Question 1

Benkart Corporation has sales of $5,000,000,net income of $800,000,total assets of $2,000,000,and 100,000 shares of common stock outstanding.If Benkart's P/E ratio is 12,what is the company's current stock price?

Accepted Answer

First, we need to calculate the earnings per share (EPS) by dividing the net income by the number of shares outstanding:

EPS = net income / number of shares outstanding
EPS = $800,000 / 100,000
EPS = $8 per share

Then, we can use the P/E ratio to find the stock price:

P/E ratio = stock price / EPS
12 = stock price / $8
stock price = 12 x $8
stock price = $96 per share

Therefore, the correct choice is B.

Question 2

Company A and Company B have the same gross profit margin and the same total asset turnover,but company A has a higher return on equity.This may result from

Accepted Answer

The answer of Company A and Company B have the...

Question 3

The computation of return on equity,or ROE,does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year.

Accepted Answer

Retained earnings are included in the calculation of common equity when computing Return on Equity (ROE) because ROE measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested, which includes retained earnings as part of the shareholders' equity.

Question 4

Jones,Inc.has a current ratio equal to 1.40.Which of the following transactions will increase the company's current ratio?

Accepted Answer

The answer of Jones,Inc.has a current ratio equal to 1.40.Which...

Question 5

Asset efficiency ratios for Fischer,Inc.are given in the table below.Based on this information,Fischer,Inc.'s fixed asset turnover ratio is likely to be ________.

Accepted Answer

The Fixed Asset Turnover Ratio is calculated as Net Sales/Total fixed assets. Since the Total Asset Turnover Ratio is 1.75 and the Current Asset Turnover Ratio is 7, it implies that the Fixed Asset Turnover Ratio must be less than 3.50 (the average of the two ratios). Therefore, option B is the correct answer.

Question 6

In an ideal world,which of the following would be used to evaluate firm performance?

Accepted Answer

In an ideal world, the market value of assets would be the best choice to evaluate firm performance as it reflects the value perceived by the market based on future growth potential, profitability, and risk level. Book value of assets may not accurately reflect the true value of the assets. Retained earnings only indicate past performance and may not be a reliable indicator of future performance. Accounting assets and profits can be easily manipulated and may not reflect the true financial health of the company.

Question 7

Smith Corporation has earned a return on capital invested of 10% for the past two years,but an investment analyst reviewing the company has stated the company is not creating shareholder value.This may be due to the fact that

Accepted Answer

The fact that the company has earned a return on capital invested of 10% is not enough to create shareholder value. The required rate of return for investors, which is 12% in this case, needs to be exceeded in order to create shareholder value.

Question 8

An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?

Accepted Answer

C) Company B having a higher operating return on assets but Company A having a higher return on equity could explain the analyst's position. This suggests that Company A is using its debt more effectively to generate returns for equity holders, making its higher debt level less concerning.

Question 9

Williams Inc.has a current ratio equal to 3,a quick ratio equal to 1.8,and total current assets of $6 million.Williams' inventory balance is

Accepted Answer

The quick ratio is calculated as (Current Assets - Inventory) / Current Liabilities. 
Substituting the given values, we have: 
1.8 = (6 million - Inventory) / Current Liabilities 
We can rearrange the equation to solve for the inventory balance: 
Inventory = 6 million - 1.8(Current Liabilities) 
We know that the current ratio is 3, which means that Current Assets / Current Liabilities = 3. 
Substituting 6 million for Current Assets, we get: 
6 million / Current Liabilities = 3 
Solving for Current Liabilities, we get: 
Current Liabilities = 2 million 
Substituting this value into the equation we derived for inventory, we get: 
Inventory = 6 million - 1.8(2 million) = 2.4 million 
Therefore, the inventory balance is $2,400,000.

Question 10

Company A has a higher days sales outstanding ratio than Company B.Therefore

Accepted Answer

A higher days sales outstanding ratio indicates that Company A takes longer to collect its accounts receivable, suggesting that Company B has a cash flow advantage as it collects its receivables more quickly.

Question 11

Which of the following transactions will increase a corporation's operating return on assets?

Accepted Answer

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

Question 12

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?

Accepted Answer

The fact that HighLev's stock price decreased relative to its industry counterparts suggests that investors perceived increased riskiness associated with the company's heavy borrowing. High levels of debt increase a company's financial risk, which can result in lower stock prices even if the return on equity improves. Therefore, option D is the best answer. Options A and C are not plausible explanations, as markets are generally efficient, and return on equity is an important metric that shareholders consider. Option B is also not the best answer as it contradicts the fact that return on equity increased.

Question 13

Baker Corp.is required by a debt agreement to maintain a current ratio of at least 2.5,and Baker's current ratio now is 3.Baker wants to purchase additional inventory for its upcoming Christmas season,and will pay for the inventory with short-term debt.How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million?

Accepted Answer

If Baker's current ratio is 3, it means that for every $1 of current liabilities, it has $3 of current assets. In order to maintain a current ratio of at least 2.5, it cannot have less than $2.5 of current assets for every $1 of current liabilities. Therefore, Baker can allocate $10 million ($15 million x 2.5/4.5) towards its current liabilities, leaving $5 million for current assets. If Baker wants to purchase additional inventory, it will have to use part of its current assets. Assuming it uses all of its remaining $5 million for inventory, it will still have a current ratio of 2.5, meeting the debt agreement. Therefore, Baker can purchase up to $5 million of inventory without violating the debt agreement. However, options A, C, and D are all above this amount, so the best choice is B.

Question 14

All of the following measure liquidity EXCEPT

Accepted Answer

Operating return on assets measures profitability, not liquidity. The other three options are common measures of liquidity.

Question 15

Nelson Industries has a higher debt ratio than Butler,Inc.,and Nelson also has a higher times interest earned ratio than Butler.If Nelson and Butler both have the same amount of total assets,then

Accepted Answer

A higher debt ratio means that Nelson has more debt compared to its total assets than Butler does. However, a higher times interest earned ratio means that Nelson is generating enough operating income to cover its interest expenses, even with the higher amount of debt. This suggests that Nelson may have more non-interest bearing liabilities, such as accounts payable, which do not affect the times interest earned ratio but increase the debt ratio. Therefore, it is possible that Nelson and Butler have the same operating income, and there is no mistake in the calculations. Choice A is incorrect because it is not necessarily true that Nelson has higher operating income than Butler. Choice B is also incorrect because it assumes that the interest rate is the only factor affecting the times interest earned ratio, which is not the case. Choice D is incorrect because there is no mistake in the calculations, as explained above.

Question 16

When comparing inventory turnover ratios,other things being equal

Accepted Answer

A higher inventory turnover ratio indicates that a company is selling its inventory quickly, which improves liquidity as cash is generated from the sale of inventory. A lower inventory turnover ratio may indicate that the company is not efficiently managing its inventory, leading to higher inventory costs and potential obsolescence. The inventory turnover ratio is not affected by the selling price of the product or old/obsolete inventory, as it only measures the frequency at which inventory is sold and replaced.

Question 17

For a retailer with inventory to sell,the acid-test ratio will be

Accepted Answer

The acid-test ratio (also known as quick ratio) excludes inventory from the calculation and only considers the most liquid assets such as cash, marketable securities, and accounts receivable. As a result, the acid-test ratio will be lower than the current ratio, which includes inventory. This makes the acid-test ratio a more stringent measure of a retailer's liquidity because it shows whether a company can pay off its short-term liabilities without relying on inventory sales.

Question 18

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

Accepted Answer

The method of financing can affect the rate of return to shareholders because different financing sources have different costs and risks associated with them. If a company chooses to finance operations through debt, they will have to pay interest on the loan which will reduce profits and therefore affect the rate of return to shareholders. On the other hand, if they choose to finance through equity, it will not have a direct impact on profits but it can dilute the value of existing shares, influencing the return to shareholders.

Question 19

The goal of most financial managers is to reduce the amount of long-term debt to zero,thus maximizing shareholder wealth.

Accepted Answer

While reducing long-term debt can be an important goal, the ultimate goal of financial managers is not necessarily to reduce it to zero. Instead, their primary goal is typically to maximize shareholder wealth, which can involve a variety of strategies and actions depending on the unique circumstances of the company.

Question 20

Operating return on assets captures the effect of taxes and financing costs,and hence provides the broadest possible measure of profitability.

Accepted Answer

Operating return on assets focuses on the operating income generated from the assets, excluding the effects of taxes and financing costs, to measure the efficiency of asset use in the core business operations.

Quiz 4: Evaluating a Firms Financial Performance