You are on page 1of 21

Lecture 3 Practice Questions: Financial Statements Analysis

Part 1: Multiple Choice Questions
1. If a firm has a debt-equity ratio of 3.0, then its debt to asset ratio must be which one of the
following?
a. 0.75
b. 2.00
c. 3.00
d. 3.75
? 3
???? ?? ?????? ????? = =
? 1
? 3 3
???? ?? ????? ????? = = = = 0.75
? 3+1 4

2. If a firm produces a fifteen percent return on assets and also an eighteen percent return on
equity, then the firm has an equity multiplier of?
a. 0.03
b. 0.33
c. 0.83
d. 1.20

??? 18%
?? = = = 1.2
??? 15%

3. Pioneer Limited has a profit margin of 10 percent, a return on assets of 15 percent, and an
equity multiplier of 2. What is the return on equity?
a. 1.50%
b. 5.00%
c. 20.00%
d. 30.00%
???
?? =
???
??? = ??? ∗ ?? = 15% ∗ 2 = 30%

4. Omega Limited has cash of $10,000, accounts receivable of $14,000, accounts payable of
$12,000, and inventory of $16,000. What is the value of the quick ratio?
a. 0.71
b. 0.83
c. 2.00
d. 3.33

???ℎ + ?? 10,000 + 14,000
????? ????? = = = 2.00
?? 12,000

1

5. A firm has total debt of $12,000 and a debt-equity ratio of 0.60. What is the value of the
total assets?
a. $16,500
b. $16,800
c. $19,200
d. $32,000
????? ????
???? ?? ?????? ????? =
????? ??????
????? ???? 12,000
????? ?????? = = = 20,000
???? ?? ?????? ????? 0.60
?? = ?? + ?? = 12,000 + 20,000 = 32,000

6. Venus Limited has net working capital of $5,000, net fixed assets of $40,000, sales of
$50,000, and current liabilities of $8,000. Calculate total asset turnover ratio.
a. 0.94 times
b. 1.11 times
c. 1.25 times
d. 1.35 times
TA = ??? + ??? + ?? = 40,000 + 5,000 + 8,000 = 53,000
????? 50,000
Total asset turnover = = = 0.94 ?????
?? 53,000

7. Mars Limited has net income of $30,000, a price-earnings ratio of 15, and earnings per
share of $0.6. How many shares of stock are outstanding?
a. 1,200
b. 2,000
c. 18,000
d. 50,000
??
EPS =
Shares outstanding
?? 30,000
Shares outstanding = = = 50,000
??? 0.6

8. Sigma Ltd has sales of $600,000, costs of goods sold of $400,000, inventory of $100,000,
and accounts receivable of $60,000. How many days, on average, does it take the firm to
sell its inventory assuming that all sales are on credit?
a. 36.50 days
b. 54.75 days
c. 60.83 days
d. 91.25 days
???? 400,000
????????? ???????? = = =4
????????? 100,000
365
????’ ????? ?? ????????? = = 91.25 ????
4
2

Long term solvency of a firm can be measured by ………… a. Balance sheet d. Activity ratios b. decrease in notes payable c.000 ?? 100.000 ??? = = = 20.000.000 ∗ 40% = 480.000 ∗ 10% = 100. total assets of $1.33% ?? ?? = ????? ?? = ????? ∗ ?? = 1. The formula which breaks down the return on equity into three component parts is referred to as which one of the following? a. Current ratio b.00% d. Pioneer Ltd has sales of $1. 83. Du Pont Analysis 3 . Financial ratios that measures the ability of a firm to meet its short-term commitments are known as ………… ratios.000 10. increase in accounts payable 12.000.000. Altman Z Score b.33% b. a.000 ????? ?????? ?????? ????? = ????? ?????? ????? ?????? = ?? ∗ ?????? ????? = 1. Gross profit ratio d. Net profit ratio 13. decrease in common stock d.000. Which one of the following is a source of cash? a. The firm has a total equity ratio of 40 percent. Debt equity ratio c. Liquidity ratios c. increase in accounts receivable b.83% ?? 480. Balance of payment c. and a profit margin of 10 percent.200.200.9. Solvency ratios 11. 20. 8. What is the return on equity? a. 40.83% c. Profitability ratios d.

Relationships determined from a firm's financial information and used for comparison purposes are known as ………… a. It also has net income of $10 million. Pioneer Limited has sales of $100 million.00% d. Sensitivity analysis 17. Profitability ratios d. Liquidity ratios c.14. Inventory 16. An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? a. 2008 and 2009 respectively. Assuming 2007 is a base year. Activity ratios b. Financial ratios that measures the ability of a firm to meet its long-term commitments are known as ………… ratios. $40 million and $120 million for the years 2007. 12. the horizontal analysis of net income of 2009 is ………… a. 200. -50. a. 2008 and 2009 respectively. $1 million and $15 million for the years 2007.50% c. 50. Dimensional analysis b. Accounts payable b.00% b. Solvency ratios 15. Cash d. Financial ratios c.00% 2007 2008 2009 Sales 100 40 120 NI 10 5 15 (15 − 10) ??(??) = = 50% 10 4 . Accounts receivable c. Scenario analysis d.

00% 2007 2008 2009 Sales 100 40 120 NI 10 5 15 15 ??(??) = = 12.00% d. Profitability ratio d. $1 million and $15 million for the years 2007. 12. $1 million and $15 million for the years 2007.00% b. It also has net income of $10 million. Liquidity ratio c. Activity ratio b. the year to year percentage change of net income of 2009 is ………… a. 2008 and 2009 respectively. the vertical analysis of net income of 2009 is ………… a. -50. Assuming 2007 is a base year.50% c.00% b. 50.00% 2007 2008 2009 Sales 100 40 120 NI 10 5 15 (15 − 5) %?(??) = = 200% 5 19.50% 120 20. $40 million and $120 million for the years 2007. Solvency ratio 5 .50% c. 2008 and 2009 respectively. 12. Pioneer Limited has sales of $100 million. 200. It also has net income of $10 million. 50. 200. $40 million and $120 million for the years 2007.18.00% d. Assuming 2007 is a base year. 2008 and 2009 respectively. -50. The ratios that show the capacity of the firm to meet its short-term obligation out of its short-term resources is known as ………… a. 2008 and 2009 respectively. Pioneer Limited has sales of $100 million.

Part 2: Case Studies Use the following balance sheets and income statements for the years 2014 and 2015 to calculate the following questions. Perform all the calculations for the year 2015. Balance Sheet as of June 30 (in millions) 2014 2015 2014 2015 Current Assets Current Liabilities Cash 30 35 Accounts Payable 20 50 Accounts Receivable 30 60 Notes Payable 10 5 Inventories 40 20 Current Portion of LTD 20 20 Total Current Assets 100 115 Total Current Liabilities 50 75 Long Term Liabilities Long Term Assets Long Term Loan 250 300 PPE (Gross) 500 620 Bonds Payable 50 40 Accumulated Depreciation 200 220 Total Long Term Liabilities 300 340 PPE (Net) 300 400 Goodwill 100 100 Total Liabilities 350 415 Total Long Term Assets 400 500 Shareholders' Equity Contributed Capital 100 130 Retained Earnings 50 70 Total Shareholders' Equity 150 200 Total Assets 500 615 Total Liabilities and Equity 500 615 6 .

5 Dividends 9. Income Statement for the year ended June 30 (in millions) 2014 2015 Sales 200 240 Cost of Goods Sold (COGS) 115 140 Gross Profit 85 100 S.5 13.G & A 10 5 Depreciation & Amortization 15 20 Earnings Before Interest and Tax (EBIT) 60 75 Interest expense 25 30 Earnings Before Tax (EBT) 35 45 Tax expense @ 30% 10.5 Retained Earnings 15 20 Shares Outstanding (in millions) 50 50 Market Value per Share ($/Share) 4 5 7 .5 Net income (NI) 24.5 11.5 31.

0% Total Long Term Liabilities 300 340 13.0% Long Term Liabilities Long Term Loan 250 300 20.3% Total Liabilities 350 415 18.0% Total Assets 500 615 23.3% Goodwill 100 100 0.0% 8 .0% PPE (Net) 300 400 33.3% Total Liabilities and Equity 500 615 23.0% Notes Payable 10 5 -50.0% Total Current Assets 100 115 15.0% Current Portion of LTD 20 20 0.7% Accounts Receivable 30 60 100.0% Long Term Assets PPE (Gross) 500 620 24. Balance Sheet as of June 30 (in millions) Horizontal Analysis 2014 2015 2015 Current Assets Cash 30 35 16.6% Shareholders' Equity Contributed Capital 100 130 30.0% Total Long Term Assets 400 500 25.0% Current Liabilities Accounts Payable 20 50 150.Question 1 Apply horizontal analysis for balance sheet for the year 2015 (assume the base year is 2014).0% Accumulated Depreciation 200 220 10.0% Total Shareholders' Equity 150 200 33.0% Retained Earnings 50 70 40.0% Inventories 40 20 -50.0% Total Current Liabilities 50 75 50.0% Bonds Payable 50 40 -20.

0% Goodwill 100 100 16.5% Total Long Term Liabilities 300 340 55.8% PPE (Net) 300 400 65.2% Long Term Liabilities Long Term Loan 250 300 48. Balance Sheet as of June 30 (in millions) Vertical Analysis 2014 2015 2015 Current Assets Cash 30 35 5.0% 9 .3% Total Liabilities 350 415 67.1% Retained Earnings 50 70 11.8% Current Portion of LTD 20 20 3.7% Accounts Receivable 30 60 9.3% Total Long Term Assets 400 500 81.8% Accumulated Depreciation 200 220 35.Question 2 Apply vertical analysis for balance sheets for the year 2015.4% Total Shareholders' Equity 150 200 32.3% Total Current Assets 100 115 18.5% Total Liabilities and Equity 500 615 100.1% Notes Payable 10 5 0.3% Total Assets 500 615 100.3% Total Current Liabilities 50 75 12.5% Shareholders' Equity Contributed Capital 100 130 21.8% Inventories 40 20 3.0% Current Liabilities Accounts Payable 20 50 8.8% Bonds Payable 50 40 6.7% Long Term Assets PPE (Gross) 500 620 100.

6% Dividends 9.5 28.0% Depreciation & Amortization 15 20 33.6% Cash Operating Expense 10 5 -50.0% Earnings Before Tax (EBT) 35 45 28.5 13.6% Net income (NI) 24. Income Statement for the year ended June 30 (in millions) Horizontal Analysis 2014 2015 2015 Sales 200 240 20.6% Tax expense @ 30% 10.5 11.5 28.0% Interest expense 25 30 20.3% Earnings Before Interest and Tax (EBIT) 60 75 25.Question 3 Apply horizontal analysis for income statement for the year 2015 (assume the base year is 2014).0% Cost of Goods Sold (COGS) 115 140 21.5 Retained Earnings 15 20 10 .5 31.7% Gross Profit 85 100 17.

Question 4 Apply vertical analysis for income statement for the year 2015.3% Interest expense 25 30 12.5 13.7% Cash Operating Expense 10 5 2.6% Net income (NI) 24.5 5. Income Statement for the year ended June 30 (in millions) Vertical Analysis 2014 2015 2015 Sales 200 240 100.5% Earnings Before Tax (EBT) 35 45 18.5 31.5 11.3% Earnings Before Interest and Tax (EBIT) 60 75 31.8% Tax expense @ 30% 10.3% Gross Profit 85 100 41.5 13.5 Retained Earnings 15 20 11 .1% Dividends 9.0% Cost of Goods Sold (COGS) 115 140 58.1% Depreciation & Amortization 15 20 8.

Question 5 Calculate enterprise value for the year 2015. Market Value of Equity (MVE) = Shares Outstanding * Market Price/ Share MVE = 50m * 5 = $250 million Enterprise Value (EV) = MVE + Debt – Cash Enterprise Value (EV) = MVE + (BVD .A/P) – Cash EV = 250m + (415m – 50m) – 35m = $580 million 12 .

12% 615 [5] Calculate Return on Equity. ??? ?????? ?????? ?????? = ????? 31. ??? ?????? ??? = ????? ?????? 31.89% 615 − 75 13 . ????? ?????? ????? ?????? ?????? = ????? 100 ????? ?????? ?????? = = 41. [1] Calculate Gross Profit Margin. ????????? ?????? ????????? ?????? ?????? = ????? 75 ????????? ?????? ?????? = = 31.Question 6 Calculate various profitability ratios.13% 240 [4] Calculate Return on Asset.5 ?????? ?????? = = 13.67% 240 [2] Calculate Operating Profit Margin. ????????? ?????? ???? = ????? ?????? − ??????? ??????????? 75 ???? = = 13.75% 200 [6] Calculate Return on Capital Employed.5 ??? = = 15.25% 240 [3] Calculate Profit Margin.5 ??? = = 5. ??? ?????? ??? = ????? ?????? 31.

53 ????? ??????? ??????????? 75 [2] Calculate Quick Ratio. ??? = ??????? ?????? − ??????? ??????????? ??? = 115 − 75 = $40 ? [5] Calculate NWC to Total Assets.27 ????? 75 [3] Calculate Cash Ratio. ??????? ?????? 115 ??????? ????? = = = 1.5% 615 [6] Calculate Interval Measure. ???ℎ ???ℎ ????? = ??????? ??????????? 35 ???ℎ ????? = = 0. ??????? ?????? − ????????? ????? ????? = ??????? ??????????? 115 − 20 ????? ????? = = 1. ??? ??? ?? ????? ?????? = ????? ?????? 40 ??? ?? ????? ?????? = = 6. [1] Calculate Current Ratio.48 ???? (140 + 5)/365 14 . ??????? ?????? ???????? ??????? = ??????? ????? ????????? ????? ??????? ?????? ???????? ??????? = (???? + ????????? ???????)/365 115 ???????? ??????? = = 289.Question 7 Calculate various liquidity ratios.47 ????? 75 [4] Calculate Net Working Capital.

??? ????? ?????? ????? ?? ?????? = ????? ?????? 400 ????? ?? ?????? = = 2 ????? 200 15 . ????? ?????? ?????? ????? = ????? ?????? 200 ?????? ????? = = 32.08 ????? 200 [4] Calculate Equity Multiplier.48% 615 [2] Calculate Equity Ratio. ????? ???? ???? ?? ?????? ????? = ????? ?????? 415 ???? ?? ?????? ????? = = 2. ????? ???? ???? ????? = ????? ?????? 415 ???? ????? = = 67. ????? ?????? ?????? ?????????? = ????? ?????? 615 ?????? ?????????? = = 3.08 ????? 200 [5] Calculate Fixed to Equity.Question 8 Calculate various solvency ratios.52% 615 [3] Calculate Debt-to-Equity Ratio. [1] Calculate Debt Ratio.

???? ???? ????????? ???? ???? ???? ????? = ???? ???? ????????? + ????? ?????? 340 ???? ???? ???? ????? = = 62.5 ????? (30 + 20) 16 . ???? + ???????????? ???ℎ ???????? = ???????? 75 + 20 ???ℎ ???????? = = 3.5 ????? 30 [8] Calculate Cash Coverage. ???? ????? ???????? ?????? = ???????? 75 ????? ???????? ?????? = = 2. ????????? ?????? ???? ??????? ???????? ????? = ????? ???? ??????? ???? ????????? ?????? ???? ??????? ???????? ????? = ???????? + ????????? 75 ???? ??????? ???????? ????? = = 1.[6] Calculate Long-Term Debt Ratio.96% (340 + 200) [7] Calculate Times Interest Earned.17 ????? 30 [9] Calculate Debt Service Coverage Ratio.

36 ???? ???????? ???????? 2.25 ???? ??????????? ???????? 4 [5] Calculate Payables Turnover. ???ℎ ?????????? ????? (???) = ???? ′ ????? ?? ????????? + ????’ ????? ?? ??????????? − ????’ ????? ?? ???????? ???ℎ ?????????? ????? (???) = 52.8 ????? ???????? ??????? 50 [6] Calculate Days’ Sales in Payables.Question 9 Calculate various activity ratios. 365 365 ????’ ????? ?? ????????? = = = 52. ????? 240 ??????????? ???????? = = = 4 ????? ???????? ?????????? 60 [4] Calculate Days’ Sales in Receivables. 365 365 ????’ ????? ?? ???????? = = = 130.04 ???? 17 . ???? 140 ???????? ???????? = = = 2. [1] Calculate Inventory Turnover.25 − 130. 365 365 ????’ ????? ?? ??????????? = = = 91.8 [7] Calculate Cash Conversion Cycle. ???? 140 ????????? ???????? = = = 7 ????? ????????? 20 [2] Calculate Days' Sales in Inventory.14 + 91.14 ???? ????????? ???????? 7 [3] Calculate Receivables Turnover.36 = 13.

6 ????? 400 [11] Calculate NWC Turnover.39 ????? 615 [9] Calculate Capital Intensity. ????? ????? ????? ???????? = ??? 240 ????? ????? ???????? = = 0.56 ????? 240 [10] Calculate Fixed Asset Turnover. ????? ????? ????? ???????? = ????? ?????? 240 ????? ????? ???????? = = 0.[8] Calculate Total Asset Turnover. ????? ?????? ??????? ????????? = ????? 615 ??????? ????????? = = 2. ????? ??? ???????? = ??? 240 ??? ???????? = = 6 ????? (115 − 75) 18 .

5 19 .5 ??? = = $0.5 [5] Calculate Retention Ratio (RR).49% 31.5 ??? = = $0.23/ ?ℎ??? 50 [3] Calculate Price Earnings (PE) Ratio.Question 10 Calculate various market value measure.51% 31.63 [4] Calculate Dividend Payout Ratio (DPO). ????????? ??? = ?ℎ???? ??????????? 11. ????? ??? ?ℎ??? ?? ????? = ??? 5 ?? ????? = = 7.94 ????? 0. [1] Calculate Earnings Per Share (EPS). ????????? ???????? ?????? ????? (???) = ??? ?????? 11. ??? ?????? ??? = ?ℎ???? ??????????? 31. ?????????? ???????? ???????? ????????? ????? (??) = ??? ?????? 20 ????????? ????? (??) = = 63.5 ???????? ?????? ????? (???) = = 36.63/?ℎ??? 50 [2] Calculate Dividends Per Share (DPS).

6% 5 [7] Calculate Market-to-Book Ratio. ???ℎ ????????? ??? ?ℎ??? ???????? ????? = ?????? ????? ??? ?ℎ??? 11. ?????? ????? ??? ?ℎ??? ?????? ?? ???? ????? = ???? ????? ??? ?ℎ??? 5 ∗ 50 ?????? ?? ???? ????? = = 1.[6] Calculate Dividend Yield.25 ????? 200 [8] Calculate Sustainable Growth Rate.49% = 10% 20 . ??????????? ?????ℎ ???? (?) = ??? ∗ ????????? ????? ??????????? ?????ℎ ???? (?) = 15.5/50 ???????? ????? = = 4.75% ∗ 63.

08 ??? ?????? = 15.08 ??? ?????? = 15.5 240 615 ??? ?????? = ∗ ∗ 240 615 200 ??? ?????? = 13. ?????? ?? Equity ??? ?????? = ( )( ) ?????? Multiplier ??? ?????? ????? ????? ?????? ??? ?????? = ????? ?????? ????? ?????? ????? ?????? 31. ?????? ????? ????? Equity ??? ?????? = ( )( )( ) ?????? ???????? Multiplier ??? ?????? ????? ????? ?????? ??? ?????? = ????? ????? ?????? ????? ?????? 31.13% ∗ 0.12% ∗ 3.39 ∗ 3.75% 21 . [1] Compute Three-factor DuPont Analysis.5 615 ??? ?????? = ∗ 615 200 ??? ?????? = 5.Question 11 Apply DuPont Analysis.75% [2] Compute Two-factor DuPont Analysis.