessaryadjustments,forCompanyAis:

A.

3.5.

B.

2.8.

C.

2.0.

D.

1.2.

38.

Whichofthefollowingstatementsiscorrect?

A.

CompanyAhasalowerROAthanCompanyB.

B.

CompanyAhasalowerROEthanCompanyB.

C.

CompanyAhassameROEasCompanyB.

D.

CompanyAhasusedfinancialleveragetoincreaseitsreturntoitsshareholders.

39.

SimmonsCompanyisinahighgrowthindustry.Youareexaminingitslong-termsolvencyandnoticethattheyhavesignificantdeferredtaxliabilities.Uponfurtherexaminationofthetaxfootnoteyoufindthatvirtuallyallofthedeferredtaxliabilitiesareduetoplantandequipment.Forpurposesofanalysisthedeferredtaxliabilityshouldbetreatedas:

A.

aliabilityasyoudonotexpectittoreverseinthenearfuture.

B.

aliabilityasyouexpectittoreverseinthenearfuture.

C.

equityasyoudonotexpectittoreverseinthenearfuture.

D.

equityasyoudoexpectittoreverseinthenearfuture.

40.

Whichofthefollowingisincorrectwhencalculatingtheearningstofixedchargesratioforacompany?

A.

Interestexpenseisconsideredafixedcharge

B.

Long-termrentalpaymentsareoftenconsideredfixedcharges

C.

Seniormanagements'salariesarenormallyconsideredfixedcharges

D.

Preferredstockdividendsarenormallyconsideredfixedcharges

41.

Whenconsideringwhetheranearningscoverageratioisacceptable,considerationisleastlikelytobegivento:

A.

earningsvariability.

B.

earningspersistence.

C.

cashflowvariability.

D.

dividendpolicyforcommonstock.

42.

Acompanyhassignificantuncapitalizedleases.Thiscompanyhasapositivenetincome.Ifthesewerecapitalized,theeffectonthefollowingratioswouldbe:

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

HoraceCorporationhas$200,000ofconvertible5%bonds.Each$500bondisconvertibleinto50sharesofcommonstock.Thebondsweresoldatparandarecurrentlytradingatpar,andtherequiredreturnonnonconvertiblebondsofsimilarriskis11%.Commonstockistradingat$23pershare.

43.

Thetotalleverageratioofacompanywill:

A.

increaseifleasesarecapitalized.

B.

increaseifacompanysellsitsreceivables.

C.

increaseifacompanysellsmoreequity.

D.

increaseifacompanypayssuppliersmorequickly.

44.

Whencalculatingdebttoequityratio:

A.

convertiblebondsshouldbetreatedasdebt.

B.

convertiblebondsshouldbeexcludedfromdebtbutnotincludedinequity.

C.

convertiblebondsshouldbetreatedasequity.

D.

halftheconvertiblebondsshouldbetreatedasdebt,andtheotherhalfasequity.

45.

ReportedoperatingincomeforHoraceCorporationwas$145,000,andreportedinterestexpensewas$45,000.TimesinterestearnedforHoraceCorporation,afternecessaryadjustments,was:

A.

2.22.

B.

3.22.

C.

4.22.

D.

4.48.

46.

Whichofthefollowingtransactionsoreventswouldhavenoimmediateeffectonthetimesinterestearnedratiobutwillcausedebttoequityratiotodecrease?

A.

Issuingnewdebt

B.

Issuingnewequity

C.

Havingastocksplit

D.

Recordinglargecontingentliabilityforlawsuit

47.

Whichofthefollowingistrueofdebtcovenants?

I.Limittheissuanceofadditionaldebtseniortotheobligation.

II.Specifyminimumlevelsofselectedfinancialratios.

III.Specifyminimumlevelsofearningscoverage.

IV.Prohibitexcessivedividendsorstockrepurchases.

A.

IIandIII

B.

IIandIV

C.

I,III,andIV

D.

I,II,III,andIV

48.

Whichofthefollowingisnotaprimarymotivationforacompanyfinancingitsbusinessactivitiesthroughdebt?

A.

Tradingontheequity

B.

Reducingearningsvariability

C.

Taxdeductibilityofinterest

D.

Avoidingearningsdilution

49.

Whilescreeninghundredsofcompaniesforinvestmentopportunities,youcomeacrossApexCorp.ItisratedAAbythemajorratingagenciesandhasalowAltman'sZ-scoreof1.15.Youwanttododetailedanalysis,butyoupreliminarilyconclude:

A.

Apexdebtisovervalued.

B.

Apexstockshouldappreciateovertheshort-term.

C.

Apexhasuntappedgrowthpotential.

D.

Noneoftheabove

True/FalseQuestions

50.

Liquidityisviewedasacompany'sabilitytomeetitsshort-termandlong-termobligations.

True

False

51.

Liquidityisgenerallymeasuredbyacompany'sabilitytopayitsshort-termobligationsusingitsshort-termassets.

True

False

52.

Liquiditydependstoalargeextentonprospectivecashflowsandtoalesserextentonthelevelofcashandcashequivalents.

True

False

53.

Thecurrentratioisasuperiortooltocashflowprojectionsandproformafinancialstatementsinassessingshort-termliquidity.

True

False

54.

Ifacompanyhasacurrentratiogreaterthanonethenthereisnochanceitwillgobankruptinthenextyear.

True

False

55.

Allcurrentassets,bydefinition,willresultincashinflowswithinthenextyearoroperatingcyclewhicheverislonger.

True

False

56.

Whenexaminingacompany'scurrentratio,itisimportanttoalsoassessthequalityofthecurrentassetsandliabilities.

True

False

57.

Thehigherthecashtocurrentliabilitiesratioofacompany,thebetteristhecompany.

True

False

58.

Thehigherthecashtocurrentliabilitiesratioofacompany,themoreliquidisthecompany.

True

False

59.

Anincreaseinthecreditdaysofferedtocustomersbyacompanywillimprovethecompany'sfinancialsituationbecauseofthelikelyincreaseinsales.

True

False

60.

Whenexaminingthecurrentratioandtrendsinthecurrentratio,itisimportanttoevaluatetheturnoverrateofcurrentassetsandcurrentliabilitiesandtrendsintheseturnoverratios.

True

False

61.

Anincreaseinthecurrentratioovertimeisalwaysagoodindicationofincreasedliquidityofafirm.

True

False

62.

TheuseofLIFOwillinflatethecurrentratioundernormaleconomicconditions.

True

False

63.

Inassessingthequalityofreceivablesitisimportanttoconsidertherevenuerecognitionmethodsusedbyacompany.

True

False

64.

Determinationofshort-termliquidityisimportanttobothinvestorsandcreditors.

True

False

65.

Ifaccountspayableturnoverdecreases,thiscouldbeanindicationthatsuppliersarecuttingoffcredittothecompany.

True

False

66.

IfacompanyswitchesfromFIFOtoLIFOduringaperiodofrisingprices,inventoryturnoverwillprobablyincrease.

True

False

67.

Ifacompany'sdaysreceivablesoutstandingincreases,thiscouldbeanindicationthatthereareproblemswiththequalityofthecompany'sproducts.

True

False

68.

Anincreaseinthecurrentratioduetoincreasedinventoryandreceivablescouldbeconsistentwitharecessionintheeconomy.

True

False

69.

Theratioof"near-cash"assetstothetotalofcurrentassetsisonemeasureofthedegreeofcurrentassetliquidity.

True

False

70.

Ifacompanysellsitsreceivables,thisisanindicationthatithasveryhighqualityreceivables.

True

False

71.

Adecreaseinprovisionfordoubtfulaccountsrelativetogrossaccountsreceivablecouldindicateimprovedcollectionofaccountsreceivableoritcouldindicatethatmanagementhasfailedtomakeadequateprovisionsfornon-collectibleaccounts.

True

False

72.

Onewouldexpectrestaurantstohavelowerinventoryturnoverthangeneralmerchandisestores.

True

False

73.

Management'sDiscussionandAnalysisprovidesinformationthatisusefulinhelpingassessacompany'sliquidity.

True

False

74.

Analysisofprofitabilityofacompanyismoreimportantwhenconsideringshort-termliquiditythanwhenconsideringlong-termsolvencyofacompany.

True

False

75.

Allotherthingsbeingequal,thelowertheequityasaproportionoftotalcapital,thegreatertheriskbornebytheotherprovidersofcapital.

True

False

76.

Whencalculatingthetimesinterestearned,adjustmentsshouldnormallybemadeforexistenceofoperatingleases.Aportionofrentalpaymentsshouldbereclassifiedasinterest.

True

False

77.

Thehigheracompany'sinventoryturnover,thebetteristhecompany.

True

False

78.

Whencalculatingearningscoverageratios,itiscommontoremovetheeffectsofextraordinarygainsandlossesandotherone-timegainsandlossesfromthenumerator.

True

False

79.

Forpurposesoflong-termsolvencyanalysis,thecalculationofbalancesheetratiossuchasdebttoequityordebttototalcapitalareoflimitedvalueandareusedmostlyasscreeningmechanismstoindicatewhetherfurtheranalysisiswarranted.

True

False

80.

Minorityshareholders'interestonthebalancesheetrepresentsaliabilitytothecompanyandshouldalwaysbeincludedindebtwhencalculatingthedebttoequityratio.

True

False

81.

"Tradingontheequity"meansthatacompanyispubliclytradedasopposedtobeingcloselyheld.

True

False

82.

Debtfinancingisalwaysbetterthanequityfinancingbecausetheinterestonthedebtistaxdeductible,whereasdividendsarenottaxdeductible.

True

False

83.

Acompany'sreturnonassetswillequalitsreturnonequityifthereisnodebt.

True

False

84.

Whenexaminingthedebttoequityratioofacompany,considerationshouldbegiventopensionliabilities.Specifically,itshouldbedeterminediftheprojectedbenefitobligationsignificantlyexceedstheplanassetsandifitdoescomparethistoanyliabilityrecordedonbalancesheet.

True

False

85.

Guaranteeddebtofunconsolidatedsubsidiariesshouldgenerallybeignoredwhenanalyzingthelong-termsolvencyofaparentcompany,assubsidiariesareseparatelegalentities.

True

False

86.

Financialratiosareoftenusedinmodelsthatpredictfinancialdistress.

True

False

87.

Aleveragedbuyoutiswhenagroupofinvestorsuseequitytobuyahighlyleveragedcompanythatisindistress,andpaydownthedebtusingtheirequity.

True

False

88.

Debtmaycontainsinkingfundprovisions.Thismeansthatbondisinsuredbygovernmentandthatintheeventofdefaultonthedebt,thegovernmentwillsinkintoitsfundsinordertohonorthedebt.

True

False

89.

Thetotaldebttototalcapitalratioismoreusefulthanthetotaldebttoequitycapitalratio.

True

False

90.

Allotherthingsbeingequal,thegreaterthevariabilityofsales,thehighertheearningscoverageratiosare.

True

False

91.

Deferredtaxassetsshouldbedeductedfromtheassetsandequity,iftheyarenotexpectedtoreverse.

True

False

92.

Capitalizationofinterestresultsinanunderstatementofthetimesinterestearned.

True

False

93.

TheSECrequiresdisclosureoftheratioofcombinedfixedchargesandpreferreddividendsintheprospectusofallpreferredstockofferings.

True

False

94.

Dividendsonpreferredstockwithcharacteristicsofdebtsuchasmandatoryredemption,fixedmaturityorsinkingfundmustbetax-affectedandtreatedasdebtforcalculationofcommonstockdividendcoverage.

True

False

95.

Altman'sZ-scoreusesmultiplediscriminantanalysisinabankruptcypredictionmodel.

True

False

EssayQuestions

96.

WorkingCapitalManagement

Considereachofthefollowingsituationsindependentlyofeachother.Foreachofthesituationsprovideoneexampleofwhentheunderlyingcircumstancesmaybesuchthattheobservedtrendisunfavorableandoneexampleofwhentheunderlyingcircumstancesarefavorable.

a.Currentratioincreasesfromoneperiodtothenext

b.Accountsreceivableturnoverincreasesfromoneperiodtothenext

c.Accountspayableturnoverincreasesfromoneperiodtothenext

97.

CashLevelsandCurrentRatio

Indicatetheeffectofthefollowingactionsoncashlevelsandcurrentratio.Assumethecompanyhasacurrentratiogreaterthanone.Indicatewhethertheeffectistoincrease(I),decrease(D)orifithasnoeffect(NE).Considereachactionindependentlyofothers.

98.

Wal-Mart

RefertothefinancialstatementsforWal-Mart,below

a.CalculateforX7theratioslistedbelow.X6numbersareprovidedforcomparativepurposes.

b.Workingcapitalmanagementisanimportantconsiderationformanycompanies.WhichcomponentofWal-Mart'sworkingcapitaldoyouthinkitspendsmosttimemanaging?Thatis,whichcomponentislikelytobethemostimportant?Why?WhathashappenedtothiscomponentfromX6toX7?

Note:Useendinginventory,endingaccountsreceivable,andendingaccountspayableinthecalculationofdays'inventoryoutstanding,days'receivableoutstanding,anddays'payablesoutstandingrespectively.Useaverageinventory,averageaccountsreceivable,andaverageaccountspayableinthecalculationofinventoryturnover,accountsreceivableturnover,andpayablesturnoverrespectively.

99.

DellFinancialRisk

FollowingareDell'scondensedconsolidatedstatementoffinancialpositionandcondensedconsolidatedstatementofoperations,inmillions(unaudited).

a.Assumeallnetrevenuearefromcreditsales.Usingtheaboveinformation,calculatethefollowingratiosforFY05toFY02:

1.Currentratio

2.Quickratio

3.Workingcapital

4.Days'salesinaccountsreceivable

5.Days'salesininventory

6.Days'purchasesinaccountspayable

7.Netdays'workingcapital

8.Long-termdebttoassetsratio

9.Totaldebt-to-equityratio

10.Totalliabilitiestototalassets

Note:Useaverageinventory,averageaccountsreceivable,andaverageaccountspayableinthecalculationofdays'salesininventory,days'salesinaccountsreceivable,anddays'purchasesinaccountspayablerespectively.

b.CommentonthechangestoDell'sliquidityrisk

c.CommentonthechangestoDell'ssolvencyrisk

100.

HurtalCorporation

SelectedratiosforHurtalCorporationforyearendedYear1are:

Belowisasetoftransactionsthatarenotreflectedintheratiosabove.Considereachtransactionindependentlyandindicateitseffectontheaboveratios.Explainyouranswer.

1.DecreaseintaxrateforYear1

2.Issued$1,000incommonstocktorepay$1,000oflong-termdebtatbeginningofYear1.

3.UsefullifeofdepreciableassetswasincreasedatbeginningofYear1.

101.

Wal-Mart

RefertoWal-Mart'sfinancialstatements,below.

a.Calculate:totaldebttoequityratioandtimesinterestearnedratioforfiscalX6andX7.Commentonyourresults.

b.AnalysisofWal-Mart'sfootnotesrevealstheexistenceofsignificantoperatingleases.Explainwhetherthiswouldchangeyouranswerinparta)andhowyouwouldmakethechanges.

102.

Consolidationvs.Equity

CompanyABChasalarge,whollyownedconsolidatedfinancesubsidiary.Foreachofthefollowingratios,statetheeffect(higher,lower,ornoeffect)thatconsolidationhasontheratioofCompanyABCcomparedtotheratioitwouldhaveifitaccountedforitsfinancesubsidiaryusingtheequitymethod.Brieflyexplainwhyeacheffectoccurs.

a.Debttoequityratio

b.Returnonassets

c.Timesinterestearned

103.

EffectofInterestRateChangesonLeverage

AssumethatCompanyABCissues$20millioninlong-termdebtatparwheninterestrateswerelow,andCompanyDEFissued$20millioninlong-termdebtatparwheninterestrateswerehigh.Assumingthatinterestratesremainhigh:

a.Whichcompanywillhavethehigherdebttocapitalratio(assumenootherdebtandidenticalequity)?

b.ABC'sdebtmaturesin18monthsandDEF'sdebtmaturesin9years.Whatwouldbetheeffectonyouranalysis?

Chapter10CreditAnalysisAnswerKey

MultipleChoiceQuestions

1.

Whichofthefollowingbestdescribesthecurrentratio?

A.

Debtratio

B.

Operatingperformanceratio

C.

Liquidityratio

D.

Efficiencyratio

2.

Whichofthefollowingisnotlikelytobeusedtomeasureacompany'sliquidity?

A.

Workingcapital

B.

Financialleverage

C.

Currentratio

D.

Acid-test(quick)ratio

3.

Whichofthefollowingislikelytobeusedtomeasureacompany'ssolvency?

A.

Netoperatingprofitmargin

B.

Currentratio

C.

Financialleverage

D.

Cashtocurrentliabilitiesratio

4.

Whichofthefollowingitemswouldnottypicallybeincludedinthecomponentsofthecurrentratio?

A.

Inventory

B.

Accountspayable

C.

Capitalizedsoftwaredevelopmentcosts

D.

Deferredcharges

5.

ImagineFASBpassesanewrulethatrequiredthecapitalizationofR&D.Theeffectforadrugcompanywouldbeto:

A.

increaseitscurrentratio.

B.

decreasedebttoequityratio.

C.

decreaseworkingcapital.

D.

improveassetturnover.

6.

Whichofthefollowingincreaseswhenaccountsreceivableissold?

A.

Currentratio

B.

Accountsreceivableturnover

C.

Debt-to-equityratio

D.

Days'sal