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Sample Test
M: Finance, 4e (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: 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.
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) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) 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.
12) 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.
13) 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.
14) 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.
15) 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.
16) 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.
17) 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.
18) 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.
19) 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.
20) 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.
21) 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.
22) 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.
23) 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.
24) Which is true? 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.
25) 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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
26) 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:
|
2018 |
|
|
|
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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
27) 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:
|
2018 |
|
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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
28) 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 turn over?
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
E)
Answer: A
Explanation: Days’ sales in inventory = = 29.2 days
Inventory turnover ratio = = 12.5 times
Difficulty: 1 Easy
Topic: Asset management ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-02 Calculate and interpret major asset
management ratios.
29) 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 = = 45.62 days
Inventory turnover ratio = = 8 times
Difficulty: 1 Easy
Topic: Asset management ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-02 Calculate and interpret major asset
management ratios.
30) CornProducts Corp. ended the year 2018 with an average
collection period of 40 days. The firm’s credit sales for 2011 were $9 million.
What is the approximate year-end 2013 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
Learning Goal: 03-02 Calculate and interpret major asset
management ratios.
31) 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
Learning Goal: 03-03 Calculate and interpret major debt
ratios.
32) 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
Learning Goal: 03-03 Calculate and interpret major debt
ratios.
33) 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. |
= 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
Learning Goal: 03-03 Calculate and interpret major debt
ratios.
34) 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
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
35) 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
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
36) 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.
37) 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.
38) 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.
39) 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: D
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.
40) 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
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
41) 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
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
42) 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
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
43) 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
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
44) 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
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
45) 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.
46) 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.
47) 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 Polo’s 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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
48) 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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
49) 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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.; 03-02 Calculate and interpret major asset management ratios.
50) 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
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.; 03-02 Calculate and interpret major asset management ratios.
51) 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.
52) 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.
53) 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
Learning Goal: 03-02 Calculate and interpret major asset
management ratios.; 03-03 Calculate and interpret major debt ratios.
54) 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
Learning Goal: 03-02 Calculate and interpret major asset
management ratios.; 03-03 Calculate and interpret major debt ratios.
55) 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.
56) 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.
57) Tierre’s Ts, Inc. reported a debt to equity ratio of 3 times
at the end of 2018. If the firm’s total assets at year-end are $15 million, how
much of their assets is financed with equity?
3. A)
$3.75m
4. B)
$5m
5. C)
$11.25m
6. D)
$45m
Answer: A
Explanation: Debt to equity = 3 = Total debt/Total equity
= Total debt/(Total assets − Total debt).
3 = Total debt/($15m − Total debt) => 3 × ($15m − Total debt)
= Total debt.
=> (3 × $15m) − (3 × Total debt) = Total debt => $45m = (3
× Total debt) + Total Debt.
=> Total debt = $45m/4 = $11.25m.
=> Total equity = $15m − $11.25m = $3.75m.
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.
58) Paige’s Purses, Inc. reported a debt to equity ratio of 2.4
times at the end of 2018. If the firm’s total assets at year-end are $27
million, how much of their assets is financed with equity?
7. A)
$7.94m
8. B)
$11.25m
9. C)
$19.06m
10.
D) $64.8m
Answer: A
Explanation: Debt to equity = 2.4 = Total debt/Total
equity = Total debt/(Total assets − Total debt).
2.4 = Total debt/($27m − Total debt) => 2.4 × ($27m − Total
debt) = Total debt.
=> (2.4 × $27m) − (2.4 × Total debt) = Total debt =>
$64.8m = (2.4 × Total debt) + Total Debt.
=> Total debt = $64.8m/3.4 = $19.06m.
=> Total equity = $27m − $19.06m = $7.94m.
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.
59) Calculate the times interest earned ratio for Tierre’s Ts,
Inc. using the following information. Sales = $200,000, cost of goods sold =
$50,000, depreciation expense = $13,000, addition to retained earnings =
$70,000, dividends per share = $0.50, tax rate = 30 percent, and number of
shares of common stock outstanding = 1,000. Tierre’s Ts has no preferred stock
outstanding.
1. A)
0.1814
2. B)
0.4854
3. C)
0.685
4. D)
3.7756
Answer: D
Explanation:
|
|
|
|
|
|
||
|
Net sales (all credit) |
$ |
200,000 |
|
|
||
|
Less: Cost of goods sold |
|
50,000 |
|
|
||
|
Gross profits |
$ |
150,000 |
|
|
||
|
Less: Depreciation |
|
13,000 |
|
|
||
|
Earnings before interest and taxes
(EBIT) |
$ |
137,000 |
|
|
||
|
Less: Interest |
|
36,286 |
|
|
||
|
Earnings before taxes (EBT) |
$ |
100,714 |
|
|
||
|
Less: Taxes |
|
|
|
|
||
|
Net income |
$ |
70,500 |
|
|
||
|
Less: Common stock dividends |
$ |
500 |
|
|
||
|
Addition to retained earnings |
$ |
70,000 |
|
|
||
|
|
|
|
||||
Step 1: Common stock dividends = $0.50 × 1,000 = $500.
Step 2: Net income = Common stock dividends + Addition to
retained earnings = $500 + $70,000 = $70,500.
Step 3: EBT (1 − tax rate) = Net income => EBT = Net
income/(1 − tax rate) = $70,500/(1 − 0.3) = $100,714.
Step 4: Gross profits = Net sales − Cost of goods sold =
$200,000 − $50,000 = $150,000.
Step 5: Gross profits − Depreciation = EBIT = $150,000 − $13,000
= $137,000.
Step 6: EBIT − Interest = EBT => Interest = EBIT − EBT =
$137,000 − $100,714 = $36,286.
=> Times interest earned = $137,000/$36,286 = 3.7756 times.
Difficulty: 2 Medium
Topic: Long-term solvency ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-03 Calculate and interpret major debt
ratios.
60) Calculate the times interest earned ratio for Paige’s
Purses, Inc. using the following information: sales = $50,000,000, cost of
goods sold = $15,000,000, depreciation expense = $2,000,000, addition to
retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30
percent, and number of shares of common stock outstanding = 10,000,000. Paige’s
Purses has no preferred stock outstanding.
1. A)
0.27
2. B)
3.30
3. C)
11.00
4. D)
16.67
Answer: C
Explanation:
|
|
|
|
|
||
|
Net sales (all credit) |
$ |
50,000,000 |
|
||
|
Less: Cost of goods sold |
|
15,000,000 |
|
||
|
Gross profits |
$ |
35,000,000 |
|
||
|
Less: Depreciation |
|
2,000,000 |
|
||
|
Earnings before interest and taxes
(EBIT) |
$ |
33,000,000 |
|
||
|
Less: Interest |
|
3,000,000 |
|
||
|
Earnings before taxes (EBT) |
$ |
30,000,000 |
|
||
|
Less: Taxes |
|
|
|
||
|
Net income |
$ |
21,000,000 |
|
||
|
Less: Common stock dividends |
$ |
11,000,000 |
|
||
|
Addition to retained earnings |
$ |
10,000,000 |
|
||
|
|
|
|
|||
Step 1: Common stock dividends = $1.10 ×10,000,000 =
$11,000,000.
Step 2: Net income = Common stock dividends + Addition to
retained earnings = $11,000,000 + $10,000,000 = $21,000,000.
Step 3: EBT (1 − tax rate) = Net income => EBT = Net
income/(1 − tax rate) = $21,000,000/(1 − 0.3) = $30,000,000.
Step 4: Gross profits = Net sales − Cost of goods sold =
$50,000,000 − $15,000,000 = $35,000,000.
Step 5: Gross profits − Depreciation = EBIT = $35,000,000 − $2,000,000
= $33,000,000.
Step 6: EBIT − Interest = EBT => Interest = EBIT − EBT =
$33,000,000 − $30,000,000 = $3,000,000.
=> Times interest earned = $33,000,000/$3,000,000 = 11 times.
Difficulty: 2 Medium
Topic: Profitability ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-03 Calculate and interpret major debt
ratios.
61) You are thinking of investing in Tikki’s Torches, Inc. You
have only the following information on the firm at year-end 2018: net income =
$500,000, total debt = $12 million, and debt ratio = 40 percent. What is
Tikki’s ROE for 2018?
1. A)
1.67 percent
2. B)
2.78 percent
3. C)
4.17 percent
4. D)
10.42 percent
Answer: B
Explanation: Debt ratio = 0.4 = $12m/Total assets =>
Total assets = $12m/0.4 = $30m
=> Total equity = $30m − $12m = $18m
=> ROE = $500,000/$18m = 2.78 percent
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.
62) You are thinking of investing in Ski Sports, Inc. You have
only the following information on the firm at year-end 2018: net income =
$50,000, total debt = $1 million, and debt ratio = 70 percent. What is Ski’s
ROE for 2018?
2. A)
2.94 percent
3. B)
3.49 percent
4. C)
7.14 percent
5. D)
11.67 percent
Answer: D
Explanation: Debt ratio = 0.7 = $1m/Total assets =>
Total assets = $1m/0.7 = $1.4286m
=> Total equity = $1.4286m − $1m = $0.4286m
=> ROE = $50,000/$428,600 = 11.67 percent
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.
63) You are thinking of investing in Wave Runnerz, Inc. You have
only the following information on the firm at year-end 2013: net income = $10
million, total debt = $65 million, and debt ratio = 35 percent. What is Wave
Runnerz’s ROE for 2018?
8. A)
8.28 percent
9. B)
15.38 percent
10.
C) 28.57 percent
11.
D) 43.96 percent
Answer: A
Explanation: Debt ratio = 0.35 = $65m/Total assets =>
Total assets = $65m/0.35 = $185.71m.
=> Total equity = $185.71m − $65m = $120.71m.
=> ROE = $10m/$120.71m = 8.2843 percent.
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.
64) PJ’s Ice Cream Parlour has asked you to help piece together
financial information on the firm for the most current year. Managers give you
the following information: sales = $50 million, total debt = $20 million, debt
ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ’s
ROA?
1. A) 4
percent
2. B) 6
percent
3. C) 10
percent
4. D) 12
percent
Answer: B
Explanation: Debt ratio = 0.50 = $20m/Total assets =>
Total assets = $20m/0.5 = $40m.
=> Total equity = $40m − $20m = $20m.
=> ROE = 0.12 = Net income/$20m => Net income = 0.12 ×
$20m = $2.4.
=> ROA = $2.4m/$40m = 6 percent.
Difficulty: 2 Medium
Topic: Profitability ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-04 Calculate and interpret major
profitability ratios.
65) DJ’s Soda Fountain has asked you to help piece together
financial information on the firm for the most current year. Managers give you
the following information: sales = $20 million, total debt = $3 million, debt
ratio = 75 percent, ROE = 27 percent.
Using this information, what is DJ’s ROA?
1. A)
.0675 percent
2. B)
6.75 percent
3. C)
25.00 percent
4. D)
27.00 percent
Answer: B
Explanation: Debt ratio = 0.75 = $3m/Total assets =>
Total assets = $3m/0.75 = $4m
=> Total equity = $4m − $3m = $1m
=> ROE = 0.27 = Net income/$1m => Net income = 0.27 × $1m
= $270,000
=> ROA = $270,000/$4m = 6.75 percent
Difficulty: 2 Medium
Topic: Market value ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-04 Calculate and interpret major
profitability ratios.
66) Lab R Doors’ year-end price on its common stock is $40. The
firm has total assets of $75 million, the debt ratio is 60 percent, there is no
preferred stock, and there are 4 million shares of common stock outstanding.
Calculate the market-to-book ratio for Lab R Doors.
2. A)
2.13
3. B)
3.20
4. C)
5.33
5. D)
10.00
Answer: C
Explanation: Debt ratio = 0.6 = Total debt/$75m =>
Total debt = 0.6 × $75m = $45m.
=> Total equity = $75m − $45m = $30m.
=> Book value of equity = $30m/4m = $7.50 per share.
=> Market to book ratio = $40/$7.50 = 5.3333 times.
Difficulty: 2 Medium
Topic: Market value ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
67) Fancy Paws’ year-end price on its common stock is $20. The
firm has total assets of $40 million, the debt ratio is 40 percent, there is no
preferred stock, and there are 2 million shares of common stock outstanding.
Calculate the market-to-book ratio for Fancy Paws.
1. A)
0.47
2. B)
1.67
3. C)
8.00
4. D)
10.00
Answer: B
Explanation: Debt ratio = 0.4 = Total debt/$40m =>
Total debt = 0.4 × $40m = $16m.
=> Total equity = $40m − $16m = $24m.
=> Book value of equity = $24m/2m = $12.00 per share.
=> Market-to-book ratio = $20/$12.00 = 1.67 times.
Difficulty: 2 Medium
Topic: Market value ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
68) Lab R Doors’ year-end price on its common stock is $40. The
firm has a profit margin of 10 percent, total assets of $30 million, a total
asset turnover ratio of 2, no preferred stock, and there are 4 million shares
of common stock outstanding. What is the PE ratio for Lab R Doors?
1. A)
0.375
2. B)
0.750
3. C)
6.667
4. D)
26.667
Answer: D
Explanation: Total asset turnover = 2 = Sales/$30m =>
Sales = $30m × 2 = $60m.
=> Profit margin = 0.1 = Net income/$60m => Net income =
0.1 × $60m = $6m.
=> EPS = $6m/4m = $1.50 per share.
=> PE ratio = $40/$1.50 = 26.67 times.
Difficulty: 2 Medium
Topic: Market value ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
69) Fancy Paws’ year-end price on its common stock is $20. The
firm has a profit margin of 12 percent, total assets of $20 million, a total
asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares
of common stock outstanding. What is the PE ratio for Fancy Paws?
3. A)
3.33
4. B)
8.33
5. C)
10.00
6. D)
33.33
Answer: D
Explanation: Total asset turnover = 0.5 = Sales/$20m =>
Sales = $20m × 0.5 = $10m.
=> Profit margin = 0.12 = Net income/$10m => Net income =
0.12 × $10m = $1.2m.
=> EPS = $1.2m/2m = $0.60 per share.
=> PE ratio = $20/$0.60 = 33.33 times.
Difficulty: 2 Medium
Topic: DuPont identity
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
70) Last year, PJ’s Ice Cream Parlours, Inc. reported an ROE =
12 percent. The firm’s debt ratio was 40 percent, sales were $25 million, and
the capital intensity ratio was 0.75 times. What is the net income for PJ’s
last year?
1. A)
$1.35m
2. B)
$2.40m
3. C)
$3.00m
4. D)
$18.75m
Answer: A
Explanation: Capital intensity ratio = 0.75 = Total assets/$25
=> Total assets = 0.75 × $25m = $18.75m.
=> Debt ratio = 0.4 = Total debt/$18.75m => Total debt =
0.4 × $18.75m = $7.5m.
=> Total equity = $18.75m − $7.5m = $11.25m.
=> ROE = 0.12 = Net income/$11.25m => Net income = 0.12 ×
$11.25m = $1.35m.
Difficulty: 2 Medium
Topic: DuPont identity
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
71) Last year, DJ’s Soda Fountains, Inc. reported an ROE = 27
percent. The firm’s debt ratio was 50 percent, sales were $9 million, and the
capital intensity ratio was 1.5 times. What is the net income for DJ’s last
year?
1. A)
$1.22m
2. B)
$1.82m
3. C)
$2.43m
4. D)
$2.84m
Answer: B
Explanation: Capital intensity ratio = 1.5 = Total
assets/$9m => Total assets = 1.5 × $9m = $13.5m.
=> Debt ratio = 0.5 = Total debt/$13.5m => Total debt =
0.5 × $13.5m = $6.75m.
=> Total equity = $13.5m − $6.75m = $6.75m.
=> ROE = 0.27 = Net income/$6.75m => Net income = 0.27 ×
$6.75m = $1.8225m.
Difficulty: 2 Medium
Topic: Long-term solvency ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-05 Calculate and interpret major market
value ratios.
72) You are considering investing in Totally Tire Services. You
have been able to locate the following information on the firm: total assets =
$50 million, accounts receivable = $10 million, ACP = 15 days, net income =
$4.5 million, and debt-to-equity ratio = 0.75 times. What is the ROE for the
firm?
1. A)
1.58 percent
2. B)
9.00 percent
3. C)
15.75 percent
4. D)
28.81 percent
Answer: C
Explanation: Debt-to-equity = 0.75 = Total debt/Total
equity = Total debt/(Total assets − Total debt).
0.75 = Total debt/(50m − Total debt) => (0.75 × 50m) − 0.75 ×
Total debt = Total debt.
=> 37.5m = 1.75 × Total debt => Total debt = 37.5m/1.75m =
$21.4286m.
=> Total equity = $50m − $21.4286 = $28.5714m.
=> ROE = $4.5m/$28.5714m = 15.75 percent.
Difficulty: 2 Medium
Topic: Long-term solvency ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
73) You are considering investing in Lenny’s Lube, Inc. You have
been able to locate the following information on the firm: total assets = $20
million, accounts receivable = $6 million, ACP = 20 days, net income = $5
million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?
2. A)
2.5000 percent
3. B)
13.9882 percent
4. C) 35.0000
percent
5. D)
87.50 percent
Answer: D
Explanation: Debt-to-equity = 2.5 = Total debt/Total
equity = Total debt/(Total assets − Total debt).
2.5 = Total debt/(20m − Total debt) => (2.5 × 20m) − 2.5 ×
Total debt = Total debt.
=> 50m = 3.5 × Total debt => Total debt = 50m/3.5 =
$14.2857m.
=> Total equity = $20m − $14.2857m = $5.7143m.
=> ROE = $5m/$5.7143m = 87.50 percent.
Difficulty: 2 Medium
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.
74) Leash N Collar reported a profit margin of 8 percent, total
asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net
income of $400,000, and dividends paid to common stockholders of $200,000. The
firm has no preferred stock outstanding. What is Leash N Collar’s internal
growth rate?
5. A)
5.2632 percent
6. B)
7.3333 percent
7. C)
8.6956 percent
8. D)
6.383 percent
Answer: D
Explanation: ROA = Profit Margin × Total asset turnover =
8 percent × 1.5 = 12 percent.
RR = ($400,000 − $200,000) / $400,000 = 0.50.
|
Internal growth rate |
= |
ROA × RR |
= |
0.12 × 0.50 |
= 0.06383 = 6.383% |
|
|
|
1 − (ROA × RR) |
|
1 − (0.12 × 0.50) |
|
Difficulty: 2 Medium
Topic: Internal and sustainable growth rates
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
75) Saddle and Bridle reported a profit margin of 12 percent,
total asset turnover ratio of 2 times, debt-to-equity ratio of 1.9 times, net
income of $1 million, and dividends paid to common stockholders of $250,000.
The firm has no preferred stock outstanding. What is Saddle and Bridle’s
internal growth rate?
13.
A) 13.64 percent
14.
B) 18.00 percent
15.
C) 24.00 percent
16.
D) 21.95 percent
Answer: D
Explanation: ROA = Profit Margin × Total asset turnover =
12 percent × 2 = 24 percent.
RR = ($1,000,000 − $250,000)/$1,000,000 = 0.75.
|
Internal growth rate |
= |
ROA × RR |
= |
0.24 × 0.75 |
= 0.2195 = 21.95% |
|
|
|
1 − (ROA × RR) |
|
1 − (0.24 × 0.75) |
|
Difficulty: 2 Medium
Topic: Internal and sustainable growth rates
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
76) You have located the following information on Rock Company:
debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin =
8 percent, and dividend payout ratio = 25 percent. What is the sustainable
growth rate for Rock?
3. A)
3.56 percent
4. B)
6.00 percent
5. C)
4.65 percent
6. D)
8.00 percent
Answer: C
Explanation: Equity multiplier = Total assets/Total equity
=> 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total
equity)/Total assets = 1 − (Total equity/Total assets).
0.4 = 1 − (Total equity/Total assets) => Total equity/Total
assets = 1 − 0.4 = 0.6 = 1/Equity multiplier => Equity multiplier = 1/0.6 =
1.6667.
ROE = Profit Margin × Total asset turnover × Equity multiplier =
0.08 × 1/2.25 × 1.6667 = 5.926 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.25 =
0.75.
|
Sustainable growth rate |
= |
ROE × RR |
= |
0.0593 × 0.75 |
= 0.0465 = 4.65% |
|
|
|
1 − (ROE × RR) |
|
1 − (0.0593 × 0.75) |
|
Difficulty: 2 Medium
Topic: Internal and sustainable growth rates
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
77) You have located the following information on Greenwich
Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit
margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the
sustainable growth rate for Greenwich?
2. A)
2.70 percent
3. B)
10.80 percent
4. C)
25.00 percent
5. D)
9.89 percent
Answer: D
Explanation: Equity multiplier = Total assets/Total equity
=> 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total
equity)/Total assets = 1 − (Total equity/Total assets).
0.6 = 1 − (Total equity/Total assets) => Total equity/Total
assets = 1 − 0.6 = 0.4 = 1/Equity multiplier.
=> Equity multiplier = 1/0.4 = 2.5.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.135 × 1/0.75 × 2.5 = 45 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.8 =
0.2.
|
Sustainable growth rate |
= |
ROE × RR |
= |
0.45 × 0.20 |
= 0.0989 = 9.89% |
|
|
|
1 − (ROE × RR) |
|
1 − (0.45 × 0.20) |
|
Difficulty: 2 Medium
Topic: Internal and sustainable growth rates
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
78) You have located the following information on Maize Company:
debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin =
12 percent, and dividend payout ratio = 10 percent. What is the sustainable
growth rate for Maize?
1. A)
1.20 percent
2. B)
10.10 percent
3. C)
12.11 percent
4. D)
73.26 percent
Answer: C
Explanation: Equity multiplier = Total assets/Total equity
=> 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total
equity)/Total assets = 1 − (Total equity/Total assets).
0.2 = 1 − (Total equity/Total assets) => Total equity/Total
assets = 1 − 0.2 = 0.8 = 1/Equity multiplier.
=> Equity multiplier = 1/0.8 = 1.25.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.12 × 1/1.25 × 1.25 = 12 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.1 =
0.9.
|
Sustainable growth rate |
= |
ROE × RR |
= |
0.12 × 0.90 |
= 0.1211 = 12.11% |
|
|
|
1 − (ROE × RR) |
|
1 − (0.12 × 0.90) |
|
Difficulty: 2 Medium
Topic: Internal and sustainable growth rates
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
79) You have located the following information on Tyler Company:
debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9
percent, and dividend payout ratio = 40 percent. What is the sustainable growth
rate for Tyler?
12.
A) 12.00 percent
13.
B) 7.76 percent
14.
C) 20.00 percent
15.
D) 30.00 percent
Answer: B
Explanation: Equity multiplier = Total assets/Total equity
=> 1/Equity multiplier = Total equity/Total assets.
Debt ratio = Total debt/Total assets = (Total assets − Total
equity)/Total assets = 1 − (Total equity/Total assets).
0.5 = 1 − (Total equity/Total assets) => Total equity/Total
assets = 1 − 0.5 = 0.5 = 1/Equity multiplier.
=> Equity multiplier = 1/0.5 = 2.
ROE = Profit Margin × Total asset turnover × Equity multiplier.
= 0.09 × 1/1.5 × 2 = 12 percent.
Retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.4 =
0.6.
|
Sustainable growth rate |
= |
ROE × RR |
= |
0.12 × 0.60 |
= 0.0776 = 7.76% |
|
|
|
1 − (ROE × RR) |
|
1 − (0.12 × 0.60) |
|
Difficulty: 2 Medium
Topic: Short-term solvency ratios
Bloom’s: Apply
AACSB: Analytical Thinking
Learning Goal: 03-06 Appreciate how various ratios relate
to one another.
80) Which of the following activities will increase a firm’s
current ratio?
1. A)
purchase inventory using cash
2. B)
buy equipment with a short-term bank loan
3. C) accrued
wages and taxes increase
4. D)
none of these statements will increase a firm’s current ratio
Answer: D
Difficulty: 2 Medium
Topic: Short-term solvency ratios
Bloom’s: Evaluate; Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Learning Goal: 03-01 Calculate and interpret major
liquidity ratios.
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