Chap7
CHAPTER 7—LONG-TERM DEBT-PAYING ABILITY
MULTIPLE CHOICE
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
2. Ingram Dog Kennels had the following financial statistics for 2010:
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 2010?
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
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
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
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
6. Jordan Manufacturing reports the
MULTIPLE CHOICE
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
2. Ingram Dog Kennels had the following financial statistics for 2010:
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 2010?
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
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
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
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
6. Jordan Manufacturing reports the