Test Bank Ch.3 Working With Financial Statements

Chapter 03

Working with Financial Statements

Test Bank - Static Key

1. Common-size financial statements present all balance sheet account values as a percentage of:

A. the forecasted budget.

B. sales.

C. total equity.

D. total assets.

E. last year's account value.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

2. The ratios that are based on financial statement values and used for comparison purposes are called:

A. financial ratios.

B. industrial statistics.

C. equity standards.

D. accounting returns.

E. analytical standards.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Ratio analysis

3. The DuPont identity can be accurately defined as:

A. Return on equity × Total asset turnover × Equity multiplier.

B. Equity multiplier × Return on assets.

C. Profit margin × Return on equity.

D. Total asset turnover × Profit margin × Debt-equity ratio.

E. Equity multiplier × Return on assets × Profit margin.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

4. Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

A. DuPont rate

B. External growth rate

C. Sustainable growth rate

D. Internal growth rate

E. Cash flow rate

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Difficulty: 1 Easy

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

5. The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

A. No new external financing of any kind

B. No new debt but additional external equity equal to the increase in retained earnings

C. New debt and external equity in equal proportions

D. New debt and external equity, provided the debt-equity ratio remains constant

E. No new external equity and a constant debt-equity ratio

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

6. Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

A. BEC

B. SED

C. BID

D. SIC

E. SBC

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-04 Identify and explain some of the problems and pitfalls in financial statement analysis.

Section: 3.5 Using Financial Statement Information

Topic: Financial statement analysis

7. Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

A. Income statement

B. Balance sheet

C. Common-size income statement

D. Common-size balance sheet

E. Statement of cash flows

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

8. A common-size balance sheet helps financial managers determine:

A. which customers are paying on a timely basis.

B. if costs are increasing faster or slower than sales.

C. if changes are occurring in a firm's mix of assets.

D. if a firm is generating more or less sales per dollar of assets than in prior years.

E. the rate at which the firm's dividend payout is changing.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

9. Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

A. remain constant over time.

B. be equal to the dividend amount divided by the net income.

C. vary in direct relation to the net profit percentage.

D. vary in direct relation to changes in the sales level.

E. vary but not in direct relation to any other variable.

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Difficulty: 2 Medium

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

10. Which one of these transactions will increase the liquidity of a firm?

A. Cash purchase of new production equipment

B. Payment of an account payable

C. Cash purchase of inventory

D. Credit sale of inventory at cost

E. Cash payment of employee wages

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Liquidity

11. Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

A. Cash purchase of inventory

B. Cash payment on an account receivable

C. Cash payment of an account payable

D. Credit sale of inventory at cost

E. Cash sale of inventory at a loss

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

12. A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

A. pays cash for its inventory.

B. has more than half its current assets invested in inventory.

C. has more cash than inventory.

D. has more current liabilities than it does current assets.

E. has positive net working capital.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

13. Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

A. Current ratio

B. Debt ratio

C. Cash coverage ratio

D. Cash ratio

E. Quick ratio

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

14. Which one of the following is a measure of long-term solvency?

A. Price-earnings ratio

B. Profit margin

C. Cash coverage ratio

D. Receivables turnover

E. Quick ratio

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

15. The cash ratio is used to evaluate the:

A. liquidity of a firm.

B. speed at which a firm generates cash.

C. length of time that a firm can pay its bills if no additional cash becomes available.

D. ability of a firm to pay the interest on its debt.

E. relationship between the firm's cash balance and its current liabilities.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

16. The equity multiplier is equal to:

A. one plus the debt-equity ratio.

B. one plus the total asset turnover.

C. total debt divided by total equity.

D. total equity divided by total assets.

E. one divided by the total asset turnover.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

17. If a firm has an inventory turnover of 15, the firm:

A. sells its entire inventory every 15 days.

B. stocks its inventory only once every 15 days.

C. delivers inventory to its customers every 15 days.

D. sells its inventory by granting customers 15 days' of free credit.

E. sells its entire inventory an average of 15 times each year.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

18. Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

A. A decrease in the total asset turnover

B. A decrease in the capital intensity ratio

C. An increase in days' sales in receivables

D. A decrease in the profit margin

E. A decrease in the inventory turnover rate

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

19. The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

A. Receivables turnover

B. Equity multiplier

C. Profit margin

D. Return on assets

E. Total asset turnover

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

20. Which one of the following will increase the profit margin of a firm, all else held constant?

A. Increase in interest paid

B. Increase in fixed costs

C. Increase in depreciation expense

D. Decrease in the tax rate

E. Decrease in sales

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

21. You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

A. Times interest earned = 1.7; debt-equity ratio = 1.6

B. Times interest earned = 1.5; debt-equity ratio = 1.2

C. Cash coverage ratio = .8; debt-equity ratio = .8

D. Cash coverage ratio = 2.6; debt-equity ratio = .3

E. Cash coverage ratio = .5; total debt ratio = .2

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Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

22. All else held constant, which one of the following will decrease if a firm increases its net income?

A. Return on assets

B. Profit margin

C. Return on equity

D. Price-sales ratio

E. Price-earnings ratio

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

23. Which one of these statements is true concerning the price-earnings (PE) ratio?

A. A high PE ratio may indicate that a firm is expected to grow significantly.

B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.

C. PE ratios are unaffected by the accounting methods employed by a firm.

D. The PE ratio is classified as a profitability ratio.

E. The PE ratio is a constant value for each firm.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

24. Which ratio was primarily designed to monitor firms with negative earnings?

A. Price-sales ratio

B. Market-to-book ratio

C. Profit margin

D. ROE

E. ROA

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

25. The DuPont identity can be used to help a financial manager determine the:

I. degree of financial leverage used by a firm.
II. operating efficiency of a firm.
III. utilization rate of a firm's assets.
IV. rate of return on a firm's assets.

A. II and III only

B. I and III only

C. II, III, and IV only

D. I, II, and III only

E. I, II, III, and IV

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

26. Outdoor Gear reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin
II. Return on assets
III. Total asset turnover
IV. Return on equity

A. I and II only

B. I and III only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

27. Sweet Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios?

I. Capital intensity ratio
II. Return on assets
III. Total asset turnover
IV. Return on equity

A. I and II only

B. II and III only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Ratio analysis

28. Donovan’s would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

A. Return on assets

B. Net income

C. Retention ratio

D. Dividend payout ratio

E. Return on equity

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

29. If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

A. zero percent.

B. 100 percent.

C. equal to the ROA.

D. negative.

E. infinite.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

30. The sustainable growth rate is based on the premise that:

A. an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued.

B. no additional equity will be added to the firm.

C. the debt-equity ratio will be held constant.

D. the dividend payout ratio will be zero.

E. the dividend payout ratio will increase at a steady rate.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

31. A firm can increase its sustainable rate of growth by decreasing its:

A. profit margin.

B. dividends.

C. total asset turnover.

D. target debt-equity ratio.

E. equity multiplier.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

32. Financial statement analysis:

A. is primarily used to identify account values that meet the normal standards.

B. is limited to internal use by a firm's managers.

C. provides useful information that can serve as a basis for forecasting future performance.

D. provides useful information to shareholders but not to debt holders.

E. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-04 Identify and explain some of the problems and pitfalls in financial statement analysis.

Section: 3.5 Using Financial Statement Information

Topic: Financial statement analysis

33. Which one of the following statements is correct?

A. Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.

B. Peer group analysis is easier when seasonal firms have different fiscal years.

C. Peer group analysis is simplified when firms use varying methods of depreciation.

D. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.

E. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 03-04 Identify and explain some of the problems and pitfalls in financial statement analysis.

Section: 3.5 Using Financial Statement Information

Topic: Financial statement analysis

34. Prisqua Rentals has inventory of $147,500, equity of $320,000, total assets of $658,800, and sales of $800,780. What is the common-size percentage for the inventory account?

A. 15.07 percent

B. 18.42 percent

C. 20.36 percent

D. 22.39 percent

E. 39.96 percent

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

35. A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?

A. 70.60 percent

B. 70.12 percent

C. 66.87 percent

D. 42.08 percent

E. 68.75 percent

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

36. Saki Kale Farms has net income of $96,320, total assets of $975,200, total equity of $555,280, and total sales of $1,141,275. What is the common-size percentage for the net income?

A. 7.90 percent

B. 8.44 percent

C. 13.88 percent

D. 48.65 percent

E. 74.57 percent

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Blooms: Analyze

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Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

37. Delmont Movers has a profit margin of 7.1 percent and net income of $63,700. What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?

A. 12.19 percent

B. 23.50 percent

C. 53.25 percent

D. 61.06 percent

E. 58.25 percent

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

38. A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

A. 1.99 percent

B. 2.86 percent

C. 1.21 percent

D. 2.24 percent

E. 1.42 percent

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-01 Standardize financial statements for comparison purposes.

Section: 3.1 Standardized Financial Statements

Topic: Standardized financial statements

39. Philippe Organic Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364.182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

A. ..95

B. .1.12

C1.26

D. 1.40

E. 1.50

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

40. Wilberton’s has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

A. 2.01

B. .52

C. .84

D. 1.18

E. 1.94

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

41. A firm has net working capital of $8,200 and current assets of $37,500. What is the current ratio?

A. .69

B. ..78

C. 1.28

0.

D. 1.45

E. .1.67

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

42. Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?

A. .08

B. .25

C. .30

D. .46

E. .51

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

43. You are analyzing a company that has cash of $8,800, accounts receivable of $15,800, fixed assets of $87,600, accounts payable of $40,300, and inventory of $46,900. What is the quick ratio?

A. 1.20

B. .67

C. .83

D. .61

E. 1.64

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

44. Gaspares Agricultural Cooperative has current liabilities of $162,500, net working capital of $28,560, inventory of $175,800, and sales of $1,941,840. What is the quick ratio?

A. .07

B. .16

C. .09

D. 1.08

E. 1.18

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

45. The Dry Dock has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio?

A. .64

B. .55

C. .53

D. .98

E. 1.34

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

46. The Conference Center has cash of $7800, accounts receivable of $15600, inventory of $48,850, and net working capital of $ 5,000. What is the cash ratio?

A. ..08

B. ..12

C. .15

D. .42

E. .45

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Short-term solvency ratios

47. Southern Style Realty has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio?

A. ..30

B. ..35

C. ..69

D. ..53

E. ..68

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

48. Tony’s Machinery has total equity of $815,280, long-term debt of $391,900, net working capital of $49,500, and total assets of $1,292,485. What is the total debt ratio?

A. ..50

B. .37

C. ..64

D. ..46

E. ..60

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

49. A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

A. 1.03

B. 1.20

C. 1.31

D. 1.43

E. .87

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

50. The Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio?

A. .68

B. .24

C. 1.24

D. ..36

E. .1.36

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

51. Allyba Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier?

A. .46

B. 1.0

C. 1.075

D. 1.86

E. 2.16

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Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

52. A firm has an equity multiplier of 1.5. This means that the firm has a:

A. debt-equity ratio of .67.

B. debt-equity ratio of .50.

C. total debt ratio of .50.

D. total debt ratio of .67.

E. total debt ratio of .33.

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Blooms: Analyze

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Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

53. Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?

A. .30

B. .43

C. 1.93

D. 2.43

E. 2.30

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

54. Assume earnings before interest and taxes of $56,850 and net income of $23,954. The tax rate is 30 percent. What is the times interest earned ratio?

A. 1.51

B. 1.73

C. 2.37

D. 2.47

E. 2.51

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

55. Gorilla Movers has sales of $645,560, cost of goods sold of $425,890, depreciation of $32,450, and interest expense of $12,500. The tax rate is 30 percent. What is the times interest earned ratio?

A. 14.98

B. 12.75

C. 11.63

D. 6.25

E. 2.75

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

56. A firm has net income of $4,238 and interest expense of $898. The tax rate is 35 percent. What is the firm's times interest earned ratio?

A. 7.33

B. 7.26

C. 5.38

D. 8.26

E. 9.33

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

57. A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio?

A. 8.78

B. 20.10

C. 14.14

D. 16.32

E. 19.55

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

58. Skylar’s Bed and Breakfast has $126,500 in total assets, depreciation of 3,500, and interest of $1,850. The total asset turnover rate is 1.02. Earnings before interest and taxes are equal to 24 percent of sales. What is the cash coverage ratio?

9.37

B. 16.74

C. 18.63

D. 20.72

E. 22.82

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

59. UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?

A. 7.33 times

B. 6.90 times

C. 5.70 times

D. 7.14 times

E. 8.47 times

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

60. SRC, Inc., sells its inventory in an average of 43 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.

A. 8.49

B. 7.29

C. 8.68

D. 10.18

E. 7.13

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

61. Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?

A. 6.40 days

B. 7.23 days

C. 48.68 days

D. 59.01 days

E. 61.10 days

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

62. Phil's Carvings sells its inventory in 93 days, on average. Costs of goods sold for the year are $187,200. What is the average value of the firm's inventory? Assume a 365-day year.

A. $20,129

B. $47,698

C. $57,132

D. $61,096

E. $32,513

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

63. Andras Technology has accounts receivable of $35,680, total assets of $538,500, cost of goods sold of $325,400, and a capital intensity ratio of ..90. What is the accounts receivable turnover rate?

A. 15.56

B. 16.77

C. 9.12

D. 10.13

E. 10.31

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

64. It takes K’s Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

A. 23.69

B. 11.41

C. 21.73

D. 24.23

E. 19.55

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

65. Jaminda’s Holistic Healing has sales of $980,000, cost of goods sold of $765,250, and accounts receivable of $88,640. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year.

A. 8.63 days

B. 15.5 days

C. 32.56 days

D. 33.01 days

E. 42.56 days

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

66. Jessica’s Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.

A. 26.91 days

B. 19.45 days

C. 11.68 days

D. 31.07 days

E. 22.70 days

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

67. Gracie Human Resource Consulting has total revenue of $285,400, cost of goods sold equal to 68 percent of sales, and a profit margin of 9.2 percent. Net fixed assets are $126,400 and current assets are $65,880. What is the total asset turnover rate?

A. 1.01

B. 1.30

C. 1.48

D. 1.84

E. 4.81

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

68. Whitt's BBQ has sales of $1,318,000, a profit margin of 7.4 percent, and a capital intensity ratio of .78. What is the total asset turnover rate?

A. 1.04

B. 1.08

C. 1.13

D. 1.43

E. 1.28

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

69. Maren’s House of Pancakes has sales of $635,400, total equity of $268,000, and a debt-equity ratio of ..6. What is the capital intensity ratio?

A. ..67

B. .59

C. .72

D. .89

E. 1.67

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

70. Discount Outlet has net income of $389,100, a profit margin of 2.8 percent, and a return on assets of 8.6 percent. What is the capital intensity ratio?

A. .33

B. .67

C. 1.49

D. 1.34

E. 3.07

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

71. Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

A. −2.43 percent

B. 1.56 percent

C. 3.33 percent

D. −5.29 percent

E. −6.11 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

72. Steve’s Music Supply has a return on equity of 19.3 percent, a profit margin of 10.1 percent, and total equity of $645,685. What is the net income?

A. $65,214.19

B. $123,383.71

C. $124,617.21

D. $65,214.19

E. $125,863.40

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

73. Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets?

A. 4.30 percent

B. 6.54 percent

C. 3.83 percent

D. 7.01 percent

E. 4.97 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

74. Prime Electronic Sales has sales of $723,450, total equity of $490,000, a profit margin of 9.3 percent, and a debt-equity ratio of .42. What is the return on assets?

A. 5.05 percent

B. 10.07 percent

C. 9.03 percent

D. 9.67 percent

E. 23.02 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

75. If sales are $211,000, the profit margin is 6.3 percent, and the capital intensity ratio is .94, what is the return on assets?

A. 4.42 percent

B. 6.08 percent

C. 6.39 percent

D. 6.92 percent

E. 6.70 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

76. Martn Tucker Enterprises., has total equity of $645,500, sales of $1.15 million, and a profit margin of 3.6 percent. What is the return on equity?

A. 4.16 percent

B. 6.44 percent

C. 7.7.13 percent

D. 6.41 percent

E. 7.07 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

77. BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?

A. $2.92

B. $2.97

C. $2.86

D. $2.58

E. $2.89

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

78. KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?

A. 6.38

B. 7.99

C. 6.65

D. 5.12

E. 7.41

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

79. The Kids’ Mart has a market-to-book ratio of 3.3, net income of $87,100, a book value per share of $18.50, and 7,500 shares of stock outstanding. What is the price-earnings ratio?

A. 4.34

B. 8.16

C. 5.61

D. 6.25

E. 5.26

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

80. Dellf’s has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?

A. 3.26

B. 8.02

C. 11.50

D. 5.93

E. 12.84

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

81. A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding?

A. 20,608

B. 27,990

C. 28,356

D. 30,515

E. 31,011

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

82. ABD common stock is selling for $36.08 a share. The company has earnings per share of $.34 and a book value per share of $12.19. What is the market-to-book ratio?

A. 8.71

B. 7.69

C. 2.96

D. 3.97

E. 5.92

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

83. Healthy Foods has a book value per share of $32.68, earnings per share of $3.09, and a price-earnings ratio of 16.8. What is the market-to-book ratio?

A. 1.08

B. 1.59

C. 1.99

D. 2.47

E. 2.16

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

84. The Inside Door has total debt of $208,600, total equity of $343,560, and a return on equity of 13.27 percent. What is the return on assets?

A. 9.14 percent

B. 8.26 percent

C. 11.45 percent

D. 9.61 percent

E. 9.48 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Profitability ratios

85. Mike's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?

A. 13.48 percent

B. 13.73 percent

C. 15.74 percent

D. 15.28 percent

E. 14.61 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

86. Computer Geeks has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity?

A. 18.91 percent

B. 12.67 percent

C. 18.28 percent

D. 22.11 percent

E. 21.55 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

87. Wiggle Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin?

A. 4.82 percent

B. 5.23 percent

C. 5.67 percent

D. 6.58 percent

E. 7.31 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

88. A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity?

A. 11.67 percent

B. 18.98 percent

C. 14.45 percent

D. 16.22 percent

E. 15.06 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

89. The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin?

A. 15.06 percent

B. 13.57 percent

C. 15.84 percent

D. 16.92 percent

E. 14.60 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

90. The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?

A. 14.26 percent

B. 13.64 percent

C. 12.28 percent

D. 19.48 percent

E. 12.03 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

91. Rogers Radiators has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

A. 6.77 percent

B. 5.93 percent

C. 8.95 percent

D. 12.21 percent

E. 14.09 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

92. World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm's net income?

A. $119,359.43

B. $88,303.33

C. $104,624.14

D. $121,548.09

E. $92,236.67

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

93. Western Hardwoods has total equity of $318,456, a profit margin of 3.79 percent, an equity multiplier of 1.68, and a total asset turnover of .97. What is the amount of the firm's sales?

A. $518,956

B. $473,550

C. $195,420

D. $190,839

E. $639,440

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

94. Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?

A. 5.56 percent

B. 8.06 percent

C. 13.67 percent

D. 15.24 percent

E. 17.41 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

95. Al’s Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm's return on assets?

A. 12.00 percent

B. 7.27 percent

C. 15.15 percent

D. 13.75 percent

E. 8.33 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

96. Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate?

A. 2.32 percent

B. 3.57 percent

C. 5.60 percent

D. 2.87 percent

E. 4.94 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

97. Fried Donuts has sales of $764,900, total assets of $687,300, total equity of $401,300, net income of $68,200, and dividends paid of $27,000. What is the internal growth rate?

A. 5.48 percent

B. 6.38 percent

C. 5.98 percent

D. 7.34 percent

E. 7.92 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

98. A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?

A. 5.11 percent

B. 4.88 percent

C. 6.62 percent

D. 7.67 percent

E. 8.37 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

99. Lookin’ Up earns $.094 in profit on every $1 of sales and has $1.21 in assets for every $1 of sales. The firm pays out 45 percent of its profits to its shareholders. What is the internal growth rate?

A. 6.37 percent

B. 2.76 percent

C. 3.82 percent

D. 4.46 percent

E. 2.65 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

100. DJ’s has a total asset turnover rate of 1.13, an equity multiplier of 1.46, a profit margin of 5.28 percent, a retention ratio of .74, and total assets of $138,000. What is the sustainable growth rate?

A. 6.98 percent

B. 6.89 percent

C. 7.33 percent

D. 7.04 percent

E. 7.21 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

101. A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate?

A. 5.72 percent

B. 6.84 percent

C. 7.12 percent

D. 11.38 percent

E. 6.64 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

102. Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate?

A. 3.38 percent

B. 2.27 percent

C. 1.78 percent

D. 3.62 percent

E. 4.97 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

103. The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the sustainable growth rate?

A. 10.48 percent

B. 11.29 percent

C. 11.79 percent

D. 12.08 percent

E. 12.39 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

104. Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued and no shares were repurchased. What is the retention ratio?

A. 29.62 percent

B. 35.84 percent

C. 56.25 percent

D. 70.38 percent

E. 64.16 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

105. Last year, Teresa's Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio?

A. 45.25 percent

B. 64.07 percent

C. 52.00 percent

D. 40.21 percent

E. 54.75 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

106. Adell Furniture has a profit margin of 8.2 percent on sales of $211,000. The common size ratio of dividends is .03 and total assets are $196,000. What is the plowback ratio?

A. 58.20 percent

B. 27.33 percent

C. 54.60 percent

D. 63.41 percent

E. 68.20 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

107. Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

A. 46.32 percent

B. 49.78 percent

C. 50.23 percent

D. 58.09 percent

E. 62.99 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

108. Use the following financial information to answer this question.









What are the values of the three components of the DuPont identity? Use ending balance sheet values.

A. .1168; 1.01; .5241

B. .1153; 1.01; .4259

C. .1153; 1.01; 1.9080

D. .1168; .99; .5241

E. .1153; .99; 1.9080

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

109. Suppose Healey Corp. has the following characteristics:

Shares outstanding: 68,500

Current share price: $13.50

Total debt: $438,500

Total cash: $63,100

Based on the formula above, what is the enterprise value of this company?

A. $948,850

B. $1,300,150

C. $1,500,400

D. $880,900

E. $1,125,600

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Firm valuation

110. Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year.

A. 24.78 days

B. 26.78 days

C. 29.09 days

D. 31.15 days

E. 33.33 days

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

111. Sunshine Rentals has a debt-equity ratio of .67. The return on assets is 8.1 percent, and total equity is $595,000. What is the net income?

A. $82,147.09

B. $81,311.29

C. $80,485.65

D. $78,887.02

E. $83,013.69

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

112. Turner's Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of $542,000. If management set a goal of increasing the total asset turnover to 1.10 times, what would the new sales figure need to be, assuming no increase in total assets?

A. $467,185

B. $492,727

C. $488,500

D. $596,200

E. $657,480

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Asset management ratios

113. High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio?

A. 3.54

B. 3.81

C. 3.99

D. 4.47

E. 4.23

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Market value ratios

114. Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of .55. If its return on equity is 14 percent, what is its net income?

A. $841.35

B. $887.16

C. $904.10

D. $911.16

E. $927.46

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

115. Mercier United has net income of $128,470. There are currently 32.67 days' sales in receivables. Total assets are $1,419,415, total receivables are $122,306, and the debt-equity ratio is .40. What is the return on equity?

A. 11.42 percent

B. 12.67 percent

C. 13.09 percent

D. 13.48 percent

E. 15.03 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.3 The DuPont Identity

Topic: DuPont identity

116. For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold of $492,300, depreciation expense of $61,200, additions to retained earnings of $48,560, and dividends per share of $2.18. There are 12,000 shares of common stock outstanding and the tax rate is 35 percent. What is the times interest earned ratio?

A. 5.47

B. 5.09

C. 6.59

D. 7.15

E. 3.67

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios

117. A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets?

A. 6.92 percent

B. 8.00 percent

C. 8.45 percent

D. 9.03 percent

E. 9.29 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: DuPont identity

118. Donegal's Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve?

A. 4.68 percent

B. 5.29 percent

C. 6.33 percent

D. 6.97 percent

E. 8.19 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

119. A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must be the total asset turnover?

A. .98

B. 1.06

C. 1.21

D. 1.44

E. 1.59

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-03 Assess the determinants of a firm’s profitability and growth.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

New Questions

120. It is important to review not just the Current Ratio, but also the Quick Ratio and Cash Ratio because:

A. the Cash Ratio must always provide a greater statistic than the Current Ratio and Quick Ratio.

B. the Quick Ratio includes inventory that can be easily liquidated for cash.

C. a low Current Ratio may not necessarily indicate a problem with a company.

D. companies can operate with a Cash Ratio close to zero and maintain liquidity.

E. GAAP requires it.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Ratio analysis

121. Financial Ratios are traditionally grouped in all but which of the following categories?:

A. Short- and Long-Term Solvency

B. Asset Management

C. Working Capital Management

D. Profitability Ratios

E. Market Value Ratios

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Ratio analysis

122. Ratio Analysis cannot be taken at face value for all of the following reasons except:

A. No underlying theory exists to pinpoint exact benchmarks.

B. While GAAP is consistent across the globe, multiple currencies may be considered.

C. Large Conglomerates can cross more than one industry type.

D. Different standards and procedures can exist from country to country.

E. Benchmarks can vary based on industry and company size.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-04 Identify and explain some of the problems and pitfalls in financial statement analysis.

Section: 3.5 Using Financial Statement Information

Topic: Financial statements

123. Which of the following is true regarding the Internal Growth Rate?

A. It represents the maximum possible growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio.

B. It represents the maximum possible growth rate a firm can achieve without external financing of any kind.

C. It represents the potential growth of the company based only on internal management controls.

D. It represents the potential growth of the company after the addition of fixed assets.

E. It represents the potential growth of the company if more common stock is issued and sold.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.4 Internal and Sustainable Growth

Topic: Internal and sustainable growth rates

124. The Texas Rustler has total assets of $645,563 and an equity multiplier of 1.22. What is the debt-equity ratio?

A. .44

B. .32

C. 1.22

D. .22

E. 1.36

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 03-02 Compute and, more importantly, interpret some common ratios.

Section: 3.2 Ratio Analysis

Topic: Long-term solvency ratios