Corporate Finance Stephen Ross 12th Edition- Test Bank

 

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Sample Test

Corporate Finance, 12e (Ross)

Chapter 3   Financial Statements and Cash Flow

 

1) Which statement expresses all relative account values as a percentage of total assets?

1.   A) Pro forma balance sheet

2.   B) Common-size income statement

3.   C) Statement of cash flows

4.   D) Pro forma income statement

5.   E) Common-size balance sheet

 

Answer:  E

Difficulty: 1 Easy

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

2) You would like to compare your firm’s cost structure to that of your competitors. However, your competitors are much larger in size than your firm. Which one of these would best enable you to compare costs across your industry?

1.   A) Pro forma balance sheet

2.   B) Common-size income statement

3.   C) Statement of cash flows

4.   D) Pro forma income statement

5.   E) Common-size balance sheet

 

Answer:  B

Difficulty: 1 Easy

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

3) Which one of these terms is most synonymous with the term “income from operations”?

1.   A) TTM

2.   B) EBIT

3.   C) LTM

4.   D) EBITDA

5.   E) EPS

 

Answer:  B

Difficulty: 1 Easy

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

4) Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are known as:

1.   A) asset management ratios.

2.   B) long-term solvency measures.

3.   C) liquidity measures.

4.   D) profitability ratios.

5.   E) market value ratios.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

5) The current ratio is measured as:

1.   A) current assets minus current liabilities.

2.   B) current assets divided by current liabilities.

3.   C) current liabilities minus inventory, divided by current assets.

4.   D) cash on hand divided by current liabilities.

5.   E) current liabilities divided by current assets.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

6) The quick ratio is measured as:

1.   A) current assets divided by current liabilities.

2.   B) cash on hand plus current liabilities, divided by current assets.

3.   C) current liabilities divided by current assets, plus inventory.

4.   D) current assets minus inventory, divided by current liabilities.

5.   E) current assets minus inventory minus current liabilities.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

7) Ratios that measure a firm’s financial leverage are known as ________ ratios.

1.   A) asset management

2.   B) long-term solvency

3.   C) short-term solvency

4.   D) profitability

5.   E) market value

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

8) The debt-equity ratio is measured as:

1.   A) total equity divided by long-term debt.

2.   B) total equity divided by total debt.

3.   C) total debt divided by total equity.

4.   D) long-term debt divided by total equity.

5.   E) total assets minus total debt, divided by total equity.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

9) The equity multiplier is measured as total:

1.   A) equity divided by total assets.

2.   B) equity plus total debt.

3.   C) assets minus total equity, divided by total assets.

4.   D) assets plus total equity, divided by total debt.

5.   E) assets divided by total equity.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

10) Ratios that measure how efficiently a firm uses its assets to generate sales are known as ________ ratios.

1.   A) asset management

2.   B) long-term solvency

3.   C) short-term solvency

4.   D) profitability

5.   E) market value

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

11) The inventory turnover ratio is measured as:

1.   A) sales divided by inventory.

2.   B) inventory times total sales.

3.   C) cost of goods sold divided by inventory.

4.   D) inventory divided by cost of goods sold.

5.   E) inventory divided by sales.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

12) Days’ sales in inventory is measured as:

1.   A) inventory turnover plus 365 days.

2.   B) inventory turnover times 365 days.

3.   C) inventory divided by cost of goods sold, times 365 days.

4.   D) 365 days divided by the inventory.

5.   E) 365 days divided by the inventory turnover.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

13) The receivables turnover ratio is measured as:

1.   A) sales plus accounts receivable.

2.   B) sales divided by accounts receivable.

3.   C) sales minus accounts receivable, divided by sales.

4.   D) accounts receivable times sales.

5.   E) accounts receivable divided by sales.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

14) The total asset turnover ratio measures the amount of:

1.   A) total assets needed for every $1 of sales.

2.   B) sales generated by every $1 in total assets.

3.   C) fixed assets required for every $1 of sales.

4.   D) net income generated by every $1 in total assets.

5.   E) net income that can be generated by every $1 of fixed assets.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

15) Ratios that measure how efficiently a firm’s management uses its assets and equity to generate bottom line net income are known as ________ ratios.

1.   A) asset management

2.   B) long-term solvency

3.   C) short-term solvency

4.   D) profitability

5.   E) market value

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

16) The financial ratio measured as net income divided by sales is known as the firm’s:

1.   A) profit margin.

2.   B) return on assets.

3.   C) return on equity.

4.   D) asset turnover.

5.   E) earnings before interest and taxes.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

17) The measure of net income returned from every dollar invested in total assets is the:

1.   A) profit margin.

2.   B) return on assets.

3.   C) return on equity.

4.   D) asset turnover.

5.   E) earnings before interest and taxes.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

18) The financial ratio that measures the accounting profit per dollar of book equity is referred to as the:

1.   A) profit margin.

2.   B) price-earnings ratio.

3.   C) return on equity.

4.   D) equity turnover.

5.   E) market profit-to-book ratio.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

19) The amount that investors are willing to pay for each dollar of annual earnings is reflected in the:

1.   A) return on assets.

2.   B) return on equity.

3.   C) debt-equity ratio.

4.   D) price-earnings ratio.

5.   E) DuPont identity.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

20) The market-to-book ratio is measured as the:

1.   A) market price per share divided by the par value per share.

2.   B) net income per share divided by the market price per share.

3.   C) market price per share divided by the net income per share.

4.   D) market price per share divided by the dividends per share.

5.   E) market value per share divided by the book value per share.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

21) Which one of the following statements is correct concerning ratio analysis?

1.   A) A single ratio is often computed differently by different individuals.

2.   B) No ratio can address the problem of size differences among firms.

3.   C) Only a very limited number of ratios can be used for analytical purposes.

4.   D) Every ratio is an income statement entry divided by a balance sheet item.

5.   E) Ratios cannot be used for comparison purposes over periods of time.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Ratio analysis

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

22) Which one of the following is a liquidity ratio?

1.   A) Quick ratio

2.   B) Cash coverage ratio

3.   C) Total debt ratio

4.   D) EV multiple

5.   E) Times interest earned ratio

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

23) An increase in which one of the following accounts increases a firm’s current ratio without affecting its quick ratio?

1.   A) Accounts payable

2.   B) Cash

3.   C) Inventory

4.   D) Accounts receivable

5.   E) Fixed assets

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

24) A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?

1.   A) Current

2.   B) Cash

3.   C) Debt-equity

4.   D) Quick

5.   E) Total debt

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

25) A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:

1.   A) $1 in total equity.

2.   B) $.53 in total assets.

3.   C) $1 in current assets.

4.   D) $.53 in total equity.

5.   E) $1 in fixed assets.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

26) The long-term debt ratio is probably of most interest to a firm’s:

1.   A) credit customers.

2.   B) employees.

3.   C) suppliers.

4.   D) mortgage holder.

5.   E) stockholders.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

27) A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of ________, and a times interest earned ratio of ________.

1.   A) .50; .75

2.   B) .50; 1.00

3.   C) .45; 1.75

4.   D) .40; .75

5.   E) .40; 1.75

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

28) From a cash flow position, which one of the following ratios best measures a firm’s ability to pay the interest on its debts?

1.   A) Times interest earned ratio

2.   B) Cash coverage ratio

3.   C) Cash ratio

4.   D) Quick ratio

5.   E) Interval measure

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

29) The higher the inventory turnover, the:

1.   A) less time inventory items remain on the shelf.

2.   B) higher the inventory as a percentage of total assets.

3.   C) longer it takes a firm to sell its inventory.

4.   D) greater the amount of inventory held by a firm.

5.   E) greater the selection of goods available for sale.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

30) Which one of the following statements is correct if a firm has a receivables turnover of 10?

1.   A) It takes the firm 10 days to collect payment from its customers.

2.   B) It takes the firm 36.5 days to sell its inventory and collect the payment from the sale.

3.   C) It takes the firm an average of 36.5 days to sell its items.

4.   D) The firm collects its credit sales in an average of 36.5 days.

5.   E) The firm has ten times more in accounts receivable than it does in cash.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

31) A capital intensity ratio of 1.03 means a firm has $1.03 in:

1.   A) total debt for every $1 in equity.

2.   B) equity for every $1 in total debt.

3.   C) sales for every $1 in total assets.

4.   D) total assets for every $1 in sales.

5.   E) long-term assets for every $1 in short-term assets.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

32) Puffy’s Pastries generates five cents of net income for every $1 in equity. Thus, Puffy’s has ________ of 5 percent.

1.   A) a return on assets

2.   B) a profit margin

3.   C) a return on equity

4.   D) an EV multiple

5.   E) a price-earnings ratio

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

33) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:

1.   A) has no debt of any kind.

2.   B) is using its assets as efficiently as possible.

3.   C) pays all its earnings out in dividends.

4.   D) also has a current ratio of 15.

5.   E) has an equity multiplier of 2.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

34) If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the:

1.   A) profit margin.

2.   B) return on assets.

3.   C) return on equity.

4.   D) equity multiplier.

5.   E) earnings per share.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

35) Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the:

1.   A) return on equity will increase.

2.   B) return on assets will decrease.

3.   C) profit margin will decline.

4.   D) total debt ratio will decrease.

5.   E) price-earnings ratio will increase.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

36) Joe’s has old, fully depreciated equipment. Moe’s just purchased all new equipment which will be depreciated over eight years. If Joe’s and Moe’s have the same sales, costs, tax rate, and enterprise value, then:

1.   A) Joe’s will have a lower profit margin.

2.   B) Joe’s will have a lower return on equity.

3.   C) Moe’s will have a higher net income.

4.   D) Moe’s and Joe’s will have the same EV multiple.

5.   E) Moe’s will have a lower EV multiple.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

37) Last year, Alfred’s Automotive had a price-earnings ratio of 15 and earnings per share of $1.20. This year, the price-earnings ratio is 18 and the earnings per share is $1.20. Based on this information, it can be stated with certainty that:

1.   A) the price per share decreased.

2.   B) the earnings per share decreased.

3.   C) investors are paying a lower price per share this year as compared to last year.

4.   D) investors are receiving a higher rate of return this year.

5.   E) the investors’ outlook for the firm has improved.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

38) Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred’s:

1.   A) has a higher market price than one share of stock in Turner’s.

2.   B) has a higher market price per dollar of earnings than does one share of Turner’s.

3.   C) sells at a lower price per share than one share of Turner’s.

4.   D) represents a larger percentage of firm ownership than does one share of Turner’s stock.

5.   E) earns a greater profit per share than does one share of Turner’s stock.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

39) Which one of the following is most apt to cause a profitable, stable firm to have a higher price-earnings ratio?

1.   A) Slow industry outlook

2.   B) Very low current earnings

3.   C) Low market share

4.   D) Low prospect of firm growth

5.   E) Low investor opinion of firm

 

Answer:  B

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

40) Vinnie’s Motors has a market-to-book ratio of 3.4. The book value per share is $34 and earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1 increase in the book value per share will:

1.   A) decrease the price-earnings ratio.

2.   B) decrease the EV multiple.

3.   C) decrease the market price per share.

4.   D) increase the price-earnings ratio.

5.   E) increase the return on equity.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

41) Which one of the following sets of ratios would generally be of the most interest to stockholders?

1.   A) Return on assets and profit margin

2.   B) Quick ratio and times interest earned

3.   C) Price-earnings ratio and debt-equity ratio

4.   D) Return on equity and price-earnings ratio

5.   E) Cash coverage ratio and equity multiplier

 

Answer:  D

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

42) If a firm decreases its operating costs, all else constant, then the:

1.   A) profit margin will decrease.

2.   B) return on assets will decrease.

3.   C) total asset turnover rate will increase.

4.   D) cash coverage ratio will decrease.

5.   E) price-earnings ratio will decrease.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

43) A public firm’s market capitalization is equal to the:

1.   A) total book value of assets less the book value of debt.

2.   B) par value of common equity.

3.   C) price per share multiplied by number of shares outstanding.

4.   D) stock price per share multiplied by the number of shares authorized.

5.   E) maximum value an acquirer would pay for the firm in an acquisition.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Market value ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

44) Enterprise value is based on the:

1.   A) market value of interest-bearing debt plus the market value of equity minus cash.

2.   B) book values of debt and assets, other than cash.

3.   C) market value of equity plus the book value of total debt minus cash.

4.   D) book value of debt plus the market value of equity.

5.   E) book values of debt and equity less cash.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Enterprise value and ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

45) Which one of these values best represents the funds needed to acquire a firm and payoff all of that firm’s debt?

1.   A) Market value of total assets

2.   B) Book value of equity

3.   C) Return on assets

4.   D) Market value of equity

5.   E) Enterprise value

 

Answer:  E

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Enterprise value and ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

46) A firm with a high level of growth opportunities is most apt to have a:

1.   A) high PE ratio and a high EV multiple.

2.   B) high cash ratio and a low EV multiple.

3.   C) high PE ratio and a low EV multiple.

4.   D) low PE ratio and a high EV multiple.

5.   E) low cash ratio and a low PE ratio.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.2 Ratio Analysis

Topic:  Enterprise value and ratios

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

47) The equity multiplier measures:

1.   A) financial leverage.

2.   B) returns to stockholders.

3.   C) operating efficiency.

4.   D) management efficiency.

5.   E) asset use efficiency.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  DuPont identity

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

48) The return on equity can be calculated as:

1.   A) ROA × Equity multiplier.

2.   B) Profit margin × ROA.

3.   C) Profit margin × ROA × Total asset turnover.

4.   D) ROA × Net income/Total assets.

5.   E) ROA × Debt-equity ratio.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  DuPont identity

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

49) The DuPont identity can be computed as:

1.   A) Net income × Profit margin × (1 + Debt-equity ratio).

2.   B) Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).

3.   C) Net income × Total asset turnover × Equity multiplier.

4.   D) Profit margin × Total asset turnover × Debt-equity ratio.

5.   E) Return on equity × Profit margin × Total asset turnover.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  DuPont identity

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

50) Which one of these ratios measures the efficiency at which a firm employs its assets?

1.   A) Profit margin

2.   B) Return on equity

3.   C) Equity multiplier

4.   D) P/E ratio

5.   E) Total asset turnover

 

Answer:  E

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  DuPont identity

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

51) It is easier to evaluate a firm using its financial statements when the firm:

1.   A) is a conglomerate.

2.   B) is global in nature.

3.   C) uses the same accounting procedures as other firms in its industry.

4.   D) has a different fiscal year than other firms in its industry.

5.   E) tends to have one-time events such as asset sales and property acquisitions.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  Financial statement analysis

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

52) The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:

1.   A) the firm’s ratios from prior time periods and to the ratios of firms with similar operations.

2.   B) the average ratios of all firms within the same country over a period of time.

3.   C) those of other firms located in the same geographic area that are similarly sized.

4.   D) the average ratios of the firm’s international peer group.

5.   E) those of the largest conglomerate that has operations in the same industry as the firm.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  Financial statement analysis

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

53) The least problems encountered when comparing the financial statements of one firm with those of another firm occur when the firms:

1.   A) are in different lines of business.

2.   B) have geographically diverse operations.

3.   C) use different methods of depreciation.

4.   D) are both classified as conglomerates.

5.   E) have the same fiscal year-end.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.3 The DuPont Identity

Topic:  Financial statement analysis

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

54) In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets:

1.   A) plus the changes in liabilities minus the changes in equity.

2.   B) minus the changes in both liabilities and equity.

3.   C) minus the changes in liabilities only.

4.   D) plus the changes in both liabilities and equity.

5.   E) minus the change in retained earnings.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.4 Financial Models

Topic:  External financing need

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

55) Which account is least apt to vary directly with sales?

1.   A) Notes payable

2.   B) Inventory

3.   C) Cost of goods sold

4.   D) Accounts payable

5.   E) Accounts receivable

 

Answer:  A

Difficulty: 1 Easy

Section:  3.4 Financial Models

Topic:  Financial planning models

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

56) Projected future financial statements are called:

1.   A) imaginative statements.

2.   B) pro forma statements.

3.   C) reconciled statements.

4.   D) aggregated statements.

5.   E) comparative statements.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.4 Financial Models

Topic:  Pro forma statements

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

57) The projected addition to retained earnings can be calculated as:

1.   A) PM × Δ Sales.

2.   B) PM × Δ Sales × (1 − Dividend payout ratio).

3.   C) PM × Projected sales × (1 −Dividend payout ratio).

4.   D) Projected sales × (1 − Dividend payout ratio).

5.   E) PM × Projected sales.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.4 Financial Models

Topic:  External financing need

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

58) The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:

1.   A) rate of return on assets.

2.   B) internal rate of growth.

3.   C) average historical rate of growth.

4.   D) rate of return on equity.

5.   E) sustainable rate of growth.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

59) The sustainable growth rate will be equivalent to the internal growth rate when, and only when:

1.   A) a firm has no debt.

2.   B) the growth rate is positive.

3.   C) the plowback ratio is positive but less than 1.

4.   D) a firm has a debt-equity ratio equal to 1.

5.   E) the retention ratio is equal to 1.

 

Answer:  A

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

60) The sustainable growth rate:

1.   A) assumes there is no external financing of any kind.

2.   B) is normally higher than the internal growth rate.

3.   C) assumes the debt-equity ratio is variable.

4.   D) is based on receiving additional external equity financing.

5.   E) assumes the dividend payout ratio is equal to zero.

 

Answer:  B

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

61) If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the:

1.   A) fixed assets will have to increase at the sustainable growth rate, even if the firm is currently operating at only 78 percent of capacity.

2.   B) number of common shares outstanding will increase at the same rate of growth.

3.   C) debt-equity ratio will have to increase.

4.   D) debt-equity ratio will remain constant while retained earnings increase.

5.   E) fixed assets, the debt-equity ratio, and number of common shares outstanding will all increase.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

62) Marcie’s Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie’s can grow is equal to:

1.   A) 35 percent of the internal rate of growth.

2.   B) 65 percent of the internal rate of growth.

3.   C) the internal rate of growth.

4.   D) the sustainable rate of growth.

5.   E) 65 percent of the sustainable rate of growth.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

63) The value of the variable “b” as used in the internal growth rate formula can be computed as:

1.   A) 1 + Growth rate.

2.   B) Total dividends/Net income.

3.   C) 1 − Dividend payout ratio.

4.   D) Net income/Total sales.

5.   E) 1 − PE ratio.

 

Answer:  C

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

64) The sustainable rate of growth for a firm can be increased by:

1.   A) decreasing the debt-equity ratio.

2.   B) decreasing the profit margin.

3.   C) increasing the dividend payout ratio.

4.   D) increasing the capital intensity ratio.

5.   E) increasing the total asset turnover.

 

Answer:  E

Difficulty: 1 Easy

Section:  3.5 External Financing and Growth

Topic:  Internal and sustainable growth rates

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

65) Financial planning models are most apt to omit:

1.   A) the changes in net working capital required for additional sales.

2.   B) the increases in costs required to increase sales.

3.   C) any change in retained earnings due to changes in the income statement.

4.   D) the timing, risk, and size of the cash flows.

5.   E) any additions that might be needed to fixed assets.

 

Answer:  D

Difficulty: 1 Easy

Section:  3.6 Some Caveats Regarding Financial Planning Models

Topic:  Financial planning models

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

66) DL Motors has sales of $22,400, net income of $3,600, net fixed assets of $18,700, inventory of $2,800, and total current assets of $6,300. What is the common-size statement value of inventory?

10.                A) 10.07 percent

11.                B) 13.67 percent

12.                C) 11.20 percent

13.                D) 12.50 percent

14.                E) 9.84 percent

 

Answer:  C

Explanation:  Common-size inventory = $2,800/($6,300 + 18,700)

Common-size inventory = .1120, or 11.20%

Difficulty: 2 Medium

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

67) Weston’s has sales of $38,900, net income of $2,400, total assets of $43,100, and total equity of $24,700. Interest expense is $830. What is the common-size statement value of the interest expense?

2.   A) 2.13 percent

3.   B) 3.08 percent

4.   C) 1.93 percent

5.   D) 2.49 percent

6.   E) 3.46 percent

 

Answer:  A

Explanation:  Common-size interest expense = $830/$38,900

Common-size interest expense = .0213, or 2.13%

Difficulty: 2 Medium

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

68) Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold of $43,100, and depreciation of $6,800. What is the common-size statement value of EBIT?

36.                A) 36.35 percent

37.                B) 38.08 percent

38.                C) 41.93 percent

39.                D) 32.49 percent

40.                E) 35.46 percent

 

Answer:  A

Explanation:  Common-size EBIT = ($78,400 − 43,100 − 6,800)/$78,400

Common-size EBIT = .3635, or 36.35%

Difficulty: 2 Medium

Section:  3.1 Financial Statements Analysis

Topic:  Standardized financial statements

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

69) Jessica’s Boutique has cash of $218, accounts receivable of $457, accounts payable of $398, and inventory of $647. What is the value of the quick ratio?

1.   A) .55

2.   B) 1.05

3.   C) 1.70

4.   D) 1.32

5.   E) 1.52

 

Answer:  C

Explanation:  Quick ratio = ($218 + 457)/$398

Quick ratio = 1.70

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Short-term solvency ratios

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

70) Browning’s has a debt-equity ratio of .47. What is the equity multiplier?

1.   A) 1.47

2.   B) .53

3.   C) 2.13

4.   D) 1.13

5.   E) 1.53

 

Answer:  A

Explanation:  EM = Total assets/Total equity

EM = Total equity/Total equity + Total debt/Total equity

EM = 1 + .47

EM = 1.47

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  DuPont identity

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

71) Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value of the total assets?

1.   A) $18,889

2.   B) $24,480

3.   C) $23,520

4.   D) $25,689

5.   E) $25,360

 

Answer:  D

Explanation:  Total equity = $6,800/.36

Total equity = $18,889

Total assets = $6,800 + 18,889

Total assets = $25,689

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

72) Leo’s Markets has sales of $684,000, costs of $437,000, interest paid of $13,800, total assets of $712,000, and depreciation of $109,400. The tax rate is 21 percent and the equity multiplier is 1.6. What is the return on equity?

21.                A) 21.30 percent

22.                B) 23.92 percent

23.                C) 20.06 percent

24.                D) 19.48 percent

25.                E) 21.98 percent

 

Answer:  E

Explanation:  Net income = ($684,000 − 437,000 − 109,400 − 13,800)(1 − .21)

Net income = $97,802

Equity = $712,000/1.6

Equity = $445,000

ROE = $97,802/$445,000

ROE = .2198, or 21.98%

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

73) Rosita’s Resources paid $11,310 in interest and $16,500 in dividends last year. The times interest earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is 21 percent. What is the value of the cash coverage ratio?

3.   A) 3.71

4.   B) 2.58

5.   C) 3.60

6.   D) 2.78

7.   E) 3.10

 

Answer:  C

Explanation:  EBIT = 2.9($11,310)

EBIT = $32,799

Cash coverage ratio = ($32,799 + 7,900)/$11,310

Cash coverage ratio = 3.60

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Long-term solvency ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

74) Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of $46,300, and accounts receivable of $62,700. How many days, on average, does it take the firm to both sell its inventory and collect payment on the sale?

142.             A) 142.10

143.             B) 96.37

144.             C) 178.21

145.             D) 150.54

146.             E) 124.03

 

Answer:  D

Explanation:  Days’ sales in inventory = 365/($218,400/$46,300)

Days’ sales in inventory = 77.38

Days’ sales in receivables = 365/($312,800/$62,700)

Days’ sales in receivables = 73.16

Total days’ sales in inventory and receivables = 77.38 + 73.16

Total days’ sales in inventory and receivables = 150.54

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

75) Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm to sell its inventory?

93.                A) 93.08

94.                B) 74.92

95.                C) 85.14

96.                D) 56.77

97.                E) 80.46

 

Answer:  D

Explanation:  Days’ sales in inventory = 365/($393,500/$61,200)

Days’ sales in inventory = 56.77

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

76) Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400, net income of $43,900, and current liabilities of $51,300. The tax rate is 21 percent and the profit margin is 9.3 percent. How many dollars of sales are generated from every $1 in total assets?

1.   A) $1.44

2.   B) $1.32

3.   C) $1.73

4.   D) $.97

5.   E) $1.06

 

Answer:  A

Explanation:  Total asset turnover = ($43,900/.093)/($43,800 + 51,300 + 232,400)

Total asset turnover = 1.44

Every $1 in total assets generates $1.44 in sales.

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Asset management ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

77) Flo’s Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23 percent, a debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the return on assets?

6.   A) 6.93 percent

7.   B) 9.50 percent

8.   C) 11.08 percent

9.   D) 7.13 percent

10.                E) 13.13 percent

 

Answer:  A

Explanation:  ROA = [.051($418,000)]/[(1 + .37)($224,400)]

ROA = .0693, or 6.93%

Difficulty: 2 Medium

Section:  3.2 Ratio Analysis

Topic:  Profitability ratios

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation