Question 1

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 firm's ability to meet its fixed charges, including interest expenses. It is calculated by dividing earnings before fixed charges and taxes by fixed charges. A higher ratio indicates a greater ability to meet fixed charges, which is important to creditors and investors.

Question 2

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 internal growth rate is a measure of how much a company can grow using only its internal resources, without issuing new equity or taking on more debt. It is the maximum growth rate that can be achieved by reinvesting earnings back into the company. The retention rate is the percentage of earnings that are retained by the company, while the sustainable growth rate is the maximum growth rate a company can achieve while maintaining its current financial policies. The operating expansion rate is not a commonly used financial term.

Question 3

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 ratio measures the operating return on assets before considering the effects of financing and taxes. It is calculated by dividing earnings before interest and taxes (EBIT) by total assets. Therefore, it measures the firm's ability to generate operating earnings from its assets regardless of how they are financed or taxed.

Question 4

According to the list provided in the textbook,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 caution about different capital structures is listed in the textbook as a consideration when using ratios to evaluate firm performance. Therefore, (C) is not one of the cautions in using ratios to evaluate firm performance. The other cautions listed include seasonal cash flow differences, different accounting procedures, and one-time events that may skew the ratios.

Question 5

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 6

Firm A and Firm B have the same total assets,ROA and profit margin (greater than 0).However,Firm B has a higher debt ratio and interest expense than Firm A.Which of the following statements is correct?
A) Firm B must have a higher ROE than Firm A.
B) Firm B must have a higher capital intensity ratio than Firm A.
C) Firm B must have a higher fixed asset turnover than Firm A.
D) Firm B must have a lower ACP than Firm A.

Accepted Answer

Since both firms have the same ROA and profit margin, the only difference between them is the higher debt ratio and interest expense of Firm B. This means that Firm B has a higher financial leverage. Therefore, the only correct statement is that Firm B must have a higher ROE than Firm A, as ROE takes into account financial leverage.

Question 7

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 they sell their inventory quickly, and a low days sales in inventory ratio, which means they do not hold onto inventory for long periods of time. This allows the firm to minimize the costs associated with holding inventory while maximizing profits through quick turnover.

Question 8

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

ROE/ROA = TA/Equity = 52/12 = 4.33.

Question 9

A firm has a ROE of 14 percent and a debt-to-equity ratio of 40 percent.If the total asset turnover is 3.4,what is the firm's profit margin?
A) 2.94 percent
B) 3.86 percent
C) 4.29 percent
D) 5.67 percent

Accepted Answer

Equity multiplier = 1 + Debt-to-equity
= 1 + .40
= 1.40
ROE = Profit margin × Total asset turnover × Equity multiplier
14% = Profit margin × 3.4 × 1.40
Profit margin = 2.94%

Question 10

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)...

Question 11

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

A/R = ACP × Sales/365 = 38 × 5.3/365 = 0.551781.

Question 12

Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?
A) times interest earned
B) fixed-charge coverage ratio
C) cash coverage ratio
D) operating coverage ratio

Accepted Answer

The cash coverage ratio measures the firm's ability to generate enough operating cash to cover its interest and other fixed charges. It is calculated by dividing the firm's earnings before interest and taxes (EBIT) by the total amount of interest and other fixed charges that the firm owes. A higher cash coverage ratio indicates that the firm is better able to meet its obligations and is therefore considered more financially stable.

Question 13

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

ROA (Return on Assets) measures the overall return on the firm's assets including financial leverage and taxes. It shows the firm's efficiency in generating profits from its assets irrespective of the capital structure or tax rates. ROE (Return on Equity) only considers the return earned on equity (ownership) capital, while basic earning power only considers earnings before interest and tax (EBIT) in relation to total assets. Profit margin only measures the profitability of sales and does not consider assets.

Question 14

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

(300,000 + 12,000)/44,000 = 7.09.

Question 15

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 proportion of long-term debt and equity on a company's balance sheet. It does not refer to the amount of current versus long-term debt or current versus fixed assets.

Question 16

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 B.
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 a premium for each dollar of earnings. This suggests that investors are optimistic about the company's future growth prospects. However, it also means that there is more downside risk if the company fails to meet these expectations. Firm A's very high PE ratio of 92 times indicates a high level of optimism and thus, investors would have higher risk investing in Firm A compared to Firm B with a lower PE ratio of 16 times. The number of shares outstanding is not directly related to the risk profile of the company.

Question 17

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

(1 − 1/EM) = (1 − 1/3.5) = 71.43 percent.

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 internal growth rate is the maximum growth rate that can be achieved without any external financing. The retention rate is the percentage of earnings that are kept (retained) by the company instead of being paid out as dividends. The sustainable growth rate is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings without affecting the company's financial leverage ratios or running out of funds. The operating expansion rate is not a commonly used financial term. Therefore, the best choice is C, sustainable growth rate.

Question 19

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 means converting dollar values in financial statements to percentages or ratios, which is creating common-size financial statements. It helps in comparing the performance of a company over different periods or with other companies regardless of their size.

Question 20

A firm reported an ROE of 19 percent.The firm's debt ratio was 45 percent,sales were $12 million,and the capital intensity ratio was 1.1 times.Calculate the net income for the firm.
A) 0.34 million
B) 1.38 million
C) 1.93 million
D) 2.06 million

Accepted Answer

TA = Sales × capital intensity = 1.1 × 12 = 13.2; Equity = TA(1 − debt ratio) = 13.2(0.55) = 7.26; NI = ROE × equity = 0.19 × 7.26 = 1.38.

Quiz 3: Analyzing Financial Statements

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

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

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

According to the list provided in the textbook,which of the following is NOT one of the cautions in using ratios to evaluate firm performance?

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

Firm A and Firm B have the same total assets,ROA and profit margin (greater than 0) .However,Firm B has a higher debt ratio and interest expense than Firm A.Which of the following statements is correct?

A firm that is efficient in inventory management will have

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

A firm has a ROE of 14 percent and a debt-to-equity ratio of 40 percent.If the total asset turnover is 3.4,what is the firm's profit margin?

Which of the following statements is correct?

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

Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?

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

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?

The term "capital structure" refers to

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 B.

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

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

The term "spreading the financial statements" refers to

A firm reported an ROE of 19 percent.The firm's debt ratio was 45 percent,sales were $12 million,and the capital intensity ratio was 1.1 times.Calculate the net income for the firm.