Verified Test Bank Financial Analysis Ch.28

Principles of Corporate Finance, 13e (Brealey)

Chapter 28 Financial Analysis

1) The following groups are stakeholders of a public company:

I. shareholders;

II. bankers;

III. suppliers;

IV. employees;

V. bondholders;

VI. management

A) I and II only

B) I, II, and III only

C) I, II, III, and IV only

D) I, II, III, IV, V, and VI

2) Assets are listed on the balance sheet in order of

A) decreasing liquidity.

B) increasing size and relative life.

C) decreasing size.

D) relative life.

3) The following are known as current assets:

A) cash, marketable securities, and receivables.

B) cash, marketable securities, receivables, and inventories.

C) marketable securities, receivables, inventories, and payables.

D) receivables, inventories, and payables.

4) The difference between total assets of a firm and its total liabilities is called

A) net working capital.

B) net current assets.

C) net worth.

D) net liabilities.

5) Inventory consists of:

A) finished goods.

B) raw material and finished goods.

C) raw material, work in process, and prepaid rent.

D) raw material, work in process, and finished goods.

6) The difference between current assets of a firm and its current liabilities is called

A) net tangible fixed assets.

B) net working capital.

C) gross working capital.

D) net worth.

7) Net working capital (NWC) is calculated as

A) total assets - total liabilities.

B) current assets + current liabilities.

C) current assets - current liabilities.

D) current liabilities - current assets.

8) Earnings before interest and taxes are calculated as

A) total revenues − costs.

B) total revenues − costs − depreciation.

C) total revenues − costs + depreciation - taxes.

D) total revenues − costs − depreciation − taxes.

9) Which of the following costs are not accounted for on the income statement?

A) Direct labor

B) Indirect labor

C) Opportunity cost

D) Legal costs

10) Equity investors have contributed $250,000 to your start-up business, while creditors provided a loan of $300,000. You have calculated your firm's WACC at 10 percent. The annual interest payment is $25,000 and the marginal corporate tax rate is 21 percent. How much profit will your equityholders need to earn in order to break even in economic terms (i.e., EVA of zero)?

A) $25,000

B) $35,250

C) $30,000

D) $13,075

11) If the debt ratio is 0.5, what is the debt-equity ratio? (Assume no leases.)

A) 0.5

B) 1.00

C) 2.00

D) 4.00

12) Which of the following is an example of a leverage ratio?

A) Debt-equity ratio

B) Quick ratio

C) Market to book ratio

D) Return on equity

13) Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80. Calculate the debt ratio.

A) 0.50

B) 0.55

C) 0.56

D) 0.60

14) Assume the following data: Long-term debt = 100; Value of leases = 20; Book value of equity = 80. Calculate the debt-equity ratio.

A) 0.50

B) 0.60

C) 1.00

D) 1.50

15) Assume the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10. Calculate the cash coverage ratio.

A) 7.0

B) 5.0

C) 4.7

D) 14.0

16) Which of the following is an example of a liquidity ratio?

A) Times interest earned (TIE)

B) P/E ratio

C) Return on equity

D) Quick ratio

17) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Accounts receivable = 200. Calculate the current ratio.

A) 2.0

B) 1.5

C) 1.0

D) 2.5

18) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200. Calculate the quick ratio.

A) 1.0

B) 2.0

C) 1.2

D) 0.4

19) Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Accounts receivable = 200. Calculate the cash ratio. (Assume that the firm has no marketable securities.)

A) 0.4

B) 2.0

C) 1.5

D) 1.2

20) Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Total assets = 1,600; Inventory = 200. Calculate the asset turnover ratio.

A) 2.00

B) 0.94

C) 1.33

D) 1.00

21) Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Total assets = 1,600; Inventory = 200. Calculate the inventory period.

A) 18.3

B) 45.6

C) 22.8

D) 16.0

22) Assume the following data: Sales = 3,200; Cost of goods sold = 1,600; Receivables = 200. Calculate the accounts receivable period.

A) 24.3

B) 22.8

C) 137.0

D) 45.6

23) When a firm improves (lowers) its days of inventory, it generally

A) requires additional cash investment in inventory.

B) releases cash locked up in inventory.

C) does not alter its cash position.

D) cannot reduce its inventories.

24) When a firm improves (lowers) its average collection period, it generally

A) requires additional cash investment in inventory.

B) releases cash locked up in accounts receivable.

C) does not alter its cash position.

D) cannot reduce its receivables.

25) Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Average total assets = 1,500. Calculate the profit margin.

A) 10.0 percent

B) 18.3 percent

C) 7.5 percent

D) 26.7 percent

26) Assume the following data: EBIT = 400; Tax = 100; Sales = 3,000; Total assets = 1,500. Calculate the ROA (return on assets).

A) 10.0 percent

B) 20.0 percent

C) 7.5 percent

D) 26.7 percent

27) Operating profit margin is calculated as

A) (after-tax interest plus net income)/sales.

B) net income/sales.

C) net income/cost of goods sold.

D) None of these answers are correct.

28) Assume the following data: EBIT = 400; Net income = 100; Equity = 1,000. Calculate the ROE (return on equity).

A) 10.0 percent

B) 12.0 percent

C) 7.5 percent

D) 30.0 percent

29) Which measure would be most useful in comparing the operating profitability of two firms in different industries?

A) Net profit margin

B) Return on equity

C) Sales to total assets

D) Return on assets

30) Efficiency ratios indicate

I. whether the firm is using its assets productively;

II. whether the firm is liquid;

III. whether the firm is profitable;

IV. how highly the firm is valued by investors

A) I only

B) II only

C) III only

D) III and IV only

31) Profitability ratios indicate

I. whether the firm is using its assets productively;

II. whether the firm is liquid;

III. whether the firm is profitable;

IV. how highly the firm is valued by investors

A) I only

B) II only

C) III only

D) III and IV only

32) Market value ratios indicate

I. whether the firm is using its assets productively;

II. whether the firm is liquid;

III. whether the firm is profitable;

IV. how highly the firm is valued by investors

A) I only

B) II only

C) II and III only

D) IV only

33) Which of the following factors would be influential in a typical financial plan?

I. how a firm can generate superior long-term returns;

II. choice of industry;

III. position within the industry

A) I only

B) I and II only

C) II and III only

D) I, II, and III

34) Assume a book value per share of $10 and a price per share of $24. What is the market capitalization of a firm with 2,000,000 outstanding shares?

A) $2,000,000

B) $20,000,000

C) $28,000,000

D) $48,000,000

35) Assume a book value per share of $5 and a price per share of $12. What is the market value added of a firm with 2,000,000 outstanding shares?

A) $1,000,000

B) $10,000,000

C) $14,000,000

D) $24,000,000

36) Net working capital equals total assets minus total liabilities.

37) An advantage of EVA, as compared to accounting measures of net income, is that EVA accounts for the cost of capital.

38) Leverage ratios indicate how heavily the company is in debt.

39) Financial ratios can help you to ask the right questions but they rarely answer these questions on their own.

40) On the balance sheet, assets are listed in increasing order of liquidity.

41) Market value ratios indicate how highly the firm is valued by managers.

42) The P/E ratio measures the price that investors are prepared to pay for each dollar of earnings.

43) According to the DuPont system: ROE = (assets/equity) × (sales/assets) × [(after-tax interest + net income)/sales] × [(net income)/( after-tax interest + net income)].

44) The calculation of market value added for a firm requires the use of the book value per share.

45) ROA can be increased by increasing asset turnover.

46) Briefly describe the relationship between accounting standards and different countries' legal traditions.

47) What are the three basic financial statements?

48) What are the common ratios used to measure the liquidity of a firm?

49) What are the different categories of financial ratios?

50) What are some of the pitfalls involved in using financial ratios?

51) Discuss the DuPont system.

52) Why is liquidity relevant?