Question 1

Trend analysis reveals whether a firm's performance over a given time period has improved or deteriorated relative to ____.

Accepted Answer

The answer of Trend analysis reveals whether a firm's performance...

Question 2

How much cash and marketable securities does Gray Day Computer Co. have if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Gray's credit sales are $98,000, and its average collection period is 40 days? (Assume 365 days per year.)

Accepted Answer

The answer of How much cash and marketable securities does...

Question 3

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

Accepted Answer

Current Ratio = Current Assets / Current Liabilities
1.5 = Current Assets / $10,000
Current Assets = $15,000

Quick Ratio = (Current Assets - Inventories) / Current Liabilities
1 = ($15,000 - Inventories) / $10,000
$10,000 = $15,000 - Inventories
Inventories = $5,000

Therefore, the inventories are $5,000.

Question 4

A(n) ____ calculates a firm's earnings after taxes, in dollars.

Accepted Answer

An income statement calculates a firm's earnings after taxes, in dollars. A balance sheet shows a firm's assets, liabilities, and equity at a specific point in time. Common-size balance sheets and common-size income statements are both formatted to show relative proportions or percentages rather than absolute values.

Question 5

What is the return on stockholders' equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?

Accepted Answer

The return on stockholders' equity (ROE) can be calculated using the formula ROE = Net Profit Margin * Asset Turnover * Equity Multiplier. First, calculate the net income by multiplying the net profit margin by sales: 0.052 * $620,000 = $32,240. Then, find the asset turnover by dividing sales by total assets: $620,000 / $380,000 = 1.63. Finally, calculate ROE: 0.052 * 1.63 * 1.8 = 0.15276 or 15.27%.

Question 6

AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.

Accepted Answer

The company's current times interest earned ratio is 3.0, which means that its earnings before interest and taxes (EBIT) are three times its interest expense. If the company issues additional debt, its interest expense will increase, and its EBIT will remain the same. Therefore, the company's times interest earned ratio will decrease. To maintain its times interest earned ratio at 3.0, the company can issue additional debt up to the point where its interest expense is one-third of its EBIT. The company's current EBIT is $3.0 million / (1 - 0.40) = $5.0 million. Therefore, the company can issue additional debt up to $5.0 million / 0.10 = $50 million. However, the company already has $20 million in debt outstanding, so it can issue an additional $50 million - $20 million = $30 million in debt.

Question 7

If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio (round to two decimals)?

Accepted Answer

The formula for the times interest earned (TIE) ratio is:

TIE = EBIT / Interest Expense

Where EBIT is earnings before interest and taxes.

To find EBIT, we can use the formula:

EBIT = Net Profit Margin x Sales

First, we find EBIT:

EBIT = 0.07 x $700,000 = $49,000

Now, we can calculate the TIE ratio:

TIE = $49,000 / $10,000 = 4.90

Rounding to two decimals, we get TIE = 4.90.

Therefore, the best choice is D.

Question 8

Determine the cost of sales for a firm with the following financial ratios and data: Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

Accepted Answer

The inventory turnover ratio is calculated as Cost of Sales / Average Inventory. Given the inventory turnover is 6 times, we can find the average inventory. The current ratio and quick ratio help determine the inventory level. Current assets = Current liabilities * Current ratio = $3,000,000. Quick assets = Current liabilities * Quick ratio = $2,000,000. Therefore, Inventory = Current assets - Quick assets = $1,000,000. Using the inventory turnover ratio: Cost of Sales = Inventory Turnover * Average Inventory = 6 * $1,000,000 = $6,000,000.

Question 9

firm with a debt ratio of 0.75, will have an equity multiplier of ____.

Accepted Answer

Equity Multiplier = Total Assets / Total Equity
Debt Ratio = Total Debt / Total Assets

As we know, Debt Ratio = 0.75

Therefore, Total Debt/Total Assets = 0.75
Total Equity/Total Assets = 1 - 0.75 = 0.25

So, Equity Multiplier = Total Assets / Total Equity
= (Total Debt + Total Equity) / Total Equity
= 1 + Total Debt/Total Equity
= 1 + 0.75/0.25
= 4

Hence, the answer is D.

Question 10

Trend analysis requires that ____.

Accepted Answer

The answer of Trend analysis requires that ____.
...

Question 11

A(n) ____ calculates a firm's total assets and total liabilities and stockholders' equity, in dollars.

Accepted Answer

A balance sheet calculates a firm's total assets and total liabilities and stockholders' equity, in dollars. An income statement, on the other hand, calculates a firm's revenue and expenses to determine net income or loss over a specific period of time. The common-size versions of both of these financial statements express each line item as a percentage of a certain base item, such as total revenue for the income statement or total assets for the balance sheet.

Question 12

What is the market price per share of Big Whoop Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market-to-book ratio of 1.5?

Accepted Answer

The market price per share can be calculated using the earnings per share (EPS) and the price-to-earnings (P/E) ratio. Given the net income and EPS, we can find the P/E ratio using the market-to-book ratio. The book value per share is the total equity divided by the number of shares. With a net income of $200,000 and an EPS of $2.70, there are 200,000 / 2.70 = 74,074.07 shares. The book value per share is $800,000 / 74,074.07 = $10.80. With a market-to-book ratio of 1.5, the market price per share is 1.5 * $10.80 = $16.20.

Question 13

What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?

Accepted Answer

The return on investment (ROI) can be calculated using the formula ROI = Net Profit Margin * Total Asset Turnover. Given a net profit margin of 6.5% and a total asset turnover of 4, the ROI is 6.5% * 4 = 26.0%.

Question 14

If Power-On Inc. has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of 0.5, and a total debt of $200,000, what would fixed assets be?

Accepted Answer

Fixed asset turnover = sales / fixed assets
1.8 = sales / total assets

Therefore, sales / fixed assets = 1.8 / (total assets / fixed assets) 
Sales / fixed assets = 1.8 / (1/3.2) = 5.76

Total debt = debt ratio * total assets 
$200,000 = 0.5 * total assets 
Total assets = $400,000

Fixed assets = total assets * (1 - total asset turnover / fixed asset turnover)
Fixed assets = $400,000 * (1 - 1.8 / 3.2) = $400,000 * 0.4375 = $175,000

Therefore, the fixed assets would be $225,000 (C).

Question 15

What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

Accepted Answer

The dividend payout ratio is the portion of earnings paid to shareholders in dividends. Given a dividend payout ratio of 0.4 (or 40%), and dividends of $1.20 per share, we can calculate earnings per share (EPS) as $1.20 / 0.4 = $3.00. With a P/E ratio of 14, the market price per share is EPS multiplied by the P/E ratio, which is $3.00 * 14 = $42.

Question 16

If a firm has a total asset turnover of 8 times and a return on investment of 15%, its net profit margin must be ____.

Accepted Answer

The net profit margin can be calculated using the formula: Net Profit Margin = Return on Investment / Total Asset Turnover. Substituting the given values: 15% / 8 = 1.875%.

Question 17

Given the following information, determine Salem Company's fixed assets. Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets

Accepted Answer

Total assets = Sales / Total asset turnover = $10,000,000 / 4 = $2,500,000Fixed assets = Total assets - Current assets = $2,500,000 - ($500,000 * 2.40) = $1,300,000

Question 18

A firm's price-to-earnings ratio is 8 and its market-to-book ratio is 2. If its earnings per share are $4.00, what is the book value per share?

Accepted Answer

The market-to-book ratio is the market value per share divided by book value per share. So,

Market-to-Book Ratio = Market Value per Share / Book Value per Share 
2 = Market Value per Share / Book Value per Share

Therefore,

Market Value per Share = 2 x Book Value per Share

The price-to-earnings ratio is the market value per share divided by earnings per share. So,

Price-to-Earnings Ratio = Market Value per Share / Earnings per Share 
8 = Market Value per Share / $4.00 
Market Value per Share = 8 x $4.00 
Market Value per Share = $32.00

Using the equation we found earlier, we can solve for book value per share:

$32.00 = 2 x Book Value per Share 
Book Value per Share = $16.00

Therefore, the book value per share is $16.00, which is answer choice D.

Question 19

What would be the times interest earned of a company if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

Accepted Answer

First, we need to calculate the net profit before interest and taxes (EBIT) using the net profit margin:

Net profit margin = Net profit / Sales
0.06 = Net profit / $220,000
Net profit = $13,200

Next, we calculate earnings before taxes (EBT) by subtracting interest expenses from EBIT:

EBIT = EBT + Interest expenses
$13,200 = EBT + $20,000
EBT = -$6,800

Since EBT is negative, the company does not need to pay any taxes. Therefore, earnings after taxes (EAT) is also -$6,800.

Finally, we can calculate the times interest earned ratio:

Times interest earned = EBIT / Interest expenses
Times interest earned = $13,200 / $20,000
Times interest earned = 0.66

Therefore, the answer is C) 2.1.

Question 20

What is the cost of sales for a firm with a gross profit margin of 30 percent, a net profit margin of 4 percent, and earnings after taxes of $20,000?

Accepted Answer

The net profit margin is the ratio of net profits (earnings after taxes) to revenues. Given a net profit margin of 4% and earnings after taxes of $20,000, we can calculate the revenues as follows: $20,000 / 0.04 = $500,000. With a gross profit margin of 30%, the cost of sales can be calculated as 100% - 30% = 70% of revenues. Therefore, the cost of sales is 70% of $500,000, which equals $350,000.

Quiz 3: Evaluation of Financial Performance