4) The ________ is a popular approach for evaluating profitability in relation to sales by expressing each
item on the income statement as a percent of sales.
A) retained earnings statement
B) common-size balance sheet
C) common-size income statement
D) profit and loss statement
5) In 2018, Walmart reported sales of $500.3 billion, gross profits of $126.9 billion, EBIT of $20.4 billion,
and net income of $9.9 billion. The company’s cost of goods sold that year equalled ________.
A) 2%
B) $373.4 billion
C) $353 million
D) 4.1%
6) In 2017, Apple Inc. reported sales of $229.2 billion, cost of goods sold of $141 billion, and net income of
$48.4 billion. Apple’s gross profit margin that year was ________.
A) 38.4%
B) 21.1%
C) 61.5%
D) 17.4%
7) In 2018, Target Corp. reported sales of $71.9 billion, cost of goods sold of $51.1 billion, operating profit
of $4.3 billion, and net income of $2.9 billion. Target has no preferred stock outstanding. It’s net profit
margin that year was ________.
A) 6%
B) 28.9%
C) 4%
D) 5.7%
8) In 2018, Target Corp. reported sales of $71.9 billion, cost of goods sold of $51.1 billion, operating profit
of $4.3 billion, and net income of $2.9 billion. Target has no preferred stock outstanding. It’s operating
profit margin that year was ________.
A) 20.7%
B) 8.4%
C) 4.0%
D) 6.0%
9) The ________ indicates the percentage of each sales dollar remaining after the firm has paid for its
goods.
A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
10) The ________ measures the percentage of profit earned on each sales dollar before interest and taxes
but after all costs and expenses.
A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
11) A firm with a gross profit margin which meets industry standard and a net profit margin which is
below industry standard may have excessive ________.
A) general and administrative expenses
B) cost of goods sold
C) dividend payments
D) principal payments
12) The ________ measures the percentage of each sales dollar remaining after all costs and expenses,
including interest, taxes, and preferred stock dividends, have been deducted.
A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
13) The ________ measures the overall effectiveness of management in generating profits with its
available assets.
A) total asset turnover
B) price/earnings ratio
C) return on equity
D) return on total assets
14) The ________ ratio measures the return earned on the common stockholders’ investment in the firm.
A) net profit margin
B) price/earnings
C) return on equity
D) return on total assets
15) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and
common stockholders’ investment of $750,000 has a return on equity of ________.
A) 2 percent
B) 15 percent
C) 3 percent
D) 4 percent
16) The net profit margin measures the percentage of each sales dollar remaining after all costs and
expenses, including interest, taxes, and common stock dividends, have been deducted.
17) If a firm has no liabilities or debt of any kind on its balance sheet, then which of the following is true?
A) ROE > ROA
B) ROE < ROA
C) ROE = ROA
D) ROA = net profit margin
18) If a firm uses any debt at all and if the firm generates positive earnings for common stockholders, then
which of the following below is true?
A) ROE > ROA
B) ROE < ROA
C) ROE = ROA
D) Gross profit margin < net profit margin
19) Return on total assets (ROA) measures the overall effectiveness of management in generating profits
with its available assets.
20) The more money a firm borrows ________.
A) the lower is its ROE because more interest expense reduces earnings
B) the larger is the gap between its ROA and its ROE
C) the lower is its operating profit margin
D) the higher is its gross profit margin
21) The ________ ratios are primarily used as measures of return.
A) liquidity
B) activity
C) debt
D) profitability
3.7 Market ratios
1) A firm’s P/E ratio tends to be higher if ________.
A) its risk and its growth prospects are lower
B) its risk is higher and its growth prospects are lower
C) its risk and its growth prospects are higher
D) its risk is lower and its growth prospects are higher
2) All other things being equal, a firm’s P/E ratio will be lower if investors think the firm’s growth
prospects are very good.
3) Earnings per share represents the dollar amount earned and distributed to shareholders.
4) The ________ ratio reflects how much investors are willing to pay for a company’s stock per dollar of
earnings that the company generates.
A) debt
B) price/earnings
C) return on equity
D) return on total assets
5) Holding all other factors constant, a higher price/earnings (P/E) ratio indicates that investors have more
confidence in a firm’s future performance.
6) Suppose a firm that is normally very profitable barely does better than breaking even this year, i.e., it
earns a very small profit. That firm’s P/E ratio is likely to be ________.
A) very high
B) zero
C) negative
D) the lowest among all firms in its industry
7) The P/E ratio measures the ________.
A) market value of the stock relative to earnings per share
B) intrinsic value of the stock relative to earnings per share
C) book value of the stock relative to earnings per share
D) market price of the stock relative to retained earnings
8) Book value per share is the ratio of ________.
A) common stock equity to number of outstanding common shares
B) retained earnings to number of outstanding common shares
C) fixed assets to number of outstanding common shares
D) total liabilities to number of outstanding common shares
9) During the 2008-2009 recession, the average P/E ratio of firms in the U.S. stock market reached an
extraordinarily high level because ________.
A) investors believed short–term growth prospects for U.S. firms were extraordinarily good at that time
B) stock prices generally boomed during the recession
C) earnings per share were unusually low during the recession
D) investors believed long-term growth prospects coming out of the recession were not very good
10) Over long periods of time, the average P/E ratio of firms in the U.S. stock market is closest to
________.
A) 0.2
B) 2.0
C) 20
D) 200
11) In its 2018 fiscal year, the data storage company, NetApp Inc., reported that it had 267.9 million shares
of common stock outstanding, trading at a price of about $68 per share. On the firm’s balance sheet, the
value of common stock equity was reported as $2.067 billion. NetApp’s market/book ratio was ________.
A) 8.8
B) 7.7
C) 68
D) greater than 100
12) Which of the following is true?
A) For most companies the market/book ratio is less than 1.0 because book value is a conservative
estimate of what a firm’s equity is really worth.
B) For most companies the market/book ratio is greater than 1.0 because the stock market tends to
overvalue things.
C) For most companies the market/book ratio is greater than 1.0 because book value is a backward–
looking measure based largely on historical costs, whereas market value is forward looking and depends
on how investors believe the company will perform in the future.
D) For most companies the market/book ratio is very close to 1.0 because on average, book value provides
a good estimate of the market value of a firm’s equity.
13) In early 2018, Facebook’s market/book ratio was close to 7.0. A market/book ratio that much greater
than 1.0 for Facebook means that ________.
A) Facebook has a huge number of common shares outstanding
B) the book value of Facebook’s equity is far less than the total market value of the company’s stock
C) Facebook’s stock is overvalued
D) Facebook’s book value is inflated because so many of its assets are intangible
14) For most companies we would expect the market/book ratio to be greater than 1.0.
15) Market ratios only measure a firm’s risk.
1) Earnings per share represents the dollar amount earned and distributed to shareholders.
2) The DuPont formula allows a firm to break down its return into the net profit margin, which measures
the firm’s profitability on sales, and its total asset turnover, which indicates how efficiently the firm has
used its assets to generate sales.
3) The DuPont system allows a firm to break its return on equity into a profit–on-sales component, an
efficiency-of-asset-use component, and a liquidity component.
4) According to the basic DuPont equation, a firm’s ROA is the product of what other two ratios?
A) net profit margin and return on equity
B) net profit margin and total asset turnover
C) net profit margin and the financial leverage multiplier
D) ROE and the financial leverage multiplier
5) The ________ is used by financial managers as a structure for dissecting a firm’s financial statements to
assess its financial condition.
A) statement of cash flows
B) DuPont system of analysis
C) break-even analysis
D) technical analysis
6) The modified DuPont formula relates the firm’s return on total assets (ROA) to its ________.
A) return on equity (ROE)
B) operating leverage multiplier
C) net profit margin
D) total asset turnover
7) In the DuPont system of analysis, the return on equity is equal to ________.
A) (net profit margin) × (total asset turnover)
B) (stockholders’ equity) × (financial leverage multiplier)
C) (return on total assets) × (financial leverage multiplier)
D) (return on total assets) × (total asset turnover)
8) A firm with a low net profit margin can improve its return on total assets by ________.
A) increasing its debt ratio
B) increasing its total asset turnover
C) decreasing its fixed asset turnover
D) decreasing its total asset turnover
9) Other things being equal, a decrease in total asset turnover will result in ________ in the return on total
assets.
A) an increase
B) a decrease
C) no change
D) an undetermined change
10) The modified DuPont equation says that a firm with a low return on total assets can improve its
return on equity, all else remaining the same, by ________.
A) financing more of its assets with debt.
B) increasing its total asset turnover
C) using less debt
D) decreasing its total asset turnover
11) The three basic ratios used in the DuPont system of analysis are ________.
A) net profit margin, total asset turnover, and return on investment
B) net profit margin, total asset turnover, and return on equity
C) net profit margin, total asset turnover, and financial leverage multiplier
D) net profit margin, financial leverage multiplier, and return on equity
12) The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing.
A) operating leverage
B) long-term debt
C) total debt
D) total assets
13) The financial leverage multiplier is the ratio of ________.
A) current assets to common stockholders’ equity
B) total assets to common stockholders’ equity
C) total assets to total debt
D) current assets to current liabilities
14) Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage
will result in ________.
A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings
