Chapter 4 Measuring Financial Performance

1. Performance measures (i.e., ratio analysis) allow for:

a. Internal assessment of a firm.
b. External assessment of a firm.
c. Comparison with other firms in the industry.
d. All of the above
2. A firm's Return on Equity (ROE) measures
a. Its profitability relative to its total assets.
b. Its profitability relative to its equity investment.
c. Its return on sales.
d. Its debt to equity ratio
3. The DuPont method decomposes the ROE into the product of three other ratios.
Thoseratios are:
a. Profit margin, asset turnover, and financial leverage.
b. Profit margin, inventory turnover, and financial leverage.
c. Current ratio, asset turnover, and profit margin.
d. Quick ratio, inventory turnover, and return on assets.
4. The firm's ________ indicates how much the firm's profits contribute to ROE.
a. asset turnover
b. financial leverage
c. profit margin
d. return on assets
5. The firm's ________ indicates the degree to which effective use of borrowing
contributedto the firm's ROE.
a. asset turnover
b. financial leverage
c. profit margin
d. return on assets
6. Working capital management is the management of:
a. Long-term debt.
b. Short-term assets and liabilities.
c. Capital assets and equity.
d. Short-term debt, long-term debt, and equity
7. The asset turnover ratio:
a. Considers how much revenue a firm is able to generate relative to its asset base.
b. Affects the firm's ROE in that a higher ratio increases ROE and a lower
ratiodecreases ROE other things equal.
c. Captures the capital intensity of a business: the more capital intense a firm is, the
lower its asset turnover.
d. All of the above
8. A firm's age of accounts receivable:
a. Measures the average time between credit-based sales and the collection
ofpayments for those sales.
b. Is likely to be greater for firms within the same industry with more generous
creditterms.
c. Is in part a function of the type of industry in which the firm operates?
d. All of the above.

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9. . The ________ ratio measures the extent to which a firm is able to cover its short-
termobligations (usually defined as obligations due within the next year) with its short-
term assets.
a. ROE
b. Current
c. inventory turnover
d. working capital
10. Spartacus Inc., has sales of $4,500,000, net income of $250,000, assets worth
$3,700,000,and total common stockholder equity of $2,500,000. The ROE for Spartacus
is:
a. 5.56%.
b. 6.76%.
c. 10.00%.
d. 55.56%
11. Modern Comics Inc., has sales of $2,500,000, net income of $50,000, assets
worth$1,700,000, and total common stockholder equity of $1,500,000. The ROE for the
firm is:
a. 68.00%.
b. 60.00%.
c. 2.94%.
d. 3.33%.
12. A few of the ratios for Quality Construction Inc., are presented here. Use this
informationto calculate the firm's ROE. Leverage ratio = 1.50, ROA is 12.00%,
profitability ratio is8.00%.
a. 1.44%
b. 12.00%
c. 18.00%
d. 8.00%
13. Use the following ratios for Crimson Industries Inc., to estimate the firm's ROE. Netprofit
margin = 8.62%, asset turnover = 1.68, return on assets = 14.48%, financialleverage =
1.35, debt to equity ratio = 35%.
a. 2.10%
b. 0.99%
c. 5.07%
d. 19.55%
14. Creative Productions Inc., has a tax rate of 30%, an EBIT of $400,000. NWC of
$80,000,fixed assets of $1,200,000, and current liabilities of $220,000 and a cost of
capital of12.35%. What is the firm's ROIC?
a. 33.33%
b. 12.35%
c. 21.88%
d. 26.92%
15. Pavillion Corp. has $6,000,000 in total assets, $1,500,000 in current assets,
and$4,000,000 in equity. Calculate the debt-to-equity ratio.
a. 0.33
b. 0.50
c. 0.25
d. 0.67
16. . Pavillion Corp. has $6,000,000 in total assets, $1,500,000 in current assets,
and$4,000,000 in equity. Calculate the debt-to-asset ratio.

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 a. 0.33
b. 0.50
c. 0.25
d. 0.67
17. How many times can the Johnson Corporation cover their interest expenses if the firm
hassales of $3,000,000, total assets of $2,100,000, EBIT equal to $1,000,000, a tax rate
of40% and interest expense of $250,000?
a. 1.43
b. 2.10
c. 4.00
d. 12.0

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18. Use the information in Table 4.1 to determine the 2013 current ratio for Bacon Signs.
a. $3,908/$2,943 = 1.33
b. $3,527/$2,250 = 1.57
c. $3,170/$2,943 = 1.08
d. $713/$2,943 = 0.24
19. Use the information in Table 4.1 to determine the 2013 long term debt to equity ratio
forBacon Signs.
a. $5,500/$5,420 = 1.01
b. $5,500/$9,620 = 0.57
c. $6,678/ $5,420 = 1.23
d. $6,678/$9,620 = 0.69
20. Use the information in Table 4.1 to determine the 2013 dividend payout ratio for
BaconSigns.
a. This question cannot be answered from the information provided.
b. $250/$7418 = 0.03
c. $463/$713 = 0.65
d. $250/$713 = 0.35
Problems
1. Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65
million, and equity of $40 million, as well as year 2 revenues of $87 million, net
income of $22 million, assets of $70 million, and equity of $50 million. Calculate
Star’s return on equity (ROE) for each year based on the DuPont method and compare
it with a direct ROE measure. Next, explain why the firm’s ROE changed between
year 1 and year 2.
2. Nextime Ltd. has operating profits (EBIT) of $87 million, a tax rate of 35 percent,
networking capital of $129 million, and fixed assets of $285 million. Calculate
Nextime’sreturn on invested capital, or ROIC. Then describe three methods BE
Enterprises has fixedcosts of $50 million. ItsGross margin percentage is 18 percent.
What sales level must it achieve in order to breakeven? By which a firm can increase
its ROIC.
3. . Fixem Co. has revenue of $125 million, property and equipment of $42 million,
andaccumulated depreciation and amortization of $6 million. Estimate the fixed asset
turnoverratio
4. Wally Wholesale has revenue of $487,000, end-of year receivables of $112,000,
accountpayables of $70,000, and inventory of $91,000. Assume purchases equal cost
of sales of$372,000. Estimate Wally Wholesale’s age of inventory, age of receivables,
and age ofpayables
5. Quick-E Inc.’s current assets consist of cash of $5 million, account receivables of
$27million, inventory of $37 million, and it has current liabilities of $48 million.
CalculateQuick-E’s current ratio and quick ratio.
6. . Deb Co. has interest-bearing debt of $122 million, non–interest-bearing debt of $33
million,and equity of $76 million. Calculate Deb Co.’s debt-to-assets, debt-to-equity,
and long-term-debt-to-capital ratios.
7. IOU Inc. has EBIT of $58,000, depreciation and amortization of $12,000, interest
expensesof $21,000, principal repayments of $17,000, and a tax rate of 35 percent.
Calculate IOUInc.’s interest coverage ratio and debt service coverage ratio.