Question 1

Each of the following is true of successful financial ratio analysis EXCEPT ____.

Accepted Answer

Financial ratio analysis requires multiple ratios and comparison to industry standards, as well as other data and contextual factors, to accurately assess a company's financial health. A single ratio is not sufficient to identify weaknesses or areas for improvement.

Question 2

The type of ratio that indicates the firm's ability to provide adequate returns in the form of dividends and share price appreciation is the ____.

Accepted Answer

Profitability ratios, such as return on equity (ROE), indicate how effectively a company is generating profits and can provide insight into its ability to pay dividends and potentially increase share price. Asset management ratios measure how efficiently a company is utilizing its assets, liquidity ratios assess a company's ability to meet short-term obligations, and financial leverage management ratios focus on a company's debt and equity mix. While all of these ratios can provide valuable information, profitability ratios are most closely tied to a firm's ability to provide returns to shareholders.

Question 3

A firm has revenue of $60,000, its total operating costs (excluding 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 EBITDA?

Accepted Answer

The answer of A firm has revenue of $60,000, its...

Question 4

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 on ____.

Accepted Answer

If the earnings after tax percentage is too low, it means that the firm's expenses are eating up a large portion of its revenue. Cost of sales as a percentage of net sales can indicate whether the firm is spending too much on producing its products or services, leading to a lower net income.

Question 5

When using financial ratios to analyze a company's ability to maximize shareholders' wealth, all of the following cautions should be considered EXCEPT ____.

Accepted Answer

This statement is incorrect. Accounting differences can impact financial ratios, and it is important to be aware of the accounting methods used when comparing ratios between companies. The other cautions mentioned are important to consider when analyzing financial ratios.

Question 6

Most analysts prefer using price to free cash flow rather than price-to-earnings (P/E) ratio because price to free cash flow is ____.

Accepted Answer

Price to free cash flow is a stricter measure that reduces cash flow by the amount of capital expenditures, giving a more accurate reflection of a company's ability to generate cash after accounting for necessary investments in fixed assets. This makes it a more reliable measure of performance than the P/E ratio, which can be influenced by accounting practices and non-cash items. While price to free cash flow may be slightly more difficult to compute than P/E, the increased accuracy and reliability make it a preferred metric among analysts.

Question 7

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%. $\begin{array}{ll}
\text { Earning before taxes } & \$ 3 \text { million } \
\text { Net profit margin } & 3.6 \% \
\text { Total liabilities } & \$ 15.0 \text { million } \
\text { Total stockhol der's equity } & \$ 10.0 \text { million }
\end{array}$

Accepted Answer

The answer of Greg is interested in investing in a...

Question 8

How does a firm determine its enterprise value?

Accepted Answer

Enterprise value is determined by multiplying the price per share of its stock by the common shares outstanding. This calculation gives the total market value of the equity.

Question 9

All of the following are users of financial information EXCEPT ____.

Accepted Answer

Customers typically do not use financial information of a company in the same way as bankers, security analysts, and unions do. Bankers may use it to assess loan qualifications, security analysts for investment decisions, and unions for bargaining agreements, whereas customers are more concerned with the quality, price, and service of the products or services offered.

Question 10

Heavily using debt to finance assets results in higher ____ as compared to ROI.

Accepted Answer

Heavily using debt to finance assets typically results in higher return on stockholders' equity (ROE) compared to return on investment (ROI) because the use of debt financing can amplify the returns to equity holders as long as the return on the total assets exceeds the cost of the debt.

Question 11

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?

Accepted Answer

The correct answer is A. The cash balance is $75,000. The current ratio is 1.3, which means that current assets are 1.3 times current liabilities. Since current liabilities are $200,000, current assets must be $260,000. The quick ratio is 0.625, which means that quick assets (cash and accounts receivable) are 0.625 times current liabilities. Since current liabilities are $200,000, quick assets must be $125,000. Therefore, the balance in the cash account must be $75,000.

Question 12

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.

Accepted Answer

Net profit margin is calculated as Net Income / Sales. First, we need to find Net Income, which is EBIT - Interest Expenses - Taxes. Given EBIT is $30,000 and Interest Expenses are $10,000, we have $20,000 before taxes. With a tax rate of 40%, taxes amount to $8,000 ($20,000 * 40%), leaving a Net Income of $12,000 ($20,000 - $8,000). To find Sales, we use the Total Asset Turnover formula, which is Sales / Total Assets. Given a Total Asset Turnover of 1.5 and Total Assets of $100,000, Sales = 1.5 * $100,000 = $150,000. Therefore, Net Profit Margin = Net Income / Sales = $12,000 / $150,000 = 8%.

Question 13

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.

Accepted Answer

The answer of Wall Mart Pictures and Decor Company has...

Question 14

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

Accepted Answer

The answer of Given the following information, calculate the return...

Question 15

Market-based ratios can be which of the following: 
I. Price-to-earnings ratio
II. Dividend yield

Accepted Answer

The answer of Market-based ratios can be which of the...

Question 16

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 stock price per share. Its stock price to cash flow is ____.

Accepted Answer

First, let's calculate the firm's net income:

Revenue - Expenses - Depreciation - Interest Expense = Net Income

$50,000 - $35,000 - $4,000 - $3,000 = $8,000

Next, let's calculate the firm's cash flow:

Net Income + Depreciation = Cash Flow

$8,000 + $4,000 = $12,000

Now, let's calculate the firm's cash flow per share:

Cash Flow / Number of Shares Outstanding = Cash Flow per Share

$12,000 / 75,000 = $0.16 per share

Finally, let's calculate the firm's price to cash flow ratio:

Stock Price / Cash Flow per Share = Price to Cash Flow Ratio

$15 / $0.16 = 93.75

Therefore, the closest answer is D) 125 since it is the closest to 93.75.

Question 17

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 ____.

Accepted Answer

First, we need to determine the firm's EBIT (Earnings Before Interest and Taxes) using the following formula:

EBIT = Revenue - Expenses - Depreciation

EBIT = $50,000 - $35,000 - $4,000 = $11,000

Next, we need to determine the firm's taxable income:

Taxable Income = EBIT - Interest Expense

Taxable Income = $11,000 - $3,000 = $8,000

Now, we can determine the firm's taxes:

Taxes = Taxable Income x Tax Rate

Taxes = $8,000 x 0.4 = $3,200

Finally, we can determine the firm's net income:

Net Income = Taxable Income - Taxes

Net Income = $8,000 - $3,200 = $4,800

Now, we can determine the firm's cash flow:

Cash Flow = Net Income + Depreciation

Cash Flow = $4,800 + $4,000 = $8,800

Finally, we can determine the firm's cash flow per share:

Cash Flow per Share = Cash Flow / Number of Shares Outstanding

Cash Flow per Share = $8,800 / 75,000 = $0.117, or approximately $0.12 per share.

Therefore, the best choice is B, $0.12.

Question 18

The sales-to-inventory ratio is ____.

Accepted Answer

The answer of The sales-to-inventory ratio is ____.
...

Question 19

The financial analysis tool that takes into account the entire capital structure of the firm is the ____.

Accepted Answer

The EBITDA multiple considers earnings before interest, taxes, depreciation, and amortization, thus reflecting the financial performance of a company including its entire capital structure (debt and equity).

Question 20

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

Accepted Answer

The current assets are $2,400,000 (current liabilities * current ratio). The quick assets (cash + accounts receivable) are $1,200,000 (current liabilities * quick ratio). The accounts receivable is $1,000,000 (sales/365 * average collection period). Therefore, cash is $200,000 ($1,200,000 - $1,000,000).

Quiz 3: Evaluation of Financial Performance