Deck 13: Financial Statement Analysis

Question 1

Consider the following information relating to Interceptors Ltd. Based on the cash flow data in the table, which of the following statements is/are correct?
I) This firm appears to be a good investment because of its steady growth in cash.
II) This firm has only been able to generate growing cash flows by borrowing or selling equity to offset declining operating cash flows.
III) Financing activities have been increasingly important for this firm's operations, at least in the short run.

A)I only
B)II and III only
C)II only
D)I and II only

Answer 1

B

Question 2

A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal this change will probably increase the firm's ________.
I) beta
II) earnings variability over the business cycle
III) ROE
IV) share price

A)I and II only
B)III and IV only
C)I, III and IV only
D)I, II and III only

Answer 2

D

Question 3

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

A)the firm's use of financial leverage is positively contributing to ROE
B)the firm's use of financial leverage is negatively contributing to ROE
C)the firm's use of operating leverage is positively contributing to ROE
D)the firm's use of operating leverage is negatively contributing to ROE

Answer 3

B

Question 4

If the interest rate on debt is higher than the ROA, then a firm's ROE will ________.

A)decrease
B)increase
C)not change
D)change but in an indeterminable manner

Question 5

The highest possible value for the interest burden ratio is ________ and this occurs when the firm ________.

A)0; uses as much debt as possible
B)1; uses debt to the point where ROA = interest cost of debt
C)1; uses no interest bearing debt
D)-1; pays down its existing debts

Question 6

Depreciation expense is in what broad category of expenditures?

A)Cost of goods sold
B)General and administrative expenses
C)Debt interest expense
D)Tax expenditures

Question 7

One of the biggest impediments to a global capital market is ________.

A)volatile exchange rates
B)the lack of common accounting standards
C)lower disclosure standards in the US than abroad
D)the lack of transparent reporting standards across the EU

Question 8

Cost of goods sold refers to ________.

A)direct costs attributable to producing the product sold by the firm
B)salaries, advertising and selling expenses
C)payments to the firm's creditors
D)payments to federal and local governments

Question 9

A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is ________.

A)8.40
B)11.90
C)17.62
D)47.60

Question 10

Firm A acquires Firm B when Firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for Firm B. This purchase would result in goodwill for Firm A equal to ________.

A)$175 million
B)$155 million
C)$120 million
D)$55 million

Question 11

If a firm has a positive tax rate, a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be ________.

A)greater than zero but it is impossible to determine how operating ROA will compare to ROE
B)equal to ROE
C)greater than ROE
D)less than ROE

Question 12

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had ________ over his long professional life.

A)increased greatly
B)increased slightly
C)remained constant
D)decreased

Question 13

Consider the following information relating to Interceptors Ltd. What must cash flow from financing have been in 2008 for Interceptors Ltd.?

A)$5
B)$28
C)$30
D)$33

Question 14

Which of the following is not a ratio used in the DuPont analysis?

A)Interest burden
B)Profit margin
C)Asset turnover
D)Earnings yield ratio

Question 15

Operating ROA can be found as the product of ________.

A)Return on sales x ATO
B)Tax burden x Interest burden
C)Interest burden x Leverage ratio
D)ROE x Dividend payout ratio

Question 16

Which of the following assets is most liquid?

A)Cash equivalents
B)Receivables
C)Inventories
D)Plant and equipment

Question 17

Operating ROA is calculated as ________ while ROE is calculated as ________.

A)EBIT/Total assets; Net profit/Total assets
B)Net profit/Total assets; EBIT/Total assets
C)EBIT/Total assets; Net profit/Equity
D)Net profit/EBIT; Sales/Total assets

Question 18

Common-size balance sheets are prepared by dividing all quantities by ________.

A)total assets
B)total liabilities
C)shareholder's equity
D)fixed assets

Question 19

Many observers believe that firms 'manage' their Income Statements to ________.

A)minimise taxes over time
B)maximise expenditures
C)smooth their earnings over time
D)generate level sales

Question 20

The process of decomposing ROE into a series of component ratios is called ________.

A)DuPont analysis
B)technical analysis
C)comparative analysis
D)liquidity analysis

Question 21

The financial statements of Burnaby Mountain Trading Company are given below. Note: The common shares are trading in the share market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio for 2008 is ________.

A)1.30
B)1.50
C)1.69
D)2.83

Question 22

A firm has a ROE equal to the industry average but its price-to-book ratio is below the industry average. You know that the firm's ________.

A)earnings yield is above the industry average
B)P/E ratio is above the industry average
C)dividend payout ratio is too high
D)interest burden must be below the industry average

Question 23

Use the following cash flow data of Haven Hardware for the year ended 31 December 2013. What is the net cash provided by operating activities of Haven Hardware?

A)($30 000)
B)$220 000
C)$320 000
D)$780 000

Question 24

Use the following cash flow data of Haven Hardware for the year ended 31 December 2013. What is the net cash provided by or used in investing activities of Haven Hardware?

A)($12 000)
B)($62 000)
C)$12 000
D)$164 000

Question 25

If a firm's ratio of (shareholders' equity/total assets) is lower than the industry average and its ratio of (long-term debt/shareholders' equity) is also lower than the industry average, this would suggest that the firm ________.

A)has more current liabilities than the industry average
B)has more leased assets than the industry average
C)will be less profitable than the industry average
D)has more current assets than the industry average

Question 26

Use the following cash flow data of Haven Hardware for the year ended 31 December 2013. What is the net increase or decrease in cash for Haven Hardware for 2013?

A)($94 000)
B)($88 000)
C)$88 000
D)$188 000

Question 27

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 1.5, a (pretax profit/EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return on sales ratio of 6%. Its ROE is ________.

A)7.56%
B)15.12%
C)20.16%
D)30.24%

Question 28

Economic Value Added (EVA) is:

A)The difference between the return on assets and the opportunity cost of capital times the capital base
B)ROA x ROE
C)A measure of the firm's abnormal return
D)Largest for high-growth firms

Question 29

Which of the following statements is true concerning Economic Value Added?

A)A growing number of firms tie managers' compensation to EVA.
B)A profitable firm will always have a positive EVA.
C)EVA recognises that the cost of capital is not a real cost.
D)If a firm has positive present value of growth opportunities it will have positive EVA.

Question 30

If a firm has an ROA of 8%, a debt/equity ratio of 0.5, its ROE is ________.

A)4%
B)6%
C)8%
D)12%

Question 31

The financial statements of Burnaby Mountain Trading Company are given below. Note: The common shares are trading in the share market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage ratio for 2008 is ________.

A)1.30
B)1.50
C)1.69
D)2.83

Question 32

A firm has lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has ________.
I) lower ATO than the industry average
II) lower ROA than the industry average
III) lower ROE than the industry average

A)I only
B)I and II only
C)II and III only
D)I, II and III

Question 33

Use the following cash flow data of Haven Hardware for the year ended 31 December 2013. What is the net cash provided by or used in financing activities of Haven Hardware?

A)($10 000)
B)($120 000)
C)$10 000
D)$120 000

Question 34

A firm has a P/E ratio of 24 and a ROE of 12%. Its market-to-book-value ratio is ________.

A)2.88
B)2.00
C)1.75
D)0.69

Question 35

The financial statements of Burnaby Mountain Trading Company are given below. Note: The common shares are trading in the share market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current ratio for 2008 is ________.

A)1.30
B)1.50
C)1.69
D)2.83

Question 36

A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return on sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

A)12.4%
B)14.5%
C)16.6%
D)17.8%

Question 37

Use the following cash flow data of Haven Hardware for the year ended 31 December 2013. What is the cash at the end of 2013 for Haven Hardware?

A)$6 000
B)$94 000
C)$736 000
D)$188 000

Question 38

A firm has an ROA of 19%, a debt/equity ratio of 1.8, a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is ________.

A)15.12%
B)28.42%
C)37.24%
D)40.60%

Question 39

A high price-to-book ratio may indicate which one of the following?

A)The firm expanded its plant and equipment in the past few years.
B)The firm is doing a better job controlling its inventory expense than other related firms.
C)Investors may believe that this firm has opportunities of earnings a rate of return in excess of the market capitalisation rate.
D)The firm's P/E ratio is too high.

Question 40

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to ________ income, and the level of interest expense reported tends to ________ income.

A)understate; overstate
B)understate; understate
C)overstate; understate
D)overstate; overstate

Question 41

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

A)Asset turnover
B)Current ratio
C)Liquidity ratio
D)Quick ratio

Question 42

Which of the following transactions will result in a decrease in cash flow from operations?

A)Increase in accounts receivable
B)Decrease in inventories
C)Decrease in taxes payable
D)Decrease in bonds outstanding

Question 43

A firm has a compound leverage factor greater than 1 indicates that ________.

A)this firm has no interest payments
B)this firm uses less debt as a percentage of financing
C)its interest payments are equal to the firm's pretax profits
D)its debt has a positive contribution to the firm's ROA

Question 44

Which of the following results in an increase in cash to the firm?

A)Dividends paid
B)A delay in collecting on accounts receivable
C)Net new investments
D)Increase in accounts payable

Question 45

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

A)$10 decrease
B)$90 decrease
C)$180 decrease
D)$190 decrease

Question 46

Which of the following would result in a cash inflow under the heading 'Cash flow from investing' in the statement of cash flows?

A)Purchase of capital equipment
B)Payments to suppliers for inventory
C)Collections on receivables
D)Sale of production machinery

Question 47

Another term for EVA is ________.

A)net income
B)operating income
C)residual income
D)market based income

Question 48

The tax burden of the firm is .4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm?

A)1.58%
B)5.68%
C)12.20%
D)13.33%

Question 49

When assessing sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

A)Cash flow from investment activities
B)Cash flow from operating activities
C)Cash flow from financing
D)Cash flow from extraordinary events

Question 50

Which of the following transactions will result in a decrease in cash flow from investments?

A)Acquisition of another business
B)Capital gain from sale of a subsidiary
C)Decrease in net investments
D)Sale of equipment

Question 51

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

A)$50 increase
B)$100 increase
C)$150 increase
D)$250 increase

Question 52

Look at the following table of data for Key Biscuit Company: What must have caused the firm's ROE to drop?

A)The firm began using more debt as a percentage of financing.
B)The firm began using less debt as a percentage of financing.
C)The compound leverage ratio was less than 1.
D)The operating ROA was declining.

Question 53

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9% and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

A)$8 million
B)-$6 million
C)$3 million
D)-$4 million

Question 54

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

A)$20 increase
B)$80 increase
C)$100 increase
D)$200 increase

Question 55

All of the following ratios are related to efficiency except for ________.

A)total asset turnover
B)fixed asset turnover
C)average collection period
D)cash ratio