Chapter 3 - Canvas Quiz Answers (plus written questions)

Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding? -13,520 -12,460 -165,745 -171,308 -170,702

170,702 How to calculate: Earnings per share (EPS) = Net income / Number of shares outstanding Given that EPS = $0.43, we can rearrange the formula to solve for the number of shares outstanding: Number of shares outstanding = Net income / EPS Plugging in the given values: Number of shares outstanding = $73,402 / $0.43 = 170,702

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? -Accounts payable -Cash -Inventory -Accounts receivable -Fixed assets

Accounts receivable

Which one of the following is a source of cash? -Repurchase of common stock -Purchase of inventory -Acquisition of debt -Payment to a supplier -Granting credit to a customer

Acquisition of debt

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit? -Current -Cash -Debt-equity -Quick -Total debt

Cash

A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do which one of the following? -Pay all of its debts that are due within the next 48 hours -Pay all of its debts that are due within the next 48 days -Cover its operating costs for the next 48 hours -Cover its operating costs for the next 48 days -Meet the demands of its customers for the next 48 hours

Cover its operating costs for the next 48 days

Which one of these is the least important factor to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code? -Type of ownership -Government regulations affecting the firm -Fiscal year end -Methods of power generation -Number of part-time employees

Number of part-time employees

Explain what peer group analysis is. As a financial manager, how could you use the results of peer group analysis to evaluate the performance of your firm? How is a peer group different from an aspirant group?

Peer group analysis involves comparing the financial ratios and operating performance of a particular firm to a set of peer group firms in the same industry or line of business. Comparing a firm to its peers allows the financial manager to evaluate whether some aspects of the firm's operations, finances, or investment activities are out of line with the norm, thereby providing some guidance on appropriate actions to take to adjust these ratios if appropriate. An aspirant group would be a set of firms whose performance the company in question would like to emulate. The financial manager often uses the financial ratios of aspirant groups as the target ratios for his or her firm; some managers are evaluated by how well they match the performance of an identified aspirant group.

In recent years Iron Man Co. has greatly increased its current ratio. At he same time the quick ratio has fallen. What has happened? Has the liquidity of the company improved?

The firm has increased inventory relative to other current assets; therefore, assuming current liability levels remain unchanged, liquidity has potentially decreased.

Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are sales key input?

The reason is that, ultimately, sales are the driving force behind a business. A firm's assets, employees, and, in fact, just about every aspect of its operations and financing exist to directly or indirectly support sales. Put differently, a firm's future need for things like capital assets, employees, inventory, and financing are determined by its future sales level.

Luke's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Leia's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, Luke's must be doing which one of the following? -Utilizing its fixed assets more efficiently than Sam's -Utilizing its total assets more efficiently than Sam's -Generating $1 in sales for every $1.26 in net fixed assets -Generating $1.26 in net income for every $1 in net fixed assets -Maintaining the same level of current assets as Sam's

Utilizing its total assets more efficiently than Sam's

According to the statement of cash flows, an increase in interest expense will ________ the cash flow from ________ activities. -decrease; operating -decrease; financing -increase; operating -increase; financing -increase; investment

decrease; operating

According to the statement of cash flows, an increase in inventory will ________ the cash flow from ________ activities. -increase; operating -decrease; financing -decrease; operating -increase; financing -increase; investment

decrease; operating

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm: -may have short-term, but not long-term debt. -is using its assets as efficiently as possible. -has no net working capital. -has a debt-equity ratio of 1.0. -has an equity multiplier of 1.0.

has an equity multiplier of 1.0.

All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies: -being conglomerates with unrelated lines of business. -having geographically varying operations. -using differing accounting methods. -differing seasonal peaks. -having the same fiscal year.

having the same fiscal year.

The cash coverage ratio directly measures the ability of a company to meet its obligation to pay: -an invoice to a supplier. -wages to an employee. -interest to a lender. -principal to a lender. -a dividend to a shareholder.

interest to a lender.

Mortgage lenders probably have the most interest in the ________ ratios. -return on assets and profit margin -long-term debt and times interest earned -price-earnings and debt-equity -market-to-book and times interest earned -return on equity and price-earnings

long-term debt and times interest earned

Mortgage lenders probably have the most interest in the ________ ratios. return on assets and profit margin long-term debt and times interest earned price-earnings and debt-equity market-to-book and times interest earned return on equity and price-earnings

long-term debt and times interest earned

The price-sales ratio is especially useful when analyzing firms that have: -volatile market prices. -negative earnings. -positive PEG ratios. -a high Tobin's Q. -increasing sales.

negative earnings.

The most acceptable method of evaluating the financial statements is to compare the company's current financial: -ratios to the company's historical ratios. -statements to the financial statements of similar companies operating in other countries. -ratios to the average ratios of all companies located within the same geographic area. -statements to those of larger companies in unrelated industries. -statements to the projections that were created based on Tobin's Q.

ratios to the company's historical ratios.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: -total assets. -total equity. -net income. -taxable income. -sales.

sales.

Ratios that measure a firm's liquidity are known as ________ ratios. -asset management -long-term solvency -short-term solvency -profitability -book value

short-term solvency

Yoda's Vegan Restaurant has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity? -17.14 percent -18.63 percent -19.67 percent -21.69 percent -22.30 percent

18.63 percent How to calculate: The DuPont model states that: ROE = Profit margin x Asset turnover x Equity multiplier Given that the profit margin is 5.6 percent, the return on assets (ROA) is 12.5 percent, and the equity multiplier is 1.49, we can calculate ROE as follows: ROE = 5.6% x (ROA / Profit margin) x (Equity multiplier) ROE = 5.6% x (12.5% / 5.6%) x 1.49 ROE = 12.5% x 1.49 ROE = 18.63

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio? -2.12 -1.84 -1.39 -2.45 -2.69

2.12 How to calculate: Hint : Explanation: EPS = $126,400/160,000 1) Get Earnings Per Share (EPS) = .79 2) Get Price per share = EPS(PE Ratio) = .79*21.3 = 16.827 3) Market-to-book ratio = Price per share/Book value per share = 16.87/7.92 = 2.12

Explain what it means for a firm to have a current ratio of .50. Would the firm be better off if the current ratio were 1.50? What if it were 15?

A current ratio of .50 means that the firm has twice as much in current liabilities as it does in current assets; the firm potentially has poor liquidity. If pressed by its short-term creditors and suppliers for immediate payment, the firm might have a difficult time meeting its obligations. A current ratio of 1.50 means the firm has 50 percent more current assets than it does current liabilities. This probably represents an improvement in liquidity; short-term obligations can generally be met completely with a safety factor built in. A current ratio of 15.0, however, might be excessive. Any excess funds sitting in current assets generally earn little or no return. These excess funds might be put to better use by investing in productive long-term assets or distributing the funds to shareholders.

Which one of the following ratios is a measure of a firm's liquidity? -Cash coverage ratio -Profit margin -NWC turnover -Debt-equity ratio -Quick ratio

Debt-equity ratio

On the statement of cash flows, which one of the following is considered an operating activity? -Increase in net fixed assets -Decrease in accounts payable -Purchase of equipment -Dividends paid -Repayment of long-term debt

Decrease in accounts payable

Which one of the following is a use of cash? -Decrease in fixed assets -Decrease in accounts payable -Decrease in inventory -Increase in long-term debt -Decrease in accounts receivables

Decrease in accounts payable

Which one of the following is a source of cash? -Increase in accounts receivable -Decrease in common stock -Increase in fixed assets -Decrease in inventory -Decrease in accounts payable

Decrease in inventory

The Death Star Corporation has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? -Decrease in the inventory turnover rate -Decrease in the net working capital turnover rate -Increase in the fixed asset turnover rate -Decrease in the day's sales in inventory -Decrease in the total asset turnover rate

Decrease in the day's sales in inventory

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. -Increase in the cash ratio -Increase in the net working capital to total assets ratio -Decrease in the quick ratio -Decrease in the cash coverage ratio -Increase in the current ratio

Decrease in the quick ratio

On the statement of cash flows, which one of the following is considered a financing activity? -Increase in inventory -Decrease in accounts payable -Increase in net working capital -Dividends paid -Decrease in fixed assets

Dividends paid

Which one of these identifies the relationship between the return on assets and the return on equity? -Profit margin -Profitability determinant -Balance sheet multiplier -DuPont identity -Debt-equity ratio

DuPont identity

Which one of the following accurately describes the three parts of the DuPont identity? -Equity multiplier, profit margin, and total asset turnover -Debt-equity ratio, capital intensity ratio, and profit margin -Operating efficiency, equity multiplier, and profitability ratio -Return on assets, profit margin, and equity multiplier -Financial leverage, operating efficiency, and profitability ratio

Equity multiplier, profit margin, and total asset turnover

Which one of the following statements is correct? -Book values should always be given precedence over market values. -Financial statements are rarely used as the basis for performance evaluations. -Historical information is useful when projecting a company's future performance. -Potential lenders place little value on financial statement information. -Reviewing financial information over time has very limited value.

Historical information is useful when projecting a company's future performance.

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner? -I and III only -II and IV only -I, II, and III only -II, III and IV only -I, II, III, and IV

I, II, and III only