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Unformatted text preview: ACC 394 Spring 2005 Final Exam CHAPTER 7LONG-TERM DEBT-PAYING ABILITY 1. Jones Company has long-term debt of $1,000,000, while Smith Company, Jones' competitor, has long-term debt of $200,000. Which of the following statements best represents an analysis of the long-term debt position of these two firms? a. Smith Company's times interest earned should be lower than Jones. b. Jones obviously has too much debt when compared to its competitor. c. Jones should sell more stock and use less debt. d. Smith has five times better long-term borrowing ability than Jones. e. Not enough information to determine if any of the answers are correct. ANS: E PTS: 1 2. Ingram Dog Kennels had the following financial statistics for 2006: Long-term debt $400,000 (average rate of interest is 8%) Interest expense 35,000 Net income 48,000 Income tax 46,000 Operating income 107,000 What is the times interest earned for 2006? a. 11.4 times b. 3.3 times c. 3.1 times d. 3.7 times e. none of the answers are correct ANS: D PTS: 1 3. A times interest earned ratio of 0.90 to 1 means: a. that the firm will default on its interest payment b. that net income is less than the interest expense c. that the cash flow is less than the net income d. that the cash flow exceeds the net income e. none of the answers are correct ANS: B PTS: 1 4. Which of the following will not cause times interest earned to drop? Assume no other changes than those listed. a. An increase in bonds payable with no change in operating income. b. An increase in interest rates. c. A rise in preferred stock dividends. d. A rise in cost of goods sold with no change in interest expense. e. A drop in sales with no change in interest expense. ANS: C PTS: 1 1 5. A times interest earned ratio indicates that: a. preferred stock has no maturity date b. the debt will never become due c. the firm will be able to repay the principal when due d. the principal can be refinanced e. none of the answers are correct ANS: E PTS: 1 6. Jordan Manufacturing reports the following capital structure: Current liabilities $100,000 Long-term debt 400,000 Deferred income taxes 10,000 Preferred stock 80,000 Common stock 100,000 Premium on common stock 180,000 Retained earnings 170,000 What is the debt ratio? a. 0.48 b. 0.49 c. 0.93 d. 0.96 e. none of the answers are correct ANS: B PTS: 1 7. The debt ratio indicates: a. the ability of the firm to pay its current obligations b. the efficiency of the use of total assets c. the magnification of earnings caused by leverage d. a comparison of liabilities with total assets e. none of the answers are correct ANS: D PTS: 1 8. Joseph and John, Inc., had the following balance sheet results for 2006: (in millions) Current liabilities $12.6 Bonds payable 18.6 Lease obligations 2.7 Minority interest 1.4 Common stock 8.6 Retained earnings 22.9 $66.8 2 Compute the debt-equity ratio....
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