Question 1

DuPont Analysis If Apex, Inc. has an ROE = 10%, equity multiplier = 3, and profit margin of 5%, what is the total asset turnover ratio?

Accepted Answer

A)  .0600 
B)  .0667 
C)  .1667 
D)  .6667

Question 2

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.

Accepted Answer

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.

Question 3

What is the trade-off between using too much financial leverage and not using enough leverage? Who is likely to complain the most in each case?

Accepted Answer

The answer of What is the trade-off between using too...

Question 4

Liquidity Ratios You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $200,000, Accounts receivable = $800,000, Inventory = $1,000,000, Accrued wages and taxes = $250,000, Accounts payable = $400,000, and Notes payable = $300,000. What are Blue Jays' Current ratio, Quick ratio, and Cash ratio, respectively?

Accepted Answer

A)  1.05263, 1.05263, 0.21053 
B)  2.10526, 1.05263, 0.21053 
C)  3.07692, 1.53846, 0.30769 
D)  3.07692, 1.05263, 0.30769

Question 5

You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the equity multiplier for the two firms.

Accepted Answer

A)  Firm A: 15 times; Firm B: 1.00 times 
B)  Firm A: 10 times; Firm B: 1.11 times 
C)  Firm A: 10 times; Firm B: 9.99 times 
D)  Firm A: 20 times; Firm B: 1.11 times

Question 6

Which of these statements is true?

Accepted Answer

A)  A low inventory turnover ratio or a low days' sales in inventory is a sign of good inventory management. 
B)  A high inventory turnover ratio or a low days' sales in inventory is a sign of good inventory management. 
C)  A low inventory turnover ratio or a high days' sales in inventory is a sign of good inventory management. 
D)  A high inventory turnover ratio or a high days' sales in inventory is a sign of good inventory management.

Question 7

The term "spreading the financial statements" refers to _____________.

Accepted Answer

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

Question 8

Asset Management Ratios Corn Products Corp. ended the year 2011 with an average collection period of 40 days. The firm's credit sales for 2011 were $9 million. What is the approximate year-end 2011 balance in accounts receivable for Corn Products?

Accepted Answer

A)  $225,000 
B)  $986,300 
C)  $4,444,400 
D)  $360,000,000

Question 9

DuPont Analysis If Epic, Inc. has an ROE = 25%, equity multiplier = 4, a profit margin of 12%, what is the total asset turnover ratio?

Accepted Answer

A)  .0833 
B)  .192 
C)  .5208 
D)  .75

Question 10

These ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm.

Accepted Answer

A)  Liquidity 
B)  Coverage 
C)  Financial 
D)  Profitability

Question 11

This measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials.

Accepted Answer

A)  Accounts receivable turnover 
B)  Average collection period 
C)  Average payment period 
D)  Accounts payable turnover

Exam 3: Analyzing Financial Statements