Question 1

What type of firm is most easily valued using fundamental analysis?

Accepted Answer

A)  public utility 
B)  social media company 
C)  new start-up company 
D)  company in financial distress 
A)  public utility 
B)  social media company 
C)  new start-up company 
D)  company in financial distress

Question 2

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is

Accepted Answer

A)  0.3. 
B)  1.3. 
C)  2.3. 
D)  3.3. 
A)  0.3. 
B)  1.3. 
C)  2.3. 
D)  3.3.

Question 3

If you wish to compute economic earnings and are trying to decide how to account for inventory,

Accepted Answer

A)  FIFO is better than LIFO. 
B)  LIFO is better than FIFO. 
C)  FIFO and LIFO are equally good. 
D)  FIFO and LIFO are equally bad. 
E)  None of the options are correct. 
A)  FIFO is better than LIFO. 
B)  LIFO is better than FIFO. 
C)  FIFO and LIFO are equally good. 
D)  FIFO and LIFO are equally bad. 
E)  None of the options are correct.

Question 4

The financial statements of Snapit Company are given below.   Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm's leverage ratio for 2009 is

Accepted Answer

A)  2.25. 
B)  3.53. 
C)  2.61. 
D)  3.06. 
E)  None of the options are correct. 
A)  2.25. 
B)  3.53. 
C)  2.61. 
D)  3.06. 
E)  None of the options are correct.

Question 5

The financial statements of Snapit Company are given below.   Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements for Snapit Company. The firm's current ratio for 2009 is

Accepted Answer

A)  1.98. 
B)  2.47. 
C)  0.65. 
D)  1.53. 
E)  None of the options are correct. 
A)  1.98. 
B)  2.47. 
C)  0.65. 
D)  1.53. 
E)  None of the options are correct.

Question 6

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

Accepted Answer

A)  The firm expanded plant and equipment in the past few years 
B)  The firm makes less efficient use of assets than competing firms 
C)  The firm has a substantial amount of old plant and equipment 
D)  The firm uses straight-line depreciation 
A)  The firm expanded plant and equipment in the past few years 
B)  The firm makes less efficient use of assets than competing firms 
C)  The firm has a substantial amount of old plant and equipment 
D)  The firm uses straight-line depreciation

Question 7

A technique to increase the perceived return to equity shareholders is _______________________.

Accepted Answer

A)  issuing new shares. 
B)  diluting existing shares. 
C)  deduce the use of debt. 
D)  through the use of leverage. 
A)  issuing new shares. 
B)  diluting existing shares. 
C)  deduce the use of debt. 
D)  through the use of leverage.

Question 8

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies

Accepted Answer

A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing its assets more efficiently than other firms in the industry. 
A)  the firm has a higher P/E ratio than other firms in the industry. 
B)  the firm is more likely to avoid insolvency in the short run than other firms in the industry. 
C)  the firm is more profitable than other firms in the industry. 
D)  the firm is utilizing its assets more efficiently than other firms in the industry.

Question 9

One problem with comparing financial ratios prepared by different reporting agencies is

Accepted Answer

A)  some agencies receive financial information later than others. 
B)  agencies vary in their policies as to what is included in specific calculations. 
C)  some agencies are careless in their reporting. 
D)  some firms are more conservative in their accounting practices. 
E)  None of the options are correct. 
A)  some agencies receive financial information later than others. 
B)  agencies vary in their policies as to what is included in specific calculations. 
C)  some agencies are careless in their reporting. 
D)  some firms are more conservative in their accounting practices. 
E)  None of the options are correct.

Question 10

__________ provides a snapshot of the financial condition of the firm at a particular time.

Accepted Answer

A)  The balance sheet 
B)  The income statement 
C)  The statement of cash flows 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  The balance sheet 
B)  The income statement 
C)  The statement of cash flows 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 11

An example of a liquidity ratio is

Accepted Answer

A)  fixed asset turnover. 
B)  current ratio. 
C)  acid test or quick ratio. 
D)  fixed asset turnover and acid test or quick ratio. 
E)  current ratio and acid test or quick ratio. 
A)  fixed asset turnover. 
B)  current ratio. 
C)  acid test or quick ratio. 
D)  fixed asset turnover and acid test or quick ratio. 
E)  current ratio and acid test or quick ratio.

Question 12

A firm has an ROE of −2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is

Accepted Answer

A)  2%. 
B)  4%. 
C)  6%. 
D)  8%. 
E)  None of the options are correct. 
A)  2%. 
B)  4%. 
C)  6%. 
D)  8%. 
E)  None of the options are correct.

Question 13

Economic value added (EVA) was coined by Stern & Stewart. The concept, however, has been around for many years but referred to as _______________________.

Accepted Answer

A)  profitability measure. 
B)  excess return. 
C)  residual income. 
D)  prospective capacity. 
E)  return margin. 
A)  profitability measure. 
B)  excess return. 
C)  residual income. 
D)  prospective capacity. 
E)  return margin.

Question 14

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,

Accepted Answer

A)  the original and restated P/E ratios were quite similar. 
B)  the original and restated P/E ratios varied considerably. 
C)  most variation was explained by tax differences. 
D)  most firms were consistent in their treatment of goodwill. 
A)  the original and restated P/E ratios were quite similar. 
B)  the original and restated P/E ratios varied considerably. 
C)  most variation was explained by tax differences. 
D)  most firms were consistent in their treatment of goodwill.

Question 15

Economic value added (EVA) is also known as

Accepted Answer

A)  excess capacity. 
B)  excess income. 
C)  value of assets. 
D)  accounting value added. 
E)  residual income. 
A)  excess capacity. 
B)  excess income. 
C)  value of assets. 
D)  accounting value added. 
E)  residual income.

Question 16

The financial statements of Snapit Company are given below.   Note: The common shares are trading in the stock market for $100 each.
Refer to the financial statements of Snapit Company. The firm's fixed asset turnover ratio for 2009 is

Accepted Answer

A)  4.60. 
B)  3.61. 
C)  3.16. 
D)  5.46. 
A)  4.60. 
B)  3.61. 
C)  3.16. 
D)  5.46.

Question 17

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's leverage ratio for 2009 is

Accepted Answer

A)  1.62. 
B)  1.56. 
C)  2.00. 
D)  2.42. 
E)  2.17. 
A)  1.62. 
B)  1.56. 
C)  2.00. 
D)  2.42. 
E)  2.17.

Question 18

The financial statements of Midwest Tours are given below.   Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm's return on sales ratio for 2009 is

Accepted Answer

A)  20.2%. 
B)  21.6%. 
C)  22.4%. 
D)  18.0%. 
A)  20.2%. 
B)  21.6%. 
C)  22.4%. 
D)  18.0%.

Question 19

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities.

Accepted Answer

A)  Net Sales 
B)  Operating Income 
C)  Net Income 
D)  Non-operating Income 
E)  Earnings before interest and taxes 
A)  Net Sales 
B)  Operating Income 
C)  Net Income 
D)  Non-operating Income 
E)  Earnings before interest and taxes

Question 20

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

Accepted Answer

A)  increase the ROE 
B)  not change the ROE 
C)  decrease the ROE 
D)  change the ROE in an indeterminable manner 
A)  increase the ROE 
B)  not change the ROE 
C)  decrease the ROE 
D)  change the ROE in an indeterminable manner

Exam 19: Financial Statement Analysis

What type of firm is most easily valued using fundamental analysis?

A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is

If you wish to compute economic earnings and are trying to decide how to account for inventory,

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's leverage ratio for 2009 is

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements for Snapit Company. The firm's current ratio for 2009 is

__________ best explains a ratio of sales/average net fixed assets that exceeds the industry average.

A technique to increase the perceived return to equity shareholders is _______________________.

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies

One problem with comparing financial ratios prepared by different reporting agencies is

__________ provides a snapshot of the financial condition of the firm at a particular time.

An example of a liquidity ratio is

A firm has an ROE of −2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is

Economic value added (EVA) was coined by Stern & Stewart. The concept, however, has been around for many years but referred to as _______________________.

A study by Speidell and Bavishi (1992) found that when accounting statements of foreign firms were restated on a common accounting basis,

Economic value added (EVA) is also known as

The financial statements of Snapit Company are given below. Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's fixed asset turnover ratio for 2009 is

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's leverage ratio for 2009 is

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm's return on sales ratio for 2009 is

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities.

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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