Deck 4: Measuring Corporate Performance

Question 1

When a firm's debt-equity ratio is 1.0, the firm:

A)Has too much long-term debt in relation to leases
B)Has less long-term debt than equity
C)Is nearing insolvency
D)has as much in long-term liabilities as in equity

Answer 1

has as much in long-term liabilities as in equity

Question 2

Last year's return on equity was 30 percent, and while the same amount of earnings was generated this year, the ROE has decreased to 20 percent.The firm has no preferred stock.What caused the decrease?

A)Equity decreased by 10 percent
B)Equity decreased by 50 percent
C)Equity increased by 10 percent
D)Equity increased by 50 percent

Answer 2

Equity increased by 50 percent

Question 3

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9 percent?

A)7.50 percent
B)9.00 percent
C)10.95 percent
D)16.70 percent 60 =

Answer 3

10.95 percent

Question 4

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3.0?

A)$1,333,333
B)$1,200,000
C)$1,800,000
D)$3,000,000

Question 5

The inventory turnover ratio compares:

A)Sales to average inventory
B)Cost of goods sold to average inventory
C)Average receivables to average inventory
D)Average assets to average inventory

Question 6

A times interest earned ratio of 5.0 indicates that the firm:

A)Pays 5 times its earnings in interest expense
B)Earns significantly more than its interest obligations
C)Has interest expense equal to 5 percent of EBIT
D)Has low tax liability

Question 7

Which of the following is correct for a firm with EPS of $2 per share and a 40 percent payout ratio?

A)40 percent of earnings will be plowed back into the firm
B)Dividends will equal 60' per share
C)Book value per share of equity will increase by $1.20
D)Retained earnings will be unchanged

Question 8

A firm with no leases has a long-term debt ratio of 50 percent.This means that the book value of equity:

A)Equals the book value of long-term debt
B)Is less than the book value of long-term debt
C)is greater than the book value of long-term debt
D)is unknown in relation to the book value of long-term debt

Question 9

Which of the following statements is most likely correct for a firm with an average collection period of 90 days?

A)Its average daily sales are low
B)Its average daily sales are high
C)Its current ratio will be high
D)It is providing financing for approximately 25 percent of its annual sales

Question 10

If a firm's total debt ratio is greater than .5, then:

A)Its current liabilities are quite high
B)Its debt-equity ratio exceeds 1.0
C)It has too few of total assets
D)It has more long-term debt than equity

Question 11

A firm has $600,000 in current assets and $150,000 in current liabilities.Which of the following is correct if they use cash to pay off $50,000 in accounts payable?

A)Current ratio will increase to 5.0.
B)Net working capital will increase to $500,000
C)Current ratio will decrease
D)Net working capital will not change

Question 12

Which of the following actions will improve a firm's current ratio if it is now less than 1.0?

A)Convert marketable securities to cash
B)Pay accounts payable with cash
C)Buy inventory on credit
D)Sell inventory at cost

Question 13

A firm reports a net profit margin of 10.0 percent on sales of $3 million when ignoring the effects of financing.If taxes are $200,000, how much is EBIT?

A)$100,000
B)$300,000
C)$500,000
D)$800,000 Net profit margin =

Question 14

How would you interpret an interval measure of 50 days?

A)It takes 50 days on average to collect receivables
B)Inventory is converted into sales every 50 days
C)The firm can pay its expenses for at least 50 days
D)Assets are converted into sales every 50 days

Question 15

A firm's quick ratio of .89 suggests that the firm:

A)Has a low level of current liabilities
B)Has been overstating the value of its inventory
C)Faces a potentially serious liquidity crisis
D)Should reduce its holdings of cash and/or marketable securities

Question 16

Which of the following will allow your firm to achieve its targeted 16 percent ROA with an asset turnover of 2.5?

A)A leverage ratio of .0667
B)A P/E ratio of 14
C)A profit margin of 15 percent
D)A profit margin of 6.4 percent ROE = Profit margin x Asset turnover
)16 = Profit margin x 2.50

Question 17

Lease obligations are included in certain leverage ratios because leases:

A)Require the payment of interest
B)Represent long-term fixed obligations
C)Must be financed through a bank
D)Are a measure of efficiency, just like debt

Question 18

If a firm's cash coverage ratio is greater than its times interest earned ratio, then:

A)The firm's assets are not fully depreciated
B)The firm has no lease obligations
C)The firm has very little long-term debt
D)The firm has a high degree of liquidity

Question 19

When Tri-C Corp.compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover.What might you assume about Tri-C?

A)Its cash balance is too low
B)Its cost of goods sold is too low
C)Its current liabilities are too low
D)Its average inventory is too high

Question 20

An asset's liquidity measures its:

A)Potential for generating a profit
B)Cash requirements
C)Ease and cost of being converted to cash
D)Proportion of debt financing

Question 21

Which of the following most effectively uses cost of capital as part its measure of company performance?

A)EVA
B)Net income
C)ROA
D)ROE

Question 22

The board of directors is dissatisfied with last year's ROE of 15 percent.If the profit margin and asset turnover remain unchanged at 8 percent and 1.25 respectively, by how much must the total debt ratio increase to achieve 20 percent ROE?

A)Total debt ratio must increase by .5
B)Total debt ratio must increase by 5
C)Total debt ratio must increase by 5 percent
D)Total debt ratio must increase by 16.67 percent Last Year:
ROE = .15 = Profit margin x Asset turnover x leverage rate
= )08 x 1.25 x 1.5
This Year:
ROE = .20 = .08 x 1.25 x?

Question 23

What is the inventory turnover ratio for ABC Corp.if cost of goods sold equals $5,000, current ratio equals 3.0, quick ratio equals 1.5, and the firm has 1,800 in current assets?

A)2.78 times
B)4.17 times
C)5.56 times
D)8.33 times

Question 24

Which of the following will increase a firm's times interest earned ratio?

A)An increase in debt
B)A decrease in cost of goods sold
C)An increase in interest expense
D)A decrease in net income

Question 25

Last year's asset turnover ratio was 2.0.Sales have increased by 25 percent and average total assets have increased by 10 percent since that time.What is the current asset turnover ratio?

A)1.82
B)2.05
C)2.15
D)2.27 sales/average total assets = 2.0

Question 26

The use of debt in the firm's capital structure will increase ROE if the firm:

A)Has more debt than equity
B)Pays less in taxes than in interest
C)Earns a higher return than the rate paid on debt
D)Has a times interest earned greater than 1.0

Question 27

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?

A)35 percent
B)39 percent
C)54 percent
D)65 percent If total debt/equity = .65
Then total liabilities/total assets = .65/1.65

Question 28

A disadvantage of standard measures of liquidity is that the measures:

A)Ignore a firm's reserve borrowing capacity
B)Fail to include accounts receivable as an asset
C)Give inventories equal weighting in the quick ratio.
D)Do not include the current portions of long-term debt

Question 29

Which of the following is most likely to result in a higher P/E ratio for a firm, other things equal?

A)Lower growth rate in dividends
B)Reduction in the stock's required rate of return
C)Lower dividend yield
D)Lower stock price

Question 30

Which of the following is correct for a firm with a debt-equity ratio of .45 if long-term debt equals 500 and equity equals 2,000? The firm has:

A)Current liabilities that is valued at 400
B)Current assets that is valued at 400
C)Retained earnings that are valued at 900
D)preferred stock of 400 Total Debt = Current Debt + Long Term Debt
Debt/Equity Ratio = .45
Therefore, Debt/Equity Ratio x Shareholder Equity = Value of Total Debt
)45 x 2,000 = 900 Total Debt
Therefore, if Total Debt = 900 = Current Debt + Long Term Debt
900 = Current Debt + 500

Question 31

If the current liabilities now shown on a firm's balance sheet are not paid within one year then they will be:

A)Transferred to long-term liabilities
B)Deducted as bad debt
C)Listed as current liabilities one year from now
D)Deducted from retained earnings

Question 32

Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?

A)Buy raw materials on credit
B)Sell marketable securities at cost
C)Pay off accounts payable with cash
D)Pay off a portion of long-term debt with cash

Question 33

The shareholders' equity as shown on a corporate balance sheet belongs to the:

A)Common shareholders
B)Preferred shareholders
C)All groups of shareholders
D)All groups of shareholders and creditors

Question 34

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

A)Will have a net loss
B)Will have no income-tax liability
C)Needs to lower its interest expense
D)Can still have a positive net income

Question 35

A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends.By how much will shareholders' equity increase on the balance sheet?

A)$17 million
B)$18 million
C)$19 million
D)$25 million

Question 36

The financial ratios of a firm can best be compared to:

A)Ratios of firms in the same city
B)Ratios of firms having the same capital structure
C)Ratios of firms in the same industry
D)Ratios of firms having the same return on equity

Question 37

What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.5?

A)$8.57
B)$30.00
C)$85.70
D)$105.00

Question 38

A firm with zero net working capital has:

A)No cash or marketable securities
B)Insufficient inventories
C)Excessive current liabilities
D)A quick ratio of less than 1.0

Question 39

Which of the following facts might make a firm's interval measure too optimistic?

A)The cost of raw materials has been decreasing
B)The average collection period continues to increase
C)A large component of marketable securities will mature soon
D)The firm's cash is not earning any interest

Question 40

What must happen to asset turnover to leave ROE unchanged from its original 16 percent level if the profit margin is reduced from 8 percent to 6 percent and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:

A)Remain constant
B)Increase from 1.46 to 2.33
C)Decrease from 14.58 to 2.33
D)Increase from 4.76 to 9.60 Old ROE: .16 = .08 x Asset turnover x 1.2
\1)667 = Asset turnover
New ROE: .16 = .06 x Asset turnover x 1.6

Question 41

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?

A)Firms have different dividend payout ratios
B)Some firms use fully depreciated assets
C)Financial leverage varies among firms
D)Unprofitable firms will not have tax liability

Question 42

An example of liquid assets would be:

A)Buildings
B)Company cars
C)Finished goods
D)Fixed assets

Question 43

A firm's net profit margin when ignoring the effects of financing is 20 percent with an EBIT of $1.5 million and sales of $5 million.How much did the firm pay in taxes?

A)$50,000
B)$300,000
C)$350,000
D)$500,000 net profit margin =

Question 44

A cash coverage ratio of less than one indicates:

A)The firm does not have enough cash to make its interest payments
B)The firm does have enough cash to make its interest payments, but not its lease obligations
C)The firm has too little depreciation expense
D)Earnings need only to fall by a small amount before interest obligations cannot be covered

Question 45

XYZ Corp.has a profit margin of 7 percent, a debt burden of .8, and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18 percent?

A)1.26
B)1.61
C)2.14
D)4.02 ROE = leverage ratio x asset turnover x profit margin x debt burden
)18 = 1.5 x asset turnover x .07 x .8
)18 = .084 asset turnover

Question 46

XYZ Corp.has improved its average collection period from 55 to 40 days.Which one of XYZ are other ratios may appear worse as a result of the improved receivables collection?

A)Inventory turnover
B)Quick ratio
C)Net profit margin
D)Return on equity

Question 47

A total debt ratio of 0.35:

A)Indicates that the firm is financed with 35 percent long-term debt
B)Would exist if a firm had liabilities of $700 and assets of $2,000
C)Indicates that 35 cents of every dollar of capital is in the form of short-term debt
D)Indicates that 35 cents of every dollar of capital is in the form of long-term debt

Question 48

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?

A)The growth rate can increase from 6 percent to 10.5 percent
B)The growth rate can increase from 6 percent to 12 percent
C)The growth rate can increase from 8 percent to 14 percent
D)The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE
= )3 x .2 = 6%

Question 49

Which of the following might be interpreted as a signal that stock price is currently too high?

A)An abnormally low dividend yield
B)A high E/P ratio
C)A low book value per share
D)A low P/E ratio

Question 50

By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?

A)$240,000
B)$333,333
C)$400,000
D)$516,167 current ROA = (sales/assets) x profit margin
)10 = ($4 million/assets) x .05
)10 = $200,000/assets
$2 million = assets
Proposed ROA = (sales/assets) x profit margin
)12= ($4 million/assets) x .05
)12 = $200,000/assets
$1,666,667 = assets

Question 51

ABC Corp.has an ROE of 20 percent and a current dividend-payout ratio of 40 percent.Which of the following changes will allow their earnings to grow at a 15 percent rate?

A)A decrease in the dividend-payout ratio to 35 percent while holding ROE constant
B)A two-percentage-point decrease in ROE while holding dividend-payout ratio constant
C)A decrease in dividend-payout ratio to 25 percent while holding ROE constant
D)An increase in dividend payout ratio to 50 percent and an increase in ROE to 25 percent current earnings growth rate = plowback ratio x ROE
= )6 x .20 = 12%
Desired earnings growth rate = plowback ratio x ROE

Question 52

Which of the following changes will provide an increase (if only in the short-run) in a firm's ROE?

A)An increase in total assets
B)An increase in the dividend-payout ratio
C)An increase in equity
D)The payment of a stock dividend

Question 53

Instead of increasing its long-term debt by borrowing money to purchase new stereo equipment, Jay's Jams Inc.decides to lease the equipment.How does this affect its long-term debt ratio?

A)It will decrease
B)It will increase
C)It will remain unchanged
D)Unknown without the amount of the lease obligation

Question 54

What is the ROE for a firm with times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million?

A)-33.33 percent
B)30.00 percent
C)33.33 percent
D)50.00 percent Times interest earned = EBIT/interest = 2
Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million
= $)5 million
ROE = net income/equity
= $)5 million/$1.5 million

Question 55

A company with long-term debt of 80, lease obligations of 20, total assets of 1,000, and total liabilities of 350 has a:

A)Total debt ratio of approximately .10
B)Total debt ratio of approximately .23
C)Long-term debt ratio of approximately .15
D)debt-to-equity ratio of approximately .15 Equity = 1000 - 350 = 650

Question 56

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10 percent and the leverage ratio equals 1.0?

A)Increase the leverage ratio
B)Increase the debt burden from its current level
C)Decrease assets from the current level
D)Decrease the debt burden from its current level

Question 57

What is the residual income or EVA for a firm with $1 million in total capital, $300,000 in net income, and a 20 percent cost of capital?

A)$100,000
B)$140,000
C)$240,000
D)$500,000 Total capital x cost of capital
$1 million x .2 = $200,000
Residual income = Net Income - Cost of Capital
= 300,000 - 200,000

Question 58

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50 percent?

A)$33.33
B)$37.50
C)$62.50
D)$66.67 market-to-book ratio = stock price/book value per share
)75 = $50/book value per share

Question 59

The use of financial leverage will be detrimental to a firm's ROE if the:

A)Firm has no long-term debt
B)Firm's profit margin does not exceed its asset turnover
C)Interest expense exceeds the tax liability
D)Interest rate on debt exceeds the firm's ROA

Question 60

Efficiency ratios:

A)Include the quick-ratio, asset turnover ratio, and return on equity
B)Are used to measure how well the company uses its assets
C)Are used to measure how liquid the company is
D)Help answer questions of firm stability

Question 61

An asset turnover ratio of 1.75 can be interpreted as:

A)$1.75 in sales are generated for every $1.00 of assets
B)$1.75 in additional assets are generated for every $1.00 of sales
C)$1.75 in assets are used to generate $1.00 of sales
D)$1.00 in sales are used to generate $1.75 in assets

Question 62

Cindex Corporation had total capitalization of $500 million.It had sales of $600; cost of goods sold of $375 million, and operating expenses of $75 million.Tax rate is 30%.Calculate the company's Return of Capital.

A)21%
B)23%
C)25%
D)27%

Question 63

Calculate the average collection period for Dotte Inc.if its accounts receivables were $500 and $600 at the end of each of the last two years, and its revenue over the last year was $3,000:

A)60 days
B)61 days
C)67 days
D)73 days

Question 64

A firm with below average earnings growth in one year is likely to:

A)have below average earnings growth in the following year
B)have had below average earnings growth in the previous year
C)have either above or below average earnings growth in the following year, (it is random)
D)continue this trend downward in the years to follow

Question 65

In the Dupont Equation, what effect does an increase in a firm's borrowing costs (i.e., a higher interest rate) have on its net profit margin?

A)Remain unchanged
B)Decline by a lot with a high interest rate
C)Decline by a little with a low interest rate
D)It will increase

Question 66

Calculate the dividend per share that is paid when the earnings per share are $6.00 and plowback ratio is 0.85:

A)$0.51
B)$0.71
C)$0.90
D)$5.10 Payout ratio = 1 - 0.85 = 0.15
0)15 = Dividend per share/$6

Question 67

Net Corp.has an ROE of 30% and would like to see earnings grow at a 18% annual rate.What percent of earnings can they afford to pay out as dividends?

A)45%
B)40%
C)35%
D)30% Growth in earnings = Plowback x ROE
)18 = Plowback x .30
)18/.30 = 60% = Plowback

Question 68

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?

A)9.56 percent
B)15.94 percent
C)16.96 percent
D)38.25 percent Given D/E ratio then leverage ratio:
1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25

Question 69

A sign that a firm is efficient is a:

A)high average collection period
B)high day's sales in inventories
C)low asset turnover
D)high inventory turnover

Question 70

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1.0 before the payoff?

A)The quick ratio and current ratio will both increase
B)The quick ratio and the current ratio will both decrease
C)The quick ratio will increase but the current ratio will remain unchanged
D)The current ratio will increase but the quick ratio will remain unchanged

Question 71

The current ratio is a good proxy for a firm's:

A)Liquidity
B)Efficiency
C)Leverage
D)Profitability

Question 72

If Dotte's Doors Corporation merges with its supplier, Wally's Wood, its profit margin will:

A)most likely decrease
B)most likely increase and continue to increase in the future
C)most likely increase but be offset by an increase in the turnover ratio
D)Most likely increase but be offset by a decrease in the turnover ratio

Question 73

Which of the following is incorrect for a firm with a payout ratio of 0.15 and ROE of 20 percent:

A)It reinvests 85 percent of its earnings back into the firm
B)The firm's retained earnings will increase the book value of equity by 17 percent
C)It pays a dividend of 15 cents per share
D)The firm's earnings and equity will grow by 17 percent per year

Question 74

TSI Inc.has enough liquid assets to finance its operations for 67 days and cash, marketable securities, and receivables totaling $1,000.TSI's average daily expenditures from operations are:

A)$6.70
B)$8.23
C)$14.93
D)$22.28 67 days = 1000/average daily expenditures

Question 75

A high dividend yield indicates:

A)investors expect high dividend growth
B)investors require a high rate of return
C)the stock price is relatively high
D)investors require a low rate of return

Question 76

__________ are those expected to be turned into cash in the near future, while __________ are those expected to be fulfilled in the near future, and the difference between the two is __________.

A)Current assets; current liabilities; shareholders' equity
B)Current assets; current liabilities; net working capital
C)Fixed assets; current liabilities; net working capital
D)Liquid assets; liquid liabilities; shareholders' equity

Question 77

Janzen Corporation had total capitalization of $890 million.It had sales of $900; cost of goods sold of $595 million, and operating expenses of $95 million.Tax rate is 40%.Calculate the company's Return of Capital.

A)18%
B)16%
C)14%
D)12%

Question 78

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?

A)32.1%
B)35.5%
C)37.6%
D)39.4% If total debt/equity = .65 then total liabilities/total assets = .65/1.65

Question 79

Zulu Corporation had total assets of $475 million.It had sales of $300; cost of goods sold of $225 million, and operating expenses of $35 million.Tax rate is 40%.Calculate the company's Return of Assets.

A)4.04%
B)5.05%
C)6.06%
D)7.07%

Question 80

Measures of a firm's efficiency with respect to earnings include:

A)Profit margin, ROA, P/E ratio, ROE
B)Market-to-book, ROE, Payout ratio
C)Profit margin, ROA, ROE, Payout ratio
D)ROA, ROE, P/E ratio, Payout ratio