Deck 2: Evaluating Financial Performance

Question 1

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

A) asset turnover and control
B) financial leverage
C) coverage
D) profitability
E) None of the above.

Answer 1

asset turnover and control

Question 2

Assume you are a banker who has loaned money to a firm,but that firm is now facing increased competition and reduced cash flows.Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

A) current ratio
B) debt-to-equity ratio
C) times interest earned ratio
D) times burden covered ratio
E) None of the above.

Answer 2

times burden covered ratio

Question 3

Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?

A) The total asset turnover rate increased.
B) The days' sales in receivables increased.
C) The inventory turnover rate increased.
D) The fixed asset turnover decreased.
E) The collection period decreased.

Answer 3

The collection period decreased.

Question 4

Selected financial data for Link, Inc. follows: ($ in thousands)

Assume a 365-day year for your calculations.The payables period in days,based on cost of goods sold,at the end of 2012 is:

A) 5.2
B) 24.3
C) 28.8
D) 35.7
E) None of the above.

Question 5

Selected financial data for Link, Inc. follows: ($ in thousands)

Which of the following statements best describes how the company's short-term liquidity changed from 2011 to 2012?

A) Link's short-run liquidity has improved modestly.
B) Link's short-run liquidity has deteriorated very little, but from a low initial base.
C) Link's short-run liquidity has improved considerably, but from a low initial base.
D) Link's short-run liquidity has deteriorated considerably, but from a high initial base.
E) None of the above.

Question 6

Which of the following ratios are measures of a firm's liquidity?
I.fixed asset turnover ratio
II.current ratio
III.debt-equity ratio
IV.acid test

A) I and III only
B) II and IV only
C) III and IV only
D) I, II, and III only
E) I, III, and IV only

Question 7

Selected financial data for Link, Inc. follows: ($ in thousands)

The current ratio at the end of 2012 is:

A) 10.21
B) 2.31
C) 2.76
D) 10.30
E) None of the above.

Question 8

Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?

A) current ratio
B) debt-to-equity
C) retention
D) asset turnover
E) return on assets

Question 9

On a common-size balance sheet,all accounts are expressed as a percentage of:

A) sales for the period.
B) the base year sales.
C) total equity for the base year.
D) total assets for the current year.
E) total assets for the base year.

Question 10

Selected financial data for Link, Inc. follows: ($ in thousands)

Assume a 365-day year for your calculations.The days' sales in cash at the end of 2012 is:

A) 24.3
B) 28.8
C) 35.7
D) 219.6
E) None of the above.

Question 11

Selected financial data for Link, Inc. follows: ($ in thousands)

The profit margin for 2012 is:

A) -94%
B) -57%
C) 13%
D) 31%
E) None of the above.

Question 12

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

A) ROE measures return on accounting book value, and this problem is not solved by using market value.
B) ROE is a forward-looking, one-period measure, while business decisions span the past and present.
C) ROE measures only return, while financial decisions involve balancing risk against return.
D) None of these describe problems with ROE.
E) All of these describe problems with ROE.

Question 13

Selected financial data for Link, Inc. follows: ($ in thousands)

The gross margin for 2012 is:

A) -94%
B) 13%
C) 26%
D) 31%
E) None of the above.

Question 14

Breakers Bay Inc.has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level.Assume that both the cost per unit and the selling price per unit also remained constant.All else held constant,how will this accomplishment be reflected in the firm's financial ratios?

A) decrease in the fixed asset turnover rate
B) decrease in the financial leverage ratio
C) increase in the inventory turnover rate
D) increase in the day's sales in inventory
E) no change in the total asset turnover rate

Question 15

The most popular yardstick of financial performance among investors and senior managers is the:

A) profit margin.
B) return on equity.
C) return on assets.
D) times burden covered ratio.
E) earnings yield.
F) None of the above.

Question 16

Selected financial data for Link, Inc. follows: ($ in thousands)

Assume a 365-day year for your calculations.The collection period in days,based on sales,at the end of 2012 is:

A) 24.3
B) 219.6
C) 35.7
D) 28.8
E) None of the above.

Question 17

Answer the questions below based on the following information.Taxes are 35% and all dollars are in millions.
a)Calculate each company's ROE,ROA,and ROIC.
b)Why is Runrun's ROE so much higher than Suunto's?
Does this mean Runrun is a better company?
Why or why not?
c)Why is Suunto's ROA higher than Runrun's?
What does this tell you about the two companies?
d)How do the two companies' ROICs compare?
What does this suggest about the two companies?

Question 18

Which of these ratios,or levers of performance,are the determinants of ROE?
I.profit margin
II.financial leverage
III.times interest earned
IV.asset turnover

A) I and IV only
B) II and IV only
C) I, II, and IV only
D) I, II, and III only
E) I, III, and IV only
F) I, II, III, and IV

Question 19

Which one of the following statements is correct?

A) If the debt-to-assets ratio is greater than 0.50, then the debt-to-equity ratio must be less than 1.0.
B) Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C) The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.
D) To realize the best risk and reward profile, financial leverage should be maximized.
E) None of the above is correct.

Question 20

Selected financial data for Link, Inc. follows: ($ in thousands)

Assume a 365-day year for your calculations.The inventory turnover,based on cost of goods sold,at the end of 2012 is:

A) 5.2
B) 24.3
C) 28.8
D) 35.7
E) None of the above.

Question 21

The financial statements for Limited Brands, Inc. follow (fiscal years ending January):

Use Limited Brands,Inc.'s financial statements,above,to answer the following question.Use the company's operating profit as an approximation of its EBIT,and assume a 40% tax rate for your calculations.What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years 2006 and 2007 before failing to cover:
a)Interest and principal repayment requirements;
b)Interest,principal and common dividend payments?

Question 22

The financial statements for Limited Brands, Inc. follow (fiscal years ending January):

Use Limited Brands,Inc.'s financial statements,above,to answer the following question.Use the company's operating profit as an approximation of its EBIT,and assume a 40% tax rate for your calculations.For the fiscal years ending in January of 2006 and 2007,calculate:
a)Limited Brands' total liabilities-to-equity ratio;
b)Times interest earned ratio; and
c)Times burden covered.

Question 23

The financial statements for Limited Brands, Inc. follow (fiscal years ending January):

Use Limited Brands,Inc.'s financial statements,above,to prepare common-size financial statements for Limited Brands,Inc.for 2006 - 2007.