Fundamentals of Corporate Finance 3e Test Bank
66.
GenTech Pharma has reported the following information:
Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36%
What are the firm’s profit margin and equity multiplier? Round your profit margin answer to
one decimal place, and equity multiplier answer to 2 decimal places.
A)
7.1%; 0.53
B)
7.1%; 1.90
C)
3.7%; 0.53
D)
3.7%; 1.90
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
67.
Tigger Corp. has reported the financial results for the year-ended 2006. Based on the
information given, calculate the firm’s gross profit margin and operating profit margin. Round
your final answers to one decimal place.
Net sales = $4,156,700
Net income = $778,321
Cost of goods sold = $2,715,334
EBIT = $1,356,098
A)
34.7%; 32.6%
B)
32.6%; 18.7%
C)
34.7%; 18.7%
D)
None of the above.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
68.
Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net
income of $812,355. What is the firm’s return on equity? Round your final answer to one
decimal place.
A)
7.1%
B)
34.7%
C)
28.1%
D)
43.2%
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
69.
Why is the quick ratio considered by some to be a better measure of liquidity than the current
ratio?
A)
The quick ratio more accurately reflects a firm’s profitability.
B)
It omits the least liquid current asset from the numerator of the ratio.
C)
The current ratio does not include accounts receivable.
D)
It measures how “quickly” cash flows through the firm.
Ans:
B
AICPA: Measurement
70.
In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio
of 30% and has total assets of $3,000,000. What is Photon’s return on equity? (Round your
percentage answer to one decimal place.)
A)
13.1%
B)
14.6%
C)
22.5%
D)
18.7%
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
71.
Which of the following is true of a firm that has no debt in its capital structure?
A)
Its return on equity (ROE) will be greater than its return on asset (ROA).
B)
Its return on equity (ROE) will be lesser than its return on asset (ROA).
C)
Its return on equity (ROE) will be equal to its return on asset (ROA).
D)
None of the above.
Ans:
C
72.
Which of the following is true of a firm that has both debt and equity?
A)
Its return on equity (ROE) will be greater than its return on asset (ROA).
B)
Its return on equity (ROE) will be lesser than its return on asset (ROA).
C)
Its return on equity (ROE) will be equal to its return on asset (ROA).
D)
None of the above.
Ans:
A
AICPA: Measurement
73.
Which one of the following statements is NOT correct?
A)
The DuPont system is based on two equations that relate a firm’s return on asset (ROA)
and return on equity (ROE).
B)
The DuPont system is a set of related ratios that links the items of balance sheet and the
income statement.
C)
Both management and shareholders can use this tool to understand the factors that drive
a firm’s return on equity (ROE).
D)
All of the above are correct.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
74.
The DuPont equation shows that a firm’s (return on equity) ROE is determined by three factors:
A)
net profit margin, total asset turnover, and the equity multiplier.
B)
operating profit margin, return on assets (ROA), and the total assets turnover.
C)
net profit margin, total asset turnover, the return on assets (ROA).
D)
return on assets (ROA), total assets turnover, and the equity multiplier.
Ans:
A
75.
Which one of the following is a criticism of equating the goals of maximizing the return on
equity (ROE) of a firm and maximizing the firm’s shareholder wealth?
A)
ROE is based on after-tax earnings, not cash flows.
B)
ROE does not consider risk.
C)
ROE ignores the size of the initial investment as well as future cash flows.
D)
All of the above are criticisms of ROE as a goal.
Ans:
D
76.
Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?
A)
ROE is highly correlated with shareholder wealth maximization.
B)
ROE and the DuPont analysis allow management to break down the performance and
identify areas of strengths and weaknesses.
C)
ROE does not consider risk.
D)
All of the above are advantages of using ROE as a goal.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
77.
Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75
million, and a total assets turnover of 2.7 times. What is the firm’s net income? Round your
final answer to two decimal places.
A)
$75,281.80
B)
$514,250.00
C)
$51,425.00
D)
$7,528.10
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
78.
Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of
17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm’s ROA. Round your
percentage answer to two decimal places.
A)
6.23%
B)
4.53%
C)
7.48%
D)
5.79%
Ans:
C
Format: Multiple Choice
Fundamentals of Corporate Finance 3e Test Bank
79.
There are people who believe that the analysis of financial statements has limitations. Which of
the statements below would qualify as a limitation of financial statement analysis?
A)
Ratio analysis requires the analyst to evaluate a firm’s performance over a period of time
to be of any value.
B)
Proper ratio analysis requires the analyst to rely upon audited financial statements, which
can be easily manipulated.
C)
Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy
to misinterpret.
D)
Ratio analysis requires the analyst to utilize accounting data that is based on historical
costs instead of current market values.
Ans:
D
AICPA: Measurement
80.
Which one of the following statements about trend analysis is NOT correct?
A)
The benchmark for trend analysis is based on a firm’s historical performance.
B)
It allows management to examine each ratio over time and determine whether the trend
is good or bad for the firm.
C)
It uses the Standard Industrial Classification (SIC) System to benchmark firms.
D)
A ratio value that is changing typically prompts the financial manager to sort out the
issues surrounding the change.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
81.
Peer group analysis can be performed by:
A)
management choosing a set of firms that are similar in size or sales, or who compete in
the same market.
B)
using the average ratios of this peer group, which would then be used as the benchmark.
C)
identifying firms in the same industry that are grouped by size, sales, and product lines in
order to establish benchmark ratios.
D)
Only a and b relate to peer group analysis.
Ans:
D
82.
Which of the following is NOT a method of “benchmarking”?
A)
Conducting an industry group analysis.
B)
Utilizing the DuPont system to analyze a firm’s performance.
C)
Evaluating a single firm’s performance over time.
D)
Identifying a group of firms that compete with the company being analyzed.
Ans:
B
83.
Which of the following is a limitation of ratio analysis?
A)
Ratios depend on accounting data based on historical costs.
B)
Differences in accounting practices like FIFO versus LIFO make comparison difficult.
C)
Trend analysis could be distorted by financial statements affected by inflation.
D)
All of the above are limitations of ratio analysis.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
84.
Compare how a firm’s creditor would analyze a firm’s financial statements relative to those of a
firm’s shareholders.
85.
What are some of the main limitations of ratio analysis?
Fundamentals of Corporate Finance 3e Test Bank
86.
Explain the different ways that a firm’s ratios can be benchmarked.