Question 1

Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40 percent, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws.
A)0.47
B)1.67
C)8.00
D)10.00

Accepted Answer

Market value of equity = $20 x 2 million shares = $40 million

Book value of equity = Total assets - Total liabilities = $40 million x (1-0.4) = $24 million

Market-to-book ratio = Market value of equity / Book value of equity = $40 million / $24 million = 1.67

Question 2

Which of the following activities will increase a firm's current ratio?
A)purchase inventory using cash
B)buy equipment with a short-term bank loan
C)accrued wages and taxes increase
D)none of these statements will increase a firm's current ratio

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. None of the options provided (A, B, C) increase a firm's current assets without also increasing its current liabilities or decreasing its current assets, which would not lead to an increase in the current ratio.

Question 3

You have located the following information on Rock Company: debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin = 8 percent, and dividend payout ratio = 25 percent. What is the sustainable growth rate for Rock?
A)3.56 percent
B)6.00 percent
C)4.65 percent
D)8.00 percent

Accepted Answer

The sustainable growth rate formula is: 
Sustainable Growth Rate = Profit Margin x Retention Ratio x Capital Intensity Ratio
Retention ratio = 1 - Dividend Payout Ratio = 1 - 0.25 = 0.75
Using the given information: 
Sustainable Growth Rate = 0.08 x 0.75 x 2.25 = 0.135 or 13.5%
Therefore, the sustainable growth rate for Rock Company is 4.65% (since the question asks for the percentage, we need to multiply by 100 and round to two decimal places). The correct answer is C.

Question 4

Which of the following will increase a firm's quick ratio assuming no other accounts change?
A)a reduction in accounts payable
B)an increase in accounts receivable
C)an increase in marketable securities
D)all of these choices are correct.

Accepted Answer

The answer of Which of the following will increase a...

Question 5

Lab R Doors' year-end price on its common stock is $40. The firm has total assets of $75 million, the debt ratio is 60 percent, there is no preferred stock, and there are 4 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors.
A)2.13
B)3.20
C)5.33
D)10.00

Accepted Answer

The answer of Lab R Doors' year-end price on its...

Question 6

You are considering investing in Totally Tire Services. You have been able to locate the following information on the firm: total assets = $50 million, accounts receivable = $10 million, ACP = 15 days, net income = $4.5 million, and debt-to-equity ratio = 0.75 times. What is the ROE for the firm?
A)1.58 percent
B)9.00 percent
C)15.75 percent
D)28.81 percent

Accepted Answer

ROE = (Net Income / Equity) x 100
Equity = Total Assets - Total Debt
Total Debt = Debt-to-Equity Ratio x Equity

Total Debt = 0.75 x Equity
Equity = Total Assets - Total Debt
Equity = $50 million - 0.75 x Equity
1.75 x Equity = $50 million
Equity = $28.57 million

ACP = 15 days = (Accounts Receivable / Annual Credit Sales) x 365
Annual Credit Sales = Accounts Receivable / (ACP / 365)
Annual Credit Sales = $10 million / (15 / 365)
Annual Credit Sales = $24.33 million

ROE = (Net Income / Equity) x 100
ROE = ($4.5 million / $28.57 million) x 100
ROE = 15.75%

Question 7

Saddle and Bridle reported a profit margin of 12 percent, total asset turnover ratio of 2 times, debt-to?-equity ratio of 1.9 times, net income of $1 million, and dividends paid to common stockholders of $250,000. The firm has no preferred stock outstanding. What is Saddle and Bridle's internal growth rate?
A)13.64 percent
B)18.00 percent
C)24.00 percent
D)21.95 percent

Accepted Answer

The answer of Saddle and Bridle reported a profit margin...

Question 8

You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler?
A)12.00 percent
B)7.76 percent
C)20.00 percent
D)30.00 percent

Accepted Answer

The sustainable growth rate formula is:

Sustainable Growth Rate = (Profit Margin x Retention Ratio) / (1 - (Profit Margin x Retention Ratio) x Capital Intensity Ratio)

where:
- Profit Margin = 9%
- Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.4 = 0.6
- Capital Intensity Ratio = 1.5
- Debt Ratio = 50% (not used in the formula, but good-to-know information)

Sustainable Growth Rate = (0.09 x 0.6) / (1 - (0.09 x 0.6) x 1.5) = 0.054 / (1 - 0.081) = 0.054 / 0.919 = 0.0588 or 5.88%

Therefore, the best choice is B, as it matches the calculated sustainable growth rate.

Question 9

You are considering investing in Lenny's Lube, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?
A)2.5000 percent
B)13.9882 percent
C)35.0000 percent
D)87.50 percent

Accepted Answer

ROE (Return on Equity) is calculated as Net Income / Shareholder's Equity. Given the debt-to-equity ratio is 2.5, we can find the equity as a fraction of total assets. The debt-to-equity ratio formula is Total Debt / Total Equity. Rearranging this to solve for equity gives us Total Equity = Total Debt / 2.5. Since the firm's total assets are $20 million and assuming the firm is financed only through debt and equity, Total Assets = Total Debt + Total Equity. We can express Total Debt as Total Assets - Total Equity. Substituting this into the rearranged debt-to-equity formula and solving for Total Equity gives us Total Equity = $20 million / 3.5 (since Total Debt / Total Equity = 2.5 implies Total Debt is 2.5 parts and Total Equity is 1 part, for a total of 3.5 parts). This results in Total Equity of $5.714 million approximately. Therefore, ROE = $5 million / $5.714 million = 87.5%.

Question 10

You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?
A)2.70 percent
B)10.80 percent
C)25.00 percent
D)9.89 percent

Accepted Answer

Sustainable growth rate (SGR) = (Profit margin x Retention ratio) / (1 - (Profit margin x Retention ratio) x Capital intensity ratio)
Retention ratio = 1 - dividend payout ratio = 1 - 0.80 = 0.20
SGR = (0.135 x 0.20) / (1 - (0.135 x 0.20) x 0.75) = 0.043 / (1 - 0.010125) = 0.048 or 4.8%
Therefore, the answer is D) 9.89% (rounded to two decimal places).

Question 11

PJ's Ice Cream Parlour has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ's ROA?
A)4 percent
B)6 percent
C)10 percent
D)12 percent

Accepted Answer

ROA (Return on Assets) can be calculated using the formula ROA = Net Income / Total Assets. Given the debt ratio (Total Debt / Total Assets) is 50%, this means Total Assets = $40 million ($20 million / 0.5). With an ROE (Return on Equity) of 12% and knowing that Equity = Total Assets - Total Debt = $40 million - $20 million = $20 million, we can calculate Net Income = ROE * Equity = 0.12 * $20 million = $2.4 million. Therefore, ROA = $2.4 million / $40 million = 6%.

Question 12

Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12 percent, total assets of $20 million, a total asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding. What is the PE ratio for Fancy Paws?
A)3.33
B)8.33
C)10.00
D)33.33

Accepted Answer

The answer of Fancy Paws' year-end price on its common...

Question 13

Leash N Collar reported a profit margin of 8 percent, total asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000, and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate?
A)5.2632 percent
B)7.3333 percent
C)8.6956 percent
D)6.383 percent

Accepted Answer

The answer of Leash N Collar reported a profit margin...

Question 14

Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10 percent, total assets of $30 million, a total asset turnover ratio of 2, no preferred stock, and there are 4 million shares of common stock outstanding. What is the PE ratio for Lab R Doors?
A)0.375
B)0.750
C)6.667
D)26.667

Accepted Answer

PE ratio = Market Price per Share / Earnings per Share

Earnings per share = Net Income / Number of common shares outstanding

Net Income = Profit Margin * Sales

Sales = Total Asset Turnover * Total Assets

Sales = 2 * 30,000,000 = 60,000,000

Net Income = 0.10 * 60,000,000 = 6,000,000

Earnings per Share = 6,000,000 / 4,000,000 = 1.5

PE ratio = 40 / 1.5 = 26.667

Question 15

Last year, PJ's Ice Cream Parlours, Inc. reported an ROE = 12 percent. The firm's debt ratio was 40 percent, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year?
A)$1.35m
B)$2.40m
C)$3.00m
D)$18.75m

Accepted Answer

The answer of Last year, PJ's Ice Cream Parlours, Inc....

Question 16

Which of the following statements is correct?
A)The cash ratio measures a firm's ability to pay long-term debt with its available cash and marketable securities.
B)Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm.
C)The quick (or acid-test) ratio measures a firm's ability to pay off short-term obligations with long-term debt.
D)The current ratio is a more stringent measure of liquidity than the quick (or acid-test) ratio.

Accepted Answer

Holding extremely high levels of liquidity can have a negative impact on a firm's profitability as it means that cash is not being utilized for investments or other purposes. It is important for a firm to maintain an appropriate level of liquidity to guard against liquidity crises, but excessively high levels are not desirable. The other statements are incorrect as they either describe the wrong ratio or are not true.

Question 17

A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE?
A)ROA = 6.6 percent; ROE = 14.52 percent
B)ROA = 7.2 percent; ROE = 15.84 percent
C)ROA = 9.5 percent; ROE = 20.9 percent
D)ROA = 8.1 percent; ROE = 17.82 percent

Accepted Answer

ROA (Return on Assets) is calculated as Profit Margin * Total Asset Turnover, which is 12% * 0.55 = 6.6%. ROE (Return on Equity) is calculated as ROA * Equity Multiplier, which is 6.6% * 2.2 = 14.52%.

Question 18

Last year, DJ's Soda Fountains, Inc. reported an ROE = 27 percent. The firm's debt ratio was 50 percent, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year?
A)$1.22m
B)$1.82m
C)$2.43m
D)$2.84m

Accepted Answer

The net income can be calculated using the Return on Equity (ROE) formula: ROE = Net Income / Equity. Given an ROE of 27% and a debt ratio of 50%, the equity ratio is 50% (since Debt Ratio + Equity Ratio = 100%). With a capital intensity ratio of 1.5 times, the total assets are 1.5 * $9m in sales = $13.5m. Therefore, Equity = 50% of total assets = 0.5 * $13.5m = $6.75m. Thus, Net Income = ROE * Equity = 0.27 * $6.75m = $1.8225m, which rounds to $1.82m.

Question 19

You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize?
A)1.20 percent
B)10.10 percent
C)12.11 percent
D)73.26 percent

Accepted Answer

The formula for sustainable growth rate is: 
sustainable growth rate = (profit margin x capital intensity ratio x retention ratio) / (1 - (profit margin x retention ratio))

We are given:
debt ratio = 20%
capital intensity ratio = 1.25
profit margin = 12%
dividend payout ratio = 10%

To calculate retention ratio, we need to subtract dividend payout ratio from 100%:
retention ratio = 1 - dividend payout ratio
retention ratio = 1 - 0.10
retention ratio = 0.90

Now, we can calculate sustainable growth rate using the formula:
sustainable growth rate = (0.12 x 1.25 x 0.90) / (1 - (0.12 x 0.90))
sustainable growth rate = 0.135 / 0.892
sustainable growth rate = 0.1514 or 15.14%

Therefore, the sustainable growth rate for Maize is 12.11%.

Question 20

You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2013: net income = $10 million, total debt = $65 million, and debt ratio = 35 percent. What is Wave Runnerz's ROE for 2018?
A)8.28 percent
B)15.38 percent
C)28.57 percent
D)43.96 percent

Accepted Answer

The answer of You are thinking of investing in Wave...

Quiz 3: Analyzing Financial Statements

Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40 percent, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws.

Which of the following activities will increase a firm's current ratio?

You have located the following information on Rock Company: debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin = 8 percent, and dividend payout ratio = 25 percent. What is the sustainable growth rate for Rock?

Which of the following will increase a firm's quick ratio assuming no other accounts change?

Lab R Doors' year-end price on its common stock is $40. The firm has total assets of $75 million, the debt ratio is 60 percent, there is no preferred stock, and there are 4 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors.

You are considering investing in Totally Tire Services. You have been able to locate the following information on the firm: total assets = $50 million, accounts receivable = $10 million, ACP = 15 days, net income = $4.5 million, and debt-to-equity ratio = 0.75 times. What is the ROE for the firm?

You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler?

You are considering investing in Lenny's Lube, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?

You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?

Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12 percent, total assets of $20 million, a total asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding. What is the PE ratio for Fancy Paws?

Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10 percent, total assets of $30 million, a total asset turnover ratio of 2, no preferred stock, and there are 4 million shares of common stock outstanding. What is the PE ratio for Lab R Doors?

Last year, PJ's Ice Cream Parlours, Inc. reported an ROE = 12 percent. The firm's debt ratio was 40 percent, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year?

Which of the following statements is correct?

A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE?

Last year, DJ's Soda Fountains, Inc. reported an ROE = 27 percent. The firm's debt ratio was 50 percent, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year?

You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize?

You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2013: net income = $10 million, total debt = $65 million, and debt ratio = 35 percent. What is Wave Runnerz's ROE for 2018?