Question 1

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
-If ECE's return on assets (ROA)is 12%,then ECE's return on equity (ROE)is:
A) 10%
B) 12%
C) 18%
D) 22%

Accepted Answer

D) ROA = (Net Income + Interest Expense)/Assets = ($X million+2 million)/$200 million = 0.12; X = $22 million;
ROE = (Net Income)/(Shareholder Equity) = $22 million/$100 million = 0.22 = 24%

Question 2

Use the table for the question(s) below.
Consider the following income statement and other information:
 
-Wyatt Oil has a net profit margin of 4.0%,a total asset turnover of 2.2,total assets of $525 million,and a book value of equity of $220 million.Wyatt Oil's current return-on-assets (ROA)is closest to:
A) 8.8%
B) 9.5%
C) 21.0%
D) 22.8%

Accepted Answer

A) ROA = net profit margin × total asset turnover = 0.04 × 2.2 = 0.088 = 8.8%

Question 3

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
-If ECE's net profit margin is 8%,then ECE's return on equity (ROE)is:
A) 10%
B) 12%
C) 24%
D) 30%

Accepted Answer

C) net profit margin = (Net Income)/Sales = $X million/$300 million = 0.08; X = $24 million;
ROE = (Net Income)/(Shareholder Equity) = $24 million/$100 million = 0.24 = 24%

Question 4

Use the following information for ECE incorporated:
Assets $200 million
Shareholder Equity $100 million
Sales $300 million
Net Income $15 million
Interest Expense $2 million
-If ECE reported $15 million in net income,then ECE's Return on Equity (ROE)is:
A) 5.0%
B) 7.5%
C) 10.0%
D) 15.0%

Accepted Answer

D) ROE = (Net Income)/(Shareholder Equity) = $15 million /$100 million = 0.15 = 15%

Question 5

The DuPont Identity expresses the firm's ROE in terms of:
A) profitability, asset efficiency, and leverage.
B) valuation, leverage, and interest coverage.
C) profitability, margins, and valuation.
D) equity, assets, and liabilities.

Accepted Answer

The DuPont Identity breaks down a firm's ROE into three components: profitability (measured by net profit margin), asset efficiency (measured by total asset turnover), and leverage (measured by equity multiplier). Therefore, choice A is the correct answer as it includes these three components. Choices B, C, and D are incorrect as they do not capture all of the components of the DuPont Identity.

Question 6

Use the table for the question(s) below.
Consider the following income statement and other information:
 
-Luther's EBITDA coverage ratio for the year ending December 31,2009 is closest to:
A) 1.64
B) 1.78
C) 1.98
D) 2.19

Accepted Answer

B) EBITDA Coverage ratio = (EBIT + Dep & Amort)/(Interest Expense) =
(41.2 + 3.6)/25.1 = 1.7849

Question 7

Use the table for the question(s) below.
Consider the following income statement and other information:
 
-Luther's EBIT coverage ratio for the year ending December 31,2009 is closest to:
A) 1.64
B) 1.78
C) 1.98
D) 2.19

Accepted Answer

C) EBIT Coverage ratio = EBIT/(Interest Expense) = 31.3/15.8 = 1.981

Question 8

Wyatt Oil has a net profit margin of 4.0%,a total asset turnover of 2.2,total assets of $525 million,and a book value of equity of $220 million.Wyatt Oil's current return-on-equity (ROE)is closest to:
A) 8.8%
B) 9.5%
C) 21.0%
D) 22.8%

Accepted Answer

C) ROE = net profit margin × total asset turnover × leverage
ROE = 0.04 × 2.2 × (525/220) = 0.21 = 21%

Question 9

Use the table for the question(s) below.
Consider the following income statement and other information:
 
-Luther's EBIT coverage ratio for the year ending December 31,2008 is closest to:
A) 1.64
B) 1.78
C) 1.98
D) 2.19

Accepted Answer

A) EBIT Coverage ratio = EBIT/(Interest Expense) = 41.2/25.1 = 1.6414

Question 10

Use the table for the question(s) below.
Consider the following income statement and other information:
 
-If Luther's accounts receivable were $55.5 million in 2009,then calculate Luther's accounts receivable days for 2009.

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 11

The firm's asset turnover measures:
A) the value of assets held per dollar of shareholder equity.
B) the return the firm has earned on its past investments.
C) the firm's ability to sell a product for more than the cost of producing it.
D) how efficiently the firm is utilizing its assets to generate sales.

Accepted Answer

Asset turnover measures how efficiently a company uses its assets to generate revenue. It is calculated by dividing the revenue by the average total assets. A higher asset turnover ratio indicates that the company is generating more revenue with the same amount of assets or using its assets efficiently.

Question 12

If Moon Corporation has an increase in sales,which of the following would result in no change in its EBIT margin?
A) A proportional increase in its net income
B) A proportional decrease in its EBIT
C) A proportional increase in its EBIT
D) An increase in its operating expenses

Accepted Answer

If Moon Corporation has an increase in sales and this increase leads to a proportional increase in its EBIT, then the EBIT margin (EBIT/Sales) will remain the same. A proportional increase in net income (Option A) would lead to an increase in the EBIT margin as the increase in net income would be proportionally larger than the increase in sales. A proportional decrease in EBIT (Option B) would lead to a decrease in the EBIT margin as EBIT/Sales would be smaller. An increase in operating expenses (Option D) would lead to a decrease in the EBIT margin as EBIT would be smaller while sales remained the same.

Question 13

The firm's equity multiplier measures:
A) the value of assets held per dollar of shareholder equity.
B) the return the firm has earned on its past investments.
C) the firm's ability to sell a product for more than the cost of producing it.
D) how efficiently the firm is utilizing its assets to generate sales.

Accepted Answer

The equity multiplier is calculated by dividing the total assets of the company by its equity. Therefore, the equity multiplier measures the amount of assets a company has per dollar of shareholder equity.

Question 14

If Moon Corporation has depreciation or amortization expense,which of the following is TRUE?
A) Its EBITDA /Interest Coverage ratio will be greater than its EBIT/Interest Coverage ratio.
B) Its EBITDA /Interest Coverage ratio will be less than its EBIT/Interest Coverage ratio.
C) Its EBITDA /Interest Coverage ratio will be equal to its EBIT/Interest Coverage ratio.
D) Not enough information to answer the question.

Accepted Answer

Depreciation or amortization expense is added back to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Therefore, if Moon Corporation has depreciation or amortization expense, its EBITDA will be higher than its EBIT. As a result, the EBITDA/Interest Coverage ratio will be greater than the EBIT/Interest Coverage ratio.

Question 15

The inventory days ratio measures:
A) the average length of time it takes a company to sell its inventory.
B) the average length of time it takes the company's suppliers to deliver its inventory.
C) the level of sales required to keep a company's average inventory on the books.
D) the percentage change in inventory over the past year.

Accepted Answer

The inventory days ratio measures the average length of time it takes a company to sell its inventory. It is also known as inventory turnover in days.

Question 16

If Moon Corporation's gross margin declined,which of the following is TRUE?
A) Its cost of goods sold increased.
B) Its cost of goods sold as a percent of sales increased.
C) Its sales increased.
D) Its net profit margin was unaffected by the decline.

Accepted Answer

Gross margin is the difference between sales revenue and cost of goods sold, expressed as a percentage. If the gross margin declined, it means that either the cost of goods sold increased or the sales revenue decreased. However, since the question states only the decline in gross margin, it is safe to assume that the sales revenue remained constant. Thus, the only possible explanation for the decline in gross margin is an increase in the cost of goods sold, which would result in a higher percentage of cost of goods sold to sales revenue. Therefore, option B is true - cost of goods sold as a percent of sales increased.

Question 17

If Firm A and Firm B are in the same industry and use the same production method,and Firm A's asset turnover is higher than that of Firm B,then all else equal we can conclude:
A) Firm A is more efficient than Firm B.
B) Firm A has a lower dollar amount of assets than Firm B.
C) Firm A has higher sales than Firm B.
D) Firm A has a lower ROE than Firm B.

Accepted Answer

The answer of If Firm A and Firm B are...

Question 18

Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to:
A) an increase in net profit margin.
B) a decrease in asset turnover.
C) an increase in leverage.
D) a decrease in Equity.

Accepted Answer

ROE (Return on Equity) is calculated by dividing net income by shareholders' equity. As the question states that there was a reduction in ROE, this means that one or both of the factors (net income and shareholder's equity) have decreased.

Option A is incorrect as an increase in net profit margin would increase ROE if other factors remain constant.

Option C is also incorrect as an increase in leverage (debt) would increase ROE if the return on the investment exceeds the cost of borrowing.

Option D is incorrect, as a decrease in equity alone cannot necessarily explain a reduction in ROE.

Option B is the correct answer as a decrease in asset turnover (the measure of how efficiently a company uses its assets to generate revenue) reduces the numerator of the ROE equation (net income) and therefore the overall ROE.

Question 19

Use the information for the question(s) below.
In November 2009, Perrigo Co. (PRGO) had a share price of $39.20. They had 91.33 million shares outstanding, a market-to-book ratio of 3.76. In addition, PRGO had $845.01 million in outstanding debt, $163.82 million in net income, and cash of $257.09 million.
-Perrigo's return on equity (ROE)is closest to:
A) 4.6%
B) 9.1%
C) 17.2%
D) 27%

Accepted Answer

C) ROE = (Net Income)/(B V Equity) = $163.82/(($39.20 × 91.33)/3.76) = 0.172 = 17.2%

Question 20

If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same,its equity multiplier will ________,and its ROE will ________.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

The answer of If Alex Corporation takes out a bank...

Quiz 2: Introduction to Financial Statement Analysis

Use the following information for ECE incorporated: Assets $200 million Shareholder Equity $100 million Sales $300 million Net Income $15 million Interest Expense $2 million -If ECE's return on assets (ROA) is 12%,then ECE's return on equity (ROE) is:

Use the following information for ECE incorporated: Assets $200 million Shareholder Equity $100 million Sales $300 million Net Income $15 million Interest Expense $2 million -If ECE's net profit margin is 8%,then ECE's return on equity (ROE) is:

Use the following information for ECE incorporated: Assets $200 million Shareholder Equity $100 million Sales $300 million Net Income $15 million Interest Expense $2 million -If ECE reported $15 million in net income,then ECE's Return on Equity (ROE) is:

The DuPont Identity expresses the firm's ROE in terms of:

Use the table for the question(s) below. Consider the following income statement and other information: -Luther's EBITDA coverage ratio for the year ending December 31,2009 is closest to:

Use the table for the question(s) below. Consider the following income statement and other information: -Luther's EBIT coverage ratio for the year ending December 31,2009 is closest to:

Wyatt Oil has a net profit margin of 4.0%,a total asset turnover of 2.2,total assets of $525 million,and a book value of equity of $220 million.Wyatt Oil's current return-on-equity (ROE) is closest to:

Use the table for the question(s) below. Consider the following income statement and other information: -Luther's EBIT coverage ratio for the year ending December 31,2008 is closest to:

Use the table for the question(s) below. Consider the following income statement and other information: -If Luther's accounts receivable were $55.5 million in 2009,then calculate Luther's accounts receivable days for 2009.

The firm's asset turnover measures:

If Moon Corporation has an increase in sales,which of the following would result in no change in its EBIT margin?

The firm's equity multiplier measures:

If Moon Corporation has depreciation or amortization expense,which of the following is TRUE?

The inventory days ratio measures:

If Moon Corporation's gross margin declined,which of the following is TRUE?

If Firm A and Firm B are in the same industry and use the same production method,and Firm A's asset turnover is higher than that of Firm B,then all else equal we can conclude:

Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to:

If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same,its equity multiplier will ,and its ROE will .