Question 1

Which of the following is NOT a method of "benchmarking"?
A) Conducting an industry group analysis.
B) Utilizing the DuPont system to analyze a firm's performance.
C) Evaluating a single firm's performance over time.
D) Identifying a group of firms that compete with the company being analyzed.

Accepted Answer

Utilizing the DuPont system is a method of financial analysis and performance evaluation, but it is not specifically a method of benchmarking. Benchmarking involves comparing a company's performance to other competitors or industry standards. Options A, C, and D all involve comparing a company's performance to external data points, which is a key aspect of benchmarking.

Question 2

Which of the following is true of a firm that has both debt and equity?
A) Its return on equity (ROE) will be greater than its return on asset (ROA).
B) Its return on equity (ROE) will be lesser than its return on asset (ROA).
C) Its return on equity (ROE) will be equal to its return on asset (ROA).
D) None of the above.

Accepted Answer

A firm that has both debt and equity will have a higher return on equity (ROE) than return on assets (ROA) because the use of debt amplifies equity returns. However, this is assuming the firm's operations generate a positive return. If the firm's return on assets is negative, then the use of debt would magnify the losses and decrease ROE.

Question 3

What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.
A) 1.82
B) 1.28
C) 2.22
D) None of the above

Accepted Answer

The equity multiplier is calculated as 1 / (1 - debt ratio). Given a debt ratio of 0.45, the equity multiplier is 1 / (1 - 0.45) = 1.82.

Question 4

There are people who believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?
A) Ratio analysis requires the analyst to evaluate a firm's performance over a period of time to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

Accepted Answer

Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values. This is a limitation because historical cost accounting can distort the true economic value of a firm's assets and liabilities.

Question 5

Which one of the following is a criticism of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth?
A) ROE is based on after-tax earnings, not cash flows.
B) ROE does not consider risk.
C) ROE ignores the size of the initial investment as well as future cash flows.
D) All of the above are criticisms of ROE as a goal.

Accepted Answer

All of the given options are valid criticisms of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth. ROE only considers after-tax earnings, not cash flows, and it does not factor in the risks associated with an investment. Additionally, ROE fails to take into account the size of a firm's initial investment and the potential for future cash flows. Therefore, all three options are valid criticisms of ROE as a goal.

Question 6

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:
A) net profit margin, total asset turnover, and the equity multiplier.
B) operating profit margin, return on assets (ROA), and the total assets turnover.
C) net profit margin, total asset turnover, the return on assets (ROA).
D) return on assets (ROA), total assets turnover, and the equity multiplier.

Accepted Answer

The DuPont equation states that ROE is equal to net profit margin (net income divided by sales), multiplied by total asset turnover (sales divided by total assets), multiplied by the equity multiplier (total assets divided by equity). Therefore, the correct answer is A, which includes all three factors in the correct order. B and C include some of the correct factors, but they are not in the correct order, and D is missing one of the factors.

Question 7

Which one of the following statements about trend analysis is NOT correct?
A) The benchmark for trend analysis is based on a firm's historical performance.
B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.
C) It uses the Standard Industrial Classification (SIC) System to benchmark firms.
D) A ratio value that is changing typically prompts the financial manager to sort out the issues surrounding the change.

Accepted Answer

Trend analysis does not use the Standard Industrial Classification (SIC) System to benchmark firms. Instead, it uses the firm's historical performance as a benchmark.

Question 8

In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.)
A) 13.1%
B) 14.6%
C) 22.5%
D) 18.7%

Accepted Answer

The answer of In the latest year, Photon, Inc. reported...

Question 9

Which one of the following statements is NOT correct?
A) The DuPont system is based on two equations that relate a firm's return on asset (ROA) and return on equity (ROE).
B) The DuPont system is a set of related ratios that links the items of balance sheet and the income statement.
C) Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (ROE).
D) All of the above are correct.

Accepted Answer

All of the statements are correct. The DuPont system is indeed based on two equations that relate a firm's return on asset (ROA) and return on equity (ROE) and is also a set of related ratios that links the items of balance sheet and income statement. Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (ROE).

Question 10

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.
A) 4.87 times
B) 8.12 times
C) 5.17 times
D) None of the above

Accepted Answer

First, we need to calculate the earnings per share (EPS):
EPS = Net Income / Number of Shares Outstanding 
EPS = $812,425 / 312,490 = $2.60

Then, we can calculate the price-earnings ratio (P/E ratio):
P/E Ratio = Share Price / EPS 
P/E Ratio = $13.45 / $2.60 = 5.17 times

Therefore, the best choice is C, with a P/E ratio of 5.17 times.

Question 11

Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?
A) ROE is highly correlated with shareholder wealth maximization.
B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses.
C) ROE does not consider risk.
D) All of the above are advantages of using ROE as a goal.

Accepted Answer

Although ROE is a useful metric, it does not consider the risk associated with achieving that return. Therefore, it is important to use other measures like return on assets (ROA) or the capital asset pricing model (CAPM) to assess the risk profile of investments before making decisions solely based on ROE.

Question 12

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?
A) The quick ratio more accurately reflects a firm's profitability.
B) It omits the least liquid current asset from the numerator of the ratio.
C) The current ratio does not include accounts receivable.
D) It measures how "quickly" cash flows through the firm.

Accepted Answer

The quick ratio is considered a better measure of liquidity than the current ratio because it excludes the least liquid current asset, which is inventory. This is important because inventory can take longer to convert to cash than other current assets. Therefore, the quick ratio provides a more conservative measure of a company's ability to meet its short-term obligations.

Question 13

Which of the following is true of a firm that has no debt in its capital structure?
A) Its return on equity (ROE) will be greater than its return on asset (ROA).
B) Its return on equity (ROE) will be lesser than its return on asset (ROA).
C) Its return on equity (ROE) will be equal to its return on asset (ROA).
D) None of the above.

Accepted Answer

When a firm has no debt in its capital structure, its return on equity (ROE) will be equal to its return on assets (ROA). This is because ROE is calculated by dividing net income by shareholder's equity, while ROA is calculated by dividing net income by total assets. Since there is no debt in the capital structure, total assets and shareholder's equity will be the same, and therefore both measures of profitability will be equal.

Question 14

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.
A) 7.1%
B) 34.7%
C) 28.1%
D) 43.2%

Accepted Answer

The answer of Andrade Corp has debt of $2,834,950, total...

Question 15

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.
A) $34.05
B) $3.68
C) $11.20
D) $36.80

Accepted Answer

The answer of Perez Electronics Corp. has reported that its...

Question 16

Peer group analysis can be performed by:
A) management choosing a set of firms that are similar in size or sales, or who compete in the same market.
B) using the average ratios of this peer group, which would then be used as the benchmark.
C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios.
D) Only a and b relate to peer group analysis.

Accepted Answer

Peer group analysis can be performed by management choosing a set of firms that are similar in size or sales, or who compete in the same market. Then, the average ratios of this peer group can be used as the benchmark. Therefore, choices A and B are both correct. Choice C is not entirely accurate as peer group analysis can involve firms in different industries if they are similar in size, sales, or competition. However, since choice D includes both correct options, it is the best answer.

Question 17

Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places.
A) 2.31; 1.31
B) 1.75; 0.75
C) 0.75; 1.75
D) 1.31; 2.31

Accepted Answer

Equity multiplier = Total assets/Total equity = Total assets/Total assets - Total debt = $2,178,990/($2,178,990 - $1,233,837) = 2.31
Debt-to-equity ratio = Total debt/Total equity = $1,233,837/($2,178,990 - $1,233,837) = 1.31. Therefore, the correct answer is A.

Question 18

Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. Round your percentage answer to two decimal places.
A) 6.23%
B) 4.53%
C) 7.48%
D) 5.79%

Accepted Answer

The answer of Sorenstam Corp. has an equity multiplier of...

Question 19

Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? Round your final answer to two decimal places.
A) $75,281.80
B) $514,250.00
C) $51,425.00
D) $7,528.10

Accepted Answer

The answer of Saunders, Inc., has a ROE of 18.7...

Question 20

Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA)? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.
A) 25.6%
B) 18%
C) 27.4%
D) None of the above

Accepted Answer

The answer of Juventus Corp has total assets of $4,744,288,...

Quiz 4: Analyzing Financial Statements

Which of the following is NOT a method of "benchmarking"?

Which of the following is true of a firm that has both debt and equity?

What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.

There are people who believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis?

Which one of the following is a criticism of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth?

The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors:

Which one of the following statements about trend analysis is NOT correct?

In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.)

Which one of the following statements is NOT correct?

RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.

Which one of the following is NOT an advantage of using return on equity (ROE) as a goal?

Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio?

Which of the following is true of a firm that has no debt in its capital structure?

Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.

Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price? Round your intermediate and final answer to two decimal places.

Peer group analysis can be performed by:

Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places.

Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. Round your percentage answer to two decimal places.

Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? Round your final answer to two decimal places.

Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA) ? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.