Question 1

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?
A) P Co's return on assets (ROA) was less than half of C Co's ROA.
B) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt ﬁnancing to leverage their assets.
C) C Co provided higher positive ﬁnancial leverage for their shareholders compared to P Co.
D) C Co. is considerably more liquid than P Co.

Accepted Answer

Liquidity is not directly assessed by ROE or ROA; these ratios measure profitability, not liquidity.

Question 2

All of the following ratios are investor measures of proﬁtability except
A) payout ratio.
B) return on assets.
C) dividend yield.
D) price-earnings ratio.

Accepted Answer

Return on assets is a measure of profitability that is used by analysts to evaluate a company's financial performance. It is calculated by dividing a company's net income by its total assets. The payout ratio, dividend yield, and price-earnings ratio are all investor measures of profitability.

Question 3

A company's optimal capital structure occurs when
A) ROA is maximized.
B) the company assets are funded by 50% debt and 50% equity.
C) the company can borrow at a rate lower than its ROA.
D) ROE is maximized.

Accepted Answer

The optimal capital structure is achieved when the company's return on equity (ROE) is maximized, as it indicates the most efficient use of debt and equity to generate profits for shareholders.

Question 4

-Calculate C Co's profit margin ratio for 20X2 and 20X1 respectively.
A) 69.7% and 70.4%
B) 19.3% and 27.6%
C) 20.1% and 26.4%
D) 12.3% and 18.8%

Accepted Answer

Calculation: $2,431 ÷ $19,805 = 12.3%; $3,533 ÷ $18,813 = 18.8%.

Question 5

-Calculate C Co's return on assets (ROA) for 20X2.
A) 11.9%
B) 13.0%
C) 13.6%
D) 17.7%

Accepted Answer

Calculation: [$2,431 + ($337 × 63.7%)] ÷ [($21,623 + $19,145)/2] = 13%.

Question 6

-Calculate C Co's return on equity (ROE) for 20X2.
A) 25.6%
B) 27.1%
C) 30.9%
D) 31.8%

Accepted Answer

Calculation: $2,431 ÷ [($9,513 + $8,403)/2] = 27.1%.

Question 7

A company has a tax rate of 40%. Leverage would be beneficial for the company for each of the following combinations of interest rates and ROA except 
$\begin{array} {  l  rr } 
 & \text { Interest } &\mathrm{ROA} \ 
&\text { rate } \\end{array}$
a) $\begin{array} {  l  rr } & 4 \% &&& 6 \% \\end{array}$
b) $\begin{array} {  l  rr } & 6 \% &&& 6 \% \\end{array}$
c) $\begin{array} {  l  rr } & 14 \% &&& 10 \% \\end{array}$
d)$\begin{array} {  l  rr }  & 16 \% &&& 10 \% \\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

Leverage is beneficial when the return on assets (ROA) is greater than the interest rate. In choice D, the interest rate (16%) is higher than the ROA (10%), making leverage not beneficial.

Question 8

-Calculate C Co's gross profit ratio for 20X2 and 20X1 respectively.
A) 30.3% and 29.6%
B) 69.7% and 70.4%
C) 20.1% and 26.4%
D) 40.6% and 45.7%

Accepted Answer

Calculation: $13,796 ÷ $19,805 = 69.7%; $13,251 ÷ $18,813 = 70.4%.

Question 9

-Calculate C Co's current ratio for 20X2 and 20X1 respectively.
A) .54 and .59
B) .60 and .70
C) .66 and .74
D) .63 and .72

Accepted Answer

Calculation: $6,480 ÷ $9,856 = .66; $6,380 ÷ $8,640 = .74.

Question 10

-Calculate C Co's financial leverage and identify whether it was positive or negative.
A) 14.1% positive
B) 15.2% positive
C) 17.8% negative
D) 19.9% negative

Accepted Answer

Calculation: 27.1% - 13% = 14.1%.

Question 11

In 20X2, C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days. In 20X2, P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days. Which of the following statements is false?
A) The higher turnover ratio for C Co hurts their liquidity.
B) P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables.
C) C Co's management has done a better job of managing their receivables.
D) C Co appears to be more proﬁtable than P Co.

Accepted Answer

The receivables turnover ratio and days' sales in receivables provide insights into how efficiently a company manages its receivables, not directly about profitability. C Co's higher turnover ratio indicates better receivables management, but it doesn't necessarily mean C Co is more profitable than P Co.

Question 12

Lyceum Co. reported profit of $8.3 million, interest expense of $.5 million and they are in a 30% tax rate bracket. Their average total assets are $65.8 million and average shareholders' equity is $48.6 million. What is Lyceum's financial leverage advantage or disadvantage?
A) 3.7%
B) 3.9%
C) 4.0%
D) 4.7%

Accepted Answer

Calculation: ($8.3/$48.6) - [($8.3 + $.35)/$65.8] = 3.9%.

Question 13

Which of the following statements about ROA is true?
A) ROA reflects the risk inherent in a company.
B) ROA is useful for comparing companies in different industries
C) ROA is the most important ratio for an equity investor
D) ROA is useful for determining how the company financed its assets

Accepted Answer

The answer of Which of the following statements about ROA...

Question 14

A company that is leveraged is one that
A) has high earnings per share.
B) contains debt financing.
C) contains equity financing.
D) has a high current ratio.

Accepted Answer

A leveraged company is one that uses debt financing to fund its operations or expansion, which means it has taken on debt to finance its activities.

Question 15

When a company's ROE is greater than its ROA for a given time-period, it could be that
A) the company could borrow at an after-tax rate that was higher than the rate earned by investing in assets
B) the company could borrow at an after-tax rate that was less than the rate earned by investing in assets.
C) the company has no debt
D) the level of debt has no impact on the ROA

Accepted Answer

When a company's Return on Equity (ROE) is greater than its Return on Assets (ROA), it often indicates that the company is using debt effectively. Specifically, it suggests that the company is able to borrow money at a rate lower than the return it generates from investing those funds in its assets. This leverage effect enhances the ROE compared to the ROA.

Question 16

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?
A) P Co's return on assets (ROA) was less than half of C Co's ROA.
B) P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt ﬁnancing to leverage their assets.
C) C Co provided higher positive ﬁnancial leverage for their shareholders compared to P Co.
D) C Co. is considerably more liquid than P Co.

Accepted Answer

The answer of In 20X2, C Co's return on owners'...

Question 17

Proitt margin is calculated by dividing
A) sales by cost of goods sold.
B) gross profit by net sales.
C) net earnings by shareholders' equity.
D) net earnings by net sales.

Accepted Answer

Profit margin is calculated by dividing net earnings (or net income) by net sales. This ratio shows what percentage of sales has translated into profits.

Question 18

If a ﬁrm is using ﬁnancial leverage successfully what would be the impact of doubling operating earnings?
A) The return on equity will increase, but not double
B) The return on equity will double
C) The return on equity will more than double
D) The return on equity will decline by half

Accepted Answer

When a firm successfully uses financial leverage, doubling operating earnings would more than double the return on equity. This is because financial leverage amplifies the effects of changes in operating earnings on the return on equity, assuming the cost of debt remains constant and is less than the return on investment.

Question 19

In 20X2, C Co's gross proﬁt ratio was 70.4% and their proﬁt margin was 18.8%. In 20X2, P Co's gross proﬁt ratio was 58.3% and their proﬁt margin was 8.9%. Which of the following is false?
A) C Co's cost of goods sold was a lower percentage of sales than P Co's.
B) In 20X2, C Co's proﬁt margin was 111.2% greater than P Co's which would contribute to a higher return on total investment.
C) The major reason for P Co's lower proﬁt margin is that their selling, general and administrative expenses were double the percentage of sales compared to C Co's percentage.
D) C Co looks to be a better investment than P Co.

Accepted Answer

The statement in C is false because it assumes specific percentages of selling, general, and administrative expenses without providing actual data to support that P Co's expenses were double that of C Co's as a percentage of sales. The information given only discusses gross profit ratios and profit margins, not specific expense categories.

Question 20

-Calculate C Co's fixed asset turnover ratio for 20X2.
A) .97
B) 3.79
C) 4.87
D) 4.99

Accepted Answer

Calculation: $19,805 ÷ [($4,267 + $3,669)/2] = 4.99.

Quiz 12: Statement Cash Flows

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?

All of the following ratios are investor measures of proﬁtability except

A company's optimal capital structure occurs when

-Calculate C Co's profit margin ratio for 20X2 and 20X1 respectively.

-Calculate C Co's return on assets (ROA) for 20X2.

-Calculate C Co's return on equity (ROE) for 20X2.

-Calculate C Co's gross profit ratio for 20X2 and 20X1 respectively.

-Calculate C Co's current ratio for 20X2 and 20X1 respectively.

-Calculate C Co's financial leverage and identify whether it was positive or negative.

In 20X2, C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days. In 20X2, P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days. Which of the following statements is false?

Lyceum Co. reported profit of $8.3 million, interest expense of $.5 million and they are in a 30% tax rate bracket. Their average total assets are $65.8 million and average shareholders' equity is $48.6 million. What is Lyceum's financial leverage advantage or disadvantage?

Which of the following statements about ROA is true?

A company that is leveraged is one that

When a company's ROE is greater than its ROA for a given time-period, it could be that

In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false?

Proitt margin is calculated by dividing

If a ﬁrm is using ﬁnancial leverage successfully what would be the impact of doubling operating earnings?

In 20X2, C Co's gross proﬁt ratio was 70.4% and their proﬁt margin was 18.8%. In 20X2, P Co's gross proﬁt ratio was 58.3% and their proﬁt margin was 8.9%. Which of the following is false?

-Calculate C Co's fixed asset turnover ratio for 20X2.