chap 014

Chapter 14 - Financial Statement Analysis

Chapter 14Financial Statement Analysis

Multiple Choice Questions

1. Which of the following assets is most liquid? A. Cash equivalentsB. ReceivablesC. InventoriesD. Plant and equipment

2. Cost of goods sold refers to ___________. A. direct costs attributable to producing the product sold by the firmB. salaries, advertising and selling expensesC. payments to the firm's creditorsD. payments to federal and local governments

3. Many observers believe that firms "manage" their income statements to _______. A. minimize taxes over timeB. maximize expendituresC. smooth their earnings over timeD. generate level sales

4. Depreciation expense is in what broad category of expenditures? A. Cost of goods soldB. General and administrative expensesC. Debt interest expenseD. Tax expenditures

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5. Firm A acquires Firm B when Firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for Firm B. This purchase would result in goodwill for Firm A equal to A. $175 millionB. $155 millionC. $120 millionD. $55 million

6. One of the biggest impediments to a global capital market is _________. A. volatile exchange ratesB. the lack of common accounting standardsC. lower disclosure standards in the U.S. than abroadD. the lack of transparent reporting standards across the EU

7. Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life. A. increased greatlyB. increased slightlyC. remained constantD. decreased

8. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________. A. decreaseB. increaseC. not changeD. change but in an indeterminable manner

9. Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A. Income statementB. Balance sheetC. Statement of operating earningsD. Statement of cash flows

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10. In 2006 Hewlett Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long term debt accounts of Hewlett Packard change? A. Increased $138 millionB. Decreased $138 millionC. Increased $836 millionD. Decreased $836 million

11. What must cash flow from financing have been in 2008 for Interceptors, Inc.? A. $5B. $28C. $30D. $33

12. Based on the cash flow data in the table for Interceptors Inc., which of the following statements is/are correct?I. This firm appears to be a good investment because of its steady growth in cash.II. This firm has only been able to generate growing cash flows by borrowing or selling equity to offset declining operating cash flows.III. Financing activities have been increasingly important for this firm's operations, at least in the short run. A. I onlyB. II and III onlyC. II onlyD. I and II only

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13. Common size balance sheets are prepared by dividing all quantities by ____________. A. total assetsB. total liabilitiesC. shareholder's equityD. fixed assets

14. Operating ROA is calculated as __________ while ROE is calculated as _________. A. EBIT/Total Assets; Net Profit/Total AssetsB. Net Profit/Total Assets; EBIT/Total AssetsC. EBIT/Total Assets; Net Profit/EquityD. Net Profit/EBIT; Sales/Total Assets

15. A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal this change will probably increase the firm's _______.I. betaII. earnings variability over the business cycleIII. ROEIV. stock price A. I and II onlyB. III and IV onlyC. I, III and IV onlyD. I, II and III only

16. The highest possible value for the interest burden ratio is ______ and this occurs when the firm _________. A. 0; uses as much debt as possibleB. 1; uses debt to the point where ROA = interest cost of debtC. 1; uses no interest bearing debtD. -1; pays down its existing debts

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17. Which one of the following ratios is used to calculate the times interest earned ratio? A. Net profit/Interest expenseB. Pretax profit/EBITC. EBIT/SalesD. EBIT/Interest expense

18. The process of decomposing ROE into a series of component ratios is called ______________. A. DuPont analysisB. technical analysisC. comparative analysisD. liquidity analysis

19. Which of the following is not a ratio used in the DuPont analysis? A. Interest burdenB. Profit marginC. Asset turnoverD. Earnings yield ratio

20. By 2008, over 100 countries have adopted financial reporting standards which are in conformance with ________. A. GAAPB. IFRSC. FASBD. GASB

21. Operating ROA can be found as the product of ______. A. return on sales x ATOB. tax burden x Interest burdenC. interest burden x Leverage ratioD. ROE x Dividend payout ratio

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22. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________. A. 8.40B. 11.90C. 17.62D. 47.60

23. If a firm has a positive tax rate, a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________. A. greater than zero but it is impossible to determine how operating ROA will compare to ROEB. equal to ROEC. greater than ROED. less than ROE

24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________. A. the firm's use of financial leverage is positively contributing to ROEB. the firm's use of financial leverage is negatively contributing to ROEC. the firm's use of operating leverage is positively contributing to ROED. the firm's use of operating leverage is negatively contributing to ROE

25. A firm has a P/E ratio of 24 and a ROE of 12%. Its market-to-book-value ratio is _________. A. 2.88B. 2.00C. 1.75D. 0.69

26. A firm has an ROA of 8%, a debt/equity ratio of 0.5, its ROE is _________. A. 4%B. 6%C. 8%D. 12%

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27. A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return on sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE? A. 12.4%B. 14.5%C. 16.6%D. 17.8%

28. Economic Value Added (EVA) is: A. The difference between the return on assets and the opportunity cost of capital times the capital baseB. ROA x ROEC. A measure of the firm's abnormal returnD. Largest for high growth firms

29. Which of the following statements is true concerning Economic Value Added? A. A growing number of firms tie managers' compensation to EVA.B. A profitable firm will always have a positive EVA.C. EVA recognizes that the cost of capital is not a real cost.D. If a firm has positive present value of growth opportunities it will have positive EVA.

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The financial statements of Flathead Lake Manufacturing Company are given below:

Note: The common shares are trading in the stock market for $15 per share

30. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2007 indicates that Flathead's liquidity has ________ since 2006. A. risenB. fallenC. stayed the sameD. can't tell from the information given

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31. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 11.6B. 10.2C. 9.5D. 7.7

32. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debt to equity ratio for 2007 is _________. A. 2.13B. 2.44C. 2.56D. 2.89

33. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash flow from operating activities for 2007 was _______. A. $810,000B. $775,000C. $755,000D. $735,000

34. Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A. Flathead's receivables are outstanding about 9 fewer days than the industry average.B. Flathead's receivables are outstanding about 15 fewer days than the industry average.C. Flathead's receivables are outstanding about 12 more days than the industry average.D. Flathead's receivables are outstanding about 6 more days than the industry average.

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35. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's ATO for 2007 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 3.56B. 3.26C. 3.14D. 3.02

36. Refer to the financial statements of Flathead Lake Manufacturing Company. In 2007 Flathead generated ______ of EBIT for every dollar of sales. A. $0.075B. $0.086C. $0.092D. $0.099

37. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2005 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 6.5%B. 26.5%C. 33.4%D. 38.0%

38. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E ratio for 2007 is _________. A. 3.39B. 3.60C. 13.33D. 10.67

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39. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 1.5B. 2.0C. 2.5D. 3.0

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The financial statements of Burnaby Mountain Trading Company are given below.

Note: The common shares are trading in the stock market for $27 each.

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40. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

41. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

42. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

43. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's times interest earned ratio for 2008 is _________. A. 2.80B. 6.00C. 9.00D. 11.11

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44. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed asset turnover ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 2.80B. 6.00C. 9.00D. 11.11

45. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 1.30B. 1.50C. 1.69D. 2.83

46. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return on sales ratio for 2008 is _________. A. 0.0409B. 0.0429C. 0.0475D. 0.0753

47. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return on equity ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 0.0409B. 0.0429C. 0.0462D. 0.0923

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48. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's P/E ratio for 2008 is _________. A. 2.80B. 3.60C. 6.00D. 11.11

49. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's market-to-book-value for 2008 is _________. A. 0.1708B. 0.1529C. 0.1462D. 0.1636

50. A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 1.5, a (pretax profit/EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return on sales ratio of 6%. Its ROE is _________. A. 7.56%B. 15.12%C. 20.16%D. 30.24%

51. A firm has an ROA of 19%, a debt/equity ratio of 1.8, a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________. A. 15.12%B. 28.42%C. 37.24%D. 40.60%

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52. The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income. A. understate; overstateB. understate; understateC. overstate; understateD. overstate; overstate

53. If a firm's ratio of (stockholders' equity/total assets) is lower than the industry average and its ratio of (long-term debt/stockholders' equity) is also lower than the industry average, this would suggest that the firm _________. A. has more current liabilities than the industry averageB. has more leased assets than the industry averageC. will be less profitable than the industry averageD. has more current assets than the industry average

54. A firm has lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has _____________.I. lower ATO than the industry averageII. lower ROA than the industry averageIII. lower ROE than the industry average A. I onlyB. I and II onlyC. II and III onlyD. I, II and III

55. A high price to book ratio may indicate which one of the following? A. The firm expanded its plant and equipment in the past few years.B. The firm is doing a better job controlling its inventory expense than other related firms.C. Investors may believe that this firm has opportunities of earnings a rate of return excess of the market capitalization rate.D. The firm's P/E ratio is too high.

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56. A firm has a ROE equal to the industry average but its price to book ratio is below the industry average. You know that the firm's _________. A. earnings yield is above the industry averageB. P/E ratio is above the industry averageC. dividend payout ratio is too highD. interest burden must be below the industry average

Use the following cash flow data of Haven Hardware for the year ended December 31, 2008.

57. What is the net cash provided by operating activities of Haven Hardware? A. ($30,000)B. $220,000C. $320,000D. $780,000

58. What is the net cash provided by or used in investing activities of Haven Hardware? A. ($12,000)B. ($62,000)C. $12,000D. $164,000

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59. What is the net cash provided by or used in financing activities of Haven Hardware? A. ($10,000)B. ($120,000)C. $10,000D. $120,000

60. What is the net increase or decrease in cash for Haven Hardware for 2008? A. ($94,000)B. ($88,000)C. $88,000D. $188,000

61. What is the cash at the end of 2008 for Haven Hardware? A. $6,000B. $94,000C. $736,000D. $188,000

62. All of the following ratios are related to efficiency except for _______. A. total asset turnoverB. fixed asset turnoverC. average collection periodD. cash ratio

63. Which of the following would result in a cash inflow under the heading cash flow from investing in the statement of cash flows? A. Purchase of capital equipmentB. Payments to suppliers for inventoryC. Collections on receivablesD. Sale of production machinery

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64. When assessing sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources? A. Cash flow from investment activitiesB. Cash flow from operating activitiesC. Cash flow from financingD. Cash flow from extraordinary events

65. The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9% and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS? A. $8 millionB. -$6 millionC. $3 millionD. -$4 million

66. Another term for EVA is ______. A. net incomeB. operating incomeC. residual incomeD. market based income

67. Which of the following transactions will result in a decrease in cash flow from operations? A. Increase in accounts receivableB. Decrease in inventoriesC. Decrease in taxes payableD. Decrease in bonds outstanding

68. Which of the following transactions will result in a decrease in cash flow from investments? A. Acquisition of another businessB. Capital gain from sale of a subsidiaryC. Decrease in net investmentsD. Sale of equipment

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69. Which of the following results in an increase in cash to the firm? A. Dividends paidB. A delay in collecting on accounts receivableC. Net new investmentsD. Increase in accounts payable

70. Look at the following table of data for Key Biscuit Company:

What must have caused the firm's ROE to drop? A. Because the firm began using more debt as a percentage of financingB. Because the firm began using less debt as a percentage of financingC. Because the compound leverage ratio was less than 1D. Because the operating ROA was declining

71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A. $50 increaseB. $100 increaseC. $150 increaseD. $250 increase

72. A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing? A. $20 increaseB. $80 increaseC. $100 increaseD. $200 increase

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73. A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments? A. $10 decreaseB. $90 decreaseC. $180 decreaseD. $190 decrease

74. The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities? A. Increase of $225B. Increase of $130C. Decrease of $195D. Decrease of $110

75. The term quality of earnings refers to ________. A. how well reported earnings conform to GAAPB. the realism and sustainability of reported earningsC. whether actual earnings matched expected earningsD. how well reported earnings fit a trend line of earnings growth

76. The practice of ‘selling' large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________. A. channel stuffingB. clogging the networkC. spamming the johnsD. artificial sales

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77. What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A. Asset turnoverB. Current ratioC. Liquidity ratioD. Quick ratio

78. The firms leverage ratio is 1.2, interest burden ratio is .81, profit margin is .25, and its asset turnover is 1.10. What is the firm's compound leverage factor? A. .243B. .267C. .826D. .972

79. The tax burden of the firm is .4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm? A. 1.58%B. 5.68%C. 12.20%D. 13.33%

80. The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm? A. 1.88%B. 6.68%C. 12.15%D. 17.02%

81. The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________. A. strictly enforced; weakly enforcedB. rules based; principles basedC. evolutionary; devolutionaryD. based on government standards; based on corporate practice

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82. Quick ratio is a measure of firm's __________. A. asset turnoverB. market valuationC. liquidityD. interest burden

83. The firms leverage ratio is 1.2, interest burden ratio is .81, profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA? A. .250B. .300C. .335D. .372

84. A firm has a compound leverage factor greater than 1 indicates that ______. A. this firm has no interest paymentsB. this firm uses less debt as a percentage of financingC. its interest payments are equal to the firm's pretax profitsD. its debt has a positive contribution to the firm's ROA

Chapter 14 Financial Statement Analysis Answer Key

Multiple Choice Questions

1. Which of the following assets is most liquid? A. Cash equivalentsB. ReceivablesC. InventoriesD. Plant and equipment

Difficulty: Easy

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2. Cost of goods sold refers to ___________. A. direct costs attributable to producing the product sold by the firmB. salaries, advertising and selling expensesC. payments to the firm's creditorsD. payments to federal and local governments

Difficulty: Easy

3. Many observers believe that firms "manage" their income statements to _______. A. minimize taxes over timeB. maximize expendituresC. smooth their earnings over timeD. generate level sales

Difficulty: Medium

4. Depreciation expense is in what broad category of expenditures? A. Cost of goods soldB. General and administrative expensesC. Debt interest expenseD. Tax expenditures

Difficulty: Easy

5. Firm A acquires Firm B when Firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for Firm B. This purchase would result in goodwill for Firm A equal to A. $175 millionB. $155 millionC. $120 millionD. $55 million

Book Value of B = $155 - $35 = $120; Firm A pays $175, goodwill = $175 - $120 = $55

Difficulty: Medium

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6. One of the biggest impediments to a global capital market is _________. A. volatile exchange ratesB. the lack of common accounting standardsC. lower disclosure standards in the U.S. than abroadD. the lack of transparent reporting standards across the EU

Difficulty: Medium

7. Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life. A. increased greatlyB. increased slightlyC. remained constantD. decreased

Difficulty: Medium

8. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________. A. decreaseB. increaseC. not changeD. change but in an indeterminable manner

Difficulty: Easy

9. Which of the following is not one of the three key financial statements available to investors in publicly traded firms? A. Income statementB. Balance sheetC. Statement of operating earningsD. Statement of cash flows

Difficulty: Easy

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10. In 2006 Hewlett Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long term debt accounts of Hewlett Packard change? A. Increased $138 millionB. Decreased $138 millionC. Increased $836 millionD. Decreased $836 million

HWP cash flow from financing: -$5,241 - $894 + $196 + x = -$6,077; x = -$138

Difficulty: Medium

11. What must cash flow from financing have been in 2008 for Interceptors, Inc.? A. $5B. $28C. $30D. $33

Cash flow from financing = $50 - $45 - $117 + $145 = $33

Difficulty: Medium

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12. Based on the cash flow data in the table for Interceptors Inc., which of the following statements is/are correct?I. This firm appears to be a good investment because of its steady growth in cash.II. This firm has only been able to generate growing cash flows by borrowing or selling equity to offset declining operating cash flows.III. Financing activities have been increasingly important for this firm's operations, at least in the short run. A. I onlyB. II and III onlyC. II onlyD. I and II only

Difficulty: Medium

13. Common size balance sheets are prepared by dividing all quantities by ____________. A. total assetsB. total liabilitiesC. shareholder's equityD. fixed assets

Difficulty: Easy

14. Operating ROA is calculated as __________ while ROE is calculated as _________. A. EBIT/Total Assets; Net Profit/Total AssetsB. Net Profit/Total Assets; EBIT/Total AssetsC. EBIT/Total Assets; Net Profit/EquityD. Net Profit/EBIT; Sales/Total Assets

Difficulty: Easy

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15. A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal this change will probably increase the firm's _______.I. betaII. earnings variability over the business cycleIII. ROEIV. stock price A. I and II onlyB. III and IV onlyC. I, III and IV onlyD. I, II and III only

Difficulty: Hard

16. The highest possible value for the interest burden ratio is ______ and this occurs when the firm _________. A. 0; uses as much debt as possibleB. 1; uses debt to the point where ROA = interest cost of debtC. 1; uses no interest bearing debtD. -1; pays down its existing debts

Difficulty: Medium

17. Which one of the following ratios is used to calculate the times interest earned ratio? A. Net profit/Interest expenseB. Pretax profit/EBITC. EBIT/SalesD. EBIT/Interest expense

Difficulty: Easy

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18. The process of decomposing ROE into a series of component ratios is called ______________. A. DuPont analysisB. technical analysisC. comparative analysisD. liquidity analysis

Difficulty: Easy

19. Which of the following is not a ratio used in the DuPont analysis? A. Interest burdenB. Profit marginC. Asset turnoverD. Earnings yield ratio

Difficulty: Easy

20. By 2008, over 100 countries have adopted financial reporting standards which are in conformance with ________. A. GAAPB. IFRSC. FASBD. GASB

Difficulty: Easy

21. Operating ROA can be found as the product of ______. A. return on sales x ATOB. tax burden x Interest burdenC. interest burden x Leverage ratioD. ROE x Dividend payout ratio

Difficulty: Easy

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22. A firm has a ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________. A. 8.40B. 11.90C. 17.62D. 47.60

Difficulty: Medium

23. If a firm has a positive tax rate, a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________. A. greater than zero but it is impossible to determine how operating ROA will compare to ROEB. equal to ROEC. greater than ROED. less than ROE

Difficulty: Hard

24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________. A. the firm's use of financial leverage is positively contributing to ROEB. the firm's use of financial leverage is negatively contributing to ROEC. the firm's use of operating leverage is positively contributing to ROED. the firm's use of operating leverage is negatively contributing to ROE

Difficulty: Medium

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25. A firm has a P/E ratio of 24 and a ROE of 12%. Its market-to-book-value ratio is _________. A. 2.88B. 2.00C. 1.75D. 0.69

Difficulty: Medium

26. A firm has an ROA of 8%, a debt/equity ratio of 0.5, its ROE is _________. A. 4%B. 6%C. 8%D. 12%

ROE = ROA x Leverage = 0.08(1.5) = 0.12

Difficulty: Medium

27. A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return on sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE? A. 12.4%B. 14.5%C. 16.6%D. 17.8%

ROE = (0.7)(1.3)(0.8)(0.10)(2.28) = 16.6%

Difficulty: Medium

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28. Economic Value Added (EVA) is: A. The difference between the return on assets and the opportunity cost of capital times the capital baseB. ROA x ROEC. A measure of the firm's abnormal returnD. Largest for high growth firms

Difficulty: Easy

29. Which of the following statements is true concerning Economic Value Added? A. A growing number of firms tie managers' compensation to EVA.B. A profitable firm will always have a positive EVA.C. EVA recognizes that the cost of capital is not a real cost.D. If a firm has positive present value of growth opportunities it will have positive EVA.

Difficulty: Medium

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The financial statements of Flathead Lake Manufacturing Company are given below:

Note: The common shares are trading in the stock market for $15 per share

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30. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2007 indicates that Flathead's liquidity has ________ since 2006. A. risenB. fallenC. stayed the sameD. can't tell from the information given

Difficulty: Medium

31. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 11.6B. 10.2C. 9.5D. 7.7

Difficulty: Medium

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32. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debt to equity ratio for 2007 is _________. A. 2.13B. 2.44C. 2.56D. 2.89

Difficulty: Medium

33. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash flow from operating activities for 2007 was _______. A. $810,000B. $775,000C. $755,000D. $735,000

Cash flow from operations = $225,000 + $550,000 + $30,000 + $20,000 - $70,000 = $755,000 = Net Income + Depreciation + Drop in A/R + Increase in A/P - Increase in Inventory

Difficulty: Hard

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34. Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.) A. Flathead's receivables are outstanding about 9 fewer days than the industry average.B. Flathead's receivables are outstanding about 15 fewer days than the industry average.C. Flathead's receivables are outstanding about 12 more days than the industry average.D. Flathead's receivables are outstanding about 6 more days than the industry average.

Difficulty: Medium

35. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's ATO for 2007 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 3.56B. 3.26C. 3.14D. 3.02

Difficulty: Medium

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36. Refer to the financial statements of Flathead Lake Manufacturing Company. In 2007 Flathead generated ______ of EBIT for every dollar of sales. A. $0.075B. $0.086C. $0.092D. $0.099

Difficulty: Medium

37. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2005 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 6.5%B. 26.5%C. 33.4%D. 38.0%

Difficulty: Medium

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38. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E ratio for 2007 is _________. A. 3.39B. 3.60C. 13.33D. 10.67

Difficulty: Medium

39. Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 1.5B. 2.0C. 2.5D. 3.0

Compound leverage ratio = (interest burden)(average leverage ratio)

Difficulty: Hard

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The financial statements of Burnaby Mountain Trading Company are given below.

Note: The common shares are trading in the stock market for $27 each.

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40. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

Difficulty: Medium

41. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

Difficulty: Medium

42. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage ratio for 2008 is _________. A. 1.30B. 1.50C. 1.69D. 2.83

Difficulty: Medium

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43. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's times interest earned ratio for 2008 is _________. A. 2.80B. 6.00C. 9.00D. 11.11

Difficulty: Medium

44. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed asset turnover ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 2.80B. 6.00C. 9.00D. 11.11

Difficulty: Medium

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45. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 1.30B. 1.50C. 1.69D. 2.83

Difficulty: Medium

46. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return on sales ratio for 2008 is _________. A. 0.0409B. 0.0429C. 0.0475D. 0.0753

Difficulty: Medium

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47. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return on equity ratio for 2008 is _________. Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged. A. 0.0409B. 0.0429C. 0.0462D. 0.0923

Difficulty: Medium

48. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's P/E ratio for 2008 is _________. A. 2.80B. 3.60C. 6.00D. 11.11

Difficulty: Medium

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49. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's market-to-book-value for 2008 is _________. A. 0.1708B. 0.1529C. 0.1462D. 0.1636

Difficulty: Medium

50. A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 1.5, a (pretax profit/EBIT) of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return on sales ratio of 6%. Its ROE is _________. A. 7.56%B. 15.12%C. 20.16%D. 30.24%

Difficulty: Hard

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51. A firm has an ROA of 19%, a debt/equity ratio of 1.8, a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________. A. 15.12%B. 28.42%C. 37.24%D. 40.60%

Difficulty: Hard

52. The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income. A. understate; overstateB. understate; understateC. overstate; understateD. overstate; overstate

Difficulty: Medium

53. If a firm's ratio of (stockholders' equity/total assets) is lower than the industry average and its ratio of (long-term debt/stockholders' equity) is also lower than the industry average, this would suggest that the firm _________. A. has more current liabilities than the industry averageB. has more leased assets than the industry averageC. will be less profitable than the industry averageD. has more current assets than the industry average

Difficulty: Medium

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54. A firm has lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has _____________.I. lower ATO than the industry averageII. lower ROA than the industry averageIII. lower ROE than the industry average A. I onlyB. I and II onlyC. II and III onlyD. I, II and III

Difficulty: Medium

55. A high price to book ratio may indicate which one of the following? A. The firm expanded its plant and equipment in the past few years.B. The firm is doing a better job controlling its inventory expense than other related firms.C. Investors may believe that this firm has opportunities of earnings a rate of return excess of the market capitalization rate.D. The firm's P/E ratio is too high.

Difficulty: Medium

56. A firm has a ROE equal to the industry average but its price to book ratio is below the industry average. You know that the firm's _________. A. earnings yield is above the industry averageB. P/E ratio is above the industry averageC. dividend payout ratio is too highD. interest burden must be below the industry average

Difficulty: Medium

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Use the following cash flow data of Haven Hardware for the year ended December 31, 2008.

57. What is the net cash provided by operating activities of Haven Hardware? A. ($30,000)B. $220,000C. $320,000D. $780,000

Difficulty: Medium

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58. What is the net cash provided by or used in investing activities of Haven Hardware? A. ($12,000)B. ($62,000)C. $12,000D. $164,000

Difficulty: Medium

59. What is the net cash provided by or used in financing activities of Haven Hardware? A. ($10,000)B. ($120,000)C. $10,000D. $120,000

Difficulty: Medium

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60. What is the net increase or decrease in cash for Haven Hardware for 2008? A. ($94,000)B. ($88,000)C. $88,000D. $188,000

Net change in cash = $220,000 + $(12,000) +$(120,000) = $88,000

Difficulty: Medium

61. What is the cash at the end of 2008 for Haven Hardware? A. $6,000B. $94,000C. $736,000D. $188,000

Cash at the end of year = $100,000 + $88,000 = $188,000

Difficulty: Medium

62. All of the following ratios are related to efficiency except for _______. A. total asset turnoverB. fixed asset turnoverC. average collection periodD. cash ratio

Difficulty: Easy

63. Which of the following would result in a cash inflow under the heading cash flow from investing in the statement of cash flows? A. Purchase of capital equipmentB. Payments to suppliers for inventoryC. Collections on receivablesD. Sale of production machinery

Difficulty: Easy

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64. When assessing sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources? A. Cash flow from investment activitiesB. Cash flow from operating activitiesC. Cash flow from financingD. Cash flow from extraordinary events

Difficulty: Easy

65. The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9% and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS? A. $8 millionB. -$6 millionC. $3 millionD. -$4 million

EVA = (ROA - k) (capital) = (0.09 - .15) $100 million = -$6 million

Difficulty: Easy

66. Another term for EVA is ______. A. net incomeB. operating incomeC. residual incomeD. market based income

Difficulty: Easy

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67. Which of the following transactions will result in a decrease in cash flow from operations? A. Increase in accounts receivableB. Decrease in inventoriesC. Decrease in taxes payableD. Decrease in bonds outstanding

Difficulty: Medium

68. Which of the following transactions will result in a decrease in cash flow from investments? A. Acquisition of another businessB. Capital gain from sale of a subsidiaryC. Decrease in net investmentsD. Sale of equipment

Difficulty: Easy

69. Which of the following results in an increase in cash to the firm? A. Dividends paidB. A delay in collecting on accounts receivableC. Net new investmentsD. Increase in accounts payable

Difficulty: Easy

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70. Look at the following table of data for Key Biscuit Company:

What must have caused the firm's ROE to drop? A. Because the firm began using more debt as a percentage of financingB. Because the firm began using less debt as a percentage of financingC. Because the compound leverage ratio was less than 1D. Because the operating ROA was declining

Compound leverage ratio = (interest burden)(leverage ratio) < 1 each year and falling

Difficulty: Medium

71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A. $50 increaseB. $100 increaseC. $150 increaseD. $250 increase

Cash from operations = 150 - 100 = 50 increase

Difficulty: Medium

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72. A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing? A. $20 increaseB. $80 increaseC. $100 increaseD. $200 increase

Cash from financing = cash raised by equity financing = $200

Difficulty: Medium

73. A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments? A. $10 decreaseB. $90 decreaseC. $180 decreaseD. $190 decrease

Cash flow from investments = cash spent on investment = $(180)

Difficulty: Medium

74. The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities? A. Increase of $225B. Increase of $130C. Decrease of $195D. Decrease of $110

Free cash flow = 120 + 15 + 20 - 40 + 110 = 225

Difficulty: Medium

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75. The term quality of earnings refers to ________. A. how well reported earnings conform to GAAPB. the realism and sustainability of reported earningsC. whether actual earnings matched expected earningsD. how well reported earnings fit a trend line of earnings growth

Difficulty: Medium

76. The practice of ‘selling' large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________. A. channel stuffingB. clogging the networkC. spamming the johnsD. artificial sales

Difficulty: Easy

77. What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A. Asset turnoverB. Current ratioC. Liquidity ratioD. Quick ratio

Difficulty: Easy

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78. The firms leverage ratio is 1.2, interest burden ratio is .81, profit margin is .25, and its asset turnover is 1.10. What is the firm's compound leverage factor? A. .243B. .267C. .826D. .972

Compound leverage factor = 1.20 x .81 = .972

Difficulty: Medium

79. The tax burden of the firm is .4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm? A. 1.58%B. 5.68%C. 12.20%D. 13.33%

ROE = .4 x .65 x .05 x .90 x 1.35 = .0158

Difficulty: Medium

80. The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm? A. 1.88%B. 6.68%C. 12.15%D. 17.02%

ROE = .5 x .55 x .25 x 1.5 x 1.65 = 0.1702

Difficulty: Medium

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81. The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________. A. strictly enforced; weakly enforcedB. rules based; principles basedC. evolutionary; devolutionaryD. based on government standards; based on corporate practice

Difficulty: Medium

82. Quick ratio is a measure of firm's __________. A. asset turnoverB. market valuationC. liquidityD. interest burden

Difficulty: Easy

83. The firms leverage ratio is 1.2, interest burden ratio is .81, profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA? A. .250B. .300C. .335D. .372

ROA = Margin x Asset turnover = 0.24 x 1.25 = 0.3

Difficulty: Medium

84. A firm has a compound leverage factor greater than 1 indicates that ______. A. this firm has no interest paymentsB. this firm uses less debt as a percentage of financingC. its interest payments are equal to the firm's pretax profitsD. its debt has a positive contribution to the firm's ROA

Difficulty: Medium

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chap 014

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