罗斯公司理财Chap003全英文题库及答案

Chapter 03 - Financial Statements Analysis and Long-Term Planning

Chapter 03 Financial Statements Analysis and Long-Term Planning Answer Key

Multiple Choice Questions

1. One key reason a long-term financial plan is developed is because: A. the plan determines your financial policy. B. the plan determines your investment policy.

C. there are direct connections between achievable corporate growth and the financial policy. D. there is unlimited growth possible in a well-developed financial plan. E. None of the above.

Difficulty level: Easy

Topic: LONG-TERM PLANNING Type: DEFINITIONS

2. Projected future financial statements are called: A. plug statements.

B. pro forma statements. C. reconciled statements. D. aggregated statements. E. none of the above.

Difficulty level: Easy

Topic: PRO FORMA STATEMENTS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

3. The percentage of sales method:

A. requires that all accounts grow at the same rate.

B. separates accounts that vary with sales and those that do not vary with sales.

C. allows the analyst to calculate how much financing the firm will need to support the predicted sales level. D. Both A and B. E. Both B and C.

Difficulty level: Medium

Topic: PERCENTAGE OF SALES Type: DEFINITIONS

4. A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively. A. tax reconciliation statement B. statement of standardization C. statement of cash flows

D. common-base year statement E. common-size statement

Difficulty level: Easy

Topic: COMMON-SIZE STATEMENTS Type: DEFINITIONS

5. Relationships determined from a firm's financial information and used for comparison purposes are known as: A. financial ratios.

B. comparison statements. C. dimensional analysis. D. scenario analysis. E. solvency analysis.

Difficulty level: Easy

Topic: FINANCIAL RATIOS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

6. Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

Difficulty level: Easy

Topic: SHORT-TERM SOLVENCY RATIOS Type: DEFINITIONS

7. The current ratio is measured as:

A. current assets minus current liabilities. B. current assets divided by current liabilities.

C. current liabilities minus inventory, divided by current assets. D. cash on hand divided by current liabilities. E. current liabilities divided by current assets.

Difficulty level: Easy Topic: CURRENT RATIO Type: DEFINITIONS

8. The quick ratio is measured as:

A. current assets divided by current liabilities.

B. cash on hand plus current liabilities, divided by current assets. C. current liabilities divided by current assets, plus inventory. D. current assets minus inventory, divided by current liabilities. E. current assets minus inventory minus current liabilities.

Difficulty level: Easy Topic: QUICK RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

9. The cash ratio is measured as:

A. current assets divided by current liabilities.

B. current assets minus cash on hand, divided by current liabilities. C. current liabilities plus current assets, divided by cash on hand. D. cash on hand plus inventory, divided by current liabilities. E. cash on hand divided by current liabilities.

Difficulty level: Medium Topic: CASH RATIO Type: DEFINITIONS

10. Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

Difficulty level: Easy

Topic: LONG-TERM SOLVENCY RATIOS Type: DEFINITIONS

11. The financial ratio measured as total assets minus total equity, divided by total assets, is the:

A. total debt ratio. B. equity multiplier. C. debt-equity ratio. D. current ratio.

E. times interest earned ratio.

Difficulty level: Easy

Topic: TOTAL DEBT RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

12. The debt-equity ratio is measured as total: A. equity minus total debt. B. equity divided by total debt. C. debt divided by total equity. D. debt plus total equity.

E. debt minus total assets, divided by total equity.

Difficulty level: Easy

Topic: DEBT-EQUITY RATIO Type: DEFINITIONS

13. The equity multiplier ratio is measured as total: A. equity divided by total assets. B. equity plus total debt.

C. assets minus total equity, divided by total assets. D. assets plus total equity, divided by total debt. E. assets divided by total equity.

Difficulty level: Medium

Topic: EQUITY MULTIPLIER Type: DEFINITIONS

14. The financial ratio measured as earnings before interest and taxes, divided by interest expense is the:

A. cash coverage ratio. B. debt-equity ratio.

C. times interest earned ratio. D. gross margin. E. total debt ratio.

Difficulty level: Medium

Topic: TIMES INTEREST EARNED RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

15. The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by interest expense, is the: A. cash coverage ratio. B. debt-equity ratio.

C. times interest earned ratio. D. gross margin. E. total debt ratio.

Difficulty level: Medium

Topic: CASH COVERAGE RATIO Type: DEFINITIONS

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

A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

Difficulty level: Easy

Topic: ASSET MANAGEMENT RATIOS Type: DEFINITIONS

17. The inventory turnover ratio is measured as: A. total sales minus inventory. B. inventory times total sales.

C. cost of goods sold divided by inventory. D. inventory times cost of goods sold. E. inventory plus cost of goods sold.

Difficulty level: Medium

Topic: INVENTORY TURNOVER Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

18. The financial ratio days' sales in inventory is measured as: A. inventory turnover plus 365 days. B. inventory times 365 days.

C. inventory plus cost of goods sold, divided by 365 days. D. 365 days divided by the inventory.

E. 365 days divided by the inventory turnover.

Difficulty level: Medium

Topic: DAYS' SALES IN INVENTORY Type: DEFINITIONS

19. The receivables turnover ratio is measured as: A. sales plus accounts receivable.

B. sales divided by accounts receivable.

C. sales minus accounts receivable, divided by sales. D. accounts receivable times sales. E. accounts receivable divided by sales.

Difficulty level: Medium

Topic: RECEIVABLES TURNOVER Type: DEFINITIONS

20. The financial ratio days' sales in receivables is measured as: A. receivables turnover plus 365 days. B. accounts receivable times 365 days.

C. accounts receivable plus sales, divided by 365 days. D. 365 days divided by the receivables turnover. E. 365 days divided by the accounts receivable.

Difficulty level: Medium

Topic: DAYS' SALES IN RECEIVABLES Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

21. The total asset turnover ratio is measured as: A. sales minus total assets. B. sales divided by total assets. C. sales times total assets.

D. total assets divided by sales. E. total assets plus sales.

Difficulty level: Easy

Topic: TOTAL ASSET TURNOVER Type: DEFINITIONS

22. Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value

Difficulty level: Easy

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

23. The financial ratio measured as net income divided by sales is known as the firm's: A. profit margin. B. return on assets. C. return on equity. D. asset turnover.

E. earnings before interest and taxes.

Difficulty level: Easy Topic: PROFIT MARGIN Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

24. The financial ratio measured as net income divided by total assets is known as the firm's: A. profit margin. B. return on assets. C. return on equity. D. asset turnover.

E. earnings before interest and taxes.

Difficulty level: Easy

Topic: RETURN ON ASSETS Type: DEFINITIONS

25. The financial ratio measured as net income divided by total equity is known as the firm's: A. profit margin. B. return on assets. C. return on equity. D. asset turnover.

E. earnings before interest and taxes.

Difficulty level: Easy

Topic: RETURN ON EQUITY Type: DEFINITIONS

26. The financial ratio measured as the price per share of stock divided by earnings per share is known as the: A. return on assets. B. return on equity. C. debt-equity ratio. D. price-earnings ratio. E. Du Pont identity.

Difficulty level: Easy

Topic: PRICE-EARNINGS RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

27. The market-to-book ratio is measured as: A. total equity divided by total assets.

B. net income times market price per share of stock.

C. net income divided by market price per share of stock.

D. market price per share of stock divided by earnings per share.

E. market value of equity per share divided by book value of equity per share.

Difficulty level: Medium

Topic: MARKET-TO-BOOK RATIO Type: DEFINITIONS

28. The _____ breaks down return on equity into three component parts. A. Du Pont identity B. return on assets

C. statement of cash flows D. asset turnover ratio E. equity multiplier

Difficulty level: Medium Topic: DU PONT IDENTITY Type: DEFINITIONS

29. The External Funds Needed (EFN) equation does not measure the: A. additional asset requirements given a change in sales. B. additional total liabilities raised given the change in sales. C. rate of return to shareholders given the change in sales. D. net income expected to be earned given the change in sales. E. None of the above.

Difficulty level: Medium

Topic: EXTERNAL FUNDS NEEDED Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

45. Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

A. It takes a firm 10 days to collect payment from its customers.

B. It takes a firm 36.5 days to sell its inventory and collect the payment from the sale. C. It takes a firm 36.5 days to pay its creditors.

D. The firm has an average collection period of 36.5 days.

E. The firm has ten times more in accounts receivable than it does in cash.

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: DEFINITIONS

46. A total asset turnover measure of 1.03 means that a firm has $1.03 in: A. total assets for every $1 in cash. B. total assets for every $1 in total debt. C. total assets for every $1 in equity. D. sales for every $1 in total assets.

E. long-term assets for every $1 in short-term assets.

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: DEFINITIONS

47. Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a _____ of 5%. A. return on assets B. return on equity C. profit margin D. Du Pont measure E. total asset turnover

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

48. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: A. has no debt of any kind.

B. is using its assets as efficiently as possible. C. has no net working capital. D. also has a current ratio of 10. E. has an equity multiplier of 2.

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

49. If shareholders want to know how much profit a firm is making on their entire investment in the firm, the shareholders should look at the: A. profit margin. B. return on assets. C. return on equity. D. equity multiplier. E. earnings per share.

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

50. BGL Enterprises increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the: A. return on equity will increase. B. return on assets will decrease. C. profit margin will decline. D. equity multiplier will decrease. E. price-earnings ratio will increase.

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

51. 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.

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: DEFINITIONS

52. Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings ratio is 18. Based on this information, it can be stated with certainty that: A. the price per share increased. B. the earnings per share decreased.

C. investors are paying a higher price for each share of stock purchased. D. investors are receiving a higher rate of return this year.

E. either the price per share, the earnings per share, or both changed.

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: DEFINITIONS

53. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's: A. has a higher market price than one share of stock in Turner's.

B. has a higher market price per dollar of earnings than does one share of Turner's. C. sells at a lower price per share than one share of Turner's.

D. represents a larger percentage of firm ownership than does one share of Turner's stock. E. earns a greater profit per share than does one share of Turner's stock.

Difficulty level: Medium

Topic: MARKET VALUE RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

54. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio? I. slow industry outlook

II. high prospect of firm growth III. very low current earnings

IV. investors with a low opinion of the firm A. I and II only B. II and III only C. II and IV only D. I and III only E. III and IV only

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: DEFINITIONS

55. Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding market-to-book constant, a $1 increase in the book value per share will:

A. cause the accountants to increase the equity of the firm by an additional $2. B. increase the market price per share by $1. C. increase the market price per share by $12. D. tend to cause the market price per share to rise. E. only affect book values but not market values.

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: DEFINITIONS

56. Which one of the following sets of ratios applies most directly to shareholders? A. return on assets and profit margin B. quick ratio and times interest earned C. price-earnings ratio and debt-equity ratio D. market-to-book ratio and price-earnings ratio E. cash coverage ratio and times equity multiplier

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

57. The three parts of the Du Pont identity can be generally described as: I. operating efficiency, asset use efficiency and firm profitability. II. financial leverage, operating efficiency and asset use efficiency. III. the equity multiplier, the profit margin and the total asset turnover. IV. the debt-equity ratio, the capital intensity ratio and the profit margin. A. I and II only B. II and III only C. I and IV only D. I and III only E. III and IV only

Difficulty level: Medium Topic: DU PONT IDENTITY Type: DEFINITIONS

58. If a firm decreases its operating costs, all else constant, then: A. the profit margin increases while the equity multiplier decreases. B. the return on assets increases while the return on equity decreases.

C. the total asset turnover rate decreases while the profit margin increases. D. both the profit margin and the equity multiplier increase. E. both the return on assets and the return on equity increase.

Difficulty level: Medium Topic: DU PONT IDENTITY Type: DEFINITIONS

59. Which one of the following statements is correct?

A. Book values should always be given precedence over market values.

B. Financial statements are frequently the basis used for performance evaluations. C. Historical information has no value when predicting the future.

D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

Difficulty level: Medium

Topic: EVALUATING FINANCIAL STATEMENTS Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

105. The Green Giant has a 5% profit margin and a 40% 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. 6.53% C. 6.72% D. 6.80% E. 6.83%

Return on equity = .05 ? 1.40 ? 1.50 = .105; Sustainable growth = {.105 ? (1 - .40)} ? {1 - [.105 ? (1 - .40)]} = .06724 = 6.72%

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH AND DU PONT IDENTITY Type: PROBLEMS

106. Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the internal growth rate? A. 7.11% B. 7.70% C. 8.34% D. 8.46% E. 11.99%

Internal growth rate = {.11 ? (1 - .30)} ? {1 - [.11 ? (1 - .30)]} = 8.34%

Difficulty level: Medium

Topic: INTERNAL GROWTH RATE Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

107. Katelyn's Kites has net income of $240 and total equity of $2,000. The debt-equity ratio is 1.0 and the plowback ratio is 40%. What is the internal growth rate? A. 2.46% B. 3.00% C. 4.92% D. 5.88% E. 6.00%

Total assets = $2,000 + $2,000 = $4,000 (The debt-equity ratio of 1.0 means TD = TE.); Return on assets = $240 ? $4,000 = .06; Internal growth = [.06 ? .40] ? [1 - (.06 ? .40)] = 2.46%

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

60. It is easier to evaluate a firm using its financial statements when the firm: A. is a conglomerate. B. is global in nature.

C. uses the same accounting procedures as other firms in its industry. D. has a different fiscal year than other firms in its industry.

E. tends to have one-time events such as asset sales and property acquisitions.

Difficulty level: Medium

Topic: EVALUATING FINANCIAL STATEMENTS Type: DEFINITIONS

61. Which two of the following represent the most effective methods of directly evaluating the financial performance of a firm?

I. comparing the current financial ratios to those of the same firm from prior time periods

II. comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations

III. comparing the financial statements of the firm to the financial statements of similar firms operating in other countries

IV. comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area A. I and II only B. II and III only C. III and IV only D. I and IV only E. I and III only

Difficulty level: Medium

Topic: EVALUATING FINANCIAL STATEMENTS Type: DEFINITIONS

62. In the financial planning model, external funds needed (EFN) is equal to changes in A. assets - (liabilities - equity). B. assets - (liabilities + equity). C. (assets + liabilities - equity). D. (assets + equity - liabilities). E. assets - equity.

Difficulty level: Medium

Topic: EXTERNAL FUNDS NEEDED Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

63. Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?

I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.

II. The operations of the two firms may vary geographically.

III. The firms may use differing accounting methods for inventory purposes. IV. The two firms may be seasonal in nature and have different fiscal year ends. 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

Difficulty level: Medium

Topic: EVALUATING FINANCIAL STATEMENTS Type: DEFINITIONS

64. A firm's sustainable growth rate in sales directly depends on its: A. debt to equity ratio. B. profit margin. C. dividend policy. D. asset efficiency. E. All of the above.

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

65. The sustainable growth rate will be equivalent to the internal growth rate when: A. a firm has no debt.

B. the growth rate is positive.

C. the plowback ratio is positive but less than 1. D. a firm has a debt-equity ratio exactly equal to 1. E. net income is greater than zero.

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

66. The sustainable growth rate:

A. assumes there is no external financing of any kind. B. is normally higher than the internal growth rate. C. assumes the debt-equity ratio is variable.

D. is based on receiving additional external debt and equity financing. E. assumes that 100% of all income is retained by the firm.

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

67. If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income, then the:

A. fixed assets will have to increase at the same rate, regardless of the current capacity level. B. number of common shares outstanding will increase at the same rate of growth. C. debt-equity ratio will have to increase.

D. debt-equity ratio will remain constant while retained earnings increase.

E. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

68. Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:

A. 40% of the internal rate of growth. B. 60% of the internal rate of growth. C. the internal rate of growth. D. the sustainable rate of growth.

E. 60% of the sustainable rate of growth.

Difficulty level: Medium

Topic: SUSTAINABLE GROWTH RATE Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

69. One of the primary weaknesses of many financial planning models is that they: A. rely too much on financial relationships and too little on accounting relationships. B. are iterative in nature.

C. ignore the goals and objectives of senior management. D. are based solely on best case assumptions. E. ignore the size, risk, and timing of cash flows.

Difficulty level: Medium

Topic: FINANCIAL PLANNING MODELS Type: DEFINITIONS

70. Financial planning, when properly executed:

A. ignores the normal restraints encountered by a firm.

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. helps ensure that proper financing is in place to support the desired level of growth. E. eliminates the need to plan more than one year in advance.

Difficulty level: Medium

Topic: FINANCIAL PLANNING Type: DEFINITIONS

71. When examining the EBITDA ratio, lower numbers are: A. considered good. B. considered mediocre. C. considered poor.

D. indifferent to higher numbers.

E. it is impossible to garner information from this ratio.

Difficulty level: Medium Topic: EBITDA RATIO Type: DEFINITIONS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

72. A firm's market capitalization is equal to:

A. total book value of assets less book value of debt. B. par value of common equity.

C. firm's stock price multiplied by number of shares outstanding. D. firm's stock price multiplied by the number of shares authorized.

E. the maximum value an acquirer would pay for a firm in an acquisition.

Difficulty level: Medium

Topic: MARKET CAPITALIZATION Type: DEFINITIONS

73. Enterprise value focused on: A. market values of debt and equity. B. book values of debt and assets.

C. market value of equity and book value of debt. D. book value if debt and market value of equity. E. book values of debt and equity.

Difficulty level: Medium

Topic: ENTERPRISE VALUE Type: DEFINITIONS

74. A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current assets of $300. The firm has $100 in inventory. What is the common-size statement value of inventory? A. 8.3% B. 12.5% C. 20.0% D. 33.3% E. 50.0%

Common-size inventory = $100 ? ($500 + $300) = .125 = 12.5%

Difficulty level: Medium

Topic: COMMON-SIZE STATEMENTS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

75. A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity of $700. Interest expense is $50. What is the common-size statement value of the interest expense? A. 3.3% B. 5.0% C. 7.1% D. 16.7% E. 50.0%

Common-size interest = $50 ? $1,500 = .033 = 3.3%

Difficulty level: Medium

Topic: COMMON-SIZE STATEMENTS Type: PROBLEMS

76. Jessica's Boutique has cash of $50, accounts receivable of $60, accounts payable of $200, and inventory of $150. What is the value of the quick ratio? A. .30 B. .55 C. .77 D. 1.30 E. 1.82

Quick ratio = ($50 + $60) ? $200 = .55

Difficulty level: Medium Topic: LIQUIDITY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

77. A firm has a debt-equity ratio of .40. What is the total debt ratio? A. .29 B. .33 C. .67 D. 1.40 E. 1.50

The debt-equity ratio is .40. Thus, if total debt is $40, total equity is $100 and total assets are $140. Total debt ratio = $40 ? $140 = .29

Difficulty level: Medium

Topic: LONG-TERM SOLVENCY RATIOS Type: PROBLEMS

78. A firm has total debt of $1,200 and a debt-equity ratio of .30. What is the value of the total assets? A. $1,560 B. $3,000 C. $3,600 D. $4,000 E. $5,200

Total equity = $1,200 ? .30 = $4,000; Total assets = $1,200 + $4,000 = $5,200

Difficulty level: Medium

Topic: LONG-TERM SOLVENCY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

79. A firm has sales of $3,600, costs of $2,800, interest paid of $100, and depreciation of $400. The tax rate is 34%. What is the value of the cash coverage ratio? A. 2 B. 4 C. 6 D. 8 E. 10

Cash coverage ratio = ($3,600 - $2,800) ? $100 = 8

Difficulty level: Medium

Topic: LONG-TERM SOLVENCY RATIOS Type: PROBLEMS

80. Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $60. What is the value of the cash coverage ratio? A. 2.40 B. 3.52 C. 3.80 D. 4.04 E. 4.28

EBIT = 3.8 ? $250 = $950; Cash coverage ratio = ($950 + $60) ? $250 = 4.04

Difficulty level: Medium

Topic: LONG-TERM SOLVENCY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

81. Mario's Home Systems has sales of $2,800, cost of goods sold of $2,100, inventory of $500, and accounts receivable of $400. How many days, on average, does it take Mario's to sell its inventory? A. 65.2 days B. 85.2 days C. 86.9 days D. 96.9 days E. 117.3 days

Inventory turnover = $2,100 ? $500 = 4.2; Days in inventory = 365 ? 4.2 = 86.9 days

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: PROBLEMS

82. Syed's Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost of goods sold of $3,400. How long does it take Syed's to both sell its inventory and then collect the payment on the sale? A. 128 days B. 146 days C. 163 days D. 190 days E. 211 days

Inventory turnover = $3,400 ? $1,200 = 2.83; Days in inventory = 365 ? 2.83 = 128.98;

Accounts receivable turnover = $4,200 ? $700 = 6; Days' sales in receivables = 365 ? 6 = 60.83; Total days in inventory and receivables = 128.98 + 60.83 = 189.81 days = 190 days (rounded)

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

83. A firm has net working capital of $400, net fixed assets of $2,400, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets? A. $1.33 B. $1.67 C. $1.88 D. $2.33 E. $2.50

Total asset turnover = $6,000 ? [($400 + $800) + $2,400] = 1.67; Every $1 in total assets generates $1.67 in sales.

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: PROBLEMS

84. Rosita's Restaurant has sales of $4,500, total debt of $1,300, total equity of $2,400, and a profit margin of 5%. What is the return on assets? A. 5.00% B. 6.08% C. 7.39% D. 9.38% E. 17.31%

Return on assets = (.05 ? $4,500) ? ($1,300 + $2,400) = $225 ? $3,700 = .0608 = 6.08%

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

85. Lee Sun's has sales of $3,000, total assets of $2,500, and a profit margin of 5%. The firm has a total debt ratio of 40%. What is the return on equity? A. 6% B. 8% C. 10% D. 12% E. 15%

Return on equity = (.05 ? $3,000) ? [$2,500 ? (1 - .40)] = $150 ? $1,500 = .10 = 10%

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: PROBLEMS

86. Jupiter Explorers has $6,400 in sales. The profit margin is 4%. There are 6,400 shares of stock outstanding. The market price per share is $1.20. What is the price-earnings ratio? A. 13 B. 14 C. 21 D. 30 E. 48

Earnings per share = (.04 ? $6,400) ? 6,400 = .04; Price-earnings ratio = $1.20 ? .04 = 30

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

87. Patti's has net income of $1,800, a price-earnings ratio of 12, and earnings per share of $1.20. How many shares of stock are outstanding? A. 1,200 B. 1,400 C. 1,500 D. 1,600 E. 1,800

Number of shares = $1,800 ? $1.20 = 1,500

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: PROBLEMS

88. A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-ratio of 10, and a book value per share of $.50. What is the market-to-book ratio? A. 1.6 B. 2.4 C. 3.0 D. 3.2 E. 3.6

Earnings per share = $800 ? 5,000 = $.16; Price per share = $.16 ? 10 = $1.60; Market-to-book ratio = $1.60 ? $.50 = 3.2

Difficulty level: Medium

Topic: MARKET VALUE RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

89. A firm has 5,000 shares of stock outstanding, sales of $6,000, an enterprise value of $5 million and an EBITDA of 1 million. What is the enterprise value multiple? A. 2.2 B. 2.4 C. 3.0 D. 4.0 E. 5.0

Enterprise value multiple = enterprise value/EBITDA = $5 million/$1 million = 5.

Difficulty level: Medium

Topic: ENTERPRISE VALUE MULTIPLE Type: PROBLEMS

90. A firm has a market capitalization of $2 million, market value of interest bearing debt of $1 million, book value of interest bearing debt of $500,000 and cash of $100,000. What is the enterprise value? A. $2.5 million B. $2.9 million C. $3.0 million D. $3.5 million E. $3.6 million

Enterprise value = $2 million + $1 million - $100,000 = 2.9 million

Difficulty level: Medium

Topic: ENTERPRISE VALUE Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

91. Frederico's has a profit margin of 6%, a return on assets of 8%, and an equity multiplier of 1.4. What is the return on equity? A. 6.7% B. 8.4% C. 11.2% D. 14.6% E. 19.6%

Return on equity = 8% ? 1.4 = 11.2%, using the Du Pont Identity

Difficulty level: Medium Topic: DU PONT IDENTITY Type: PROBLEMS

92. Samuelson's has a debt-equity ratio of 40%, sales of $8,000, net income of $600, and total debt of $2,400. What is the return on equity? A. 6.25% B. 7.50% C. 9.75% D. 10.00% E. 11.25%

Return on equity = $600 ? ($2,400 ? .40) = .10 = 10%

Difficulty level: Medium Topic: DU PONT IDENTITY Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

93. A firm has a return on equity of 15%. The debt-equity ratio is 50%. The total asset turnover is 1.25 and the profit margin is 8%. The total equity is $3,200. What is the amount of the net income? A. $480 B. $500 C. $540 D. $600 E. $620

Using the Du Pont identity: Total assets = (1 + .50) ? $3,200 = $4,800; Total sales = $4,800 ? 1.25 = $6,000; Net income = $6,000 ? .08 = $480

Difficulty level: Medium Topic: DU PONT IDENTITY Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

94. What is the quick ratio for 2008? A. .82 B. .95 C. 1.36 D. 2.18 E. 2.28

Quick ratio for 2008 = ($2,440 - $1,520) ? $1,120 = .82

Difficulty level: Easy

Topic: LIQUIDITY RATIOS Type: PROBLEMS

95. What is the days' sales in receivables in 2008? A. 31.8 days B. 33.7 days C. 38.4 days D. 41.9 days E. 47.4 days

Accounts receivable turnover for 2008 = $8,450 ? $780 = 10.83; Days' sales in receivables for 2008 = 365 ? 10.83 = 33.7

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: PROBLEMS

96. What is the equity multiplier for 2008? A. 1.6 B. 1.8 C. 2.0 D. 2.3 E. 2.5

Equity multiplier for 2008 = $6,040 ? ($3,000 + $710) = 1.6

Difficulty level: Medium

Topic: FINANCIAL LEVERAGE RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

97. What is the cash coverage ratio for 2008? A. 11.6 B. 12.8 C. 13.7 D. 17.3 E. 18.8

Cash coverage ratio for 2008 = ($810 + $400) ? $70 = 17.3

Difficulty level: Medium

Topic: FINANCIAL LEVERAGE RATIOS Type: PROBLEMS

98. What is the return on equity for 2008? A. 5.7% B. 6.8% C. 13.0% D. 15.3% E. 16.0%

Return on equity for 2008 = $481 ? ($3,000 + $710) = .13 = 13%

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

99. Windswept, Inc. has 90 million shares of stock outstanding. Its price-earnings ratio for 2008 is 12. What is the market price per share of stock? A. $57.12 B. $59.94 C. $62.82 D. $64.13 E. $65.03

Earnings per share for 2008 = $481 million ? 90 million = $5.3444; Market price per share = $5.3444 ? 12 = $64.13

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

100. In 2008, how many days on average did it take Bayside to sell its inventory? A. 126.1 days B. 127.9 days C. 153.8 days D. 176.5 days E. 178.9 days

Inventory turnover for 2008 = $4,060 ? $1,990 = 2.04; Days' sales in inventory = 365 ? 2.04 = 178.9 days

Difficulty level: Medium

Topic: ASSET MANAGEMENT RATIOS Type: PROBLEMS

101. What is the debt-equity ratio for 2008? A. 22.5% B. 26.2% C. 35.5% D. 45.1% E. 47.7%

Debt-equity ratio for 2008 = ($1,170 + $500) ? ($3,500 + $1,200) = .355 = 35.5%

Difficulty level: Medium

Topic: FINANCIAL LEVERAGE RATIOS Type: PROBLEMS

102. What is the times interest earned ratio for 2008? A. 30 B. 36 C. 40 D. 50 E. 54

Times interest earned for 2008 = $1,200 ? $30 = 40

Difficulty level: Medium

Topic: FINANCIAL LEVERAGE RATIOS Type: PROBLEMS

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Chapter 03 - Financial Statements Analysis and Long-Term Planning

103. What is the equity multiplier for 2008? A. 1.21 B. 1.36 C. 1.44 D. 1.82 E. 1.91

Equity multiplier for 2008 = $6,370 ? ($3,500 + $1,200) = 1.36

Difficulty level: Medium

Topic: FINANCIAL LEVERAGE RATIOS Type: PROBLEMS

104. What is the return on equity for 2008? A. 16.2% B. 20.9% C. 21.7% D. 22.1% E. 23.3%

Return on equity for 2008 = $760 ? ($3,500 + $1,200) = .162 = 16.2%

Difficulty level: Medium

Topic: PROFITABILITY RATIOS Type: PROBLEMS

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