FIN 334 Chapter 7

A company has sales of $640,000, net profit after taxes of $23,000, a total asset turnover of 4.17 and an equity multiplier of 1.67. What is the return on equity? A) 24% B) 9.0% C) 8.1% D) 4.5%

A

Cash flow from operations includes all of the following adjustments to net income EXCEPT A) purchases of new equipment. B) depreciation. C) increase or decrease in current liabilities. D) increase or decrease in current inventory

A

Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of A) fundamental analysis. B) behavioral analysis. C) the efficient market hypothesis. D) technical analysis.

A

JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ's stock is currently selling for A) $16.74 per share. B) $17.07 per share. C) $18.00 per share. D) $19.35 per share.

A

Marco's just reported an EPS of $1.80 on revenues of $440 million. The company has 13 million shares outstanding. Total assets are $380 million, current liabilities equal $78 million, and long-term debt is $122 million. Net fixed assets are worth $230 million. Given this information, which one of the following statements is correct? A) Marco's net working capital is $72 million. B) Marco's current ratio is 1.75. C) Marco's total asset turnover is 3.67. D) .Marco's debt-equity ratio is 0.75.

A

On December 31, the Gold Standard Company reported the following information on its financial statements. CA 680,000 LTA 1,850,000 CL 490,000 LTD 975,000 According to this information, the company's current ratio is approximately A) 1.39. B) 1.68. C) 1.73. D) 1.90.

A

On March 31, Adolpha, Inc. reported the following information on its financial statements. CA 421,374 LTA 2,126,864 CL 675,218 LTD 2,005,286 What is the available net working capital for Adolpha, Inc.? A) -$253,844 B) -$132,366 C) $121,578 D) $1,873,020

A

On September 30, the Simpson Company reported the following information on its financial statements. CA 650,000 LTA 1,080,000 CL 684,000 LTD 803,000 What is the amount of the stockholder's equity in the Simpson Company? A) $243,000 B) $277,000 C) $927,000 D) $3,217,000

A

Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of A) 4%. B) 6%. C) 8%. D) 12%.

A

Rising corporate profits are likely to have the greatest effect on which of the following industrial sectors? A) business equipment B) defense C) food and agriculture D) consumer durable

A

Rising interest rates tend to A) contract the level of economic activity. B) increase the level of business investment. C) indicate governmental expansion of the economy. D) signal the trough of a recessionary market.

A

The consumer electronics industry would be most significantly affected by A) developments in technology. B) interest rates and inflation. C) labor relations. D) government regulations.

A

The measure that indicates how efficiently assets are being used to support sales is called the A) total asset turnover. B) current ratio. C) book value. D) net profit margin.

A

Which of the following are characteristics of an expansionary fiscal policy? I. Increased government spending on infrastructure projects. II. Reduction in defense and education budgets. III. Reduction in employment taxes. IV. Reduction in government borrowing. A) I and III only B) II and III only C) I, II and IV only D) I, II, III and IV

A

Which of the following are measures of liquidity? I. net working capital II. accounts receivable turnover III. current ratio IV. times interest earned A) I and III only B) I, II and III only C) I, II and IV only D) I, III and IV only

A

Which of the following is most likely to increase in value as the result of a weakening dollar? A) an ADR for a foreign telecommunications company B) stock in a firm that depends heavily on imported raw materials C) stock in a firm with many accounts payable in foreign currencies D) stock in a foreign company that depends heavily on exports to the U.S.

A

Which one of the following is a leverage measure? A) times interest earned B) net working capital C) return on equity D) net profit margin

A

A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of $(1,000,000). ROE will be A) 1000% indicating an exceptional opportunity. B) 1000% and meaningless. C) -1000% indicating that the company is in dire straits. D) 10.

B

Fundamental analysis involves the in-depth study of the A) role of nondiversifiable risk in an investor's portfolio. B) financial condition and operating results of a given firm. C) pattern of security prices as revealed in chart formations. D) role of diversifiable risk in an investor's portfolio.

B

Generally, the market price of a stock is A) below its book value. B) above its book value. C) equal to its par value. D) equal to its book value.

B

If a firm has an ROA of 10% and an ROE of 10%, then the A) operating results of the firm are improving. B) firm has no financial leverage. C) firm must have enough cash on hand to pay some extra dividends. D) firm is losing money.

B

Kim has gathered the following information on a company. Sales 640,000 Div CS 18,000 Profit Margin 5% SHs Out 128,000 What is the amount of the earnings per share? A) $0.14 B) $0.25 C) $0.28 D) $0.30

B

Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear A) more leveraged. B) less leveraged. C) more profitable. D) less efficient.

B

The PEG ratio A) preferred by investors is equal to 2.0 or higher. B) compares the price/earnings ratio to the rate of growth of the company's earnings. C) is a measure of a firm's liquidity. D) measures the ability of a firm's assets to generate growth for the firm.

B

The government has an expansionary economic policy when it A) increases taxes. B) increases government spending. C) promotes rising interest rates. D) limits exports of goods and services.

B

The three steps in determining a stock's intrinsic value are I. estimating the stock's future cash flows. II. estimating the risk associated with future cash flows. III. careful analysis of patterns in the stock's recent price history. IV. estimating an appropriate discount rate to apply to future cash flows. A) II, III and IV only B) I, II and IV only C) I, III and IV only

B

To determine whether a pharmaceutical company's profitability ratios indicate strength or weakness, we should I. compare them to others in the same industry. II. compare them to companies in unrelated industries such as energy or banking. III. compare them to previous years. IV. compare them to absolute standards established by the CFA Institute. A) I and II only B) I and III only C) III and IV only D) IV only

B

Top-down security analysis A) starts with the fundamental analysis of a firm. B) includes economic, industry, and fundamental analysis. C) concentrates on the competency of the senior management of a firm. D) centers on the past performance of a firm.

B

Well managed companies rarely reach the decline stage because A) the world's population is growing. B) they continuously develop new products to meet the needs of changing markets. C) consumers remain loyal to established brands. D) all of the above.

B

Which of the following are considered in the ratio analysis of a firm? I. profitability II. market share III. liquidity IV. leverage A) I and II only B) I, III and IV only C) II and IV only D) I, II, III and IV

B

Which of the following is a readily available source of industry comparisons? I. Standard & Poor's II. MSN Money, Yahoo Finance and other financial portals III. Mergent (Moody's) IV. The Wall Street Journal A) I and II only B) I, II and III only C) III and IV only D) II, III and IV only

B

Which one of the following is likely to have a negative effect on stock prices? A) falling interest rates B) a decrease in the money supply (M2) C) low inflation D) a decrease in the unemployment rate

B

Which stage of an industry's growth cycle is interesting only for potentially high dividend payouts? A) initial development B) stability or decline C) mature growth D) rapid expansion

B

A comparison of a firm's current financial ratios to those of prior years allows one to A) accurately predict the future performance of a firm. B) see how a firm's performance compares to that of a competitor. C) see trends that are developing. D) determine if the firm is performing better than the overall industry.

C

A lending institution would prefer that a firm have a ________ debt-equity ratio and a ________ times interest earned ratio. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

C

If a company's ROA is high, then an investor can assume that the company A) is in danger of defaulting on its loans. B) pays a high dividend. C) is profitable. D) has more equity than debt in its capital structure.

C

Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on assets of 9%. What is the return on equity? A) 5.4% B) 5.6% C) 14.4% D) 15.0%

C

One of the basic premises of security analysis, and in particular fundamental analysis, is that A) a stock's price is based on its past cash flows rather than on anticipated future cash flows. B) market sectors do not move in concert with business cycles. C) all securities have an intrinsic value that their market value will approach over time. D) a security's risk has relatively little effect on the security's return.

C

Over the last 5 years, Spencer Inc.'s earnings have grown at an annual average rate of 9%. Current EPS are $1.80 and the company's stock recently sold for $36 per share. Spencer's PEG ratio is A) .05 B) 20 C) 2.22 D) 222.22

C

The Federal Reserve through monetary policy can help expand the economy by A) lowering income taxes on individuals. B) reducing tariffs such that foreign exports can increase. C) supporting a moderate growth of the money supply. D) increasing government spending on the national infrastructure.

C

The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In this case, the firm is A) selling its inventory slower than the industry. B) underperforming the industry. C) averaging fewer days of sales in inventory than the industry. D) generating fewer sales per dollar of inventory.

C

The normal sequence in performing top down analysis is A) competition, consumer demand, threat of substitute products. B) market conditions, risk, company fundamentals. C) economy, industry, company. D) profitability, efficiency, liquidity

C

The rapid expansion phase of an industry is characterized by A) extreme sensitivity to interest rates and other economic factors. B) high returns and relatively low risks. C) willingness of investors to buy almost any stock associated with the industry. D) many decades of sustained above average growth.

C

To determine whether a company is using leverage effectively, an analyst should consider A) the current ratio and net working capital. B) inventory, accounts receivable and total asset turnover ratios. C) the debt to equity and times interest earned ratios. D) ROA and the net profit margin.

C

Which measure of the business cycle represents the market value of all goods and services produced in a country over a twelve-month period? A) industrial production index B) money supply C) gross domestic product D) productivity average

C

Which of the following businesses will be negatively impacted by a strong dollar? A) retailing B) imports C) exports D) automotive

C

Which of the following businesses will be positively impacted by a weak dollar? A) retailing B) imports C) exports D) personal services

C

Which of the following may be signs of future problems for a company? I. Inventories growing faster than sales. II. Rapidly increasing debt to equity ratio. III. Cash flow from operations is higher than net income. IV. Current liabilities increasing faster than current assets. A) I and III only B) II and IV only C) I, II and IV only D) I, II and III only

C

Which of the following tend to signal that stock prices are likely to rise in the future? I. Employment increases after several months of recession. II. Interest rates are low compared to the recent past. III. Major market indexes have just reached record highs. IV. Housing starts increase after several months of decline. A) I and II only B) II and III only C) I, II and IV only D) I, II, III and IV

C

Which of the following would be found on a company's income statement? I. cost of goods sold II. interest expense III. cash flow from operations IV. earnings before taxes A) I an IV only B) I, II and III only C) I, II and IV only D) I, II, III and IV

C

Which of the following would be typical of a Statement of Cash Flows for a healthy firm in a sustainable business? A) Cash flow from operations is negative, cash flows from investment activities and financing activities are positive. B) Cash flow from operations , investment activities and financing activities must all be positive. C) Cash flow from operations is positive, cash flows from investment activities and financing activities are negative. D) If the Statement shows a net increase in cash, the source is unimportant.

C

Which one of the following statements concerning accounting reports is correct? A) The income statement reflects the position of a firm as of a single point in time. B) The total equity of a firm is equal to the total assets plus the total liabilities. C) The statement of cash flows identifies both the sources and the uses of cash. D) The income statement reflects the amount of cash available for investment and financing activities.

C

Which one of the following statements is correct? A) Stock prices are independent of the economic cycle. B) Stock prices change simultaneously with the economy. C) Stock prices are often start to rise before the end of a recession. D) Changes in stock prices generally lag changes in the economy.

C

Which stage of an industry's growth cycle is most influenced by economic events? A) initial development B) stability or decline C) mature growth D) rapid expansion

C

Worcester Corporation has a P/E ratio of 15. Natick Corporation is in the same industry as Worcester, but has a P/E ratio of 20. Possible interpretations of this discrepancy include A) Worcester Corporation is overpriced. B) Natick Corporation has higher earnings per share. C) Investors expect Natick to grow faster than Worcester. D) Natick's stock price is higher than Worcester's.

C

A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets? A) 3.6% B) 4.5% C) 8.1% D) 9.0%

D

A total asset turnover of 3 means that every A) $1 in sales is supported by $3 of assets. B) $3 in assets produces $1 in net earnings. C) $1 in total assets is replaced on average every 3 years. D) $1 in assets produces $3 in sales.

D

Amgen's debt to equity ratio is .54 while Walmart's is .68. By comparing these ratios we can conclude A) that Walmart is in danger of bankruptcy. B) that Amgen uses too little debt financing. C) that Walmart uses too little equity financing. D) very little because the firm's are in different industries.

D

Financial ratios I. allow comparisons across firms without concern over firm size. II. can compare a firm's operating and financial status to industry norms. III. provide insights into a companies future. IV. look at the liquidity, activity, leverage, profitability and market measures of a firm. A) II and IV only B) I and II only C) I, II and IV only D) I, II, III and IV

D

For their last fiscal year, the Short Company reported the following information. Acc Rec 160,000 Inv 204,000 Sales 1,168,000 COGS 724,000 What is the accounts receivables turnover rate? A) 0.8 B) 2.8 C) 4.5 D) 7.3

D

Investors are most interested in which one of the following ratios? A) return on assets B) current ratio C) net profit margin D) return on equity

D

The basic motivation of security analysis is to help investors A) identify the best times to buy and sell securities. B) contribute to the efficiency of securities markets. C) identify securities whose intrinsic values are at or near their market values. D) identify mispriced stocks.

D

The intrinsic value of a security is based on the I. amount of risk. II. current market value of the security. III. discount rate applicable to the security. IV. estimated future cash flows from the security. A) I and III only B) III and IV only C) I, II and III only D) I, III and IV only

D

When dividend payout ratios are higher than ________, investors should investigate whether or not they are sustainable. A) 15% B) 25%. C) 40%. D) 75%.

D

Which of the following accounting practices are potentially misleading or even fraudulent? I. writing off goodwill as an extraordinary loss II. using accrual rather than cash basis reporting III. off-balance sheet liabilities IV. recognizing revenues prematurely A) I and II only B) I, II and IV only C) III and IV only D) I, III and IV only

D

Which of the following directly impact return on equity? I. net profit margin II. leverage III. return on assets IV. cash flow from investment activities A) I and III only B) II and IV only C) I, II and IV only D) I, II and III only

D

Which of the following factors are considered when analyzing an industry? I. the nature and conditions of governmental regulations II. the involvement and relations, if any, with labor unions III. the development of new technologies relevant to the industry IV. the extent of competition within the industry A) I, II and IV only B) II, III and IV only C) I, II and III only D) I, II, III and IV

D

Which of the following measures excludes non-cash charges against income? A) operating expenses B) EBIT C) net income before taxes D) EBITDA

D

Which of the following would be found on a company's balance sheet? I. Accounts receivable II. Interest expense III. Property plant and equipment IV. Total stockholders' equity A) I an IV only B) I, II and III only C) I, II and IV only D) I, III and IV only

D

Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is seeking capital gains? A) initial development B) mature growth C) stability or decline D) rapid expansion

D

nvestors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to I. be price leaders. II. benefit more from economies of scale. III. have better R&D programs. IV. have lower production costs. A) II and IV only B) I, II and IV only C) I, II and III only D) I, II, III and IV

D