Question 1

(Net income ∕ Net sales)

Accepted Answer

Net profit margin is the ratio of net income to net sales and measures the percentage of revenue that translates into profit.

Question 2

Which one of the following types of financial ratios does not get all of its information from a firm's income statements and balance sheets?

Accepted Answer

Market value ratios do not solely rely on information from a firm's income statements and balance sheets. Market value ratios incorporate market price data, which is not found on financial statements, to evaluate a company's performance and value.

Question 3

(Earnings before interest & taxes ∕ Net sales)

Accepted Answer

Earnings before interest and taxes (EBIT) divided by net sales gives the operating profit margin, which is a measure of a company's profitability after accounting for its operating expenses.

Question 4

Using the DuPont system of analysis and holding other factors constant, an increase in the net profit margin will result in ________ in the return on equity.

Accepted Answer

The DuPont system of analysis states that Return on Equity (ROE) is equal to Net Profit Margin multiplied by Asset Turnover multiplied by Financial Leverage. Holding the other factors constant, if there is an increase in the Net Profit Margin, it will directly increase the ROE as well. Thus, the correct answer is A) an increase.

Question 5

Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

Accepted Answer

Net profit margin is calculated by dividing the net income by sales. In this case, net profit margin would be $10,000/$50,000, which is 20%.

Question 6

If a firm has sales of $100, total expenses (including interest and taxes) of $50, has a stock that is selling at $50 per share and has 10 shares of stock outstanding, then the firm has a P/E ratio of:

Accepted Answer

The P/E ratio is calculated by dividing the market price per share by the earnings per share (EPS). To calculate the EPS, we divide the total earnings (sales - expenses) by the number of outstanding shares.
EPS = (sales - expenses) / number of shares
EPS = ($100 - $50) / 10 = $5
P/E ratio = market price per share / EPS
P/E ratio = $50 / $5 = 10.0
Therefore, the best choice is C, which is 10.0.

Question 7

(Net income ∕ Common equity)

Accepted Answer

The formula given is for return on equity (ROE), which measures the return generated on the investment made by the company's owners.

Question 8

(Net income ∕ Total assets)

Accepted Answer

Return on total assets (ROA) measures the efficiency of a company in generating profits from its assets. It is calculated by dividing net income by total assets.

Question 9

If a firm has no debt and pays no taxes, then the firm's operating profit margin will be ___________ the firm's net profit margin.

Accepted Answer

Since the firm has no debt (so no interest expense) and pays no taxes, its operating profit margin and net profit margin will be the same. The only difference between the two margins arises due to the interest and tax expenses. Since there are none in this case, the two margins will be equal.

Question 10

What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000?

Accepted Answer

Return on total assets (ROA) is calculated by dividing net income by total assets. So, ROA = (Net Income / Total Assets) * 100%. Plugging in the numbers, ROA = ($50,000 / $175,000) * 100% = 28.6%. Therefore, the answer is B.

Question 11

Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.

Accepted Answer

The DuPont system of analysis states that return on equity (ROE) is calculated as the product of net profit margin, asset turnover, and financial leverage. Holding other factors constant, an increase in financial leverage (i.e., an increase in debt) increases the denominator (total equity), which increases the ROE. Therefore, the answer is A) an increase in the return on equity.

Question 12

The price/earnings ratio (P/E) is calculated as:

Accepted Answer

The P/E ratio is calculated by dividing the stock price by earnings per share. It gives investors an idea of how much they are willing to pay for each dollar of earnings generated by the company.

Question 13

Which of the following ratios is not a component in the return on equity using DuPont analysis?

Accepted Answer

The current ratio is not a component in the return on equity using DuPont analysis. The DuPont analysis formula only includes the profit margin, asset turnover, and equity multiplier ratios. The current ratio measures a company's liquidity, which is not directly related to its return on equity.

Question 14

Given the following financial data: net income/sales = 6%; sales/total assets = 3.5; debt/total assets = 30%. The return on total assets is:

Accepted Answer

Return on Total Assets = Net Income/Total Assets
= Net Income/Sales * Sales/Total Assets
= 6% * 3.5
= 21%

Question 15

(Earnings before interest & taxes ∕ Total assets)

Accepted Answer

The formula for Operating Return on Assets (OROA) is Earnings before interest & taxes (EBIT) divided by Total assets. Therefore, the correct choice is C) Operating return on assets.

Question 16

If a firm has an after-tax profit margin of 5%, an asset turnover of 2.5 times, and no debt, the return on equity is:

Accepted Answer

The return on equity (ROE) can be calculated using the formula ROE = Profit Margin * Asset Turnover * Equity Multiplier. Since the firm has no debt, the equity multiplier is 1. Therefore, ROE = 5% * 2.5 * 1 = 12.5%.

Question 17

Which one of the following is not a basic component of the DuPont method of ratio analysis?

Accepted Answer

The basic components of the DuPont method of ratio analysis include profit margin, total asset turnover, and equity multiplier. Liquidity margin is not a component of this method.

Question 18

Which one of the following is not a basic component of the DuPont method of ratio analysis?

Accepted Answer

The basic components of the DuPont method of ratio analysis are profit margin, total asset turnover, and equity multiplier. The liquidity margin is not a component of the DuPont method.

Question 19

The method of calculating return on assets which highlights the importance of sales, profit margin, and asset turnover is known as:

Accepted Answer

DuPont analysis breaks down return on assets into three components: profit margin, asset turnover, and leverage. It highlights the importance of each component in generating return on assets, and can help a company identify areas for improvement in its operations.

Question 20

The profitability ratio that measures the return that shareholders earned on their investment in the firm is the:

Accepted Answer

Return on equity (ROE) measures the net income a company generates per dollar of shareholder's equity, showing how efficient the company is at using shareholder's investments to generate profits. It is the profitability ratio that measures the return that shareholders earned on their investment in the firm. The other options are also profitability ratios, but they do not specifically measure the return for shareholders.

Quiz 14: Financial Analysis and Long-Term Financial Planning

(Net income ∕ Net sales)

Which one of the following types of financial ratios does not get all of its information from a firm's income statements and balance sheets?

(Earnings before interest & taxes ∕ Net sales)

Using the DuPont system of analysis and holding other factors constant, an increase in the net profit margin will result in ________ in the return on equity.

Find the net profit margin if earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

If a firm has sales of $100, total expenses (including interest and taxes) of $50, has a stock that is selling at $50 per share and has 10 shares of stock outstanding, then the firm has a P/E ratio of:

(Net income ∕ Common equity)

(Net income ∕ Total assets)

If a firm has no debt and pays no taxes, then the firm's operating profit margin will be ___________ the firm's net profit margin.

What would be the return on total assets of a firm if net income is $50,000, total sales are $100,000, and total assets are $175,000?

Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.

The price/earnings ratio (P/E) is calculated as:

Which of the following ratios is not a component in the return on equity using DuPont analysis?

Given the following financial data: net income/sales = 6%; sales/total assets = 3.5; debt/total assets = 30%. The return on total assets is:

(Earnings before interest & taxes ∕ Total assets)

If a firm has an after-tax profit margin of 5%, an asset turnover of 2.5 times, and no debt, the return on equity is:

Which one of the following is not a basic component of the DuPont method of ratio analysis?

Which one of the following is not a basic component of the DuPont method of ratio analysis?

The method of calculating return on assets which highlights the importance of sales, profit margin, and asset turnover is known as:

The profitability ratio that measures the return that shareholders earned on their investment in the firm is the: