CHAPTER 2 & 3
1. Ratio analysis involves analyzing financial statements
in order to appraise a firm's financial position and strength.
a. True
b. False
2. The inventory turnover ratio and days sales outstanding
(DSO) are two ratios that are used to assess how effectively a firm is managing
its assets.
a. True
b. False
3. Which one of the following statements is correct, all
else constant?
A. Increasing the inventory level will increase the
inventory turnover rate.
B. Increasing the inventory level will increase the days'
sales in inventory.
C. Increasing the receivables turnover rate will increase
the days' sales in receivables.
D. Increasing sales will lower the total asset turnover.
E. Increasing sales will increase the capital intensity
ratio.
4. The profit margin is the amount of net profit earned
for every $1 of:
A. total assets.
B. equity.
C. long-term debt.
D. sales.
E. external financing.
5. You are analyzing a company that has cash of $2,000,
accounts receivable of $3,700, fixed assets of $10,900, accounts payable of
$6,600, and inventory of $4,100. What is the quick ratio?
A. .30
B. .67
C. .2424
D. 1.48
E. 3.30
Quick ratio = (Current assets – Inventory) / Current
Liabilities
Quick ratio = ($2,000 + $3,700) - $4,100 / $6,600 = .2424
6. A firm has total assets of $456,000 and total equity
of $217,000. What is the debtequity
ratio?
A. .48
B. .68
C. 1.10
D. 1.48
E. 2.10
Debt-equity ratio = ($456,000 − $217,000) / $217,000 =
1.10
7. Harold's Hardware has total assets of $773,000 and
total debt of $189,000. What
is the equity multiplier?
A. .76
B. .80
C. 1.24
D. 1.32
E. 2.56
Equity multiplier = $773,000 / ($773,000 − $189,000) =
1.32
8. Singletrak, Inc. has sales of $348,900, cost of goods
sold of $294,300, and
inventory of $41,200. What is the inventory turnover
rate?
A. 1.33
B. 4.28
C. 6.67
D. 7.14
E. 8.47
Inventory turnover rate = $348,900/ $41,200 = 8.47
9. Technical Services, Inc. has sales of $846,370, cost
of goods sold of $672,500,
and inventory of $10,930. How long on average does it
take the firm to sell its
inventory?
A. 4.71 days
B. 5.93 days
C. 22.95 days
D. 61.53 days
E. 77.44 days
Inventory turnover rate = $846,370/ $10,930 = 77.44
10. Arnold, Inc. has sales of $124,700, cost of goods
sold of $102,500, net profit of
$9,800, fixed assets of $84,200, and current assets of
$8,100. What is the total
asset turnover rate?
A. 1.03
B. 1.11
C. 1.22
D. 1.35
E. 1.48
Total asset turnover rate = $124,700 / ($84,200 + $8,100)
= 1.35
11. Nagel, Inc. has sales of $330,600, total assets of
$252,100, and a profit margin of
7.5 percent. What is the return on assets?
A. 5.72 percent
B. 6.10 percent
C. 7.63 percent
D. 8.34 percent
E. 9.84 percent
Return on assets = ($330,600 × .075) / $252,100 = 9.84
percent
12. The Accessories Outlet has total equity of $257,000,
sales of $508,000, and a
profit margin of 3.5 percent. What is the return on
equity?
A. 1.77 percent
B. 2.32 percent
C. 4.58 percent
D. 6.92 percent
E. 8.14 percent
Return on equity = ($508,000 × .035) / $257,000 = 6.92
percent
13. Benet, Inc. has total sales of $128,000 and a profit
margin of 12.89 percent.
Currently, the firm has 15,000 shares outstanding. What
are the earnings per
share?
A. $.91
B. $1.10
C. $4.35
D. $7.43
E. $8.53
Earnings per share = ($128,000 × .1289) / 15,000 = $1.10
14. The common stock of McDonald and Sons is selling for
$27.10 a share. The
company has earnings per share of $.95 and a book value
per share of $15.60.
What is the market-to-book ratio?
A. .58
B. 1.64
C. 1.74
D. 2.67
E. 2.85
Market-to-book ratio = $27.10 / $15.60 = 1.74
15. Nelson Ledges has total equity of $64,800. There are
15,000 shares of stock
outstanding at a market price of $15.70 a share. What is
the market-to-book ratio?
a. .28
b. .37
c. 2.70
d. 3.63
Market-to-book ratio = $15.70 / ($64,800 / 15,000) = 3.63
1. d Operating cash flow $41,400 + $14,100 − $13,200 =
$42,300
Review Quiz for Chapter 3
Review Quiz for Chapter 2
Balance Sheet
2007 2008
Cash $ 1,700 $ 1,600
Accounts receivable 14,300 17,400
Inventory 22,500 23,700
Net fixed assets 82,900 81,600
Total assets $121,400 $124,300
2007 2008
Accounts payable $13,800 $ 12,900
Long-term debt 47,500 48,600
Common stock 17,000 22,000
Retained earnings 43,100 40,800
Total liabilities and equity $121,400 $124,300
Income Statement
Net Sales $163,700
Costs 108,200
Depreciation 14,100
EBIT 41,400
Interest 3,800
Taxable income 37,600
Taxes 13,200
Net Income $ 24,400
1. What is the amount of the operating cash
flow?
a. $24,400 b. $30,500 c. $38,500 d. $42,300
2. What is the cash flow to stockholders for
2008?
a. $5,000 b. $19,400 c. $21,700 d. $29,400
3. What is the net new borrowing for 2008?
a. -$2,700 b. $200 c. $1,100 d. $4,900
4. What is the change in net working capital for
2008?
a. $5,100 b. $6,300 c. $24,700 d. $25,200
5. What is the cash flow to creditors for 2008?
a. -$2,700 b. -$1,100 c. $1,100 d. $2,700
6. What is the change in the book value of
equity for 2008?
a. -$2,300 b. $2,700 c. $3,800 d. $5,000
7. A firm has net income of $4,320 and a tax
rate of 34 percent. The revenue is $16,800, cost of goods sold is $8,400, and interest expense is $700. What is the depreciation expense for the year?
a. $1,155 b. $2,470 c. $2,860 d. $3,380
8. A firm has net working capital of $8,100 and
current assets of $14,600. Total assets equal $32,900. What is the book value of the firm if long-term debt is $7,500?
a. $2,700 b. $10,800 c. $17,300 d. $18,900
9. A firm currently has an average tax rate of
20 percent and a marginal tax rate of 25 percent based on its current taxable income of $36,600. What will the firm’s
average tax rate be if it increases its taxable income by $1,100?
a. 20 percent b. 20.05 percent c. 20.09 percent d. 20.15
percent
10. Which of the following accounts represent
key differences between a firm’s net income and its operating cash
flow?
a. depreciation, taxes, and interest expense
b. dividends and interest expense
c. interest expense and depreciation
d. dividends, interest expense, and depreciation
Answers
2. c Dividends paid = $24,400 − ($40,800 − $43,100) =
$26,700
Cash flow to stockholders = $26,700 − ($22,000 − $17,000)
= $21,700
3. c Net new borrowing = $48,600 − $47,500 = $1,100
4. a Change in net working capital = ($1,600 + $17,400 +
$23,700 − $12,900) − ($1,700 + $14,300 + $22,500 −
$13,800) = $5,100
5. d Cash flow to creditors = $3,800 − ($48,600 −
$47,500) = $2,700
6. b Change in the book value of equity = ($22,000 +
$40,800) − ($17,000 + $43,100) = $2,700
7. a Taxable income = $4,320 / (1 − .34) = $6,545.45
Depreciation = $16,800 − $8,400 − $700 − $6,545.45 =
$1,154.55 = $1,155
8. d Book value of firm = $32,900 − ($14,600 − $8,100) −
$7,500 = $18,900
9. d Average tax = [($36,600 × .20) + ($1,100 × .25)] /
($36,600 + $1,100) = 20.15 percent
10. c Depreciation is a non-cash expense. Interest
expense is a financing cost not an operating cost.
Review Quiz for Chapter 3
1. Redding
Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at
the beginning of the year. At
the end of the year, the common stock balance is $7,000 and the retained
earnings account balance is
$5,498. The net income for the year is $938. What is the retention ratio?
a. 17.59
percent b. 38.91 percent c. 61.09 percent d. 82.41 percent
2.
A firm has a debt-equity ratio of .55. What is the equity multiplier if total
equity is $4,500?
a. .45 b.
1.55 c. 1.82 d. 2.22
3.
Which one of the following formulas is correct?
a. Profit
margin = EBIT / Sales
b. Capital
intensity ratio = 1 / Return on assets
c. ROA = ROE
/ Equity multiplier
d. Quick
ratio = Cash / Current liabilities
4.
Jefferson Enterprises has a profit margin of 3.2 percent, a total asset
turnover of 1.3, and a total debt ratio of .60. What is
the amount of the sales if total debt is equal to $20,000?
a.
$15,384.62 b. $28,051.28 c. $33,333.33 d. $43,333.33
5.
Katelyn’s Pizza Parlour has net income of $1,485.52, total assets of
$21,500.78, total equity of $11,980.00, and
dividends paid of $594.21. What is the sustainable rate of growth?
a. 2.84
percent b. 3.81 percent c. 5.22 percent d. 8.04 percent
6.
A firm has sales of $26,800, depreciation of $2,200, interest expense of $330,
cost of goods sold of $14,970,
other costs of $5,800, and a tax rate of 34 percent. What is the firm’s profit
margin?
a. 7.79
percent b. 7.87 percent c. 8.08 percent d. 8.62 percent
7.
A firm has sales of $46,700 and inventory of $5,600. The common-size income
statement lists cost of goods sold at 62
percent and depreciation at 8 percent. How long on average does it take the
firm to sell its inventory?
a. 70.59
days b. 81.63 days c. 82.11 days d. 85.06 days
8.
Wexford Hotels has sales of $289,600, depreciation of $21,400, interest of
$1,300, net income of $14,500, and a tax
rate of 34 percent. What is the times interest earned ratio?
a. 11.15 b.
12.15 c. 17.90 d. 28.62
9.
A firm has a return on equity of 14.60 percent and a profit margin of 8.2
percent. What is the return on assets if the
equity multiplier is 1.4?
a. 10.43
percent b. 11.48 percent c. 11.55 percent d. 20.44 percent
10.
Nelson Ledges has total equity of $64,800. There are 15,000 shares of stock
outstanding at a market price of $15.70 a
share. What is the market-to-book ratio?
a. .28 b.
.37 c. 2.70 d. 3.63
Answers
1. c Retention ratio = ($5,498 − $4,925) / $938 = .61087 = 61.09
percent
2. b Equity multiplier = 1 + Debt-equity ratio = 1 + .55 =
1.55
3. c
4. d Total debt ratio = .60 = $20,000 / Total assets; Total
assets = $33,333.33
Total asset turnover = 1.3 = Sales / $33,333.33; Sales =
$43,333.33
5. d Return on equity = $1,485.52 / $11,980 = .124
Plowback ratio = 1 − ($594.21 / $1,485.52) = .60
Sustainable growth rate = (.124 × .6) / [1 − (.124 × .6)] =
.0744 / .9256 = .08038 = 8.04 percent
6. d Net income = ($26,800 − $14,970 − $5,800 − $2,200 −
$330) × (1 − .34) = $2,310
Profit margin = $2,310 / $26,800 = .08619 = 8.62 percent
7. a Inventory turnover = ($46,700 × .62) / $5,600 = 5.17036
Days’ sales in inventory = 365 / 5.17036 = 70.59 days
8. c Earnings before interest and taxes =[$14,500 / (1 −
.34)] + $1,300 = $23,269.69697
Times interest earned ratio = $23,269.69697 / $1,300 = 17.90
9. a ROA = ROE / Equity multiplier = .1460 / 1.4 = .10429 =
10.43 percent
10. d Market-to-book ratio = $15.70 / ($64,800 / 15,000) =
3.63
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