Question 1

Common-sized income statements

Accepted Answer

A)  assist in the comparison of companies of different sizes. 
B)  show each income statement account as a percentage of total assets. 
C)  compare companies with the same level of total sales. 
D)  compare companies with the same level of net income. 
A)  assist in the comparison of companies of different sizes. 
B)  show each income statement account as a percentage of total assets. 
C)  compare companies with the same level of total sales. 
D)  compare companies with the same level of net income.

Question 2

Common-sized balance sheets

Accepted Answer

A)  show data for companies in the same industry. 
B)  show data for companies with approximately the same amount of assets. 
C)  show each balance sheet account as a percentage of total sales. 
D)  show each balance sheet account as a percentage of total assets. 
A)  show data for companies in the same industry. 
B)  show data for companies with approximately the same amount of assets. 
C)  show each balance sheet account as a percentage of total sales. 
D)  show each balance sheet account as a percentage of total assets.

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

A) True 
 B)False

Question 4

Please refer to Table 4-5 for the following questions.
Table 4-5
Yen Inc.
Balance Sheet
   Yen Inc.
Income Statement
For the year ended December 31, 2010
  
-Based on the information contained in Tables 4-5,what was the total amount of Yen's common stock dividend for 2010?

Accepted Answer

A)  $17,000 
B)  $12,800 
C)  $9,000 
D)  $8,000 
A)  $17,000 
B)  $12,800 
C)  $9,000 
D)  $8,000

Question 5

Operating return on assets is equal to the operating profit margin times total asset turnover.

Accepted Answer

A) True 
 B)False

Question 6

Ratio analysis enhances our understanding of three basic attributes of performance:
 liquidity,profitability,and the ability to create shareholder value.

Accepted Answer

A) True 
 B)False

Question 7

Return on equity is driven by (1)the spread between the operating return on assets and the interest rate,and (2)changes in the debt ratio.

Accepted Answer

A) True 
 B)False

Question 8

It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.

Accepted Answer

A) True 
 B)False

Question 9

SRC has a debt ratio of .4,current liabilities of $18,000,and total assets of $100,000.What is the level of SRC's total liabilities?

Accepted Answer

A)  $22,000 
B)  $40,000 
C)  $58,000 
D)  $63,934 
A)  $22,000 
B)  $40,000 
C)  $58,000 
D)  $63,934

Question 10

The current ratio of a firm would be decreased by which of the following?

Accepted Answer

A)  land held for investment is sold for cash 
B)  equipment is purchased, financed by a long-term debt issue 
C)  inventories are sold for cash 
D)  inventories are sold on a long-term credit basis 
A)  land held for investment is sold for cash 
B)  equipment is purchased, financed by a long-term debt issue 
C)  inventories are sold for cash 
D)  inventories are sold on a long-term credit basis

Question 11

Economic Value Added attempts to measure a firm's economic profit rather than its accounting profit.

Accepted Answer

A) True 
 B)False

Question 12

Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

Accepted Answer

A) True 
 B)False

Question 13

Please refer to Table 4-3 for the following questions.
Table 4-3
Emery Corporation
  
-Based on the information in Table 4-3,the current and acid-test ratios are,respectively

Accepted Answer

A)  2.37 and 1.39. 
B)  2.37 and 1.27. 
C)  2.18 and 1.39. 
D)  2.18 and 1.27. 
A)  2.37 and 1.39. 
B)  2.37 and 1.27. 
C)  2.18 and 1.39. 
D)  2.18 and 1.27.

Question 14

Gemini Corp.reported the following balance sheet:
  Gemini has sales of $600,000 and net income of $50,000.Gemini's return on equity is

Accepted Answer

A)  5.00%. 
B)  50.00%. 
C)  38.17%. 
D)  41.13%. 
A)  5.00%. 
B)  50.00%. 
C)  38.17%. 
D)  41.13%.

Question 15

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

Accepted Answer

A) True 
 B)False

Question 16

a.Using the financial statements for IUP Enterprises for 2010 (given below),calculate the return on equity,the debt ratio,and the times interest earned ratio.
b.Suppose the industry average debt ratio is 50%.Give one reason why the debt ratio for IUP Enterprises may be considered favorable,and give one reason why the debt ratio for IUP Enterprises may be considered unfavorable.
IUP Enterprises
2010 Financial Statements

Accepted Answer

a.ROE = $1,020/$3,600 = 28.33%
Debt Rati

Question 17

Please refer to Table 4-2 for the following questions.
Table 4-2
Drummond Company
Balance Sheet
  
-Based on the information in Table 4-2,and assuming the company's stock price is $50 per share,the P/E ratio is

Accepted Answer

A)  10.89. 
B)  14.33. 
C)  24.44. 
D)  27.50. 
A)  10.89. 
B)  14.33. 
C)  24.44. 
D)  27.50.

Question 18

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

A)  the risk free rate of interest is 3% 
B)  the corporation's inventory turnover is high 
C)  investors' required rate of return is 8% 
D)  investors' required rate of return is 12% 
A)  the risk free rate of interest is 3% 
B)  the corporation's inventory turnover is high 
C)  investors' required rate of return is 8% 
D)  investors' required rate of return is 12%

Question 19

Which of the following statements concerning Economic Value Added (EVA)is most correct?

Accepted Answer

A)  The higher the cost of capital, the higher the EVA, other things being held constant 
B)  EVA can be negative even if operating profits are positive 
C)  A company with positive net income will have positive EVA 
D)  HIgher operating return on assets will result in lower EVA for a company with a debt ratio over 50% 
A)  The higher the cost of capital, the higher the EVA, other things being held constant 
B)  EVA can be negative even if operating profits are positive 
C)  A company with positive net income will have positive EVA 
D)  HIgher operating return on assets will result in lower EVA for a company with a debt ratio over 50%

Question 20

During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000.The result of this growth will be

Accepted Answer

A)  a higher operating profit margin and higher net income. 
B)  a lower operating profit margin and lower net income. 
C)  a lower operating profit margin and higher net income. 
D)  a higher P/E ratio. 
A)  a higher operating profit margin and higher net income. 
B)  a lower operating profit margin and lower net income. 
C)  a lower operating profit margin and higher net income. 
D)  a higher P/E ratio.

Common-sized income statements

Common-sized balance sheets

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.

Please refer to Table 4-5 for the following questions. Table 4-5 Yen Inc. Balance Sheet Yen Inc. Income Statement For the year ended December 31, 2010 -Based on the information contained in Tables 4-5,what was the total amount of Yen's common stock dividend for 2010?

Operating return on assets is equal to the operating profit margin times total asset turnover.

Ratio analysis enhances our understanding of three basic attributes of performance: liquidity,profitability,and the ability to create shareholder value.

Return on equity is driven by (1)the spread between the operating return on assets and the interest rate,and (2)changes in the debt ratio.

It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.

SRC has a debt ratio of .4,current liabilities of $18,000,and total assets of $100,000.What is the level of SRC's total liabilities?

The current ratio of a firm would be decreased by which of the following?

Economic Value Added attempts to measure a firm's economic profit rather than its accounting profit.

Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

Please refer to Table 4-3 for the following questions. Table 4-3 Emery Corporation -Based on the information in Table 4-3,the current and acid-test ratios are,respectively

Gemini Corp.reported the following balance sheet: Gemini has sales of $600,000 and net income of $50,000.Gemini's return on equity is

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

Please refer to Table 4-2 for the following questions. Table 4-2 Drummond Company Balance Sheet -Based on the information in Table 4-2,and assuming the company's stock price is $50 per share,the P/E ratio is

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

Which of the following statements concerning Economic Value Added (EVA)is most correct?

During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000.The result of this growth will be

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

Exam 4: Evaluating a Firms Financial Performance

Common-sized income statements

Common-sized balance sheets

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.

Please refer to Table 4-5 for the following questions. Table 4-5 Yen Inc. Balance Sheet Yen Inc. Income Statement For the year ended December 31, 2010 -Based on the information contained in Tables 4-5,what was the total amount of Yen's common stock dividend for 2010?

Operating return on assets is equal to the operating profit margin times total asset turnover.

Ratio analysis enhances our understanding of three basic attributes of performance: liquidity,profitability,and the ability to create shareholder value.

Return on equity is driven by (1)the spread between the operating return on assets and the interest rate,and (2)changes in the debt ratio.

It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.

SRC has a debt ratio of .4,current liabilities of $18,000,and total assets of $100,000.What is the level of SRC's total liabilities?

The current ratio of a firm would be decreased by which of the following?

Economic Value Added attempts to measure a firm's economic profit rather than its accounting profit.

Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

Please refer to Table 4-3 for the following questions. Table 4-3 Emery Corporation -Based on the information in Table 4-3,the current and acid-test ratios are,respectively

Gemini Corp.reported the following balance sheet: Gemini has sales of $600,000 and net income of $50,000.Gemini's return on equity is

Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.

Please refer to Table 4-2 for the following questions. Table 4-2 Drummond Company Balance Sheet -Based on the information in Table 4-2,and assuming the company's stock price is $50 per share,the P/E ratio is

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

Which of the following statements concerning Economic Value Added (EVA)is most correct?

During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000.The result of this growth will be

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters