Chapter 3: Evaluation of Financial Performance
68. A firm’s price to earnings ratio is 8 and its market to book ratio is 2. If its earnings per share are $4.00,
what is the book value per share?
a. $ 8.00
b. $32.00
c. $64.00
d. $16.00
69. Flash In The Pan Cooking School is considering the issuance of additional long–term debt to finance
expansion. At the present time the company has $160 million of 10% debentures outstanding. Its after–tax
net income is $48 million, and the company’s (marginal) income tax rate is 40%. The company is required
by the debenture holders to maintain its coverage ratio at 4.0 or greater. Determine Flash’s present
coverage ratio.
a. 3.33
b. 2.78
c. 5.00
d. 6.00
70. Stepping Out Shoe Mfg. has inventory purchases of $2,200 during the month of June. If the June 1
accounts payable was $1,700 and June 30 accounts payable was $1,900, what was the cash payment?
a. $3,900
b. $2,000
c. $1,900
d. $1,700
71. Last year, Monroe Bro Products had $25,000 net cash provided by its operating activities. Its investing
activities used $30,000, and its financing activities provided $10,000. Its cash and cash equivalents balance
at the beginning of the year was $15,000. By how much did Monroe’s cash and cash equivalents
increase?
a. –$10,000
b. $0
c. $5,000
d. $15,000
Chapter 3: Evaluation of Financial Performance
72. Newfangled Dangle Systems had earnings after tax of $1,000,000 last year. Included in its expenses were
$50,000 of interest, $100,000 of deferred taxes, and $150,000 of depreciation. In addition, the company
paid dividends of $200,000 to its stockholders last year. What was Newfangled’s aftertax cash flow last
year?
a. $1,500,000
b. $1,300,000
c. $1,150,000
d. $1,250,000
73. If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit
margin of 7%, what is the firm’s times interest earned ratio?
a. 8.17
b. 4.90
c. 13.25
d. 9.17
74. How much cash and marketable securities does Gray Day Computer Co. have if the firm has a current
ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Gray’s credit sales are $98,000 and its
average collection period is 40 days. (Assume 365 days per year.)
a. $3,660
b. $14,440
c. $10,740
d. $12,660
Chapter 3: Evaluation of Financial Performance
75. What is the market price per share of Big Whoop, Inc. if the firm had net income of $200,000, earnings
per share of $2.70, total equity of $800,000, and a market to book ratio of 1.5?
a. $16.20
b. $10.80
c. $7.20
d. $12.40
76. If Power-On Inc. has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of 0.5 and a
total debt of $200,000, then fixed assets are
a. $56,250
b. $711,111
c. $225,000
d. $62,250
77. What would be the times interest earned of a company, if its total interest charges are $20,000, sales are
$220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
a. 2.65
b. 1.1
c. 2.1
d. 1.2
Chapter 3: Evaluation of Financial Performance
78. Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
a. $2,000,000
b. $6,000,000
c. $3,000,000
d. $1,000,000
79. AK, Inc. is considering issuing additional long–term debt to finance an expansion. The company currently
has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and
average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest
earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and
maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest
and taxes remains at its present level.
a. $10 million
b. $ 6 million
c. $ 1 million
d. $5 million
80. Given the following information, determine Salem Company‘s fixed assets.
Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets
a. $1,200,000
b. $4,800,000
c. $1,300,000
d. Cannot be determined
Chapter 3: Evaluation of Financial Performance
81. Given the following information, determine Taylor Company‘s cash balance.
Sales = $10,000,000 (all on credit)
Current ratio = 3.0
Current liabilities = $800,000
Average collection period = 36.5 days (Assume 365 days/year)
Quick ratio = 1.50
Current assets = cash + accounts receivable + inventory
a. $200,000
b. $1,400,000
c. $2,400,000
d. $500,000
82. What is the net profit margin for TJX Inc. if the current ratio = 2; total asset turnover =1.5; total assets =
$100,000; and EBIT = $30,000? Assume the marginal tax rate for TJX is 40% and that interest expenses
are $10,000.
a. 20%
b. 8%
c. 12%
d. 6%
83. Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal
$200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current
ratio is 1.3 and the quick ratio is 0.625. What is the balance in the cash account?
a. $ 75,000
b. $ 65,000
c. $135,000
d. $ 50,000
Chapter 3: Evaluation of Financial Performance
84. Wall Mart Pictures and Decor Company has a net profit margin of 10% and its inventory turnover is 9, what
is its annual cost of sales? You also know that Wall Mart’s average inventory is $96,700 and its annual sales
are $1,000,000.
a. $870,000
b. $850,000
c. $870,300
d. $790,000
85. Greg is interested in investing in a small company, and he thinks Good Buy Co. might be a good
investment. He has been given the following information and would like to know the return on
stockholder’s equity. Assume Good Buy’s marginal tax rate is 40%.
Earning before taxes $3 million
Net profit margin 3.6%
Total liabilities $15.0 million
Total stockholder’s equity $10.0 million
a. 12%
b. 20%
c. 15%
d. 18%
Chapter 3: Evaluation of Financial Performance
86. Given the following information, calculate the return on equity for Regrets Only Dating Services, Inc.:
Net Profit margin = 5%
Total asset turnover = 2
Debt ratio = 0.73
a. 14%
b. 7.3%
c. 37%
d. 21%
87. All of the following are users of financial information EXCEPT:
a. customers
b. bankers
c. analysts
d. unions
88. Successful financial ratio analysis requires all of the following EXCEPT:
a. Some industries use special ratios that are unique to each company.
b. A single ratio is all that is needed to indicate specific areas of weakness that must be addressed.
c. Ratios are meaningful only when it is compared to a standard.
d. Ratios must be used in conjunction with other data to obtain meaningful information.
89. If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm
may have spent too much money:
a. on total assets as a percentage of long-term liabilities.
b. on expenses as a percentage of current assets.
c. on cost of goods sold as a percentage of sales.
d. on taxes paid as a percentage of stockholders’ equity.
Chapter 3: Evaluation of Financial Performance
90. The sales–to–inventory ratio:
a. is superior to the inventory turnover ratio.
b. as a determination of financial performance, is good comparison tool.
c. is technically inferior to other commonly used ratios.
d. was developed by the Dupont Corporation and is satisfactory when used to make comparisons between
the firm and the industry as a whole.
91. The type of ratio that indicates the firm’s ability to provide adequate returns in the form of dividends and
share price appreciation is:
a. Profitability ratios
b. Asset management ratios
c. Liquidity ratios
d. Financial leverage management ratios
92. A firm has revenue of $60,000, its total operating costs including depreciation and cost of goods sold are
$50,620, depreciation is $4,620 and its interest expense on outstanding loans is $2,000. What is the firm’s
EBIT?
a. $55,380
b. $2,760
c. $9,380
d. $12,000
93. Market based ratios can be which of the following:
I. Price-to-earnings ratio
II. Dividend yield
a. Statement I only is correct.
b. Statement II only is correct.
c. Both statements I and II are correct
d. Neither statement I nor statement II is correct.
Chapter 3: Evaluation of Financial Performance
94. Nukin’ Gnats Pest Control is trying to determine its cash flow per share. It has revenue of $50,000,
$35,000 of expenses, $4,000 of depreciation and $3,000 of interest expense. The firm is in the 40% tax
bracket. The firm has 75,000 shares of common stock outstanding. Its cash flow per share is:
a. $.08
b. $.07
c. $.92
d. $.46
95. Most analysts prefer using price to free cash flow rather than price-to–earnings (P/E) ratio because price
to free cash flow is:
a. Easier to compute.
b. More accurate than cash flow per share.
c. A stricter measure that reduces the cash flow by the amount of capital expenditures.
d. More reliable as a measure of performance.
96. Nukin’ Gnats Pest Control is trying to determine its cash flow per share. It has revenue of $50,000,
$35,000 of expenses, $4,000 of depreciation and $3,000 of interest expense. The firm is in the 40% tax
bracket. The firm has 75,000 shares of common stock outstanding. The firm has a $15 price per share. Its
price to cash flow is:
a. .0057
b. .0098
c. .0076
d. .0029
97. What are the main purposes of financial analysis and what does it identify?
98. Heavily using debt to finance assets results in higher as compared to ROI.
a. Return on Sales
b. Return on Stockholders’ Equity
c. Return on Assets
d. Times Interest Earned
Chapter 3: Evaluation of Financial Performance
99. List the major financial ratio groups and briefly indicate what they analyze.
100. What information can be determined by common size financial statements?
101. What information can Asset Management Ratios provide?
102. What factors make it possible for firms with virtually identical plants to have significantly different fixed–
asset turnover ratios?
Chapter 3: Evaluation of Financial Performance
103. There are numerous sources which provide financial analysis via the internet. List some of those
resources.
104. List some earnings management tricks used by some companies.
105. The financial analysis tool that takes into account the entire capital structure of the firm is the:
a. EBITDA multiple
b. the price to book ratio
c. the P/E ratio
d. the total asset turnover ratio
106. When using financial ratios to analyze a company‘s ability to maximize shareholders‘ wealth, all of the
following cautions should be considered EXCEPT:
a. financial ratios are flags indicating potential areas of strength or weakness.
b. a financial ratio must be dissected to discover its true meaning.
c. a financial ratio must be compared to some standard
d. although there may be accounting differences between companies, these differences do not impact
financial ratios.
107. How does a firm determine its enterprise value?
a. price per share of its stock × the common shares outstanding.
b. sales × (1 + growth rate in sales)
c. EBIT × (1 – tax rate)
d. Net Income + depreciation
Chapter 3: Evaluation of Financial Performance
108. Common stock prices are dependent on the amount and stability of a firm’s cash flows so common
stockholders are especially interested in:
a. profitability measurements
b. accounting profits
c. earnings after tax
d. NOPAT
109. Stockholder’s equity is also known by another name. It is:
a. dividend liability
b. equity earnings
c. net worth
d. cash flow