Deck 4: Measuring Financial Performance

Question 1

Which of the following statements about EBIT and EBITDA margins is TRUE?

A)EBIT and EBITDA ratios are one of the few sets of ratios that tend to be the same across almost all industries.
B)These ratios tell the firm what percentage of sales dollars are available to cover interest,taxes,and to provide a return to stockholders.
C)These measures are useful for internal analysis but not for external analysis.
D)These measures are useful for external analysis but not for internal analysis.

Answer 1

B

Question 2

The asset turnover ratio:

A)considers how much revenue a firm is able to generate relative to its asset base.
B)affects the firm's ROE in that a higher ratio increases ROE and a lower ratio decreases ROE other things equal.
C)captures the capital intensity of a business: the more capital intense a firm is,the lower its asset turnover.
D)All of the above.

Answer 2

D

Question 3

The DuPont method decomposes the ROE into the product of three other ratios.those ratios are:

A)profit margin,asset turnover,and financial leverage.
B)profit margin,inventory turnover,and financial leverage.
C)current ratio,asset turnover,and profit margin.
D)quick ratio,inventory turnover,and return on assets.

Answer 3

A

Question 4

As long as a firm's cost of sales are primarily ________ then the firm's gross profit margin should be ________ from year to year.

A)variable; roughly equal
B)variable; vary widely
C)fixed; more likely to be the same
D)fixed; also fixed

Question 5

Use the following ratios for Crimson Industries Inc.,to estimate the firm's ROE.Net profit margin = 8.62%,asset turnover = 1.68,return on assets = 14.48%,financial leverage = 1.35,debt to equity ratio = 35%.

A)2.10%
B)0.99%
C)5.07%
D)19.55%

Question 6

Time series ratio analysis of your own firm over time is an example of:

A)internal assessment.
B)external assessment.
C)narcissistic assessment.
D)cross sectional assessment.

Question 7

A few of the ratios for Quality Construction Inc.,are presented here.Use this information to calculate the firm's ROE.Leverage ratio = 1.50,ROA is 12.00%,profitability ratio is 8.00%.

A)1.44%
B)12.00%
C)18.00%
D)8.00%

Question 8

The firm's ________ indicates how much the firm's profits contribute to ROE.

A)asset turnover
B)financial leverage
C)profit margin
D)return on assets

Question 9

In the text one industry stands out with an ROE in excess of 50%.This figure is well above the next highest industry ROE of just over 30%.Which of the following is that high-performing industry?

A)Steel
B)Tobacco
C)Newspaper
D)Beverages

Question 10

If a firm's Return on Invested Capital (ROIC)is consistently greater than the firm's cost of capital,then:

A)the firm should consider borrowing more money in an effort to increase the cost of capital.
B)this should help drive up the stock price.
C)the firm's net working capital is too low.
D)All of the above.

Question 11

Which of the following statements about profitability measures is NOT generally true?

A)Other things equal,the firm and other investors prefer higher profitability ratios.
B)Profitability measures use values from the firm's income statement.
C)Profitability measures use values from the firm's balance sheet.
D)All of the above are true.

Question 12

In chapter four we focus on the Financial Management Framework and examine the three key decision-making areas of:

A)investing,dividends,and operations.
B)financing,investing,and dividends.
C)operating,investing,and financing.
D)dividends,operations,and investing.

Question 13

Creative Productions Inc.,has a tax rate of 30%,an EBIT of $400,000.NWC of $80,000,fixed assets of $1,200,000,and current liabilities of $220,000 and a cost of capital of 12.35%.What is the firm's ROIC?

A)33.33%
B)12.35%
C)21.88%
D)26.92%

Question 14

Performance measures (i.e.,ratio analysis)allow for:

A)internal assessment of a firm.
B)external assessment of a firm.
C)comparison with other firms in the industry.
D)all of the above.

Question 15

Spartacus Inc.,has sales of $4,500,000,net income of $250,000,assets worth $3,700,000,and total common stockholder equity of $2,500,000.The ROE for Spartacus is:

A)5.56%.
B)6.76%.
C)10.00%.
D)55.56%.

Question 16

Modern Comics Inc.,has sales of $2,500,000,net income of $50,000,assets worth $1,700,000,and total common stockholder equity of $1,500,000.The ROE for the firm is:

A)68.00%.
B)60.00%.
C)2.94%.
D)3.33%.

Question 17

Working capital management is the management of:

A)long-term debt.
B)short-term assets and liabilities.
C)capital assets and equity.
D)short-term debt,long-term debt,and equity.

Question 18

The firm's ________ indicates the degree to which effective use of borrowing contributed to the firm's ROE.

A)asset turnover
B)financial leverage
C)profit margin
D)return on assets

Question 19

A firm's Return on Equity (ROE)measures

A)its profitability relative to its total assets.
B)its profitability relative to its equity investment.
C)its return on sales.
D)its debt to equity ratio.

Question 20

The average age of inventory ratio would most likely be considered:

A)a profitability ratio.
B)a leverage ratio.
C)a working capital measure.
D)a debt ratio.

Question 21

To create a common-size balance sheet for a firm one would typically divide each item on the balance sheet by:

A)total assets.
B)total equity.
C)net sales.
D)total liabilities.

Question 22

Use the DuPont method to calculate the 2013 ROE for Bacon Signs.

A)0.0961 * 0.46 * 4.30 = 0.1698 = 16.98%
B)0.0961 * 0.46 * 1.81 = .0796 = 7.96%
C)0.0961 * 0.41 * 1.88 = .0741 = 7.41%
D)0.0961 * 0.41 * 1.00 = 0.0395 = 3.95%

Question 23

Pavillion Corp.has $6,000,000 in total assets,$1,500,000 in current assets,and $4,000,000 in equity.Calculate the debt-to-asset ratio.

A)0.33
B)0.50
C)0.25
D)0.67

Question 24

Pavillion Corp.has $6,000,000 in total assets,$1,500,000 in current assets,and $4,000,000 in equity.Calculate the debt-to-equity ratio.

A)0.33
B)0.50
C)0.25
D)0.67

Question 25

Which of the following statements is NOT true regarding overall resource management?

A)A firm would like to have as LITTLE money tied up in inventory as possible.
B)A firm would like to receive payment from customers as QUICKLY as possible.
C)A firm would like to generate as LITTLE revenue as possible for a given level of fixed assets.
D)A firm would like to take as LONG as possible to to pay its suppliers.

Question 26

The ________ ratio measures the extent to which a firm is able to cover its short-term obligations (usually defined as obligations due within the next year)with its short-term assets.

A)ROE
B)current
C)inventory turnover
D)working capital

Question 27

Which of the following questions is more likely to be asked by the firm's managers as opposed to the firm's financial lenders or potential investors?

A)How should we finance firm improvements and investments?
B)Should we continue to lend money to this firm?
C)Should we buy equity in this firm?
D)What are the accounts receivable policies for the firm?

Question 28

Two firms,Sunny Inc.,and Rainy Inc.,are alike in every way.They sell the same products in the same markets for the same price and have equally good reputations.In fact,they even have identical ROEs.If Rainy Inc.however,has a higher leverage ratio,then we can conclude that:

A)Rainy Inc.shareholders bear greater financial risk than Sunny Inc.shareholders.
B)Rainy Inc.has a lower ROA.
C)either the net profit margin or the asset turnover ratio for Rainy Inc.is lower than the comparable ratio for Sunny Inc.
D)All of the above are true.

Question 29

Use the information to determine the 2013 current ratio for Bacon Signs.

A)$3,908/$2,943 = 1.33
B)$3,527/$2,250 = 1.57
C)$3,170/$2,943 = 1.08
D)$713/$2,943 = 0.24

Question 30

Which of the following questions is more likely to be asked by the firm's potential investors as opposed to the firm's managers or financial lenders?

A)How should we finance firm improvements and investments?
B)Should we continue to lend money to this firm?
C)Should we buy equity in this firm?
D)What are the accounts receivable policies for the firm?

Question 31

Which of the following statements is TRUE?

A)The lower a firm's debt-to-equity ratio,the LESS room it has to take on additional debt.
B)More stable industries,such as utilities,tend to have LOWER debt-to-equity ratios.
C)Leverage ratios focus on INCOME STATEMENT items.
D)There is NO GENERAL BENCHMARK FOR LEVERAGE RATIOS,and ideal values vary from industry to industry.

Question 32

________ ratios are a form of leverage-related ratios.

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

Question 33

A firm that has an average age of accounts receivable that is significantly lower than the industry average:

A)may have higher credit standards and offer credit to only the most highly qualified customers.
B)may have credit terms that allow fewer days to pay before beginning to charge interest.
C)may offer a larger discount than the industry average to encourage customers to pay early.
D)All of the above.

Question 34

A firm's age of accounts receivable:

A)measures the average time between credit-based sales and the collection of payments for those sales.
B)is likely to be greater for firms within the same industry with more generous credit terms.
C)is in part a function of the type of industry in which the firm operates.
D)All of the above.

Question 35

________ look at a firm's ability to meet its long-term obligations,as well as its overall optimal use of debt.

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

Question 36

How many times can the Johnson Corporation cover their interest expenses if the firm has sales of $3,000,000,total assets of $2,100,000,EBIT equal to $1,000,000,a tax rate of 40% and interest expense of $250,000?

A)1.43
B)2.10
C)4.00
D)12.00

Question 37

Which of the following questions is more likely to be asked by the firm's financial lenders as opposed to the firm's managers or potential investors?

A)How should we finance firm improvements and investments?
B)Should we continue to lend money to this firm?
C)Should we buy equity in this firm?
D)What are the accounts receivable policies for the firm?

Question 38

Use the information to determine the 2013 long term debt to equity ratio for Bacon Signs.

A)$5,500/$5,420 = 1.01
B)$5,500/$9,620 = 0.57
C)$6,678/ $5,420 = 1.23
D)$6,678/$9,620 = 0.69

Question 39

Use the information to determine the 2013 dividend payout ratio for Bacon Signs.

A)This question cannot be answered from the information provided.
B)$250/$7418 = 0.03
C)$463/$713 = 0.65
D)$250/$713 = 0.35

Question 40

To create a common-size income statement for a firm one would typically divide each time on the income statement by:

A)total assets.
B)total equity.
C)net sales.
D)net income.

Question 41

The asset turnover measure indicates how much effective resource management contributed to the firm's ROE.

Question 42

A grocery store chain with a high current ratio but a low quick ratio probably does not have a serious liquidity problem and would likely have little trouble selling inventory to meet the obligations of current liabilities.

Question 43

Some analysts claim that the true value of ratio analysis is not that ratios answer our questions,but rather that they help us ask better questions.

Question 44

ROE is an important benchmark because it indicates the overall profits of a firm for a particular period relative to the shareholders' investment in the firm.

Question 45

A "qualified" opinion from an auditor is preferred to an "unqualified" opinion in a firm's annual report.

Question 46

Because a firm's performance measures reflect past performance,these measures can NOT be used to assist in forecasting future financial statements.

Question 47

The higher a firm's long-term-debt-to-capital ratio is,the LESS financial risk the firm is taking on.

Question 48

Which of the following statement i s NOT accurate? Financial statements serve a number of purposes:

A)from a lender's perspective they often form the basis for covenant restrictions.
B)financial ratios are useful for planning and budgeting purposes
C)financial ratios are only useful when using book values because market values change almost continuously and distort manager's intentions.
D)the ROE measure helps us to understand how well we are rewarding our investors.

Question 49

The interested reader of a firm's annual report will find which of the following to be of little value?

A)Management's discussion and analysis of financial conditions.
B)Legal proceedings in which the firm is involved.
C)A description of the firm's operations and strategy.
D)None of the above.Each item identified is of interest to those who carefully read and use the information included in annual reports.

Question 50

You have been provided financial statements for Bacon Signs.With this information you are able to calculate a number of financial ratios.However,financial ratios,while often very useful,alone are insufficient for a thorough financial analysis.Identify at least 5 types of useful financial information you would like to use in conjunction with the ratios you could calculate from the information provided.

Question 51

Common-size statements allow us to level the playing field by examining trends across time or among competitors by focusing on percentages.

Question 52

The author presents the Return on Equity (ROE)as one of our most important benchmarks because it measures the return to the owners of the firm.because stockholders own the firm,maximizing their returns is considered an important goal.Use the DuPont method to de construct the ROE into three components and briefly discuss what information each provides to the total ROE value.

Question 53

Public corporations are NOT required to publish annual reports.

Question 54

________ measures such as debt-to-capital along with coverage ratios focus on a firm's ability to meet its long-term debt obligations,as well as its optimal use of debt.

A)Liquidity
B)Leverage
C)Profitability
D)Resource management

Question 55

If a firm has any long-term debt then its ROE will exceed its ROA.

Question 56

The age of accounts receivable measures the average time between the firm's purchase of materials (assumed to be on credit)and its payment to the suppliers of those materials.

Question 57

A firm's ________ contains key financial statements,management's insights about performance and additional financial details to aid in understanding financial statements.

A)annual report
B)balance sheet
C)income statement
D)statement of cash flows

Question 58

Explain how to create a common size income statement and a common size balance sheet.Provide at least three reasons why analysts find the creation of common size statements to be a useful practice.

Question 59

Which of the following is likely to be a part of the firm's annual report?

A)The 10-K report
B)A letter from senior management to the shareholders
C)Footnotes to the financial statements
D)All of the above

Question 60

Generally speaking,a higher financial leverage ratio will result in an increase in a firms ROE and also reduce risk to shareholders.

Question 61

Performance measures focus on the profitability,resource management,liquidity,and leverage position of a firm.

Question 62

In an annual report,who writes the letter to shareholders and what purpose is served by the letter?

Question 63

Profitability measures such as the EBIT margin and ROIC focus on the ability of a firm to earn a sufficient operating profit with reasonable expenses.

Question 64

The author chooses to focus on four sections of a firm's 10K report,the firm description,risk factors,current legal proceedings,and analysis of financial conditions.What important information can be obtained by looking at each of these sections?

Question 65

LEVERAGE measures such as the current ratio and quick ratio focus on the ability of a firm to meet its short-term obligations.