FINN 3013 Test #3
Q2 Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #3 - Each line item is expressed as a percentage of the prior year's amount. Vertical analysis Horizontal analysis
C) Statement #2 Statement #1
Q18: An analyst who is interested in a company's long-term solvency would most likely examine the:
C) fixed charge coverage ratio.
Q11 Which of the following is least likely a routinely used operating profitability ratio?
Sales/ Total Assets B was correct! Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability.
Q5 What is the average receivables collection period?
The correct answer was A) 76.7 days. Average collection period = 365 / receivables turnover Receivables turnover = sales / average receivables = 3,000 / 630 = 4.76 Average receivables collection period = 365 / 4.76 = 76.65
Q6 A firm's financial statements reflect the following: Which of the following is the closest estimate of the firm's sustainable growth rate?
The correct answer was A) 9%. Return on equity (ROE) = net profit margin × asset turnover × leverage = (0.15)(0.67)(1.364) = 0.137. The sustainable growth = (1 - dividend rate)(ROE) = (0.65)(0.137) = 8.9%.
Q10 Which ratio is used to measure a company's internal liquidity?
The correct answer was A) Current ratio. Total asset turnover measures operating efficiency and interest coverage measures a company's financial risk.
Q12 How would the collection of accounts receivable most likely affect the current and cash ratios? Current Ratio Cash Ratio
The correct answer was A) No effect Increase Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts receivable increases the cash ratio.
Q7 A firm's financial statements reflect the following: What are the firm's current ratio, quick ratio, and cash ratio? Current Ratio Quick Ratio Cash Ratio
The correct answer was C) 1.1 0.8 0.6 Current ratio = (0.4 + 2.0 + 0.8 + 1.2) / 4.0 = 1.1. Quick ratio = (0.4 + 2.0 + 0.8) / 4.0 = 0.8. Cash ratio = (0.4 + 2.0) / 4.0 = 0.6.
Q23: A company's quick ratio is 1.2. If inventory were purchased for cash, the:
A ) numerator would decrease more than the denominator, resulting in a lower quick ratio.
Q25: RGB, Inc.'s receivable turnover is ten times, the inventory turnover is five times, and the payables turnover is nine times. RGB's cash conversion cycle is closest to:
A) 69 Days (365/10 + 365/5 - 365/9)= 69 Days
Q14 Which of the following is least likely a limitation of financial ratios?
A) Data on comparable firms are difficult to acquire.
Q1 Common size income statements express all income statement items as a percentage of:
A) Sales
Q16 A company's quick ratio is 1.2. If inventory were purchased for cash, the:
A)Numerator would decrease more than the denominator, resulting in a lower quick ratio.
Q8 A firm's financial statements reflect the following: Based on this information and assuming that the firm's debt has a cost of 9% and has been outstanding for a full year, what is the firm's total debt ratio and interest coverage ratio? Total Debt Ratio Interest Coverage Ratio
B was correct! The total debt ratio = ($18.4m - 7.0m) / ($18.4m) or 0.62. The interest coverage ratio = $2,000,000 / $900,000 = 2.22.
Q20: RGB, Inc. has a gross profit of $45,000 on sales of $150,000. The balance sheet shows average total assets of $75,000 with an average inventory balance of $15,000. RGB's total asset turnover and inventory turnover are closest to: Asset turnover Inventory turnover
B) 2.00 times 7.00 times
Q26: RGB, Inc.'s income statement shows sales of $1,000, cost of goods sold of $400, pre-interest operating expense of $300, and interest expense of $100. RGB's interest coverage ratio is closest to:
B) 3 times Interest cov. ratio = EBIT/ I = (1,000 - 400 - 300) / 100 = 3 times
Q19: RGB, Inc.'s purchases during the year were $100,000. The balance sheet shows an average accounts payable balance of $12,000. RGB's payables payment period is closest to:
B) 44 days.
Q29: A firm has a dividend payout ratio of 40%, a net profit margin of 10%, an asset turnover of 0.9 times, and a financial leverage multiplier of 1.2 times. The firm's sustainable growth rate is closest to:
B) 6.5% g= (1 - .4) (.108) = 6.5%
Q13 To study trends in a firm's cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by:
B) Sales
Q3 Which of the following is closest to the company's return on equity (ROE)?
B) There are several ways to approach this question but the easiest way is to recognize that ROE = NI / average equity thus ROE = 944 / 1,519 = 0.622.
Q22: A company's current ratio is 1.9. If some of the accounts payable are paid off from the cash account, the:
B) denominator would decrease by a greater percentage than the numerator, resulting in a higher current ratio.
Q4 Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions): The financial risk of E Company, as measured by the interest coverage ratio, is:
B) higher than that of G Company's because its interest coverage ratio is less than one-third of G Company's. E Company's interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5. G Company's interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G Company.
Q30: An analyst who needs to model and forecast a company's earnings for the next three years would be least likely to:
B) use common-size financial statements to estimate expenses as a percentage of net income.
Q28: Which of the following equations least accurately represents return on equity?
C) (ROA)(interest burden)(tax retention rate). (ROA) (Interest Burden) (Tax retention rate) is not a model
Q15 Return on equity using the traditional DuPont formula equals:
C) (net profit margin) (total asset turnover) (financial leverage multiplier).
Q27: RGB, Inc. has a net profit margin of 12%, a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. RGB's return on equity is closest to:
C) 17.3% Return on Equity = (net income/ sales) (sales/ assets
Q17 Analysis has generated the following data: Tax rate 35% Equity multiplier 2.7X Net profit margin 4.6% Equity turnover 5.2X ROE is closest to:
C) 24% net income/ equity = 4.6% x 5.2 = 23.92%
Q21: If RGB, Inc. has annual sales of $100,000, average accounts payable of $30,000, and average accounts receivable of $25,000, RGB's receivables turnover and average collection period are closest to: Receivables turnover Average collection period
C) 4.0 times 91 days
Q24: All other things held constant, which of the following transactions will increase a firm's current ratio if the ratio is greater than one?
C) Accounts payable are paid with funds from the cash account.
Q9 An analyst gathered the following data about a company: Current liabilities are $300. Total debt is $900. Working capital is $200. Capital expenditures are $250. Total assets are $2,000. Cash flow from operations is $400. If the company would like a current ratio of 2, they could:
increase current assets by 100 or decrease current liabilities by 50. B was correct! For the current ratio to equal 2.0, current assets would need to move to $600 (or up by $100) or current liabilities would need to decrease to $250 (or down by $50). Remember that CA − CL = working capital (500 − 300 = 200).
