Question 1

If a firm's inventory level of $10,000 represents 30 days' sales, what is the annual cost of goods sold? What is the inventory turnover ratio?

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Question 2

What are some potential pitfalls of ratio analysis based on accounting data?

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Question 3

After calculating a firm's financial ratios, in what manner might they be analyzed to assess the firm's performance?

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Question 4

Sappy Syrup has a profit margin below the industry average, but its ROA equals the industry average. How is this possible?

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Question 5

Value Corp. recently reported earnings of $2 per share and each of its 50,000 shares is currently selling for $20. The firm's book equity is $600,000. Given this information, answer the following about the firm's market-value ratios:
a. Calculate the firm's price-to-earnings (P/E) and market-to-book ratios.
b. If the P/E ratio is said to compare favorably to that of the industry average, speculate on what could account for this fact.

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Question 6

The board of directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover remain unchanged at 8% and 1.25, respectively, by how much must the total debt ratio increase to achieve 20% ROE?

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Question 7

A firm reports an ROE of 14%, a leverage ratio of 1.5, an asset turnover of 1.667, and a profit margin of 9%. Calculate the firm's ROA and then comment on the ROA in relation to ROE. What is happening?

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Question 8

Travel Corp. has net income of $1.95 million, an effective tax rate of 35%, interest expense of $400,000, an asset turnover of 2, and $14 million in total assets, of which $7 million is debt. Use the DuPont system to calculate its ROE, decomposed into leverage ratio, asset turnover, profit margin, and debt burden.

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Question 9

What may make simple comparisons of financial ratios misleading?

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Question 10

Sappy Syrup's ROA equals the industry average, but its ROE exceeds the industry average. How is this possible?

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Question 11

A company has announced $50,000 in net income after paying taxes of $26,000 and interest of $20,000. It intends to pay $17,000 of net income as dividends. Its assets have averaged $600,000 over the past year, during which its total debt ratio has averaged 40%. Given this information, calculate the ROA and ROE.

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Question 12

In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio.
a. Debt-equity ratio: an electronics store or a tour operator
b. Payout ratio: BigBookstore or HomeRobots
c. Ratio of sales to assets: a restaurant or a car rental company
d. Average collection period: The Power Company or Joe's FastFood

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Question 13

How do measures such as market value added and economic value added help assess the firm's performance?

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Question 14

How does the DuPont formula help identify the determinants of the firm's return on its assets and equity?

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Question 15

Compared to accounting profits, why is EVA a better measure of a company's performance? What might happen to a manager if his or her plant earns a negative EVA?

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Question 16

What are the standard measures of a firm's leverage, liquidity, efficiency, and profitability? What is the significance of each of these measures?

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Quiz 4: Measuring Corporate Performance