Finance Applications and Theory Marcia Cornett 5th Edition- Test Bank

 

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Sample Test

Finance, 5e (Cornett)

Chapter 3   Analyzing Financial Statements

 

1) Which of the following refer to ratios that measure the relationship between a firm’s liquid (or current) assets and its current liabilities?

1.   A) cross-section

2.   B) internal-growth

3.   C) liquidity

4.   D) market value

 

Answer:  C

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

2) Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities

1.   A) cross-section

2.   B) current

3.   C) internal-growth

4.   D) quick or acid-test

 

Answer:  B

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

3) Which type of ratio measures a firm’s ability to pay off short-term obligations without relying on inventory sales?

1.   A) cash

2.   B) current

3.   C) internal-growth

4.   D) quick or acid-test

 

Answer:  D

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

4) Which ratio measures a firm’s ability to pay short-term obligations with its available cash and market securities?

1.   A) cash

2.   B) current

3.   C) internal-growth

4.   D) quick or acid-test

 

Answer:  A

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

5) Which statement is true?

1.   A) The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress.

2.   B) The lower the liquidity ratios, the less liquidity risk a firm has.

3.   C) Liquid assets generate profits for the firm.

4.   D) Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

6) Select the most commonly used liquidity ratios

1.   A) Current ratio

2.   B) Quick ratio

3.   C) Cash ratio

4.   D) All of the above are considered commonly used liquidity ratios.

 

Answer:  D

Difficulty: 2 Medium

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

7) Which of the following ratios measure how efficiently a firm uses its assets, as well as how efficiently the firm manages its accounts payable?

1.   A) asset management

2.   B) cash

3.   C) internal-growth

4.   D) quick or acid-test

 

Answer:  A

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

8) Which ratio measures the number of dollars of sales produced per dollar of inventory?

1.   A) asset management

2.   B) cash

3.   C) internal-growth

4.   D) inventory turnover

 

Answer:  D

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

 

 

9) Which of these statements is true?

1.   A) A low inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.

2.   B) A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.

3.   C) A low inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.

4.   D) A high inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.

 

Answer:  B

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

10) Which of the following measures the number of days accounts receivable are held before the firm collects cash from the sale?

1.   A) accounts receivable turnover

2.   B) average collection period

3.   C) average payment period

4.   D) accounts payable turnover

 

Answer:  B

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

 

 

11) Which of the following measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials?

1.   A) accounts receivable turnover

2.   B) average collection period

3.   C) average payment period

4.   D) accounts payable turnover

 

Answer:  C

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

12) Which of the following measures the number of dollars of sales produced per dollar of fixed assets?

1.   A) fixed asset to working capital ratio

2.   B) fixed asset turnover ratio

3.   C) fixed asset management ratio

4.   D) sales to working capital ratio

 

Answer:  B

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

13) Which of these statements is true?

1.   A) The age of a firm’s cash will affect the current ratio level.

2.   B) The age of a firm’s accounts receivable will affect the current ratio level.

3.   C) The age of a firm’s fixed assets will affect the fixed asset turnover ratio level.

4.   D) The age of a firm’s fixed assets will affect the current ratio level.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

 

 

14) Which of these statements is true?

1.   A) In general, the lower the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.

2.   B) In general, the lower the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be.

3.   C) In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be.

4.   D) In general, the higher the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be.

 

Answer:  C

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

15) Which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets?

1.   A) debt management ratios

2.   B) equity ratios

3.   C) financial ratios

4.   D) liquidity ratios

 

Answer:  A

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

16) Which ratio measures the percentage of total assets financed by debt?

1.   A) debt

2.   B) debt-to-equity

3.   C) equity multiplier

4.   D) liquidity

 

Answer:  A

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

17) Select the major debt management ratios.

1.   A) Debt ratio and debt-to-equity.

2.   B) The equity multiplier and the times interest earned.

3.   C) The fixed-charge coverage and the cash coverage.

4.   D) All of the above.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

18) Which of the following refers to the amount of debt versus equity a firm has on its balance sheet?

1.   A) capital coverage

2.   B) capital structure

3.   C) debt structure

4.   D) financial structure

 

Answer:  B

Difficulty: 1 Easy

Topic:  Capital structure

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

19) Which of these is NOT considered a coverage ratio?

1.   A) cash coverage ratio

2.   B) current ratio

3.   C) fixed-charge coverage ratio

4.   D) times interest earned

 

Answer:  B

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

 

 

20) According to the Tax Cuts and Jobs Act (TCJA) of 2017, which of the following statements are true?

2018.         A) The act contains a new limitation on the deductibility of net interest expense that exceeds 30% of a firm’s adjusted taxable income starting in 2018.

2019.         B) For tax years beginning before January 1, 2022, adjusted taxable income is measured as a businesses’ EBITDA.

2020.         C) Both A and B are true.

2021.         D) Neither A or B are true.

 

Answer:  C

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

21) Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm?

1.   A) liquidity

2.   B) coverage

3.   C) financial

4.   D) profitability

 

Answer:  D

Difficulty: 1 Easy

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-04 Calculate and interpret major profitability ratios.

 

22) Which of the following measures the operating return on the firm’s assets, irrespective of financial leverage and taxes?

1.   A) basic earnings power ratio

2.   B) profit margin

3.   C) return on assets

4.   D) return on equity

 

Answer:  A

Difficulty: 1 Easy

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-04 Calculate and interpret major profitability ratios.

 

23) Return on Equity….

1.   A) Measures the return on the common stockholder’s investment in the assets of the firm.

2.   B) Measures the overall return on the firm’s assets, including financial leverage and taxes.

3.   C) Measures the operating return on the firm’s assets regardless of financial leverage and taxes.

4.   D) Is the percent of sales left after all operating expenses are deducted.

 

Answer:  A

Difficulty: 1 Easy

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-04 Calculate and interpret major profitability ratios.

 

24) For publicly traded firms, which of these ratios measure what investors think of the company’s future performance and risk?

1.   A) liquidity ratios

2.   B) market value ratios

3.   C) price value ratios

4.   D) profitability ratios

 

Answer:  B

Difficulty: 1 Easy

Topic:  Market value ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-05 Calculate and interpret major market value ratios.

 

25) Which statement(s) is/are true of PE ratios?

1.   A) Managers, analysts, and investors expect companies with high PE ratios to experience future growth.

2.   B) Measures the amount that investors will pay for the firm’s stock per dollar of equity used to finance the firm’s assets.

3.   C) Measures how much investors are willing to pay for each dollar the firm earns per share of its stock.

4.   D) Both A and C are true.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Market value ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-05 Calculate and interpret major market value ratios.

 

26) Which of these can be used by interested parties to identify changes in corporate performance?

1.   A) common-size financial statements

2.   B) industrialized financial statements

3.   C) sanitized financial statements

 

Answer:  A

Difficulty: 1 Easy

Topic:  Standardized financial statements

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-07 Understand the differences between time series and cross-sectional ratio analysis.

 

27) Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings?

1.   A) internal growth rate

2.   B) retained earnings growth rate

3.   C) sustainable growth rate

4.   D) weighted growth rate

 

Answer:  C

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-07 Understand the differences between time series and cross-sectional ratio analysis.

 

28) To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks?

1.   A) competitive analysis

2.   B) cross-industry analysis

3.   C) time-industry analysis

4.   D) time series analysis

 

Answer:  D

Difficulty: 1 Easy

Topic:  Financial statement analysis

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-08 Explain cautions that should be taken when examining financial ratios.

 

29) Which statement is true of ratio analysis:

1.   A) can provide useful information on a firm’s current position but should never be used to forecast future performance.

2.   B) can provide useful information on a firm’s current position and hint at future performance.

3.   C) can provide useful information on a firm’s past but not current position.

4.   D) can provide useful information on a firm’s past and current position, but should never be used to forecast future performance.

 

Answer:  B

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-08 Explain cautions that should be taken when examining financial ratios.

 

30) The key to cross-sectional analysis comparison of firm ratios include:

1.   A) Identifying similar firms that compete in the same markets.

2.   B) Identifying similar firms that have similar asset sizes.

3.   C) Identifying firms that operate in a similar manner.

4.   D) All of the above.

 

Answer:  D

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-08 Explain cautions that should be taken when examining financial ratios.

 

 

 

31) You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: cash and marketable securities = $200,000, accounts receivable = $800,000, inventory = $1,000,000, accrued wages and taxes = $250,000, accounts payable = $400,000, and notes payable = $300,000. What are Blue Jays’ current ratio, quick ratio, and cash ratio, respectively?

1.   A) 1.05263, 1.05263, 0.21053

2.   B) 2.10526, 1.05263, 0.21053

3.   C) 3.07692, 1.53846, 0.30769

4.   D) 3.07692, 1.05263, 0.30769

 

Answer:  B

Explanation:

Current ratio	=	$200,000 + $800,000 + $1,000,000	= 2.10526 times
		$250,000 + $400,000 + $300,000
Quick ratio (acid-test ratio)	=	$200,000 + $800,000 + $1,000,000 – $1,000,000	= 1.05263 times
		$250,000 + $400,000 + $300,000
Cash ratio	=	$200,000	= 0.21053 times
		$250,000 + $400,000 + $300,000

 

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

32) The top part of Mars, Inc.’s 2018 balance sheet is listed as follows (in millions of dollars).

 

Current assets:							Current liabilities:
Cash and marketable securities	$	10					Accrued wages and taxes		$	20
Accounts receivable		40					Accounts payable			30
Inventory		160					Notes payable			40
Total	$	210					Total		$	90

 

 

What are Mars, Inc.’s current ratio, quick ratio, and cash ratio for 2018?

1.   A) 0.1111, 0.5556, 0.2

2.   B) 2.3333, 0.5556, 0.1111

3.   C) 4.2, 1.0, 0.2

4.   D) 10.5, 6.0, 1.0

 

Answer:  B

Explanation:

Current ratio	=	$210m.	= 2.3333 times
		$90m.

 

 

Quick ratio (acid-test ratio)	=	$210m. − $160m.	= 0.5556 times
		$90m.

 

 

Cash ratio	=	$10m.	= 0.1111 times
		$90m.

 

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

33) The top part of Rammy’s Inc.’s 2018 balance sheet is listed as follows (in millions of dollars).

 

Current assets:					Current liabilities:
Cash and marketable securities	$	5			Accrued wages and taxes	$	6
Accounts receivable		15			Accounts payable		10
Inventory		95			Notes payable		50
Total	$	115			Total	$	66

 

 

What are Mars, Inc.’s current ratio, quick ratio, and cash ratio for 2018?

1.   A) 1.74242, 0.30303, 0.07576

2.   B) 7.1875, 1.25, 0.3125

3.   C) 1.43939, 0.30303, 0.07576

4.   D) 19.16667, 3.33333, 0.83333

 

Answer:  A

Explanation:

Current ratio	=	$115m.	= 1.74242 times
		$66m.

 

 

Quick ratio (acid-test ratio)	=	$115m. − $95m.	= 0.30303 times
		$66m.

 

 

Cash ratio	=	$5m.	= 0.07576 times
		$66m.

 

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

34) Tops N Bottoms Corp. reported sales for 2018 of $50 million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a 365-day year, how many days did Tops N Bottoms’ inventory stay on the premises? How many times per year did Tops N Bottoms’ inventory turnover?

29.                A) 29.2 days, 12.5 times, respectively

30.                B) 12.5 days, 29.2 times, respectively

31.                C) 0.08 days, 12.5 times, respectively

32.                D) 29.2 days, 0.0345 times, respectively

 

Answer:  A

Explanation:

 

Days′ sales in inventory =	$4m. × 365	= 29.2 days
	$50m.

 

Inventory turnover ratio =	$50m.	= 12.5 times
	$4m.

 

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

 

 

35) Rachets R Us Corp. reported sales for 2013 of $200,000. Rachets R Us listed $25,000 of inventory on its balance sheet. Using a 365-day year, how many days did Rachets R Us’s inventory stay on the premises? How many times per year did Rachets R Us’s inventory turnover?

1.   A) 0.125 days, 8 times, respectively

2.   B) 0.125 days, 5 times, respectively

3.   C) 45.625 days, 8 times, respectively

4.   D) 45.625 days, 5 times respectively

 

Answer:  C

Explanation:

Days′ sales in inventory =	$25,000 × 365	= 45.625 days
	$200,000

 

Inventory turnover ratio =	$200,000	= 8 times
	$25,000

 

Difficulty: 1 Easy

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

36) CornProducts Corp. ended the year 2018 with an average collection period of 40 days. The firm’s credit sales for 2018 were $9 million. What is the approximate year-end 2018 balance in accounts receivable for Corn Products?

1.   A) $225,000

2.   B) $986,300

3.   C) $4,444,400

4.   D) $360,000,000

 

Answer:  B

Explanation:

Average collection period (ACP)	=	Accounts receivable × 365	= 40 days
		$9m.

 

=> Accounts receivable = 40 days × $9m./365 = $0.9863m.

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.

 

 

 

37) Trina’sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2018. If the firm’s total debt at year-end was $10 million, how much equity does Trina’s Trikes have?

1.   A) $2 million

2.   B) $5 million

3.   C) $10 million

4.   D) $20 million

 

Answer:  B

Explanation:

Debt-to-equity ratio	=	Total debt	=	2	=	$10m.	=> Total equity = $10m./2 = 5m.
		Total equity				Total equity

 

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

38) Will’s Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2018. If the firm’s total debt at year-end was $5 million, how much equity does Will’s Wheels have?

1.   A) $0.65 million

2.   B) $3.25 million

3.   C) $5 million

4.   D) $7.69 million

 

Answer:  D

Explanation:

Debt-to-equity ratio	=	Total debt	=	.65	=	$5m.	=> Total equity = $5m./.65 = 7.6923m.
		Total equity				Total equity

 

Difficulty: 1 Easy

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

 

 

39) You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

1.   A) LotsofDebt: 90 percent, 10 times, 9 times, respectively; and LotsofEquity: 10 percent, 1.11 times, 0.1111 times, respectively

2.   B) LotsofDebt: 10 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 90 percent, 10 times, 9 times, respectively

3.   C) LotsofDebt: 90 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 10 percent, 10 times, 9 times, respectively

4.   D) LotsofDebt: 10 percent, 10 times, 9 times, respectively; and LotsofEquity: 90 percent, 1.11 times, 0.1111 times, respectively

 

 

 

Answer:  A

Explanation:  Lots of Debt

 

 

Debt ratio	=	$90m.	= 90.00%
		$100m.

 

 

Equity multiplier ratio	=	$100m.	= 10 times
		$10m.

 

 

Debt-to-equity ratio	=	$90m.	= 9 times
		$10m.

 

 

Lots of Equity

 

 

Debt ratio	=	$10m.	= 10.00%
		$100m.

 

 

Equity multiplier ratio	=	$100m.	= 1.11 times
		$90m.

 

 

Debt-to-equity ratio	=	$10m.	= .1111 times
		$90m.

 

Difficulty: 1 Easy

Topic:  Market value ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

 

 

40) Bree’s Tennis Supply’s market-to-book ratio is currently 9.4 times and PE ratio is 20 times. If Bree’s Tennis Supply’s common stock is currently selling at $20.50 per share, what is the book value per share and earnings per share?

1.   A) $1.025, $2.1809, respectively

2.   B) $2.1809, $1.025, respectively

3.   C) $410.00, $192.70, respectively

4.   D) $192.70, $410.00, respectively

 

Answer:  B

Explanation:

Market-to-book ratio = 9.4 =	$20.50	=> Book value per share = $20.50/9.40 = $2.1809
	Book value per share

 

 

Price-earnings (PE) ratio = 20 times =	$20.50	=> Earnings per share = $20.50/20 = $1.025
	Earnings per share

 

Difficulty: 1 Easy

Topic:  Market value ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-05 Calculate and interpret major market value ratios.

 

 

 

41) Tina’s Track Supply’s market-to-book ratio is currently 4.5 times and PE ratio is 10.5 times. If Tina’s Track Supply’s common stock is currently selling at $100 per share, what is the book value per share and earnings per share?

1.   A) $450, $1,050, respectively

2.   B) $1,050, $450, respectively

3.   C) $22.2222, $9.5238, respectively

4.   D) $9.5238, $22.2222, respectively

 

Answer:  C

Explanation:

Market-to-book ratio = 4.5 =	$100	=> Book value per share = $100/4.5 = $22.2222
	Book value per share

 

 

Price-earnings (PE) ratio = 10.5 times =	$100	=> Earnings per share = $100/10.5 = $9.5238
	Earnings per share

 

Difficulty: 1 Easy

Topic:  DuPont identity

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-05 Calculate and interpret major market value ratios.

 

42) If Epic, Inc. has an ROE = 25 percent, equity multiplier = 4, a profit margin of 12 percent, what is the total asset turnover ratio?

1.   A) 0.0833

2.   B) 0.192

3.   C) 0.5208

4.   D) 0.75

 

Answer:  C

Explanation:  ROE = 0.25 = 0.12 × Total asset turnover × 4 => Total asset turnover = 0.25/(0.12 × 4) = 0.520833.

Difficulty: 1 Easy

Topic:  DuPont identity

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

 

 

43) If Apex, Inc. has an ROE = 10 percent, equity multiplier = 3, and profit margin of 5 percent, what is the total asset turnover ratio?

1.   A) 0.0600

2.   B) 0.0667

3.   C) 0.1667

4.   D) 0.6667

 

Answer:  D

Explanation:  ROE = 0.10 = 0.05 × Total asset turnover × 3 => Total asset turnover = 0.10/(0.05 × 3) = 0.6667.

Difficulty: 1 Easy

Topic:  DuPont identity

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

44) Last year Café Creations, Inc. had an ROA of 25 percent, a profit margin of 12 percent, and sales of $4 million. What is Café Creations’ total assets?

1.   A) $0.12m.

2.   B) $0.48m.

3.   C) $1.00m.

4.   D) $1.92m.

 

Answer:  D

Explanation:  ROA = 0.25 = 0.12 × ($4m/Total assets) => Total assets = 0.12 × $4m/0.25m = $1.92m.

Difficulty: 1 Easy

Topic:  DuPont identity

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

 

 

45) Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java’s total assets?

1.   A) $0.125m.

2.   B) $1.25m.

3.   C) $12.5m.

4.   D) $12m.

 

Answer:  C

Explanation:  ROA = 0.10 = 0.05 × ($25m/Total assets) => Total assets = 0.05 × $25m/0.10m = $12.5m.

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

46) Last year Umbrellas Unlimited Corporation had an ROA of 10 percent and a dividend payout ratio of 50 percent. What is the internal growth rate?

1.   A) 1.00 percent

2.   B) 2.25 percent

3.   C) 5.26 percent

4.   D) 100.00 percent

 

Answer:  C

Explanation:

Internal growth rate =	0.10 × 0.50	= 0.0526 = 5.26%
	1 − (0.10 × 0.50)

 

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

 

 

47) Last year Rain Repel Corporation had an ROA of 5 percent and a dividend payout ratio of 90 percent. What is the internal growth rate?

4.   A) 4.75 percent

5.   B) 0.50 percent

6.   C) 50.00 percent

7.   D) 52.63 percent

 

Answer:  B

Explanation:  RR = 1 − .9 = 0.10.

 

 

Internal growth rate =	0.05 × 0.10	= 0.0050 = 0.50%
	1 − (0.05 × 0.10)

 

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

48) Last year Poncho Villa Corporation had an ROA of 16 percent and a dividend payout ratio of 25 percent. What is the internal growth rate?

1.   A) 1.19 percent

2.   B) 13.64 percent

3.   C) 25.40 percent

4.   D) 33.33 percent

 

Answer:  B

Explanation:  RR = 1 − .25 = .75.

 

 

Internal growth rate =	0.16 × 0.75	= 0.1364 = 13.64%
	1 − (0.16 × 0.75)

 

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

 

 

49) Last year Umbrellas Unlimited Corporation had an ROE of 16.5 percent and a dividend payout ratio of 40 percent. What is the sustainable growth rate?

13.                A) 13.17 percent

14.                B) 10.99 percent

15.                C) 27.50 percent

16.                D) 32.93 percent

 

Answer:  B

Explanation:  RR = 1 − .40 = .60.

 

 

Sustainable growth rate =	0.165 × 0.60	= 0.1099 = 10.99%
	1 − (0.165 × 0.60)

 

Difficulty: 1 Easy

Topic:  Internal and sustainable growth rates

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

50) Last year Rain Repel Corporation had an ROE of 10 percent and a dividend payout ratio of 80 percent. What is the sustainable growth rate?

1.   A) 1.11 percent

2.   B) 2.04 percent

3.   C) 44.44 percent

4.   D) 50.00 percent

 

Answer:  B

Explanation:  RR = 1 − .80 = .20.

 

 

Sustainable growth rate =	0.10 × 0.20	= 0.0204 = 2.04%
	1 − (0.10 × 0.20)

 

Difficulty: 1 Easy

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-06 Appreciate how various ratios relate to one another.

 

 

 

51) Burt’s TVs has current liabilities of $25 million. Cash makes up 40 percent of the current assets and accounts receivable makes up another 20 percent of current assets. Burt’s current ratio = 0.85 times. What is the value of inventory listed on the firm’s balance sheet?

4.   A) $4.25m.

5.   B) $8.5m.

6.   C) $10m.

7.   D) $40m.

 

Answer:  B

Explanation:  Current ratio = 0.85 = Current assets/$25m => Current assets = 0.85 × $25m = $21.25m.

Cash = 0.40 × $21.25m = $8.5m.

Accounts receivable = 0.20 × $21.25m = $4.25m.

=> Inventory = $21.25m − $8.5m − $4.25m = $8.5m.

Difficulty: 2 Medium

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

52) Ernie’s Mufflers has current liabilities of $45 million. Cash makes up 5 percent of the current assets and accounts receivable makes up another 50 percent of current assets. Ernie’s current ratio = 1.5 times. What is the value of inventory listed on the firm’s balance sheet?

13.                A) $13.75m.

14.                B) $20.25m.

15.                C) $30.375m.

16.                D) $33.75m.

 

Answer:  C

Explanation:  Current ratio = 1.5 = Current assets/$45m => Current assets = 1.5 × $45m = $67.5m.

Cash = 0.05 × $67.5m = $3.375m.

Accounts receivable = 0.50 × $67.5m = $33.75m.

=> Inventory = $67.5m − $3.375m − $33.75m = $30.375m.

Difficulty: 2 Medium

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

53) You have the following information on Marco’s Polo Shop: total liabilities and equity = $205 million, current liabilities = $45 million, inventory = $60 million, and quick ratio = 2.4 times. Using this information, what is the balance for fixed assets on Marco’s Polo balance sheet?

1.   A) $37m.

2.   B) $97m.

3.   C) $145m.

4.   D) $157m.

 

Answer:  A

Explanation:

Quick ratio (acid-test ratio) = 2.4 times =	Current assets − $60m.
	$45m.

 

=> Current assets = (2.4 × $45m) + $60m = $168m.

=> Total assets = $205m = $168m + Fixed assets => Fixed assets = $205m − $168m = $37m.

Difficulty: 2 Medium

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

54) You have the following information on Olivia’s Bridle Shop: total liabilities and equity = $65 million, current liabilities = $10 million, inventory = $15 million, and quick ratio = 3 times. Using this information, what is the balance for fixed assets on Olivia’s balance sheet?

1.   A) $20m.

2.   B) $40m.

3.   C) $45m.

4.   D) $135m.

 

Answer:  A

Explanation:

Quick ratio (acid-test ratio) = 3 times =	Current assets − $15m.
	$10m.

 

=> Current assets = (3 × $10m) + $15m = $45m.

=> Total assets = $65m = $45m + Fixed assets => Fixed assets = $65m − $45m = $20m.

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.

 

 

 

55) Oasis Products, Inc. has current liabilities = $10 million, current ratio = 1.5 times, inventory turnover ratio = 12 times, average collection period = 20 days, and sales = $100 million. What is the value of their cash and marketable securities?

1.   A) $1,187,215

2.   B) $8,333,333

3.   C) $15,000,000

4.   D) $17,146,188

 

Answer:  A

Explanation:

Current ratio = 1.5 times =	Current assets	=> Current assets = 1.5 × $10m = $15m.
	$10m

 

 

Inventory turnover ratio = 12 times =	$100m	=> Inventory = $100m/12 = $8,333,333
	Inventory

 

 

Average collection period (ACP) = 20 days =	Accounts receivable × 365 days
	$100m

 

=> Accounts receivable = 20 × $100m/365 = $5,479,452.

=> Cash and marketable securities = $15m − $8,333,333 − $5,479,452 = $1,187,215.

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.; 03-02 Calculate and interpret major asset management ratios.

 

 

 

56) Green Products, Inc. has current liabilities = $40 million, current ratio = 2.4 times, inventory turnover ratio = 8 times, average collection period = 40 days, and sales = $320 million. What is the value of their cash and marketable securities?

20.                A) $20.93m.

21.                B) $56.00m.

22.                C) $75.07m.

23.                D) $96.00m.

 

Answer:  A

Explanation:

Current ratio = 2.4 times =	Current assets	=> Current assets = 2.4 × $40m = $96m.
	$40m

 

 

Inventory turnover ratio = 8 times =	$320m	=> Inventory = $320m/8 = $40m.
	Inventory

 

 

Average collection period (ACP) = 40 days =	Accounts receivable × 365 days
	$320m

 

=> Accounts receivable = 40 × $320m/365 = $35.0685m.

=> Cash and marketable securities = $96m − $40m − $35.0685 = $20.9315m.

Difficulty: 2 Medium

Topic:  Profitability ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-01 Calculate and interpret major liquidity ratios.; 03-02 Calculate and interpret major asset management ratios.

 

 

 

57) You have the following information on Universe It Ts, Inc.: sales to working capital = 10 times, profit margin = 25 percent, net income available to common stockholders = $3 million, and current liabilities = $1 million. What is the firm’s balance of current assets?

1.   A) $1.075m

2.   B) $1.2m

3.   C) $2.2m

4.   D) $5m

 

Answer:  C

Explanation:  Profit margin = 0.25 = $3m/Sales => Sales = $3m/0.25 = $12m.

Sales/(Current assets − Current liabilities) = 10 = $12m/(Current assets − $1m).

=> Current assets = ($12m/10) + 1m = $2.2m.

Difficulty: 2 Medium

Topic:  Profitability ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.; 03-04 Calculate and interpret major profitability ratios.

 

58) You have the following information on Zip’s Diner, Inc.: sales to working capital = 8 times, profit margin = 5 percent, net income available to common stockholders = $20 million, and current liabilities = $4 million. What is the firm’s balance of current assets?

4.   A) $4.125m

5.   B) $6.5m

6.   C) $46m

7.   D) $54m

 

Answer:  D

Explanation:  Profit margin = 0.05 = $20m/Sales => Sales = $20m/0.05 = $400m.

Sales/(Current assets − Current liabilities) = 8 = $400m/(Current assets − $4m).

=> Current assets = ($400m/8) + 4m = $54m.

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.; 03-04 Calculate and interpret major profitability ratios.

 

 

 

59) Use the following information to calculate current assets: sales = $12 million, capital intensity ratio = 4 times, debt ratio = 45 percent, and fixed asset turnover ratio = 2.5 times.

4.   A) $4.8m

5.   B) $21.6m

6.   C) $43.2m

7.   D) $48m

 

Answer:  C

Explanation:

Assets					Liabilities and Equity
Current assets	$	43.2	m.		Total liabilities	$	21.6	m.
Fixed assets	$	4.8	m.		Total equity	$	26.4	m.
Total assets	$	48.0	m.		Total liabilities and equity	$	48.0	m.

 

 

 

Step 1: Capital intensity ratio = 4 = Total assets/$12m => Total assets = 4 × $12m = $48m and Total liabilities and equity = $48m.

 

Step 2: Debt ratio = 0.45 = Total debt/$48m => Total debt = 0.45 × $48m = $21.6m.

 

Step 3: Total equity = $48m − $21.6m = $26.4m.

 

Step 4: Fixed asset turnover = 2.5 = $12m/Fixed assets => Fixed assets = $12m/2.5 = $4.8m.

 

Step 5: Current assets = $48m − $4.8m = $43.2m.

Difficulty: 2 Medium

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.; 03-03 Calculate and interpret major debt ratios.

 

 

 

60) Use the following information to calculate current assets: sales = $100 million, capital intensity ratio = 0.5 times, debt ratio = 30 percent, and fixed asset turnover ratio = 5 times.

1.   A) $10m

2.   B) $15m

3.   C) $30m

4.   D) $50m

 

Answer:  C

Explanation:

Assets					Liabilities and Equity
Current assets	$	30	m.		Total liabilities	$	15	m.
Fixed assets	$	20	m.		Total equity	$	35	m.
Total assets	$	50	m.		Total liabilities and equity	$	50	m.

 

 

 

Step 1: Capital intensity ratio = 0.5 = Total assets/$100m => Total assets = 0.5 × $100m = $50m and Total liabilities and equity = $50m.

 

Step 2: Debt ratio = 0.30 = Total debt/$50m => Total debt = 0.3 × $50m = $15m.

 

Step 3: Total equity = $50m − $15m = $35m.

 

Step 4: Fixed asset turnover = 5 = $100m/Fixed assets => Fixed assets = $100m/5 = $20m.

 

Step 5: Current assets = $50m − $20m = $30m.

Difficulty: 2 Medium

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-02 Calculate and interpret major asset management ratios.; 03-03 Calculate and interpret major debt ratios.

 

 

 

61) Zoe’s Dog Toys, Inc. reported a debt to equity ratio of 0.5 times at the end of 2018. If the firm’s total assets at year-end are $50 million, how much of their assets is financed with equity?

16.                A) $16.67m

17.                B) $25m

18.                C) $33.33m

19.                D) $50m

 

Answer:  C

Explanation:  Debt to equity = 0.5 = Total debt/Total equity = Total debt/(Total assets − Total debt) = 0.5 = Total debt/($50m − Total debt) => 0.5 × ($50m − Total debt) = Total debt.

=> (0.5 × $50m) − (0.5 × Total debt) = Total debt => $25m = (0.5 × Total debt) + Total Debt.

=> Total debt = $25m/1.5 = $16.67m.

=> Total equity = $50m − $16.67m = $33.33m.

Difficulty: 2 Medium

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.

 

62) Nicole’s Neon Signs, Inc. reported a debt to equity ratio of 1.9 times at the end of 2018. If the firm’s total assets at year-end are $100 million, how much of their assets is financed with equity?

34.                A) $34.48m

35.                B) $65.52m

36.                C) $52.63m

37.                D) $100m

 

Answer:  A

Explanation:  Debt to equity = 1.9 = Total debt/Total equity = Total debt/(Total assets − Total debt).

1.9 = Total debt/($100m  − Total debt) => 1.9 × ($100m − Total debt) = Total debt.

=> (1.9 × $100m) − (1.9 × Total debt) = Total debt => $190m = (1.9 × Total debt) + Total Debt.

=> Total debt = $190m/2.9 = $65.52m.

=> Total equity = $100m − $65.52m = $34.48m.

Difficulty: 2 Medium

Topic:  Long-term solvency ratios

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

Learning Goal:  03-03 Calculate and interpret major debt ratios.