Question 1

Ratio analysis works best when evaluating the financial statements of two firms
A)in the same industry but located in different countries.
B)of differing sizes in the same industry.
C)with one being in a single line of business while the other is a conglomerate.
D)of the same size in differing industries.
E)when both are conglomerates with varying lines of business.

Accepted Answer

Ratio analysis is most effective when comparing firms that are in the same industry, as this provides a baseline for industry-specific performance. However, when comparing firms of different sizes within the same industry, adjustments may need to be made to ensure accurate comparisons.

Question 2

Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?
A)Total asset turnover
B)Return on equity
C)Return on assets
D)Equity multiplier
E)DuPont identity

Accepted Answer

Total asset turnover measures how efficiently a company uses its assets to generate sales, indicating the amount of sales generated for each dollar of assets (debt and equity) invested in the firm.

Question 3

Which ratio computes the amount of net income generated by each $1 of sales?
A)EV multiple
B)Return on assets
C)Return on equity
D)Profit margin
E)Price-earnings ratio

Accepted Answer

Profit margin is the ratio that computes the amount of net income generated by each $1 of sales. It is calculated by dividing net income by total revenue.

Question 4

The amount shareholders are willing to pay for each $1 per share of annual earnings a firm generates is indicated by the
A)equity multiplier.
B)return on equity.
C)price-earnings ratio.
D)DuPont identity.
E)return on assets.

Accepted Answer

The price-earnings ratio (P/E ratio) is a measure of how much investors are willing to pay for each dollar of earnings a company generates. It is calculated by dividing the stock price by the earnings per share (EPS) for a given time period. A high P/E ratio typically indicates that investors expect strong future earnings growth from the company, while a low P/E ratio suggests that the market has lower expectations for future earnings growth. Therefore, the P/E ratio is an important metric used by investors in evaluating a company's stock.

Question 5

The return on equity can be calculated as
A)Profit margin × 1 / Capital intensity ratio × Equity multiplier
B)Return on assets × b
C)Profit margin × Total asset turnover × Debt-equity ratio
D)Profit margin × 1 / Equity multiplier × (1 + Debt-equity ratio)
E)Return on assets × Debt-equity ratio

Accepted Answer

The return on equity (ROE) is calculated as the net income divided by the shareholders' equity. It can also be expressed as the product of the profit margin, asset turnover, and the financial leverage. The profit margin is the net income divided by the total revenue, the asset turnover is the total revenue divided by the total assets, and the financial leverage is the equity multiplier (total assets divided by equity) multiplied by the capital intensity ratio (total assets divided by sales). Therefore, the correct formula for ROE is Profit margin × 1 / Capital intensity ratio × Equity multiplier.

Question 6

Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?
A)Equity multiplier
B)Capital intensity ratio
C)DuPont identity
D)Profit margin
E)Return on assets

Accepted Answer

The DuPont identity measures a firm's operating efficiency through its profit margin, asset use efficiency through its return on assets, and financial leverage through its equity multiplier. Therefore, it includes all three components mentioned in the question.

Question 7

Which one of these is calculated as: 365 / (Cost of goods sold / Inventory)?
A)Total asset turnover
B)Inventory turnover
C)Days sales in receivables
D)Days sales in inventory
E)Capital intensity ratio

Accepted Answer

The formula given in the question is for calculating "Days sales in inventory". It measures the average number of days it takes a company to sell its inventory.

Question 8

If a firm decreases its operating costs,all else constant,then
A)the profit margin increases while the cash coverage ratio decreases.
B)the return on assets increases while the return on equity decreases.
C)both the return on assets and the return on equity increase.
D)both the profit margin and the equity multiplier increase.
E)the total asset turnover rate decreases while the profit margin increases.

Accepted Answer

If a firm decreases its operating costs, all else constant, it means it is increasing its efficiency, which results in higher return on assets and return on equity. This is because the firm is achieving a higher level of profitability with the same level of assets and equity. Therefore, option C is correct. Option A is incorrect because a decrease in operating costs would increase the cash coverage ratio, not decrease it. Option B is incorrect because both the return on assets and the return on equity would increase, not one increase and the other decrease. Option D is incorrect because a decrease in operating costs would not necessarily result in an increase in the equity multiplier. Option E is incorrect because a decrease in operating costs would likely result in an increase in the total asset turnover rate, not a decrease.

Question 9

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment that will be depreciated over 8 years.Assuming all else equal,
A)Joe's will have a lower profit margin.
B)Joe's will have a lower return on equity.
C)Moe's will have a higher net income.
D)Moe's will have a lower profit margin.
E)Moe's will have a higher return on assets.

Accepted Answer

Joe's will have lower expenses due to having fully depreciated equipment, therefore they will have a higher profit margin than Moe's. Moe's, on the other hand, will have higher expenses due to the depreciation of their new equipment, resulting in a lower profit margin.

Question 10

Ratios that measure how efficiently a firm uses its assets to generate sales are known as ________ ratios.
A)profitability
B)long-term solvency
C)short-term solvency
D)utilization
E)market value

Accepted Answer

The statement describes asset utilization ratios, which analyze how efficiently a firm uses its assets to produce revenues. Therefore, the best choice is D – utilization ratios. Profitability ratios determine a firm's ability to produce income, long-term solvency ratios scrutinize a company's ability to repay long-term debt, short-term solvency ratios assess a business's liquidity, and market value ratios evaluate a company's worth in the market.

Question 11

Firms with high enterprise value multiples are most apt to have
A)high growth opportunities.
B)low market-to-book ratios.
C)low profit margins.
D)low inventory turnover rates.
E)a low price-earnings ratio.

Accepted Answer

Firms with high enterprise value multiples are typically seen as having high growth opportunities, as investors are willing to pay more for a share of future profits. This is because a higher enterprise value multiple implies that investors believe the firm will continue to generate strong revenue and earnings growth in the future.

Question 12

The return on equity can be calculated as
A)Profit margin × 1 / Total asset turnover × Equity multiplier
B)Return on assets × Profit margin
C)Profit margin × Capital intensity ratio × Debt-equity ratio
D)Profit margin × 1 / Equity multiplier × (1 + Debt-equity ratio)
E)Return on assets × (1 + Debt-equity ratio)

Accepted Answer

The answer of The return on equity can be calculated...

Question 13

Last year,Bennett's had a PE ratio of 5.4.This year,the PE ratio is 4.9.Based on this information,it can be stated with absolute certainty that
A)the price per share increased.
B)the earnings per share decreased.
C)either the price per share,the earnings per share,or both,changed.
D)investors are receiving a lower rate of return this year.
E)investors are paying a lower price for each share of stock purchased.

Accepted Answer

The PE ratio is the price per share divided by earnings per share. A decrease in the PE ratio could mean that either the price per share decreased, the earnings per share increased, or a combination of both. Therefore, it can be stated with certainty that either the price per share, earnings per share, or both, changed. There is not enough information to determine the specific changes in price or earnings or the impact on investor returns or share price.

Question 14

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
I.The firms may have unrelated lines of business.
II.The operations of the two firms may vary geographically.
III.The firms may use differing accounting methods.
IV.The two firms may be regulated differently.
A)I and II only
B)II and III only
C)I,III,and IV only
D)I,II,and III only
E)I,II,III,and IV

Accepted Answer

All the listed factors can create difficulties when comparing financial statements between firms, as they can lead to significant differences in financial reporting and performance metrics.

Question 15

The enterprise value estimates the
A)current market value of a firm's entire outstanding shares of common and preferred stock.
B)cash required to purchase all of a firm's outstanding stock and pay off the interest-bearing debt.
C)current market value of all a firm's outstanding debt.
D)relationship between the current market value and the book value of a firm.
E)total current market value of a firm's outstanding shares of common stock.

Accepted Answer

The enterprise value estimates the cash required to purchase all of a firm's outstanding stock and pay off the interest-bearing debt. It is calculated by adding market capitalization, outstanding debt, and preferred stock, and then subtracting cash and cash equivalents. This provides a more accurate measure of a company's worth as it takes into account both equity and debt.

Question 16

Which ratio measures the number of times a firm lends money to customers,collects that money,and relends it within a year?
A)Total asset turnover
B)Days' sales in receivables
C)Total debt ratio
D)Receivables turnover
E)Quick ratio

Accepted Answer

The ratio that measures the number of times a firm lends money to customers, collects that money, and relends it within a year is the Receivables Turnover ratio. It calculates how efficiently a company manages its sales on credit by dividing net credit sales by the average accounts receivable balance during a particular period.

Question 17

Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?
A)Inventory
B)Cash
C)Long-term debt
D)Accounts payable
E)Fixed assets

Accepted Answer

Long-term debt is a fixed financial obligation that is not directly affected by changes in sales. Inventory, accounts payable, and fixed assets are all operational accounts that tend to fluctuate with sales. Cash can also vary with sales as increased sales typically result in increased cash inflows.

Question 18

Which portion of the DuPont identity measures the financial leverage employed by a firm?
A)Both the profit margin and the equity multiplier
B)Equity multiplier
C)Total asset turnover
D)Both the capital intensity ratio and the total asset turnover
E)Both the capital intensity ratio and the debt-equity ratio

Accepted Answer

The equity multiplier measures the company's financial leverage. It is calculated as total assets divided by total equity. Therefore, it reflects the degree to which a firm relies on debt financing.

Question 19

Enterprise value is computed as
A)Price per share × Shares outstanding - Cash
B)Market capitalization + Market value of interest-bearing debt - Cash
C)Market capitalization - Market value of interest-bearing debt
D)Price per share × Number of shares outstanding
E)Market capitalization + Market value of all debt - Cash

Accepted Answer

Enterprise value is the total value of a company's operations, including both debt and equity. It is calculated as the market capitalization (share price times outstanding shares) plus the market value of interest-bearing debt, minus any cash and cash equivalents. Option B reflects this definition and calculation. Option A only subtracts cash, leaving out interest-bearing debt. Option C subtracts the market value of interest-bearing debt from the market capitalization, which only gives us equity value. Option D is only market capitalization. Option E includes all types of debt (including non-interest bearing debt), which is incorrect as we should only account for interest-bearing debt.

Question 20

Yesterday,ABC stock sold for $28 a share.Today,the overall market fell,and ABC stock is now selling for $22 a share.Which of these ratios for ABC will be affected by this market reaction? Assume all else is held constant.
A)Enterprise value multiple and price-earnings ratio
B)Earnings per share and price-earnings ratio
C)Return on equity and return on assets
D)Return on book equity and market-to-book ratio
E)Price-earnings ratio and return on book equity

Accepted Answer

The answer of Yesterday,ABC stock sold for $28 a share.Today,the...

Quiz 3: Financial Statements Analysis and Financial Models

Ratio analysis works best when evaluating the financial statements of two firms

Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?

Which ratio computes the amount of net income generated by each $1 of sales?

The amount shareholders are willing to pay for each $1 per share of annual earnings a firm generates is indicated by the

The return on equity can be calculated as

Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?

Which one of these is calculated as: 365 / (Cost of goods sold / Inventory) ?

If a firm decreases its operating costs,all else constant,then

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment that will be depreciated over 8 years.Assuming all else equal,

Ratios that measure how efficiently a firm uses its assets to generate sales are known as ________ ratios.

Firms with high enterprise value multiples are most apt to have

The return on equity can be calculated as

Last year,Bennett's had a PE ratio of 5.4.This year,the PE ratio is 4.9.Based on this information,it can be stated with absolute certainty that

The enterprise value estimates the

Which ratio measures the number of times a firm lends money to customers,collects that money,and relends it within a year?

Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?

Which portion of the DuPont identity measures the financial leverage employed by a firm?

Enterprise value is computed as

Yesterday,ABC stock sold for $28 a share.Today,the overall market fell,and ABC stock is now selling for $22 a share.Which of these ratios for ABC will be affected by this market reaction? Assume all else is held constant.