Deck 28: Financial Analysis

Question 1

In the U.S.and the UK,laws and accounting procedures are designed,generally,to benefit:

A)shareholders.
B)managers.
C)creditors.
D)employees.

Answer 1

shareholders.

Question 2

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the quick ratio.

A)1.0
B)2.0
C)1.2
D)0.4

Answer 2

1.2

Question 3

Which of the following is an example of a liquidity ratio?

A)Times interest earned (TIE)
B)P/E ratio
C)Return on equity
D)Quick ratio

Answer 3

Quick ratio

Question 4

The difference between total assets of a firm and its total liabilities is called:

A)net working capital.
B)net current assets.
C)net worth.
D)net liabilities.

Question 5

Earnings before interest and taxes is calculated as:

A)total revenues - costs.
B)total revenues - costs - depreciation.
C)total revenues - costs + depreciation - taxes.
D)total revenues - costs - depreciation - taxes.

Question 6

Inventory consists of:

A)finished goods.
B)raw material and finished goods.
C)raw material,work in process,and prepaid rent.
D)raw material,work in process,and finished goods.

Question 7

The following are known as current assets:
i.cash; II)marketable securities; III)receivables; IV)inventories; V)payables

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

Question 8

Which of the following is an example of a leverage ratio?

A)Debt-equity ratio
B)Quick ratio
C)Payout ratio
D)Return on equity

Question 9

German laws and accounting procedures are designed,generally,to protect interests of:

A)shareholders.
B)managers.
C)creditors.
D)employees.

Question 10

Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80; Market value of equity = 100.Calculate the debt ratio.

A)0.50
B)0.55
C)0.56
D)0.60

Question 11

Net working capital (NWC)is calculated as:

A)total assets - total liabilities.
B)current assets + current liabilities.
C)current assets - current liabilities.
D)current liabilities - current assets.

Question 12

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the current ratio.

A)2.0
B)1.5
C)1.0
D)2.5

Question 13

Assets are listed on the balance sheet in order of:
I.decreasing liquidity;
II.decreasing size;
III.increasing size;
IV.relative life

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

Question 14

If the debt ratio is 0.5,what is the debt-equity ratio? (Assume no leases.)

A)0.5
B)1.0
C)2.0
D)4.0

Question 15

Equity investors have contributed $250,000 to your start-up business,while creditors provided a loan of $300,000.You have calculated your firm's WACC at 10%.The annual interest payment is $25,000 and the marginal corporate tax rate is 35%.How much profit will your equityholders need to earn in order to break even in economic terms (i.e.,EVA of zero)?

A)$25,000
B)$38,750
C)$30,000
D)$13,075

Question 16

Which of the following costs are not accounted for on the income statement?

A)Direct labor
B)Indirect labor
C)Opportunity cost
D)Legal costs

Question 17

The difference between current assets of a firm and its current liabilities is called:

A)net tangible fixed assets.
B)net working capital.
C)gross working capital.
D)net worth.

Question 18

The following groups are stakeholders of a public company:
i.shareholders; II)the government; III)suppliers; IV)employees; V)bondholders; VI)management

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

Question 19

Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10.Calculate the times interest earned (TIE)ratio.(Account for depreciation.)

A)7.0
B)5.0
C)4.7
D)14.0

Question 20

Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80; Market value of equity = 100.Calculate the debt-equity ratio.

A)0.50
B)0.60
C)1.00
D)1.50

Question 21

Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Average total assets = 1500.Calculate the profit margin.

A)10%
B)18.3%
C)7.5%
D)26.7%

Question 22

Assume the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $60.Calculate the dividend yield.

A)10%
B)5%
C)60%
D)8.3%

Question 23

Assume the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600; Average inventory = 200.Calculate the days in inventory.

A)18.3
B)45.6
C)22.8
D)16.0

Question 24

Assume the following data: Earnings per share = $6; Dividends per share = $3; Price per share = $60.Calculate the P/E ratio.

A)16.7
B)10
C)25
D)20

Question 25

Assume a book value per share of $5 and a price per share of $12.What is the market value added of a firm with 2,000,000 outstanding shares?

A)$1,000,000
B)$10,000,000
C)$14,000,000
D)$24,000,000

Question 26

Assume the following data: EBIT = 400; Net income = 100; Average equity = 1000.Calculate the ROE (return on equity).

A)10%
B)12%
C)7.5%
D)30%

Question 27

Which measure would be most useful in comparing the operating profitability of two firms in different industries?

A)Net profit margin
B)Return on equity
C)Sales to total assets
D)Return on assets

Question 28

Assume the following data: Sales = 3200; Cost of goods sold = 1600; Average receivables = 200.Calculate the average collection period.

A)24.3
B)22.8
C)137
D)45.6

Question 29

Operating profit margin is calculated as:

A)(after-tax interest plus net income)/sales.
B)net income/sales.
C)net income/cost of goods sold.
D)none of these answers.

Question 30

Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200.Calculate the cash ratio.(Assume that the firm has no marketable securities.)

A)0.4
B)2.0
C)1.5
D)1.2

Question 31

Which of the following factors would be influential in a typical financial plan?
I.how a firm can generate superior long-term returns;
II.choice of industry;
III.position within the industry

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

Question 32

When a firm improves (lowers)its days of inventory it generally:

A)requires additional cash investment in inventory.
B)releases cash locked up in inventory.
C)does not alter its cash position.
D)cannot reduce its inventories.

Question 33

Assume the following data: Earnings per share = $5; Dividends per share = $3; Price per share = $50.Calculate the payout ratio.

A)10%
B)5%
C)60%
D)8.3%

Question 34

Profitability ratios indicate:
I.whether the firm is using its assets productively;
II.whether the firm is liquid;
III.whether the firm is profitable;
IV.how highly the firm is valued by investors

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

Question 35

Market value ratios indicate:
I.whether the firm is using its assets productively;
II.whether the firm is liquid;
III.whether the firm is profitable;
IV.how highly the firm is valued by investors

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

Question 36

Assume a book value per share of $10 and a price per share of $24,what is the market capitalization of a firm with 2,000,000 outstanding shares?

A)$2,000,000
B)$20,000,000
C)$28,000,000
D)$48,000,000

Question 37

When a firm improves (lowers)its average collection period it generally:

A)requires additional cash investment in inventory.
B)releases cash locked up in accounts receivable.
C)does not alter its cash position.
D)cannot reduce its receivables.

Question 38

Assume the following data: EBIT = 400; Tax = 100; Sales = 3000; Average total assets = 1500.Calculate the ROA (return on assets).

A)10%
B)20%
C)7.5%
D)26.7%

Question 39

Efficiency ratios indicate:
I.whether the firm is using its assets productively;
II.whether the firm is liquid;
III.whether the firm is profitable;
IV.how highly the firm is valued by investors

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

Question 40

Assume the following data: Sales = 3200; Cost of goods sold = 1600; Average total assets = 1600; Average inventory = 200.Calculate the asset turnover ratio.

A)2.0
B)0.94
C)1.33
D)1.0

Question 41

Briefly describe the different categories of financial ratios.

Question 42

Discuss the DuPont system.

Question 43

The P/E ratio measures the price that investors are prepared to pay for each dollar of earnings.

Question 44

Why is liquidity relevant?

Question 45

Briefly describe the relationship between accounting standards and different countries' legal traditions.

Question 46

An advantage of EVA,as compared to accounting measures of net income,is that EVA accounts for the cost of capital.

Question 47

What are the three basic financial statements?

Question 48

Financial ratios can help you to ask the right questions but they rarely answer these questions on their own.

Question 49

According to the DuPont system: ROE = (assets/equity)× (sales/assets)× [(after-tax interest + net income)/sales] × [(net income)/( after-tax interest + net income)].

Question 50

Net working capital equals total assets minus total liabilities.

Question 51

Market value ratios indicate how highly the firm is valued by managers.

Question 52

What are some of the pitfalls involved in using financial ratios?
B.Finally,an analyst should understand how a given ratio has changed over time and the reasons for that change.A ratio for a given period may be acceptable,but ignoring changes over time can lead an analyst to overlook important developments.

Question 53

ROA can be increased by increasing asset turnover.

Question 54

The calculation of market value added for a firm requires the use of the book value per share.

Question 55

On the balance sheet,assets are listed in increasing order of liquidity.

Question 56

What are the common ratios used to measure the liquidity of a firm?

Question 57

Leverage ratios indicate how heavily the company is in debt.