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Company J and Company K each recently reported the same
earnings per share (EPS). Company J’s stock, however, trades at a higher price.
Which of the following statements is correct?
A. a. Company J must
have a higher P/E ratio.
B. b. Company J must
have a higher market to book ratio.
C. c. Company J must
be riskier
D. d. Company J must
have fewer growth opportunities.
E. e. All of the
statements above are correct.
Question 2 of 20
Which of the following statements is correct?
A. a. Many large firms
operate different divisions in different industries, and this makes it hard to
develop a meaningful set of industry benchmarks for these types of firms.
B. b. Financial
ratios should be interpreted with caution because there exist seasonal and
accounting differences that can reduce their comparability.
C. c. Financial
ratios should be interpreted with caution because it may be difficult to say
with certainty what is a “good” value. For example, in the case of
the current ratio, a “good” value is neither high nor low.
D. d. Ratio analysis
facilitates comparisons by standardizing numbers.
E. e. All of the
statements above are correct.
Question 3 of 20
Which of the following actions can a firm take to increase
its current ratio?
A. a. Issue
short-term debt and use the proceeds to buy back long-term debt with a maturity
of more than one year.
B. b. Reduce the
company’s days sales outstanding to the industry average and use the resulting
cash savings to purchase plant and equipment.
C. c. Use cash to
purchase additional inventory.
D. d. Statements a
and b are correct.
E. e. None of the
statements above is correct.
Question 4 of 20
Which of the following actions will cause an increase in the
quick ratio in the short run?
A. a. $1,000 worth of
inventory is sold, and an account receivable is created. The receivable exceeds
the inventory by the amount of profit on the sale, which is added to retained
earnings.
B. b. A small
subsidiary which was acquired for $100,000 two years ago and which was
generating profits at the rate of 10 percent is sold for $100,000 cash.
(Average company profits are 15 percent of assets.)
C. c. Marketable
securities are sold at cost.
D. d. All of the
answers above.
E. e. Answers a and b
above.
Question 5 of 20
Company A is financed with 90 percent debt, whereas Company
B, which has the same amount of total assets, is financed entirely with equity.
Both companies have a marginal tax rate of 35 percent. Which of the following
statements is correct?
A. a. If the two
companies have the same basic earning power (BEP), Company B will have a higher
return on assets.
B. b. If the two
companies have the same return on assets, Company B will have a higher return
on equity.
C. c. If the two
companies have the same level of sales and basic earning power (BEP), Company B
will have a lower profit margin.
D. d. All of the
answers above are correct.
E. e. None of the
answers above is correct.
Question 6 of 20
The Wilson Corporation has the following relationships:
Sales/Total assets 2.0
Return on assets (ROA) 4%
Return on equity (ROE) 6%
What is Wilson’s profit margin and debt ratio?
A. a. 2% and 0.33
B. b. 4% and 0.33
C. c. 4% and 0.67
D. d. 2% and 0.67
E. e. 4% and 0.50
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Question 7 of 20
Q Corp. has a basic earnings power (BEP) ratio of 15
percent, and has a times interest earned (TIE) ratio of 6. Total assets are
$100,000. The corporate tax rate is 40 percent. What is Q Corp.’s return on
assets (ROA)?
A. a. 7.5%
B. b. 10.0%
C. c. 12.2%
D. d. 13.1%
E. e. 14.5%
Question 8 of 20
Kansas Office Supply had $24,000,000 in sales last year. The
company’s net income was $400,000. Its total assets turnover was 6.0. The
company’s ROE was 15 percent. The company is financed entirely with debt and
common equity. What is the company’s debt ratio?
A. a. 0.20
B. b. 0.30
C. c. 0.33
D. d. 0.60
E. e. 0.66
Question 9 of 20 Given the following information, calculate
the market price per share of WAM Inc.
Net income = $200,000
Earnings per share = $2.00
Stockholders’ equity = $2,000,000
Market/Book ratio = 0.20
A. a. $20.00
B. b. $ 8.00
C. c. $ 4.00
D. d. $ 2.00
E. e. $ 1.00
Question 10 of 20
Taft Technologies has the following relationships:
annual sales $1,200,000
current liabilities $375,000
days sales outstanding(DSO)(360-day year) 40
Inventory Turnover Ratio 4.8
current ratio 1.2
The company’s current assets consist of cash, inventories,
and accounts receivable. How much cash does Taft have on its balance sheet?
A. -$ 8,333
B. $ 66,667
C. $125,000
D. $200,000
E. $316,667
Question 11 of 20
Info Technics Inc. has an equity multiplier of 2.50. The
company’s assets are financed with some combination of long-term debt and
common equity. What is the company’s debt ratio?
A. a. 51.20%
B. b. 26.00%
C. c. 39.36%
D. d. 65.00%
E. e. 60.00%
Question 12 of 20
Cutler Enterprises has current assets equal to $5 million.
The company’s current ratio is 1.25, and its quick ratio is 0.75. What is the
firm’s level of current liabilities (in millions)?
A. a. $2.85
B. b. $3.0
C. c. $4.0
D. d. $0.9
E. e. 1.9
Question 13 of 20
Lewis Inc. has sales of $3,600,000 per year, all of which
are credit sales. Its days sales outstanding is 42 days. What is its average
accounts receivable balance? Assume 360 days per year.
A. a. $238,090
B. b. $420,000
C. c. $280,000
D. d. $386,000
E. e. $400,000
Question 14 of 20
A firm has total interest charges of $20,000 per year, sales
of $2,800,000, a tax rate of 40 percent, and a profit margin of 6 percent. What
is the firm’s times-interest-earned ratio?
A. a. 15
B. b. 12.5
C. c. 11.5
D. d. 15.8
E. e. 16
Question 15 of 20
A fire has destroyed many of the financial records at
Anderson Associates. You are assigned to piece together information to prepare
a financial report. You have found that the firm’s return on equity is 12
percent and its debt ratio is 0.20. What is its return on assets?
A. a. 6.40%
B. b. 4.85%
C. c. 9.60%
D. d. 8.50%
E. e. 6.90%
Question 16 of 20
Rowe and Company has a debt ratio of 0.20, a total assets
turnover of 0.25, and a profit margin of 10 percent. The president is unhappy
with the current return on equity, and he thinks it could be doubled. This
could be accomplished (1) by increasing the profit margin to 14 percent and (2)
by increasing debt utilization. Total assets turnover will not change. What new
debt ratio, along with the 14 percent profit margin, is required to double the
return on equity?
A. a. 0.50
B. b. 0.56
C. c. 0.88
D. d. 0.78
E. e. 0.44
Question 17 of 20
Pinkerton Packaging’s ROE last year was 4.5 percent, but its
management has developed a new operating plan designed to improve things. The
new plan calls for a total debt ratio of 50 percent, which will result in
interest charges of $240 per year. Management projects an EBIT of $800 on sales
of $8,000, and it expects to have a total assets turnover ratio of 1.6. Under
these conditions, the federal-plus-state tax rate will be 40 percent. If the
changes are made, what return on equity will Pinkerton earn?
A. a. 2.50%
B. b. 13.44%
C. c. 13.00%
D. d. 14.02%
E. e. 14.57%
Question 18 of 20
Examining the ratios of a particular firm against the same
measures for a small group of firms from the same industry, at a point in time,
is an example of
A. a. Trend analysis.
B. b. Benchmarking.
C. c. Du Pont
analysis.
D. d. Simple ratio
analysis.
E. e. Industry
analysis.
Question 19 of 20
Which of the following statements is correct?
A. a. Having a high
current ratio and a high quick ratio is always a good indication that a firm is
managing its liquidity position well.
B. b. A decline in
the inventory turnover ratio suggests that the firm’s liquidity position is
improving.
C. c. If a firm’s
times-interest-earned ratio is relatively high, then this is one indication
that the firm should be able to meet its debt obligations.
D. d. Since ROA
measures the firm’s effective utilization of assets (without considering how
these assets are financed), two firms with the same EBIT must have the same
ROA.
E. e. If, through
specific managerial actions, a firm has been able to increase its ROA, then,
because of the fixed mathematical relationship between ROA and ROE, it must
also have increased its ROE.
Question 20 of 20
Which of the following statements is correct?
A. a. Suppose two
firms with the same amount of assets pay the same interest rate on their debt
and earn the same rate of return on their assets and that ROA is positive. However,
one firm has a higher debt ratio. Under these conditions, the firm with the
higher debt ratio will also have a higher rate of return on common equity.
B. b. One of the
problems of ratio analysis is that the relationships are subject to
manipulation. For example, we know that if we use some cash to pay off some of
our current liabilities, the current ratio will always increase, especially if
the current ratio is weak initially, for example, below 1.0.
C. c. Generally,
firms with high profit margins have high asset turnover ratios and firms with
low profit margins have low turnover ratios; this result is exactly as
predicted by the extended Du Pont equation.
D. d. Firms A and B
have identical earnings and identical dividend payout ratios. If Firm A’s
growth rate is higher than Firm Bs, then Firm A’s P/E ratio must be greater
than Firm B’s P/E ratio.
E. e. Each of the
above statements is false.
