Deck 3: Financial Statements Analysis and Financial Models

Question 1

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as:

A)asset management ratios.
B)liquidity measures.
C)leverage ratios.
D)profitability ratios.
E)utilization ratios.

Answer 1

liquidity measures.

Question 2

Which one of these is calculated as earnings before interest and taxes plus depreciation and amortization,divided by interest expense?

A)Times interest earned ratio
B)Enterprise value multiple
C)Profit margin
D)Cash coverage ratio
E)Debt ratio

Answer 2

Cash coverage ratio

Question 3

Which ratio measures the number of times a firm lends money to customers,collects that money,and relends it within a year?

A)Total asset turnover
B)Days' sales in receivables
C)Total debt ratio
D)Receivables turnover
E)Quick ratio

Answer 3

Receivables turnover

Question 4

Which one of these combinations will provide sufficient information to determine the sustainable growth rate of a firm?

A)Profit margin,total asset turnover and the price-earnings ratio
B)Profit margin,dividend payout ratio,debt-equity ratio,and total asset turnover
C)Return on assets and the retention ratio
D)Return on assets,capital intensity ratio,and the retention ratio
E)Profit margin,total asset turnover,return on assets,and debt-equity ratio

Question 5

What is the purpose of the enterprise value measure?

A)To estimate the total current market value of a firm's outstanding shares of common and preferred stock
B)To estimate the cash required to purchase all of the outstanding stock of a firm as well as pay off the firm's interest bearing debt
C)To measure the current market value of all outstanding debt
D)To measure the relationship between the current market value of a firm's equity and its book value
E)To estimate the amount of cash needed to purchase sufficient shares of stock to be elected to the firm's board of directors

Question 6

On a common-size income statement,depreciation will be:

A)omitted since it is a non-cash expense.
B)added back to convert net income to cash flows.
C)expressed as a percentage of total assets.
D)expressed as a percentage of sales.
E)expressed as a percentage of gross fixed assets.

Question 7

Which one of these is the formula for computing enterprise value?

A)Price per share × Shares outstanding - Cash
B)Market capitalization + Market value of interest bearing debt - Cash
C)Market capitalization - Market value of interest bearing debt
D)Price per share × Shares outstanding
E)Market capitalization + Market value of all debt - Cash

Question 8

The return on equity can be calculated as:

A)Profit margin × 1/Capital intensity ratio × Equity multiplier.
B)Return on assets × b.
C)Profit margin × Total asset turnover × Debt-equity ratio
D)Profit margin × 1/Equity multiplier × (1 + Debt-equity ratio).
E)Return on assets × Debt-equity ratio

Question 9

The quick ratio is calculated as:

A)current assets divided by current liabilities.
B)current assets minus inventory,divided by current liabilities.
C)net working capital divided by current liabilities.
D)cash on hand divided by current liabilities.
E)current liabilities divided by current assets.

Question 10

Which one of these measures a firm's operating and asset use efficiency as well as its financial leverage?

A)Equity multiplier
B)Capital intensity ratio
C)DuPont identity
D)Profit margin
E)Return on assets

Question 11

Which of the following are liquidity ratios?
I.Cash coverage ratio
II.Current ratio
III.Quick ratio
IV.Capital intensity

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

Question 12

The sustainable rate of growth can be increased by:

A)decreasing the equity multiplier.
B)increasing the profit margin.
C)decreasing the debt-equity ratio.
D)increasing the dividend payout ratio.
E)increasing the capital intensity ratio.

Question 13

Which ratio calculates the amount of sales generated by each $1 invested in assets?

A)Total asset turnover
B)Return on equity
C)Return on assets
D)Equity multiplier
E)DuPont identity

Question 14

Firms with high enterprise value multiples are most apt to have:

A)high growth opportunities.
B)low market-to-book ratios.
C)low profit margins.
D)low inventory turnover rates.
E)a low price-earnings ratio.

Question 15

A common-size balance sheet will express accounts receivable as a percentage of:

A)sales.
B)current assets.
C)net working capital.
D)total assets.
E)total owners' equity.

Question 16

Which one of the following statements is correct concerning ratio analysis?

A)Ratios cannot be used for comparison purposes over extended periods of time.
B)Ratios do not address the problem of size differences among firms.
C)Only a very limited number of ratios can be used for analytical purposes.
D)Each ratio has a specific formula that is used consistently by all analysts.
E)A single ratio is often computed differently by different individuals.

Question 17

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.

A)profitability
B)long-term solvency
C)short-term solvency
D)utilization
E)market value

Question 18

Which ratio computes the amount of net income generated per each $1 of sales?

A)EV multiple
B)Gross margin
C)Return on equity
D)Profit margin
E)PE ratio

Question 19

Which ratio identifies the amount shareholders are willing to pay for each $1 per share of earnings a firm generates?

A)Equity multiplier
B)Return on equity
C)Price-earnings ratio
D)DuPont identity
E)Return on assets

Question 20

Which one of these measures a firm's long-run ability to meet its obligations?

A)Cash ratio
B)Total asset turnover
C)Quick ratio
D)Return on equity
E)Equity multiplier

Question 21

Assume a firm is operating at full capacity.Which one of these accounts is least apt to vary directly with sales?

A)Inventory
B)Cash
C)Long-term debt
D)Accounts payable
E)Fixed assets

Question 22

Ratio analysis works best when evaluating the financial statements of two firms:

A)in the same industry but located in different countries.
B)of differing sizes in the same industry.
C)with one being in a single-line of business while the other is a conglomerate.
D)of the same size in differing industries.
E)when both are conglomerates with varying lines of business.

Question 23

The only difference between Joe's and Moe's is that Joe's has old,fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.Assuming all else equal:

A)Joe's will have a lower profit margin.
B)Joe's will have a lower return on equity.
C)Moe's will have a higher net income.
D)Moe's will have a lower profit margin.
E)Moe's will have a higher return on assets.

Question 24

For a dividend-paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?

A)Net income × (1 - Retention ratio)
B)Net income × (1 - Dividend payout ratio)
C)(Cash dividends/Net income)× (New sales/Old sales)
D)Retained earnings/Sales × (New Sales/Old Sales)
E)Net income × (New Sales/Old Sales)

Question 25

Assume JustDoIt Co.increases its operating efficiency such that costs decrease while sales remain constant.As a result,given all else constant,the:

A)equity multiplier will decrease
B)return on assets will decrease.
C)profit margin will decline.
D)return on equity will increase.
E)total asset turnover will increase.

Question 26

If Textile Cloth shareholders want to know how much net profit Textile Cloth is making on a percentage basis on their investment in that firm,the shareholders should refer to the:

A)profit margin.
B)return on assets.
C)return on equity.
D)equity multiplier.
E)EV multiple.

Question 27

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

A)Accounts payable
B)Cash
C)Accounts receivable
D)Inventory
E)Fixed assets

Question 28

Which cash coverage ratio would a lender prefer its borrower have?

A)-1.5
B)-.5
C)0
D).5
E)1.5

Question 29

A total asset turnover measure of 1.03 means that a firm has $1.03 in:

A)sales for every $1 in total assets.
B)total assets for every $1 in sales.
C)total assets for every $1 in total equity.
D)total assets for every $1 in cash.
E)long-term assets for every $1 in short-term assets.

Question 30

If a non-dividend paying firm bases its growth assumptions on the sustainable rate of growth,and shows positive net income,then the pro forma statement must reflect:

A)an increase in fixed assets irrespective of the firm's current operating capacity.
B)an increase in both sales and the debt-equity ratio.
C)both an increase in the total asset turnover and in the equity multiplier.
D)a constant debt-equity ratio and an increase in retained earnings.
E)increases in fixed assets,the debt-equity ratio,and the number of shares outstanding.

Question 31

Last year,Bennett's had a price-earnings ratio of 10.2.This year,the price earnings ratio is 10.4.Based on this information,it can be stated with absolute certainty that:

A)the price per share increased.
B)the earnings per share decreased.
C)either the price per share,the earnings per share,or both,changed.
D)investors are receiving a higher rate of return this year.
E)investors are paying a higher price for each share of stock purchased.

Question 32

Which one of the following statements is correct if a firm has an accounts receivable turnover measure of 10?

A)It takes the firm 36.5 days to pay its creditors.
B)It takes the firm 36.5 days to sell its inventory and collect payment from the sale.
C)It take the firm 36.5 days to collect payment for a sale.
D)The firm has ten times more in accounts receivable than it does in cash.
E)It takes an average of ten days to collect payment from the firm's customers.

Question 33

The higher a firm's inventory turnover,the:

A)longer it takes the firm to sell its inventory and collect payment.
B)faster the firm collects payment on its sales.
C)faster the firm sells its inventory.
D)longer inventory sits on the firm's shelves.
E)greater the amount of inventory held by the firm.

Question 34

If a firm decreases its operating costs,all else constant,then:

A)the profit margin increases while the cash coverage ratio decreases.
B)the return on assets increases while the return on equity decreases.
C)both the return on assets and the return on equity increase.
D)both the profit margin and the equity multiplier increase.
E)the total asset turnover rate decreases while the profit margin increases.

Question 35

A supplier,who requires payment within ten days,should be most concerned about which one of its customer's ratios?

A)Current ratio
B)Debt-equity ratio
C)Cash ratio
D)Quick ratio
E)Total debt ratio

Question 36

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
I.The firms may have unrelated lines of business.
II.The operations of the two firms may vary geographically.
III.The firms may use differing accounting methods.
IV.The two firms may be regulated differently.

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

Question 37

If a firm produces a 12 percent return on assets and also a 12 percent return on equity,then the firm:

A)has no net working capital.
B)is using its assets as efficiently as possible.
C)has no debt of any kind.
D)also has a current ratio of 12.
E)has an equity multiplier of 1.2.

Question 38

From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?

A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Debt-equity ratio

Question 39

Yesterday,Dai stock sold for $28 a share.Today,the overall market fell and Dai stock is now selling for $22 a share.Which of these ratios for Dai will be affected by this market reaction? Assume all else is held constant.

A)Enterprise value multiple and price-earnings ratio
B)Earnings per share and price-earnings ratio
C)Return on equity and return on assets
D)Return on book equity and market-to-book ratio
E)Price-earnings ratio and return on book equity

Question 40

A firm has a total debt ratio of .53.This means the firm has $.53 in debt for every:

A)$.47 in equity.
B)$.47 in total assets.
C)$1.53 in total assets.
D)$1 in total equity.
E)$1.53 in total equity.

Question 41

A firm has sales of $2,400,net income of $125,total assets of $1,100,and total equity of $750.Interest expense is $200.What is the common-size statement value of the interest expense?

A)13.33%
B)7.10%
C)8.33%
D)18.18%
E)26.67%

Question 42

A firm has a debt-equity ratio of .40.What is the total debt ratio?

A).24
B).29
C).67
D)1.40
E)2.50

Question 43

Jessica's Boutique has cash of $460,accounts receivable of $630,accounts payable of $1,200,and inventory of $1,450.What is the value of the quick ratio?

A).29 times
B).38 times
C).75 times
D).84 times
E).91 times

Question 44

The internal rate of growth is based on the assumption that:

A)the dividend amount is held constant.
B)no external funding of any type is obtained.
C)the return on equity is held constant.
D)the only additional outside capital obtained is long-term debt.
E)the debt-equity ratio is held constant.

Question 45

Parker's Meats has total assets of $411,900,a price-earnings ratio of 8.4,a debt-equity ratio of .65,and earnings per share of $1.22.What is the market to book ratio if there are 45,000 shares of stock outstanding?

A)1.85 times
B).79 times
C)2.24 times
D)5.46 times
E)2.80 times

Question 46

Tree Top Furniture has current sales of $311,000 and fixed assets of $198,000.The firm is currently operating at 83 percent of capacity.What is the maximum percentage increase the firm can have in sales without investing in additional fixed assets?

A)20.48%
B)17.00%
C)19.25%
D)23.09%
E)36.33%

Question 47

A firm has total assets of $262,000,long-term debt of $105,000,stockholders' equity of $111,000,and current liabilities of $46,000.The retention ratio is 60 percent and the profit margin is 6 percent.Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity.What is the external financing need if the current sales of $275,000 are projected to increase by 10 percent?

A)$210
B)$14,340
C)$6,200
D)$10,890
E)$10,710

Question 48

A firm has total assets of $162,000,long-term debt of $46,000,stockholders' equity of $95,000,and current liabilities of $21,000.The dividend payout ratio is 60 percent and the profit margin is 8 percent.Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity.What is the external financing need if the current sales of $150,000 are projected to increase by 10 percent?

A)$4,220
B)$54,820
C)$16,200
D)$38,700
E)$8,820

Question 49

A firm has total debt of $1,500 and a debt-equity ratio of .40.What is the value of the total assets?

A)$1,560
B)$3,000
C)$5,250
D)$6,500
E)$7,200

Question 50

Rosario's has sales of $114,500,total debt of $46,300,total equity of $68,400,and a profit margin of 5 percent.What is the return on assets?

A)5.21%
B)4.99%
C)7.39%
D)8.37%
E)19.97%

Question 51

Western Wear has net working capital of $3,500,net fixed assets of $42,000,sales of $69,000,and current liabilities of $9,800.From each $1 in total assets,the firm generates sales of:

A)$1.43
B)$1.52
C)$1.25
D)$1.64
E)$1.39

Question 52

A firm has sales of $142,600,net income of $22,800,net fixed assets of $94,300,and current assets of $42,600,of which $31,400 is inventory.What is the common-size statement value of inventory?

A)22.02%
B)12.56%
C)22.94%
D)73.71%
E)37.71%

Question 53

A firm has sales of $83,600,costs of $52,800,interest paid of $1,600,and depreciation of $11,400.The tax rate is 34 percent.What is the value of the cash coverage ratio?

A)3.78 times
B)11.13 times
C)26.94 times
D)19.25 times
E)16.47 times

Question 54

Les' Motors has sales of $482,800,cost of goods sold of $297,400,inventory of $169,600,and accounts receivable of $52,900.How many days,on average,does it take the firm to sell its inventory?

A)65.27 days
B)85.20 days
C)208.15 days
D)128.22 days
E)284.67 days

Question 55

Financial planning,when properly executed:

A)helps ensure that adequate financing is in place to support the desired level of growth.
B)ensures that the primary goals of senior management are fully achieved.
C)reduces the necessity of daily management oversight of the business operations.
D)ignores the normal restraints encountered by a firm.
E)eliminates the need to plan more than one year in advance.

Question 56

Vaun's Pet Store paid $16,950 in interest and $21,300 in dividends last year.The times interest earned ratio is 3.8 and the depreciation expense is $84,200.What is the value of the cash coverage ratio?

A)4.81 times
B)6.22 times
C)7.75 times
D)8.77 times
E)8.20 times

Question 57

Burnside's has accounts receivable of $33,700,inventory of $54,200,sales of $364,200,and cost of goods sold of $193,400.How long does it take the firm to sell its inventory and collect payment on the sale?

A)128.14 days
B)88.09 days
C)163.78 days
D)136.06 days
E)154.08 days

Question 58

Juno's has sales of $389,000,a tax rate of 34 percent,a dividend payout ratio of 45 percent,and a profit margin of 6 percent.What is the addition to retained earnings?

A)$10,503.00
B)$12,837.00
C)$141,207.00
D)$8,472.42
E)$15,913.64

Question 59

Jensen's Boats has sales of $387,000,cost of goods sold of $204,000,depreciation of $32,000,and selling and general costs of $21,000.The firm has a loan balance of $87,400 with an interest rate of 7 percent.What is the value of the interest bearing debt to EBITDA measure?

A).67 times
B).54 times
C)1.49 times
D)1.85 times
E)1.78 times

Question 60

Charlotte's has current sales of $122,000,current liabilities of $16,400,and net working capital of $2,100.The projected sales for next year are $134,000.All net working capital accounts change directly with sales.What is the projected value of current assets for next year?

A)$2,306.56
B)$18,013.11
C)$22,626.23
D)$20,319.67
E)$15,706.56

Question 61

Supra's has sales of $893,000,total assets of $932,500,a profit margin of 6.5 percent,and a total debt ratio of 40 percent.What is the return on equity?

A)15.56%
B)10.37%
C)8.71%
D)6.22%
E)11.49%

Question 62

Southern Markets has a profit margin of 4.8 percent,a return on assets of 11.2 percent,and a debt-equity ratio of.55.What is the return on equity?

A)8.33%
B)8.49%
C)11.28%
D)17.36%
E)6.16%

Question 63

The Uptowner has $956,400 in sales.The profit margin is 4.75 percent.There are 25,000 shares of stock outstanding with a market price per share of $32.40.What is the price-earnings ratio?

A)8.47
B)5.89
C)21.09
D)17.83
E)13.64

Question 64

A firm has 5,000 shares of stock outstanding with a market value of $23.60 a share,$74,800 of long-term debt with an interest rate of 7.5 percent,cash on hand of $6,400,sales of $198,000,costs of $107,200,and depreciation of $13,400.The tax rate is 35 percent.What is the enterprise value multiple?

A)2.05 times
B)3.97 times
C)2.19 times
D)4.18 times
E)3.10 times

Question 65

The Purple Cove has a 5 percent profit margin and a 40 percent dividend payout ratio.The total asset turnover is 1.40 and the equity multiplier is 1.50.What is the sustainable rate of growth?

A)6.30%
B)6.72%
C)6.83%
D)6.90%
E)6.93%

Question 66

Nelson Farms has 12,500 shares of stock outstanding with a market value of $11.20 a share and $68,000 of debt bearing an interest rate of 6.7 percent.Current assets consist of $2,800 in cash,$16,400 in accounts receivable,and $31,200 in inventory.Accounts payable are $27,300.What is the firm's enterprise value?

A)$300,889
B)$205,200
C)$157,600
D)$184,900
E)$242,700

Question 67

Identify the three parts of the DuPont identity and specify what each part measures.

Question 68

Cellar Wines has a debt-equity ratio of 42 percent,sales of $849,000,net income of $76,800,and total debt of $349,000.What is the return on equity?

A)5.24%
B)9.05%
C)10.75%
D)15.50%
E)9.24%

Question 69

The Top Shop has net income of $240 and total equity of $2,000.The debt-equity ratio is 1 and the plowback ratio is 40 percent.What is the internal growth rate?

A)2.46%
B)3.00%
C)4.92%
D)5.88%
E)6.00%

Question 70

Suppose a firm calculates its external funding need and finds that it is negative.What are the firm's options in this case?

Question 71

Patti's has net income of $43,700,a price-earnings ratio of 15.7,and earnings per share of $1.39.How many shares of stock are outstanding?

A)2,002 shares
B)38,690 shares
C)31,439 shares
D)493,590 shares
E)28,750 shares

Question 72

A firm has 35,000 shares of stock outstanding,sales of $767,000,net income of $84,900,a price-earnings ratio of 16.4,and a book value per share of $9.60.What is the market-to-book ratio?

A)3.67 times
B)3.98 times
C)4.27 times
D)3.29 times
E)4.14 times

Question 73

You have been advised that the sustainable growth rate for your firm is 2.86 percent.How should you interpret this information? Assume your firm is financially sound.

Question 74

Nails and More has net income of $11,200,total equity of $56,400,a dividend payout ratio of 60 percent,and an equity multiplier of 1.25.What is the internal rate of growth?

A)11.91%
B)8.63%
C)8.01%
D)5.54%
E)6.79%

Question 75

Which is a more meaningful measure of profitability for a firm,return on assets or return on equity? Why?

Question 76

Marcel's has a debt-equity ratio of 60 percent,a capital intensity ratio of .98,and a profit margin of 4.2 percent.What is the return on equity?

A)6.86%
B)4.89%
C)6.13%
D)2.57%
E)2.47%

Question 77

When using the percentage of sales approach to calculate the external financing need,some accounts are assumed to vary in direct proportion to sales while others do not.For each of the following accounts,explain how they are generally expected to change using this approach: