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21
Copyright © 2017 Pearson Education, Inc.
13) Return on equity can be expressed mathematically as "(net profit margin)(total asset
turnover)(equity multiplier)."
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
14) A high P/E ratio may be an indication that a stock is overpriced.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
15) A high PEG ratio implies a high growth rate in earnings relative to the stock's price.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
16) When comparing companies in the same industry but of different sizes, net profit margin is
more meaningful than net profit as a dollar amount.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
17) Which of the following are measures of liquidity?
I. net working capital
II. accounts receivable turnover
III. current ratio
IV. times interest earned
A) I and III only
B) I, II and III only
C) I, II and IV only
D) I, III and IV only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
22
18) Financial ratios
I. allow comparisons across firms without concern over firm size.
II. can compare a firm's operating and financial status to industry norms.
III. provide insights into a companies future.
IV. look at the liquidity, activity, leverage, profitability and market measures of a firm.
A) II and IV only
B) I and II only
C) I, II and IV only
D) I, II, III and IV
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 4
19) On December 31, the Gold Standard Company reported the following information on its
financial statements.
According to this information, the company's current ratio is approximately
A) 1.39.
B) 1.68.
C) 1.73.
D) 1.90.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
20) To determine whether a company is using leverage effectively, an analyst should consider
A) the current ratio and net working capital.
B) inventory, accounts receivable and total asset turnover ratios.
C) the debt to equity and times interest earned ratios.
D) ROA and the net profit margin.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
21) A company has sales of $640,000, net profit after taxes of $23,000, and a total asset
turnover of 2.5. What is the return on assets?
A) 3.6%
B) 4.5%
C) 8.1%
D) 9.0%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
22) A company has sales of $640,000, net profit after taxes of $23,000, a total asset turnover of
4.17 and an equity multiplier of 1.67. What is the return on equity?
A) 24%
B) 9.0%
C) 8.1%
D) 4.5%
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
23) Substituting EBITDA for EBIT when computing the times interest earned ratio will make
the company appear
A) more leveraged.
B) less leveraged.
C) more profitable.
D) less efficient.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
24
24) For their last fiscal year, the Short Company reported the following information.
What is the accounts receivables turnover rate?
A) 0.8
B) 2.8
C) 4.5
D) 7.3
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
25) The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of
13.2. In this case, the firm is
A) selling its inventory slower than the industry.
B) underperforming the industry.
C) averaging fewer days of sales in inventory than the industry.
D) generating fewer sales per dollar of inventory.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26) A total asset turnover of 3 means that every
A) $1 in sales is supported by $3 of assets.
B) $3 in assets produces $1 in net earnings.
C) $1 in total assets is replaced on average every 3 years.
D) $1 in assets produces $3 in sales.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
25
27) On March 31, Adolpha, Inc. reported the following information on its financial statements.
What is the available net working capital for Adolpha, Inc.?
A) -$253,844
B) -$132,366
C) $121,578
D) $1,873,020
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
28) A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of
$(1,000,000). ROE will be
A) 1000% indicating an exceptional opportunity.
B) 1000% and meaningless.
C) -1000% indicating that the company is in dire straits.
D) 10.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
29) The measure that indicates how efficiently assets are being used to support sales is called
the
A) total asset turnover.
B) current ratio.
C) book value.
D) net profit margin.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26
30) A lending institution would prefer that a firm have a ________ debt-equity ratio and a
________ times interest earned ratio.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
31) Marco's just reported an EPS of $1.80 on revenues of $440 million. The company has 13
million shares outstanding. Total assets are $380 million, current liabilities equal $78 million,
and long-term debt is $122 million. Net fixed assets are worth $230 million. Given this
information, which one of the following statements is correct?
A) Marco's net working capital is $72 million.
B) Marco's current ratio is 1.75.
C) Marco's total asset turnover is 3.67.
D) .Marco's debt-equity ratio is 0.75.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
32) Worcester Corporation has a P/E ratio of 15. Natick Corporation is in the same industry as
Worcester, but has a P/E ratio of 20. Possible interpretations of this discrepancy include
A) Worcester Corporation is overpriced.
B) Natick Corporation has higher earnings per share.
C) Investors expect Natick to grow faster than Worcester.
D) Natick's stock price is higher than Worcester's.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
27
33) Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on
assets of 9%. What is the return on equity?
A) 5.4%
B) 5.6%
C) 14.4%
D) 15.0%
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
34) Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total
asset turnover of 2, it follows that the firm must have a net profit margin of
A) 4%.
B) 6%.
C) 8%.
D) 12%.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
35) Investors are most interested in which one of the following ratios?
A) return on assets
B) current ratio
C) net profit margin
D) return on equity
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
36) Which one of the following is a leverage measure?
A) times interest earned
B) net working capital
C) return on equity
D) net profit margin
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
28
37) If a company's ROA is high, then an investor can assume that the company
A) is in danger of defaulting on its loans.
B) pays a high dividend.
C) is profitable.
D) has more equity than debt in its capital structure.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
38) If a firm has an ROA of 10% and an ROE of 10%, then the
A) operating results of the firm are improving.
B) firm has no financial leverage.
C) firm must have enough cash on hand to pay some extra dividends.
D) firm is losing money.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
39) Kim has gathered the following information on a company.
What is the amount of the earnings per share?
A) $0.14
B) $0.25
C) $0.28
D) $0.30
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
