978-0134083308 Chapter 7 Part 3

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13) Return on equity can be expressed mathematically as “(net profit margin)(total asset

turnover)(equity multiplier).”

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14) A high P/E ratio may be an indication that a stock is overpriced.

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15) A high PEG ratio implies a high growth rate in earnings relative to the stock’s price.

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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.

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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

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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

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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.

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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.

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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%

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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%

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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.

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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

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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.

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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.

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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

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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.

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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.

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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

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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.

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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.

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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%

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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%.

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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

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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

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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.

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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.

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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

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