Question 1

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 debt-to-equity ratio for the two firms.

Accepted Answer

A)  Firm A: 9 times; Firm B: 1.11 times
B)  Firm A: 19 times; Firm B: 0.11 times
C)  Firm A: 9 times; Firm B: 0.11 times
D)  Firm A: 19 times; Firm B: 1.11 times C

Question 2

A firm that is efficient in inventory management will have:

Accepted Answer

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. A

Question 3

Last year Rain Repel Corporation had an ROE of 10 percent and a dividend payout ratio of 80 percent. What is the sustainable growth rate?

Accepted Answer

A)  1.11 percent
B)  2.04 percent
C)  44.44 percent
D)  50.00 percent B

Question 4

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

Accepted Answer

A)  Basic earning power ratio
B)  Profit margin
C)  Return on assets
D)  Operating leverage return

Question 5

A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE?

Accepted Answer

A)  ROA = 6.6 percent; ROE = 14.52 percent
B)  ROA = 7.2 percent; ROE = 15.84 percent
C)  ROA = 9.5 percent; ROE = 20.9 percent
D)  ROA = 8.1 percent; ROE = 17.82 percent

Question 6

To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks?

Accepted Answer

A)  Competitive analysis
B)  Cross-industry analysis
C)  Time-industry analysis
D)  Time series analysis

Question 7

You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?

Accepted Answer

A)  2.70 percent
B)  10.80 percent
C)  25.00 percent
D)  9.89 percent

Question 8

Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales?

Accepted Answer

A)  Cash
B)  Current
C)  Internal-growth
D)  Quick or acid test

Question 9

Tina's Track Supply's market-to-book ratio is currently 4.5 times and PE ratio is 10.5 times. If Tina's Track Supply's common stock is currently selling at $100 per share, what is the book value per share and earnings per share?

Accepted Answer

A)  $9.5238, $22.2222, respectively
B)  $450, $1,050, respectively
C)  $1,050, $450, respectively
D)  $22.2222, $9.5238, respectively

Question 10

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

Accepted Answer

A)  internal growth rate.
B)  retention rate.
C)  sustainable growth rate.
D)  operating expansion rate.

Question 11

Trina'sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2013. If the firm's total debt at year-end was $10 million, how much equity does Trina's Trikes have?

Accepted Answer

A)  $2 million
B)  $5 million
C)  $10 million
D)  $20 million

Question 12

CornProducts Corp. ended the year 2013 with an average collection period of 40 days. The firm's credit sales for 2011 were $9 million. What is the approximate year-end 2013 balance in accounts receivable for Corn Products?

Accepted Answer

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

Question 13

Use the following information to calculate current assets: sales = $12 million, capital intensity ratio = 4 times, debt ratio = 45 percent, and fixed asset turnover ratio = 2.5 times.

Accepted Answer

A)  $4.8m
B)  $21.6m
C)  $43.2m
D)  $48m

Question 14

The term "capital structure" refers to:

Accepted Answer

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.
D)  none of these.

Question 15

Which of the following statements is correct?

Accepted Answer

A)  If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity.
B)  An extremely low average collection period will maximize net income.
C)  In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible.
D)  All of these statements are correct.

Question 16

Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java's total assets?

Accepted Answer

A)  $0.125m
B)  $1.25m
C)  $12.5m
D)  $12m

Question 17

Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax rate = 30 percent, and number of shares of common stock outstanding = 1,000. Tierre's Ts has no preferred stock outstanding.

Accepted Answer

A)  0.1814
B)  0.4854
C)  0.685
D)  3.7756

Question 18

Calculate the times interest earned ratio for Paige's Purses, Inc. using the following information: sales = $50,000,000, cost of goods sold = $15,000,000, depreciation expense = $2,000,000, addition to retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30 percent, and number of shares of common stock outstanding = 10,000,000. Paige's Purses has no preferred stock outstanding.

Accepted Answer

A)  0.27
B)  3.30
C)  11.00
D)  16.67

Question 19

Leash N Collar reported a profit margin of 8 percent, total asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000, and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate?

Accepted Answer

A)  5.2632 percent
B)  7.3333 percent
C)  8.6956 percent
D)  6.383 percent

Question 20

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

Accepted Answer

A)  0.23
B)  4.33
C)  1.63
D)  2.90

Exam 3: Analyzing Financial Statements