29
40) Over the last 5 years, Spencer Inc.’s earnings have grown at an annual average rate of 9%.
Current EPS are $1.80 and the company’s stock recently sold for $36 per share. Spencer’s PEG
ratio is
A) .05
B) 20
C) 2.22
D) 222.22
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
41) JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ’s stock is
currently selling for
A) $16.74 per share.
B) $17.07 per share.
C) $18.00 per share.
D) $19.35 per share.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
42) When dividend payout ratios are higher than ________, investors should investigate
whether or not they are sustainable.
A) 15%
B) 25%.
C) 40%.
D) 75%.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
30
43) Which of the following may be signs of future problems for a company?
I. Inventories growing faster than sales.
II. Rapidly increasing debt to equity ratio.
III. Cash flow from operations is higher than net income.
IV. Current liabilities increasing faster than current assets.
A) I and III only
B) II and IV only
C) I, II and IV only
D) I, II and III only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
44) The PEG ratio
A) preferred by investors is equal to 2.0 or higher.
B) compares the price/earnings ratio to the rate of growth of the company’s earnings.
C) is a measure of a firm’s liquidity.
D) measures the ability of a firm’s assets to generate growth for the firm.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
45) Which of the following directly impact return on equity?
I. net profit margin
II. leverage
III. return on assets
IV. cash flow from investment activities
A) I and III only
B) II and IV only
C) I, II and IV only
D) I, II and III only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
31
46) ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of
using this expanded version of the ROE formula versus using the simplified version which is
net income divided by total equity?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
47) The following information is available for the Oil Creek Corporation.
(a) What is the current ratio?
(b) What is the net working capital?
(c) What is the net income?
(d) What is the return on equity?
(e) What is the total asset turnover?
(f) What is the debt-equity ratio?
(g) What is the accounts receivable turnover?
(h) What is the earnings per share (EPS)?
(i) What is the price to earnings (P/E) ratio?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
32
Copyright © 2017 Pearson Education, Inc.
7.6 Learning Goal 6
1) A company’s ratios are more meaningful when compared to other companies in the same
industry.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) The debt to equity ratio should be approximately the same across all industrial sectors.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
3) Financial ratios give little indication whether a company is well managed or not.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4) Investors who want to analyze a company’s ratios usually need to compute them from the
financial statements.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
5) Historical comparisons will reveal whether a company’s performance is improving or
deteriorating.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
33
6) Generally, the market price of a stock is
A) below its book value.
B) above its book value.
C) equal to its par value.
D) equal to its book value.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
7) To determine whether a pharmaceutical company’s profitability ratios indicate strength or
weakness, we should
I. compare them to others in the same industry.
II. compare them to companies in unrelated industries such as energy or banking.
III. compare them to previous years.
IV. compare them to absolute standards established by the CFA Institute.
A) I and II only
B) I and III only
C) III and IV only
D) IV only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
8) Which of the following is a readily available source of industry comparisons?
I. Standard & Poor’s
II. MSN Money, Yahoo Finance and other financial portals
III. Mergent (Moody’s)
IV. The Wall Street Journal
A) I and II only
B) I, II and III only
C) III and IV only
D) II, III and IV only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
34
9) A comparison of a firm’s current financial ratios to those of prior years allows one to
A) accurately predict the future performance of a firm.
B) see how a firm’s performance compares to that of a competitor.
C) see trends that are developing.
D) determine if the firm is performing better than the overall industry.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
10) Amgen’s debt to equity ratio is .54 while Walmart’s is .68. By comparing these ratios we
can conclude
A) that Walmart is in danger of bankruptcy.
B) that Amgen uses too little debt financing.
C) that Walmart uses too little equity financing.
D) very little because the firm’s are in different industries.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
Use the following information for the question(s) that follow.
Company X and Company Y are in the same industry and have the following ratios.
11) Based on the information above, we can conclude that
A) company X is using leverage more aggressively than company Y.
B) company X is more liquid than company Y.
C) company X is using assets more efficiently than company Y.
D) company X is reinvesting a higher percentage of its earnings in the business than company
Y.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
35
12) Based on the information above, we can conclude that
A) company Y is more financially conservative than company X.
B) company Y is more liquid than company X.
C) company Y is reinvesting a higher percentage of its earnings in the business than company
X.
D) company Y is using assets less efficiently than company X.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
13) Company X and Company Y are in the same industry and have the following ratios.
Discuss the relative natures of the two companies in terms of risk and return. Identify the more
growth-oriented firm and justify your selection. Support your discussion and conclusions by
referring to the ratios.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6