Deck 2: Evaluating Financial Performance

Question 1

Assume you are a banker who has loaned money to a firm,but that firm is now facing increased competition and reduced cash flows.Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

A) current ratio
B) debt-to-equity ratio
C) times-interest-earned ratio
D) times-burden-covered ratio
E) None of the abovE.

Answer 1

times-burden-covered ratio

Question 2

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

A) asset turnover and control
B) financial leverage
C) coverage
D) profitability
E) None of the abovE.

Answer 2

asset turnover and control

Question 3

Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014.The firm's current asset accounts remained constant.Given this information,which one of the following statements must be true?

A) The total asset turnover rate increased.
B) The days' sales in receivables increased.
C) The inventory turnover rate increased.
D) The fixed asset turnover decreased.
E) The collection period decreased.

Answer 3

The collection period decreased.

Question 4

Which of these ratios,or levers of performance,are the determinants of ROE?
I.profit margin
II.financial leverage
III.times interest earned
IV.asset turnover

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

Question 5

An inventory turnover ratio of 10 means that,on average,items are held in inventory for 10 days.

Question 6

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

Question 7

A company's price-to-earnings ratio is always equal to one minus its earnings yield.

Question 8

All else equal,an increase in a company's asset turnover will decrease its ROE.

Question 9

Klamath Corporation has asset turnover of 3.5,a profit margin of 5.2%,and a current ratio of 0.5.What is Klamath Corporation's return on equity?

A) 8.7%
B) 9.1%
C) 18.2%
D) Insufficient information to find ROE.

Question 10

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?

A) current ratio
B) debt-to-equity
C) retention
D) asset turnover
E) return on assets

Question 11

At the end of 2014,Stacky Corp.had $500,000 in liabilities and a debt-to-assets ratio of 0.5.For 2014 Stacky had an asset turnover of 3.0.What were annual sales for Stacky in 2014?

A) $333,333
B) $1,200,000
C) $1,800,000
D) $3,000,000
Liabilities/Assets = 0.5 = $500,000/$1,000,000
So Assets = $1,000,000
Then,Sales/$1,000,000 = 3
So sales = $3,000,000

Question 12

Which one of the following statements is correct?

A) If the debt-to-assets ratio is greater than 0.50,then the debt-to-equity ratio must be less than 1.0.
B) Long-term creditors would prefer the times-interest-earned ratio be 1.4 rather than 1.5.
C) The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.
D) To realize the best risk and reward profile,financial leverage should be maximized.
E) None of the abovE.

Question 13

All else equal,a firm would prefer to have a higher gross margin.

Question 14

A times-interest-earned ratio of 3.5 indicates that the firm:

A) pays 3.5 times its earnings in interest expense.
B) has interest expense equal to 3.5% of EBIT.
C) has interest expense equal to 3.5% of net income.
D) has EBIT equal to 3.5 times its interest expense.

Question 15

Breakers Bay Inc.has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level.Assume that both the cost per unit and the selling price per unit also remained constant.All else held constant,how will this accomplishment be reflected in the firm's financial ratios?

A) decrease in the fixed asset turnover rate
B) decrease in the financial leverage ratio
C) increase in the inventory turnover rate
D) increase in the days' sales in inventory
E) decrease in the total asset turnover rate

Question 16

In comparison to industry averages,Okra Corp.has a low inventory turnover,a high current ratio,and an average quick ratio.Which of the following would be the most reasonable inference about Okra Corp.?

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

Question 17

A company's return on assets will always equal or exceed its profit margin.

Question 18

Which of the following ratios are measures of a firm's liquidity?
I.fixed asset turnover ratio
II.current ratio
III.debt-equity ratio
IV.acid test

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

Question 19

The most popular yardstick of financial performance among investors and senior managers is the:

A) profit margin.
B) return on equity.
C) return on assets.
D) times-burden-covered ratio.
E) earnings yield.

Question 20

Return on assets can be calculated as profit margin times asset turnover.

Question 21

Primavera Holdings has a profit margin of 25%,an asset turnover of 0.5 and financial leverage (assets to equity)of 1.5.Primavera has $20 billion in assets,of which half is in cash and marketable securities.Assume that Primavera earns a 3 percent after-tax return on cash and securities.What would Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders?

A) Negative
B) Between 0% and 20%
C) Between 20% and 40%
D) between 40% and 60%
E) Greater than 60%

Question 22

The financial statements for Limited Brands,Inc.follow (fiscal years ending January):
Please refer to Limited Brands Inc.'s financial statements above.Use the company's operating profit as an approximation of its EBIT,and assume a 40% tax rate for your calculations.What percentage decline in earnings before interest and taxes could Limited Brands have sustained in fiscal years ending in January 2006 and 2007 before failing to cover:
a.Interest and principal repayment requirements?
b.Interest,principal,and common dividend payments?

Question 23

Please refer to the financial data for Link,Inc.above.Assume a 365-day year for your calculations.Link's days' sales in cash at the end of 2014 is:

A) 24.3
B) 28.8
C) 219.6
D) 249.7
E) None of the abovE.

Question 24

Please refer to the financial data for Link,Inc.above.Link's profit margin for 2014 is:

A) -94%
B) -57%
C) 13%
D) 31%
E) None of the abovE.

Question 25

Please refer to the financial data for Link,Inc.above.Which of the following statements best describes how the Link's short-term liquidity changed from 2013 to 2014?

A) Link's short-term liquidity has improved modestly.
B) Link's short-term liquidity has deteriorated very little,but from a low initial base.
C) Link's short-term liquidity has improved considerably,but from a low initial base.
D) Link's short-term liquidity has deteriorated considerably,but from a high initial base.
E) None of the abovE.

Question 26

Answer the questions below based on the following information.The tax rate is 35% and all dollars are in millions.Assume that the companies have no liabilities other than the debt shown below.a.Calculate each company's ROE,ROA,and ROIC.b.Why is Runrun's ROE so much higher than Suunto's? Does this mean Runrun is a better company? Why or why not?
c.Why is Suunto's ROA higher than Runrun's? What does this tell you about the two companies?
d.How do the two companies' ROICs compare? What does this suggest about the two companies?

Question 27

Please refer to the financial data for Link,Inc.above.The current ratio for Link at the end of 2014 is:

A) 10.21
B) 2.31
C) 2.76
D) 10.30
E) None of the abovE.

Question 28

Please refer to the financial data for Link,Inc.above.Assume a 365-day year for your calculations.Link's collection period in days,based on sales,at the end of 2014 is:

A) 24.3
B) 219.6
C) 35.7
D) 28.8
E) None of the abovE.

Question 29

Please refer to the financial data for Link,Inc.above.Assume a 365-day year for your calculations.Link's payables period in days,based on cost of goods sold,at the end of 2014 is:

A) 5.2
B) 24.3
C) 28.8
D) 35.7
E) None of the abovE.

Question 30

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

A) ROE measures return on accounting book value,and this problem is not solved by using market value.
B) ROE is a forward-looking,one-period measure,while business decisions span the past and present.
C) ROE measures only return,while financial decisions involve balancing risk against return.
D) None of these describe problems with ROE.
E) All of these describe problems with ROE.

Question 31

The financial statements for Limited Brands,Inc.follow (fiscal years ending January):
Please refer to Limited Brands Inc.'s financial statements above.Use the company's operating profit as an approximation of its EBIT,and assume a 40% tax rate for your calculations.For the fiscal years ending in January of 2006 and 2007,calculate:
a.Debt-to-equity ratio
b.Times-interest-earned ratio
c.Times burden covered

Question 32

Please refer to the financial data for Link,Inc.above.Assume a 365-day year for your calculations.Link's inventory turnover,based on cost of goods sold,at the end of 2014 is:

A) 5.2
B) 24.3
C) 28.8
D) 35.7
E) None of the abovE.

Question 33

On a common-size balance sheet,all accounts are expressed as a percentage of:

A) sales.
B) profits.
C) equity.
D) total assets.
E) None of the abovE.

Question 34

Please refer to the financial data for Link,Inc.above.Link's gross margin for 2014 is:

A) -94%
B) 13%
C) 26%
D) 31%
E) None of the abovE.

Question 35

The financial statements for Limited Brands,Inc.follow (fiscal years ending January):
Please refer to Limited Brands Inc.'s financial statements above.Prepare common-size financial statements for Limited Brands,Inc.for 2006 - 2007.

Question 36

-Please refer to the income statement for VGA Associates below.Assuming that cost of goods sold are variable and operating expenses are fixed,what was VGA Associates' breakeven sales volume in 2014?
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ VGA Associates
$\quad$ $\quad$ $\quad$ Income statement for 2014
$\begin{array}{lr}\hline \text { Sales } & \$ 200,000 \\\text { Cost of goods sold } & 150,000 \\ \text { Gross profit } & 50,000 \\\text { Operating expenses } & 20,000 \\\text { Operating income } & 30,000 \\\text { Interest expense } & 5,000 \\\text { Pre-tax income } & 25,000 \\\text { Taxes } & 5,000 \\\text { Net income } & \$ 20,000 \\\hline\end{array}$

A) $20,000
B) $80,000
C) $150,000
D) $180,000
E) None of the above.