Deck 28: Financial Analysis

Question 1

The following are known as current assets:

A)cash, marketable securities, and receivables.
B)cash, marketable securities, receivables, and inventories.
C)marketable securities, receivables, inventories, and payables.
D)receivables, inventories, and payables.

Answer 1

cash, marketable securities, receivables, and inventories.

Question 2

The following groups are stakeholders of a public company:

A)shareholders and the government.
B)shareholders, the government, and suppliers.
C)shareholders, the government, suppliers, and employees.
D)shareholders, the government, suppliers, employees, bondholders, and management.

Answer 2

shareholders, the government, suppliers, employees, bondholders, and management.

Question 3

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

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

Answer 3

creditors.

Question 4

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

Question 5

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 percent.The annual interest payment is $25,000 and the marginal corporate tax rate is 35 percent.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 6

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 7

In the United States and the UK, laws and accounting procedures are designed, generally, to benefit

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

Question 8

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

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

Question 9

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

A)1
B)2
C)1.2
D)0.4

Question 10

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

A)0.50
B)0.60
C)1
D)1.50

Question 11

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 12

Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10.Calculate the cash coverage ratio.

A)7
B)5
C)4.7
D)14

Question 13

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 14

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 15

Assets are listed on the balance sheet in order of

A)decreasing liquidity.
B)increasing size and relative life.
C)decreasing size.
D)relative life.

Question 16

Earnings before interest and taxes are calculated as

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

Question 17

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

A)2
B)1.5
C)1
D)2.5

Question 18

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 19

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

A)0.5
B)1
C)2
D)4

Question 20

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 21

Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Total assets = 1,500.Calculate the ROA (return on assets).

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

Question 22

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Total assets = 1,600; Inventory = 200.Calculate the asset turnover ratio.

A)2
B)0.94
C)1.33
D)1

Question 23

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Total assets = 1,600; Inventory = 200.Calculate the inventory period.

A)18.3
B)45.6
C)22.8
D)16

Question 24

Market value ratios indicate

A)whether the firm is using its assets productively
B)whether the firm is liquid
C)whether the firm is liquid and whether the firm is profitable
D)how highly the firm is valued by investors

Question 25

Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Receivables = 200.Calculate the accounts receivable period.

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

Question 26

Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Average total assets = 1,500.Calculate the profit margin.

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

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

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

Question 29

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 30

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 31

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
C)1.5
D)1.2

Question 32

Which of the following factors would be influential in a typical financial plan?

A)How a firm can generate superior long-term returns
B)How a firm can generate superior long-term returns and choice of industry
C)Choice of industry and position within the industry
D)How a firm can generate superior long-term return, choice of industry, and position within the industry

Question 33

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 34

Profitability ratios indicate

A)whether the firm is using its assets productively.
B)whether the firm is liquid.
C)whether the firm is profitable.
D)whether the firm is profitable and how highly the firm is valued by investors.

Question 35

Assume the following data: EBIT = 400; Net income = 100; Equity = 1,000.Calculate the ROE (return on equity).

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

Question 36

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

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

Question 37

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 38

Efficiency ratios indicate

A)whether the firm is using its assets productively.
B)whether the firm is liquid.
C)whether the firm is profitable.
D)whether the firm is profitable and how highly the firm is valued by investors.

Question 39

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 are correct.

Question 40

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 41

Net working capital equals total assets minus total liabilities.

Question 42

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

Question 43

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

Question 44

Leverage ratios indicate how heavily the company is in debt.

Question 45

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 46

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

Question 47

What are the different categories of financial ratios?

Question 48

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

Question 49

What are the three basic financial statements?

Question 50

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

Question 51

ROA can be increased by increasing asset turnover.

Question 52

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

Question 53

Why is liquidity relevant?

Question 54

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

Question 55

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

Question 56

Discuss the DuPont system.

Question 57

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