Question 1

Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm
A)Firm A because it has the higher PE ratio.
B)Firm B because it has a lower PE ratio.
C)Firm A because it has fewer shares outstanding.
D)Firm B because it has more shares outstanding.

Accepted Answer

A higher PE ratio indicates that investors are willing to pay more for each dollar of earnings, which implies high growth expectations for the company. This also means that there is a higher risk associated with meeting those expectations. Furthermore, the fact that Firm A has fewer shares outstanding does not necessarily increase its risk as it is just a matter of the capital structure of the company.

Question 2

Which of the following is unlikely to have a high capital intensity ratio?
A)railroad
B)automobile manufacturer
C)law firm
D)shipbuilder

Accepted Answer

Capital intensity ratio is the ratio of capital required per unit of output. Law firms typically have high labor costs but low capital requirements, so they are unlikely to have a high capital intensity ratio. The other options, such as railroad, automobile manufacturer, and shipbuilder, all involve expensive capital investments such as tracks, factories, and equipment, which results in a higher capital intensity ratio.

Question 3

The term "spreading the financial statements" refers to
A)creating common-size financial statements.
B)comparing the statements to the industry average.
C)calculating the internal and sustainable growth rate.
D)evaluating the debt levels.

Accepted Answer

Spreading the financial statements refers to creating common-size financial statements, which involves expressing each item in the financial statements as a percentage of a base amount. This allows for easier comparison between companies of different sizes or within the same company over time.

Question 4

Which of the following is NOT one of the cautions in using ratios to evaluate firm performance?
A)The firm has seasonal cash flow differences.
B)The firm has different accounting procedures.
C)The firm has a different capital structure.
D)The firm had a one-time event.

Accepted Answer

The answer of Which of the following is NOT one...

Question 5

Which of the following statements is correct?
A)A low average payment period and a high accounts payable turnover are a sign of good management.
B)A high average payment period and a low accounts payable turnover are a sign of good management.
C)A high average payment period and a high accounts payable turnover are a sign of good management.
D)A low average payment period and a low accounts payable turnover are a sign of good management.

Accepted Answer

The answer of Which of the following statements is correct?
A)A...

Question 6

The term "capital structure" refers to
A)the amount of current versus long-term debt on the balance sheet.
B)the amount of current versus fixed assets on the balance sheet.
C)the amount of long-term debt versus equity on the balance sheet.

Accepted Answer

Capital structure refers to the mix between long-term debt and equity financing used by a company. It is not directly related to the amount of current assets or fixed assets on the balance sheet.

Question 7

A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio?
A)3.76 times
B)4.91 times
C)7.25 times
D)7.09 times

Accepted Answer

The answer of A firm has EBIT of $300,000 and...

Question 8

Which ratio measures the operating return on the firm's assets irrespective of financial leverage and taxes?
A)basic earning power ratio
B)profit margin
C)return on assets
D)operating leverage return

Accepted Answer

The basic earning power (BEP) ratio measures the operating return on the firm's assets without considering the effects of taxes and financial leverage, focusing solely on the firm's ability to generate earnings from its operations relative to its assets.

Question 9

An investor wanting large returns will be interested in companies that have
A)high ROAs.
B)high ROEs.
C)high current ratios.
D)high times interest earned.

Accepted Answer

ROE (Return on Equity) measures the amount of profit a company generates from the money invested in it by shareholders. A high ROE indicates that a company is effectively using shareholder funds to generate profits, which makes it an attractive investment option for investors seeking high returns.

Question 10

A firm has an ACP of 38 days and its annual sales are $5.3 million. What is its account receivable balance?
A)$551,781
B)$619,304
C)$692,098
D)$759,021

Accepted Answer

The answer of A firm has an ACP of 38...

Question 11

A firm that is efficient in inventory management will have
A)a high inventory turnover ratio and a low days sales in inventory ratio.
B)a low inventory turnover ratio and a low days sales in inventory ratio.
C)a high inventory turnover ratio and a high days sales in inventory ratio.
D)a low inventory turnover ratio and a high days sales in inventory ratio.

Accepted Answer

A firm that is efficient in inventory management will have a high inventory turnover ratio, which means it sells its inventory quickly, and a low days sales in inventory ratio, which means it takes less time to sell inventory. Therefore, the option A is the correct answer.

Question 12

All of the following are users of financial ratios EXCEPT
A)managers.
B)investors.
C)analysts.
D)auditors.

Accepted Answer

Auditors do not use financial ratios in their work, as their primary role is to provide an independent opinion on the financial statements of a company. They may look at certain ratios as part of their review procedures, but they do not use them in the same way that managers, investors, and analysts do to make decisions about the company.

Question 13

Which ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges?
A)times interest earned
B)basic earning power
C)fixed-charge coverage ratio
D)ROA

Accepted Answer

The fixed-charge coverage ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars, lease payments, and other fixed charges. It is calculated by dividing earnings before fixed charges and taxes (EBIT) by fixed charges (interest expense + lease payments). A higher fixed-charge coverage ratio indicates that the firm has more earnings to cover its fixed expenses and is therefore less risky to creditors.

Question 14

Which ratio measures the overall return on the firm's assets including financial leverage and taxes?
A)ROA
B)ROE
C)basic earning power
D)profit margin

Accepted Answer

The ratio that measures the overall return on the firm's assets including financial leverage and taxes is the return on assets (ROA). ROA considers both the firm's profitability and efficiency in using its assets to generate earnings before any financing activities are taken into account. ROE measures only the return to equity investors, while the basic earning power and profit margin measures profitability only.

Question 15

A strong liquidity position means that
A)the firm is able to meet its short-term obligations.
B)the firm uses little debt in its capital structure.
C)the firm pays out a large portion of its net income in the form of dividends.
D)the firm pays its creditors on time.

Accepted Answer

A strong liquidity position means that a firm is able to meet its short-term obligations. This indicates that the firm has enough cash or assets that can be quickly converted to cash to cover its debts as they come due. It is an important indicator of a firm's financial health and ability to manage its cash flow effectively. The other choices are not necessarily related to a strong liquidity position.

Question 16

What is the debt ratio for a firm with an equity multiplier of 3.5?
A)44.09 percent
B)58.51 percent
C)66.25 percent
D)71.43 percent

Accepted Answer

The debt ratio is calculated as (Total Debt / Total Assets). The equity multiplier, which is given as 3.5, is calculated as (Total Assets / Total Equity). This implies that for every $1 of equity, there are $3.5 of assets. Since the equity multiplier is the inverse of the equity ratio (Total Equity / Total Assets), we can find the equity ratio as 1 / 3.5 = 0.2857 or 28.57%. Therefore, the debt ratio, which is 1 - the equity ratio, is 1 - 0.2857 = 0.7143 or 71.43%.

Question 17

Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt?
A)fixed-charge coverage ratio
B)times interest earned
C)cash coverage ratio
D)ROA

Accepted Answer

The times interest earned ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on a firm's debt, indicating the firm's ability to cover its interest obligations with its earnings before interest and taxes (EBIT).

Question 18

The maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings is called the
A)internal growth rate.
B)retention rate.
C)sustainable growth rate.
D)operating expansion rate.

Accepted Answer

The sustainable growth rate is the maximum rate at which a company can grow its sales, earnings, and dividends by using internally generated equity (retained earnings) and without issuing new debt or equity.

Question 19

A firm has an ROA of 12 percent and an ROE of 52 percent. What is the firm's equity multiplier?
A)0.23
B)4.33
C)1.63
D)2.90

Accepted Answer

The equity multiplier is calculated as ROE divided by ROA, which is 52% / 12% = 4.33.

Question 20

The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the
A)internal growth rate.
B)retention rate.
C)sustainable growth rate.
D)operating expansion rate.

Accepted Answer

The maximum growth rate achievable by financing asset growth with internal financing or retained earnings is called the internal growth rate. This rate is calculated by subtracting the dividend payout ratio from the return on assets. It indicates the maximum level of growth a company can achieve without obtaining external financing or issuing new equity.

Quiz 3: Analyzing Financial Statements

Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm

Which of the following is unlikely to have a high capital intensity ratio?

The term "spreading the financial statements" refers to

Which of the following is NOT one of the cautions in using ratios to evaluate firm performance?

Which of the following statements is correct?

The term "capital structure" refers to

A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio?

Which ratio measures the operating return on the firm's assets irrespective of financial leverage and taxes?

An investor wanting large returns will be interested in companies that have

A firm has an ACP of 38 days and its annual sales are $5.3 million. What is its account receivable balance?

A firm that is efficient in inventory management will have

All of the following are users of financial ratios EXCEPT

Which ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges?

Which ratio measures the overall return on the firm's assets including financial leverage and taxes?

A strong liquidity position means that

What is the debt ratio for a firm with an equity multiplier of 3.5?

Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt?

The maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings is called the

A firm has an ROA of 12 percent and an ROE of 52 percent. What is the firm's equity multiplier?

The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the