Question 1

Financial leverage refers to the use of preferred stock in a firm's capital structure.

Accepted Answer

A) True 
 B)False

Question 2

Liquidity ratios are concerned with a firm's ability to pay its current bills without putting the firm in financial difficulty.

Accepted Answer

A) True 
 B)False

Question 3

Which one of the following statements is NOT correct?

Accepted Answer

A)  The DuPont system is based on two equations that relate a firm's return on asset (RO
A)  and return on equity (RO
E) . 
B)  The DuPont system is a set of related ratios that links the items of balance sheet and the income statement. 
C)  Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (RO
E) . 
D)  All of the above are correct. 
A)  The DuPont system is based on two equations that relate a firm's return on asset (RO
A)  and return on equity (RO
E) . 
B)  The DuPont system is a set of related ratios that links the items of balance sheet and the income statement. 
C)  Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (RO
E) . 
D)  All of the above are correct.

Question 4

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

Accepted Answer

A)  7.1% 
B)  34.7% 
C)  28.1% 
D)  43.2% 
A)  7.1% 
B)  34.7% 
C)  28.1% 
D)  43.2%

Question 5

Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.

Accepted Answer

A)  15.42 times 
B)  18.34 times 
C)  14.15 times 
D)  None of the above 
A)  15.42 times 
B)  18.34 times 
C)  14.15 times 
D)  None of the above

Question 6

The purchase of additional inventory by a firm should decrease a firm's quick ratio.

Accepted Answer

A) True 
 B)False

Question 7

The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier to determine its return on equity.

Accepted Answer

A) True 
 B)False

Question 8

The higher the times-interest-earned ratio, the more comfortable a firm is in meeting its interest obligations.

Accepted Answer

A) True 
 B)False

Question 9

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

Accepted Answer

A)  4.87 times 
B)  8.12 times 
C)  5.17 times 
D)  None of the above 
A)  4.87 times 
B)  8.12 times 
C)  5.17 times 
D)  None of the above

Question 10

Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio? Round your final answer to two decimal places.

Accepted Answer

A)  1.83 
B)  0.73 
C)  1.67 
D)  None of the above 
A)  1.83 
B)  0.73 
C)  1.67 
D)  None of the above

Question 11

The most frequent method used for creating a common-size balance sheet is to divide each of the accounts by total assets, expressing each account as a percentage of total assets.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is a benefit of a common-size income statement?

Accepted Answer

A)  It is very useful to assess how effectively a firm collected its accounts receivable. 
B)  It reveals a great deal of information about the adequacy of a firm's net working capital. 
C)  It can tell the analyst a great deal about a firm's efficiency and profitability. 
D)  It reveals how effectively a firm has increased its assets. 
A)  It is very useful to assess how effectively a firm collected its accounts receivable. 
B)  It reveals a great deal of information about the adequacy of a firm's net working capital. 
C)  It can tell the analyst a great deal about a firm's efficiency and profitability. 
D)  It reveals how effectively a firm has increased its assets.

Question 13

Which of the following is NOT true about the inventory turnover ratio?

Accepted Answer

A)  It is calculated by dividing inventory by cost of goods sold. 
B)  It measures how many times the inventory is turned over into saleable products. 
C)  The more times a firm can turnover its inventory, the better. 
D)  Too high a turnover or too low a turnover could be a warning sign. 
A)  It is calculated by dividing inventory by cost of goods sold. 
B)  It measures how many times the inventory is turned over into saleable products. 
C)  The more times a firm can turnover its inventory, the better. 
D)  Too high a turnover or too low a turnover could be a warning sign.

Question 14

For a given level of after-tax income, the lower the level of equity a firm has, the higher the return on equity its shareholders will earn.

Accepted Answer

A) True 
 B)False

Question 15

A firm that has no debt will have its return on assets (ROA) equal to its return on equity (ROE).

Accepted Answer

A) True 
 B)False

Question 16

Stockholders are primarily concerned on the value of their stock, but not on how much cash they can expect to receive from dividends and/or capital appreciation over time.

Accepted Answer

A) True 
 B)False

Question 17

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

Accepted Answer

A)  $34.05 
B)  $3.68 
C)  $11.20 
D)  $36.80 
A)  $34.05 
B)  $3.68 
C)  $11.20 
D)  $36.80

Question 18

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Accepted Answer

A)  The quick ratio more accurately reflects a firm's profitability. 
B)  It omits the least liquid current asset from the numerator of the ratio. 
C)  The current ratio does not include accounts receivable. 
D)  It measures how "quickly" cash flows through the firm. 
A)  The quick ratio more accurately reflects a firm's profitability. 
B)  It omits the least liquid current asset from the numerator of the ratio. 
C)  The current ratio does not include accounts receivable. 
D)  It measures how "quickly" cash flows through the firm.

Question 19

Coverage ratios, like times interest earned and cash coverage ratio, allow:

Accepted Answer

A)  a firm's management to assess how well they meet short-term liabilities. 
B)  a firm's shareholders to assess how well the firm will meet its short-term liabilities. 
C)  a firm's creditors to assess how well the firm will meet its interest obligations. 
D)  a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense. 
A)  a firm's management to assess how well they meet short-term liabilities. 
B)  a firm's shareholders to assess how well the firm will meet its short-term liabilities. 
C)  a firm's creditors to assess how well the firm will meet its interest obligations. 
D)  a firm's creditors to assess how well the firm will meet its short-term liabilities other than interest expense.

Question 20

Explain the different ways that a firm's ratios can be benchmarked.

Accepted Answer

Benchmark data can be obtained in three

Exam 4: Analyzing Financial Statements

Financial leverage refers to the use of preferred stock in a firm's capital structure.

Liquidity ratios are concerned with a firm's ability to pay its current bills without putting the firm in financial difficulty.

Which one of the following statements is NOT correct?

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.

The purchase of additional inventory by a firm should decrease a firm's quick ratio.

The DuPont equation relates a firm's net profit margin, total asset turnover ratio, and equity multiplier to determine its return on equity.

The higher the times-interest-earned ratio, the more comfortable a firm is in meeting its interest obligations.

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio? Round your final answer to two decimal places.

The most frequent method used for creating a common-size balance sheet is to divide each of the accounts by total assets, expressing each account as a percentage of total assets.

Which of the following is a benefit of a common-size income statement?

Which of the following is NOT true about the inventory turnover ratio?

For a given level of after-tax income, the lower the level of equity a firm has, the higher the return on equity its shareholders will earn.

A firm that has no debt will have its return on assets (ROA) equal to its return on equity (ROE).

Stockholders are primarily concerned on the value of their stock, but not on how much cash they can expect to receive from dividends and/or capital appreciation over time.

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Coverage ratios, like times interest earned and cash coverage ratio, allow:

Explain the different ways that a firm's ratios can be benchmarked.

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Bond Valuation and the Structure of Interest Rates

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

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