Quiz: Brigham/Houston: Fundamentals of Financial Mana...

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Assignment Name: Brigham/Houston: Fundamentals of Financial Management, 12e, Chapter 4 Summary of Results Total Possible: 36.0 Time Spent: 00:02:53 / 01:00:00

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Financial statement analysis helps management and investors identify a firm's strengths and weaknesses. Managers can then take actions to exploit the strengths and improve the weaknesses, and investors can analyze the data and make estimates regarding the firm's future performance. True or False?
True False

status: correct (1.0) correct: true your answer: true feedback: Correct.

The easier it is to convert an asset to cash at close to a given value, the more liquid the asset. True or false?
2 True False status: correct (1.0) correct: true your answer: true feedback: Correct. Given the following balance sheet data, what is Firm A's current ratio?

a. 2.12

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a. 2.12 3 b. 2.36

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c. 2.60

d. 2.86

e. 3.14

status: correct (1.0) correct: b your answer: b feedback: Correct. Given the data below, what is Firm B's quick ratio?

a. 2.01 4 b. 2.24

c. 2.48

d. 2.76

e. 3.04

status: correct (1.0) correct: d your answer: d feedback: Correct. Given the data below, which firm is more liquid based on its liquidity ratios, A or B?

a. A

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a. A

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b. B

status: correct (1.0) correct: b your answer: b feedback: Correct.

The asset management ratios are designed to see if the amount of assets a firm has are consistent with its volume of sales. True or false?
6 True False status: correct (1.0) correct: true your answer: true feedback: Correct.

All of the asset turnover ratios are formed by dividing a balance sheet asset by annual sales. This tells us how frequently the assets are used up and replaced during a year. True or false?
7 True False status: correct (1.0) correct: false your answer: false feedback: Sales are always used as the numerator, assets as the denominator. Collins Corporation had sales of $100,000, year-end receivables of $12,000, inventories of $21,500, and total assets of $75,000. It uses a 365-day year for ratio calculations. What was its inventory turnover ratio? a. 3.77

b. 4.19 8

c. 4.65

d. 5.12

e. 5.63

status: correct (1.0) correct: c your answer: c feedback: Correct. Collins Corporation had sales of $100,000, year-end receivables of $12,000, inventories of $21,500, and total assets of $75,000. It uses a 365-day year for ratio calculations. What was Collins' total assets turnover ratio? a. 1.33

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b. 1.46 9

c. 1.61

d. 1.77

e. 1.95

status: correct (1.0) correct: a your answer: a feedback: Correct. Collins Corporation had sales of $100,000, year-end receivables of $12,000, inventories of $21,500, and total assets of $75,000. It uses a 365-day year for ratio calculations. What was Collins' Days Sales Outstanding (DSO)? a. 39.2

b. 40.1 10

c. 41.7

d. 42.3

e. 43.8 days

status: correct (1.0) correct: e your answer: e feedback: Correct. In 2006 Firm X had $500 of assets and $1,000 of sales. Its operating costs were $700, including $10 of lease payments and of $100 of depreciation. X had no amortization charges. Its current liabilities were $100, its long-term debt was $250, and its interest charges were $35. In addition, it was required to pay off $10 of long-term debt. What was Firm X's debt ratio? a. 55%

b. 60% 11 c. 65%

d. 70%

e. 75%

status: correct (1.0) correct: d your answer: d

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your answer: d feedback: Correct.

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If Collins sells on credit terms of 30 days, do all of its customers pay on time? a. yes 12 b. no

status: correct (1.0) correct: b your answer: b feedback: Correct. In 2006 Firm X had $500 of assets and $1,000 of sales. Its operating costs were $700, including $10 of lease payments and of $100 of depreciation. X had no amortization charges. Its current liabilities were $100, its long-term debt was $250, and its interest charges were $35. In addition, it was required to pay off $10 of long-term debt. What was X's times interest earned (TIE) ratio? a. 7.90

b. 8.23 13 c. 8.57

d. 8.91

e. 9.27

status: correct (1.0) correct: c your answer: c feedback: Correct. In 2006 Firm X had $500 of assets and $1,000 of sales. Its operating costs were $700, including $10 of lease payments and of $100 of depreciation. X had no amortization charges. Its current liabilities were $100, its long-term debt was $250, and its interest charges were $35. In addition, it was required to pay off $10 of long-term debt. What was X's EBITDA coverage ratio? a. 7.45

b. 7.64 14 c. 7.83

d. 8.02

e. 8.22

status: correct (1.0) correct: a your answer: a feedback: Correct.

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feedback: Correct.

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In 2006 Keys Industries had assets of $2,100, sales of $2,960, operating costs of $2,675, total debt of $1,115, interest charges of $125, and a tax rate of 40%. What was Keys' profit margin? a. 2.36%

b. 2.62% 15

c. 2.92%

d. 3.24%

e. 3.56%

status: correct (1.0) correct: d your answer: d feedback: Correct. In 2006 Keys Industries had assets of $2,100, sales of $2,960, operating costs of $2,675, total debt of $1,115, interest charges of $125, and a tax rate of 40%. What was Keys' return on total assets, ROA? a. 3.33%

b. 3.70% 16

c. 4.11%

d. 4.57%

e. 4.80%

status: correct (1.0) correct: d your answer: d feedback: Correct. In 2006 Keys Industries had assets of $2,100, sales of $2,960, operating costs of $2,675, total debt of $1,115, interest charges of $125, and a tax rate of 40%. What was Keys' basic earning power (BEP) ratio? a. 11.05%

b. 11.63% 17

c. 12.25%

d. 12.89%

e. 13.57%

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e. 13.57%

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status: correct (1.0) correct: e your answer: e feedback: Correct. Which of these ratios tells you the profits provided by each dollar of sales? a. ROE

b. ROA

18

c. Total Assets Turnover

d. Basic Earning Power

e. Profit Margin

status: correct (1.0) correct: e your answer: e feedback: Correct. In 2006 Keys Industries had assets of $2,100, sales of $2,960, operating costs of $2,675, total debt of $1,115, interest charges of $125, and a tax rate of 40%. What was Keys' ROE? a. 9.26%

b. 9.75% 19

c. 10.24%

d. 10.75%

e. 11.29%

status: correct (1.0) correct: b your answer: b feedback: Correct. Etzkorn Corporation's 2006 year-end assets were $1,650, its sales for the year were $2,730, its operating costs were $2,438, its total debt was $625, its interest charges were $52, and its tax rate was 40%. What was Etzkorn's profit margin? a. 4.76%

b. 5.01% 20 c. 5.27%

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c. 5.27%

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d. 5.53%

e. 5.81%

status: correct (1.0) correct: c your answer: c feedback: Correct. Etzkorn Corporation's 2006 year-end assets were $1,650, its sales for the year were $2,730, its operating costs were $2,438, its total debt was $625, its interest charges were $52, and its tax rate was 40%. What was Etzkorn's total assets turnover? a. 1.20

b. 1.34 21 c. 1.49

d. 1.65

e. 1.82

status: correct (1.0) correct: d your answer: d feedback: Correct. Etzkorn Corporation's 2006 year-end assets were $1,650, its sales for the year were $2,730, its operating costs were $2,438, its total debt was $625, its interest charges were $52, and its tax rate was 40%. What was Etzkorn's equity multiplier? a. 0.84

b. 0.99 22 c. 1.16

d. 1.37

e. 1.61

status: correct (1.0) correct: e your answer: e feedback: Correct. If operating conditions held constant, would Keys' ROA increase or decrease if it used more financial leverage, i.e., if it increased its debt ratio?

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it increased its debt ratio? a. Increase 23 b. Decrease

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status: correct (1.0) correct: b your answer: b feedback: Correct. More debt would mean higher interest charges, hence lower net income. Assets would not change, so the ROA would have to fall. Which of the following factors would cause Yobaccio Company's P/E, Price/Cash Flow, and M/B ratios to be high relative to other firms in its industry? a. Yobaccio's expected future growth rate is below its industry average.

b. Yobaccio uses more financial leverage than most other firms in its industry. 24 c. Yobaccio's accountants are very aggressive in terms of using procedures that reduce costs below the levels that more conservative firm's report. d. Yobaccio's management is highly regarded with respect to strategic planning, operating skills, and ethical behavior. status: correct (1.0) correct: d your answer: d feedback: Correct.

The average firm in each industry will have a P/E ratio that is equal to the P/E of all firms as approximated by the S&P 500. True or false?
25 True False status: correct (1.0) correct: false your answer: false feedback: Correct. Firms in industries that are doing well, like semiconductors, will have relatively high P/Es compared to say the U.S. auto companies. Suppose a firm's P/E ratio showed a rising trend over the last 5 years. Would this suggest that the firm's image is getting better or getting worse? a. Getting better 26 b. Getting worse

status: correct (1.0) correct: a your answer: a feedback: Correct.

The DuPont Equation shows that a firm's ROE is equal to its profit margin (Net Income/Sales) times its Total Assets Turnover (Sales/Total Assets) minus the Equity Multiplier (Total Assets/Common Equity). True or false? 9 of 12

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True False

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27

status: correct (1.0) correct: false your answer: false feedback: Correct. We multiply by the Equity Multiplier, not subtract it. Etzkorn Corporation's 2006 year-end assets were $1,650, its sales for the year were $2,730, its operating costs were $2,438, its total debt was $625, its interest charges were $52, and its tax rate was 40%. What was Etzkorn's ROE, rounded to the nearest whole percentage? a. 13%

b. 14% 28 c. 15%

d. 16%

e. 17%

status: correct (1.0) correct: b your answer: b feedback: Correct.

If a firm used more debt, this would increase its interest costs and lower its profit margin, and that would almost certainly cause its ROE to decline. True or false?
29 True False status: correct (1.0) correct: false your answer: false feedback: Correct.

30

"Benchmarking" refers to comparing a firm's ratios with the ratios of a set of other companies. This helps a firm identify areas where operations could be improved. Also, benchmarking can be useful for improving a firm's executive compensation plan. True or false?
True False

status: correct (1.0) correct: true your answer: true feedback: Correct.

31

Ratio analysis is useful for bankers and other credit analysts, but it is not useful for stock analysts because stock prices depend on future earnings and the riskiness of those earnings, and ratios cannot be used to help forecast profits or their risk. True or false?
True

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True False status: correct (1.0) correct: false your answer: false feedback: Correct.

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It is easier to obtain comparative ratios on things like the profit margin and the DSO for large, multidivisional firms than for small, single product firms. True or false?
32 True False status: correct (1.0) correct: false your answer: false feedback: Correct.

The ratios for a well-established, relatively stable company whose results are quite predictable would be relatively constant at each point in time, such as at the end of each month during the year. True or false?
33 True False status: correct (1.0) correct: false your answer: false feedback: Correct.

If a firm takes steps that increase its expected future ROE, this means that its shareholders' wealth must also increase. True or false?
34 True False status: correct (1.0) correct: false your answer: false feedback: Correct.

35

Economic Value Added (EVA) differs from accounting net income mainly in the sense that in the EVA calculation we deduct the cost of common equity capital whereas this cost is not deducted when calculating net income. True or false?
True False

status: correct (1.0) correct: true your answer: true feedback: Correct.

Until 2005 General Motors was the largest company in the U.S., and for over 50 years it was also regarded as one of the strongest U.S. firms. If an analyst had calculated all of the ratios discussed in this chapter for GM and found all of them to look good in comparison with other companies, would this 36 indicate that the firm was going to perform well in the future?
True

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False status: correct (1.0) correct: false your answer: false feedback: Correct.

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