Fact Pattern:

Selected data from Ostrander Corporation’s financial statements for the years indicated are presented in
thousands.

Year 2 Operations December 31

Net credit sales $4,175 Year 2 Year 1
Cost of goods sold 2,880 Cash $ 32 $ 28
Interest expense 50 Trading securities 169 172
Income tax 120 Accounts receivable (net) 210 204
Gain on disposal of a segment (net of tax) 210 Merchandise inventory 440 420
Administrative expense 950 Tangible fixed assets 480 440
Net income 385 Total assets 1,397 1,320
Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

1) The times interest earned ratio for Ostrander Corporation for Year 2 is

A. .57 times.
B. 7.70 times.
C. 3.50 times.
D. 6.90 times.

Fact Pattern:

Selected data from Ostrander Corporation’s financial statements for the years indicated are
presented in thousands.

Year 2 Operations December 31

Net credit sales $4,175 Year 2 Year 1
Cost of goods sold 2,880 Cash $ 32 $ 28
Interest expense 50 Trading securities 169 172
Income tax 120 Accounts receivable (net) 210 204
Gain on disposal of a segment (net of Merchandise inventory 440 420
tax) 210
Tangible fixed assets 480 440
Administrative expense 950 Total assets 1,397 1,320
Net income 385 Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

2) The total debt to equity ratio for Ostrander Corporation in Year 2 is

A. 3.49
B. 0.77
C. 2.07
D. 1.30

3) A debt to equity ratio is

A. About the same as the debt to assets ratio.

B. Higher than or equal to the debt to assets ratio.
C. Lower than or equal to the debt to assets ratio.
D. Not correlated with the debt to assets ratio.

4) Which one of the following factors would likely cause a firm to increase its use of debt financing
as measured by the debt to total capital ratio?

A. Increased economic uncertainty.

B. An increase in the degree of operating leverage.
 C. An increase in the price-earnings ratio.
D. An increase in the corporate income tax rate.

Fact Pattern:
Assume the following information pertains to Ramer Company, Matson Company, and for their
common industry for a recent year.
Industry
Ramer Matson Average

Current ratio 3.50 2.80 3.00

Accounts receivable turnover 5.00 8.10 6.00

Inventory turnover 6.20 8.00 6.10

Times interest earned 9.00 12.30 10.40

Debt to equity ratio 0.70 0.40 0.55

Return on investment 0.15 0.12 0.15

Dividend payout ratio 0.80 0.60 0.55

Earnings per share $3.00 $2.00 --

5) The attitudes of both Ramer and Matson concerning risk are best explained by the

A. Current ratio, accounts receivable turnover, and inventory turnover.

B. Dividend payout ratio and earnings per share.
C. Current ratio and earnings per share.
D. Debt to equity ratio and times interest earned.
6) If the ratio of total liabilities to equity increases, a ratio that must also increase is

A. Times interest earned.

B. Total liabilities to total assets.
C. Return on equity.
D. The current ratio.

7) A measure of long-term debt-paying ability is a company’s

A. Length of the operating cycle.

B. Return on assets.
C. Inventory turnover ratio.
D. Times interest earned ratio.

Fact Pattern: The information below pertains to Devlin Company.

Statement of Financial Position as of May 31 Income Statement for the year ended May 31
(in thousands) (in thousands)

Year 2 Year 1 Year 2 Year 1

Assets Net sales $480 $460
Current assets Costs and expenses
Cash $ 45 $ 38 Costs of goods sold 330 315
Trading securities 30 20 Selling, general, and administrative 52 51
Interest expense 8 9
Accounts receivable (net) 68 48
Income before taxes $ 90 $ 85
Inventory 90 80 Income taxes 36 34
Prepaid expenses 22 30 Net income $ 54 $ 51

Total current assets $255 $216

Investments, at equity 38 30
Property, plant, and equipment
(net) 375 400
Intangible assets (net) 80 45
Total assets $748 $691
Liabilities
Current liabilities
Accounts payable $ 70 $ 42
Accrued expenses 5 4
Notes payable 35 18
Income taxes payable 15 16
Total current liabilities $125 $ 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities $163 $117
Equity
Preferred stock, 6%, $100 par
value, cumulative $150 $150
Common stock, $10 par value 225 195
Additional paid-in capital --
common stock 114 100
Retained earnings 96 129
Total equity $585 $574
Total liabilities and equity $748 $691

8) Devlin Company’s times interest earned ratio for the year ended May 31, Year 2, was

A. 6.75 times.
B. 11.25 times.
C. 12.25 times.
D. 18.75 times.

Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000

Retained earnings 32,000 20,000

Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

9) McKeon Company’s debt ratio for Year 2 is

A. 0.352
B. 0.315
C. 0.264
D. 0.237
Fact Pattern: The data presented below show actual figures for selected accounts of McKeon
Company for the fiscal year ended May 31, Year 1, and selected budget figures for the Year 2 fiscal
year. McKeon’s controller is in the process of reviewing the Year 2 budget and calculating some key
ratios based on the budget. McKeon Company monitors yield or return ratios using the average
financial position of the company. (Round all calculations to three decimal places if necessary.)
5/31/Year 2 5/31/Year 1

Current assets $210,000 $180,000

Noncurrent assets 275,000 255,000
Current liabilities 78,000 85,000
Long-term debt 75,000 30,000
Common stock ($30 par value) 300,000 300,000
Retained earnings 32,000 20,000
Year 2
Operations

Sales* $350,000
Cost of goods sold 160,000
Interest expense 3,000
Income taxes (40% rate) 48,000
Dividends declared and paid in Year 2 60,000
Administrative expense 67,000

*All sales are credit sales.

Current Assets

5/31/Year 2 5/31/Year 1

Cash $ 20,000 $10,000

Accounts receivable 100,000 70,000

Inventory 70,000 80,000

Prepaid expenses 20,000 20,000

10) McKeon Company’s times interest earned ratio in Year 2 is

A. 41
B. 40
C. 25
 D. 24

11) A bondholder would be most concerned with which one the following ratios?

A. Inventory turnover.
B. Times interest earned.
C. Quick ratio.
D. Earnings per share.

12) A firm earned $10,000 before interest and taxes, has a 36% tax rate, and has the following
debt outstanding:

First mortgage bond, 9.0% $ 5,000

Debenture, 10.2% 10,000

Subordinated bond, 12.0% 6,000

Total long-term debt $21,000

The annual coverage of the firm’s debt is

A. 4.57 times.
B. 2.92 times.
C. 11.85 times.
D. 3.57 times.

Fact Pattern:
RST Corporation Comparative Income
 Statements for the Years 5 and 6

Year 6 Year 5

Sales (all are credit) $285,000 $200,000

Cost of goods sold 150,000 120,000

Gross profit $135,000 $ 80,000

Selling and administrative expenses 65,000 36,000

Income before interest and income taxes $ 70,000 $ 44,000

Interest expense 3,000 3,000

Income before income taxes $ 67,000 $ 41,000

Income tax expense 27,000 16,000

Net income $ 40,000 $ 25,000

RST Corporation

Comparative Balance Sheets

End of Years 5 and 6

Assets Year 6 Year 5

Current assets:
Cash $ 5,000 $ 4,000
Short-term marketable investments 3,000 2,000
Accounts receivable (net) 16,000 14,000
Inventory 30,000 20,000

Total current assets $ 54,000 $ 40,000

Noncurrent assets:
Long-term investments 11,000 11,000
Property, plant, and equipment 80,000 70,000
Intangibles 3,000 4,000

Total assets $148,000 $125,000

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 11,000 $ 7,000

Accrued payables 1,000 1,000

Total current liabilities $ 12,000 $ 8,000

Long-term Liabilities:

0% Bonds payable, due in Year 12 30,000 30,000

Total liabilities $ 42,000 $ 38,000

Stockholders’ equity:

Common stock, 2,400 shares, $10 par $ 24,000 $ 24,000

Retained earnings 82,000 63,000

Total stockholders’ equity $106,000 $ 87,000

Total liabilities and stockholders’ equity $148,000 $125,000

The market value of RST’s common stock at the end of Year 6 was $100.00 per share.

13) RST’s times interest earned ratio at the end of Year 6 is

A. 23.33 times.
B. 14.67 times.
C. 14.33 times.
D. 13.33 times.

14) A company issued long-term bonds and used the proceeds to repurchase 40% of the
outstanding shares of its stock. This financial transaction will likely cause the

A. Total assets turnover ratio to increase.

B. Current ratio to decrease.
C. Times interest earned ratio to decrease.
D. Fixed charge coverage ratio to increase.
15) Which one of the following is the best indicator of long-term debt paying ability?

A. Working capital turnover.

B. Asset turnover.
C. Current ratio.
D. Debt to total assets ratio.

16) The following information has been derived from a company’s financial statements:

Current assets $640,000

Total assets 990,000

Long-term liabilities 130,000

Current ratio 3.2

The company’s debt to equity ratio is

A. 0.50
B. 0.37
C. 0.33
D. 0.13

17) The interest expense for a company is equal to its earnings before interest and taxes (EBIT).
The company’s tax rate is 40%. The company’s times interest earned ratio is equal to

A. 2.0
B. 1.0
C. 0.6
D. 1.2
18) The Liabilities and Shareholders’ Equity section of a Statement of Financial Position is shown
below.

January 1 December 31

Accounts payable $ 32,000 $ 84,000

Accrued liabilities 14,000 11,000

7% bonds payable 95,000 77,000

Common stock ($10 par value) 300,000 300,000

Reserve for bond retirement 12,000 28,000

Retained earnings 155,000 206,000

Total liabilities and shareholders’ equity $608,000 $706,000

The debt/equity ratio is

A. 25.1%.
B. 25.6%.
C. 32.2%.
D. 33.9%.

19) A corporation is considering the acquisition of one of its parts suppliers and has been reviewing
the pertinent financial statements. Specific data, shown below, has been selected from these
statements for review and comparison with industry averages.

B R W Industry

Total sales (millions) $4.27 $3.91 $4.86 $4.30

Net profit margin 9.55% 9.85% 10.05% 9.65%

Current ratio 1.32 2.02 1.96 1.95

Return on assets 11.0% 12.6% 11.4% 12.4%

Debt/equity ratio 62.5% 44.6% 49.6% 48.3%

 Financial leverage 1.40 1.02 1.86 1.33
The objective for this acquisition is assuring a steady source of supply from a stable company.
Based on the information above, select the strategy that would fulfill the objective.

A. The corporation should not acquire any of these firms as none of them represents a good risk.
B. Acquire B as both the debt/equity ratio and degree of financial leverage exceed the industry average.
C. Acquire R as both the debt/equity ratio and degree of financial leverage are below the industry average.
D. Acquire W as the company has the highest net profit margin and degree of financial leverage.

20) A company has interest expense of $4 million, sales revenue of $50 million, earnings before
interest and taxes of $20 million, and an income tax rate of 35%. This company has a times-
interest-earned ratio of

A. 12.5
B. 7.5
C. 5.0
D. 0.2

21) A company has earnings before interest and taxes of $100,000, income taxes of $30,000, and
interest expense of $10,000. The company’s interest coverage ratio is

A. 6
B. 7
C. 9
D. 10

22) A company’s income statement shows interest expense of $5 million, sales revenue of $50
million, earnings before interest and taxes of $20 million, and net income of $8 million. This
 company has a times interest earned (or interest coverage) ratio of

A. 10
B. 4
C. 1.6
D. 0.25

23) The following information pertains to Ali Corp. as of and for the year ended December 31:

Liabilities $60,000

Equity $500,000

Shares of common stock issued and outstanding 10,000

Net income $30,000

During the year, Ali’s officers exercised share options for 1,000 shares of stock at an option
price of $8 per share. What was the effect of exercising the share options?

A. Debt-to-equity ratio decreased to 12%.

B. Earnings per share increased by $0.33.
C. Asset turnover increased to 5.4%.
D. No ratios were affected.

24) The ratio of earnings before interest and taxes to total interest expense is a measure of

A. Liquidity.
B. Solvency.
C. Activity.
D. Profitability.
25) Selected financial data of Draco Corporation for the year ended December 31 are as follows.
Common stock dividends were $120,000.

Operating income $900,000

Interest expense (100,000)

Income before income tax $800,000

Income tax expense (320,000)

Net income $480,000

Preferred stock dividends (200,000)

Net income available to

common shareholders $280,000

The times-interest-earned ratio is

A. 2.8 to 1.
B. 4.8 to 1.
C. 8.0 to 1.
D. 9.0 to 1.