Question 1

A firm has $10 million in cash,$4.5 million in accounts receivable,and inventory of $8 million.The firm's accounts payable is $6.2 million and the firm has no short-term debt.What is the firm's current ratio?

Accepted Answer

A) Current ratio = current assets/current liabilities = (10 + 4.5 + 8)/6.2 = 3.63

Question 2

Manufacturer A has a profit margin of 2.0%,an asset turnover of 1.7,and an equity multiplier of 4.9. Manufacturer B has a profit margin of 2.3%,an asset turnover of 1.1,and an equity multiplier of 4.7.
How much asset turnover should manufacturer B have to match manufacturer A's ROE?

Accepted Answer

A) ROEa = 2 × 1.7 × 4.9 = 16.66; ROEb = 2.3 × 1.1 × 4.7 = 11.891; 16.66 / (2.3 × 4.7) = 1.54

Question 3

A firm has EBIT of $15 million,interest expense of $1 million,and pays taxes of $4 million.The firm has a market-to-book ratio of 5.75.If the firm has 30 million shares outstanding at a current price of $12 per share,what is its ROE?

Accepted Answer

C) Net income = 15 - 1 - 4 = $10 million.
Book value of equity = (30 × 12)/5.75 = 62.61
ROE = Net income/Book value of equity = 10/62.61 = 16%

Question 4

The above data is for five regional trucking firms.Based on price-earnings ratios,which firm's stock is the best value?

Accepted Answer

Without having more information about the companies, we can only compare their price-earnings ratios. A lower price-earnings ratio suggests that a company's stock is undervalued. We can see that Firm B has the lowest price-earnings ratio, making it the best value.

Question 5

A firm has ROE of 18.5%,net profit margin of 3.2% and an asset turnover ratio of 0.7.What is the firm's equity multiplier?

Accepted Answer

B) ROE = net profit margin × asset turnover × equity multiplier
Equity multiplier = 18.5/(3.2 × 0.7) = 8.3

Question 6

A firm's net profit margin increased from 8.1% to 8.3% from 2014 to 2015.If net income increased from $4.5 million to $5.6 million,what was the change in the firm's sales?

Accepted Answer

D) Net profit margin = net income/sales
2014: Sales = 4.5/0.081 = $55.56 million
2015: Sales = 5.6/0.083 = $67.47 million
Increase in sales = 67.47 - 55.56 = $11.9 million

Question 7

A firm has total sales of $53 million.It has gross profit of $12 million,operating income of $8.5 million,and net income of $4 million.What is the firm's net profit margin?

Accepted Answer

A) Net profit margin = net income/sales = 4/53 = 7.5%

Question 8

The balance sheet and income statement of a particular firm are shown above.What does the accounts payable days ratio tell you about this company?

Accepted Answer

E) 42 / (210 / 365) = 73 days, or approximately 10 weeks

Question 9

A firm's net profit margin increased from 3.2% to 3.8% from 2014 to 2015.If total sales increased from $312 million in 2014 to $345 million in 2015,what was the increase in net income?

Accepted Answer

C) Net profit margin = net income/sales
2014: Net income = 0.032 × 312 = $10 million
2015: Net income = 0.038 × 345 = $13 million
Increase in net income = 13 -10 = $3 million.

Question 10

A firm has EBIT of $24 million and has a corporate tax rate of 25%.The firm has total debt of $40 million,and excess cash of $8 million.If the firm's book value of equity is $72 million,what is the firm's return on invested capital (ROIC)?

Accepted Answer

B) ROIC = EBIT(1 - tax rate)/(Book value of equity + Net debt)
ROIC = 24(1 - 0.25)/(72 + 40 - 8) = 18/104 = 17%

Question 11

A firm has an asset turnover ratio of 1.6 and a net profit margin of 1.3%.If the firm has 5 dollars in assets per dollar of equity,what is the firm's ROE?

Accepted Answer

D) ROE = net profit margin × asset turnover × equity multiplier
ROE = 1.3 × 1.6 × 5 = 10.4%

Question 12

Above are portions of the balance sheet and income statement for two companies in 2015.Based upon this information,which of the following statements is most likely to be true?

Accepted Answer

The answer of 
Above are portions of the balance sheet...

Question 13

The balance sheet and income statement of a particular firm are shown above.What does the accounts receivable days ratio tell you about this company?

Accepted Answer

A) 22 / (312 / 365) = 25.7 days, or approximately 4 weeks

Question 14

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency?

Accepted Answer

A high operating efficiency indicates that a company is able to generate a high amount of revenue relative to its assets. This is reflected in a high turnover ratio, which is a key component of ROE. The grocery store chain in option D has a very high turnover, meaning it is selling many multiples of its assets per year. This suggests that it has a high level of operating efficiency and would be expected to have a high ROE. Options A, B, and E may generate high profits, but without knowing more about their assets and how they are used, it is difficult to determine if they have a high level of operating efficiency. Option C, a brokerage firm with high levels of leverage, is actually risky as it may increase the chances of financial distress leading to low ROE.

Question 15

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

Accepted Answer

A medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals would be expected to have a high ROE based on that firm's high profitability. This is because the company has a high profit margin due to its precise instruments being sold at a high price, and it likely has a relatively low level of assets and equity needed to operate, leading to a high ROE.

Question 16

A firm has $6 million in cash,$1.5 million in accounts receivable,and inventory of $4.2 million.The firm's accounts payable is $7.4 million and the firm has no short-term debt.What is the firm's quick ratio?

Accepted Answer

C) Quick ratio = (current assets - inventory)/current liabilities = (6 + 1.5)/7.4 = 1.01

Question 17

A firm's current assets increase from 1.4 million in 2014 to 1.7 million in 2015.If the firm's current liabilities are unchanged at $1.1 million,and inventory remains unchanged,what is the change in the firm's quick ratio?

Accepted Answer

A) Initial current ratio = 1.4/1.1 = 1.27
Final current ratio = 1.7/1.1 = 1.55
Since current liabilities and inventory do not change, change in quick ratio = change in current ratio = 1.55 - 1.27 = 0.28

Question 18

In 2015,an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops.If sales in 2014 and 2015 were steady at $25 million,but the gross margin increased from 2.3% to 3.4% between those years,by what amount was the cost of sales reduced?

Accepted Answer

A) (25 × 0.034 - 25 × 0.023) × 1,000,000 = $275,000

Question 19

A firm has ROE of 15% and a net profit margin of 4.5%.If the firm has 6.5 dollars in assets per dollar of equity,what is the firm's asset turnover ratio?

Accepted Answer

A) ROE = net profit margin × asset turnover × equity multiplier
Asset turnover = 15/(4.5 × 6.5) = 0.5

Question 20

A firm has ROE of 5.5% and an asset turnover ratio of 1.2.If the firm has 10 dollars in assets per dollar of equity,what is the firm's net profit margin?

Accepted Answer

E) ROE = net profit margin × asset turnover × equity multiplier
Net profit margin = 5.5/(1.2 × 10) = 0.46%

Quiz 2: Introduction to Financial Statement Analysis