MBA 620 6-1 Milestone Two: Performance
Analysis | 2026 Update with complete
solutions - SNHU.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
98 exam-style multiple-choice questions. Each question includes the correct answer and a complete rationale
for focused revision.
COVERAGE
This exam assesses mastery of financial statement analysis, ratio interpretation, and performance evaluation
for strategic decision-making. It covers profitability, liquidity, solvency, efficiency, and market-based metrics,
with emphasis on DuPont decomposition, cash flow quality, and benchmarking.
STUDY GUIDE
Recommended duration: 3 hours. Passing target: 80%.
HIGHP - Page 1 of 33
,1. A firm reports net income of $2.4M, sales of $30M, total assets of $15M, and equity of
$6M. Using the three-step DuPont decomposition, what is the firm's return on equity
(ROE)?
[ ] A. 16.0%
[ ] B. 24.0%
[ ] C. 40.0%
[ ] D. 8.0%
CORRECT: C. 40.0%
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier = (2.4/30) × (30/15) × (15/6) = 0.08 × 2 × 2.5 =
0.40 or 40%. Option A incorrectly uses only net income/equity without the full decomposition; B uses
assets/equity only; D uses net income/assets.
2. A company's current ratio is 2.5, but its quick ratio is 0.8. Which of the following best
explains this discrepancy?
[ ] A. The firm has a high level of accounts receivable.
[ ] B. The firm carries a large amount of inventory.
[ ] C. The firm has significant short-term debt.
[ ] D. The firm has a low cash balance.
CORRECT: B. The firm carries a large amount of inventory.
A large gap between current and quick ratios typically indicates heavy inventory, which is excluded from the
quick ratio. High receivables would affect both ratios similarly; short-term debt is in the denominator but does
not explain the gap; low cash would lower both ratios.
3. Which of the following transactions would increase a firm's operating cash flow but not
its net income?
[ ] A. A decrease in accounts receivable
[ ] B. An increase in accounts payable
[ ] C. Depreciation expense
[ ] D. A gain on the sale of equipment
CORRECT: A. A decrease in accounts receivable
A decrease in accounts receivable means cash collections exceed credit sales, increasing operating cash
flow without affecting net income. An increase in accounts payable also increases OCF but does not affect
net income; however, it is a liability increase, not a direct cash inflow from customers. Depreciation reduces
net income but is added back in OCF, so it affects both. A gain on sale increases net income but is
subtracted in OCF.
HIGHP - Page 2 of 33
,4. A firm has an economic value added (EVA) of -$1.2M. Which of the following
conclusions is most appropriate?
[ ] A. The firm is generating positive net income but not covering its cost of capital.
[ ] B. The firm is experiencing negative operating cash flow.
[ ] C. The firm's return on equity is below the industry average.
[ ] D. The firm has excessive debt in its capital structure.
CORRECT: A. The firm is generating positive net income but not covering its cost of capital.
Negative EVA indicates that after-tax operating profit is less than the dollar cost of capital, meaning the firm is
not creating shareholder value even if net income is positive. Negative operating cash flow is a separate
liquidity issue; ROE comparison is not directly implied; excessive debt may contribute but is not the definitive
conclusion.
5. A company's price-to-earnings (P/E) ratio is 12, while its industry average is 18. Which
of the following is the most likely explanation?
[ ] A. The market expects lower future growth for the company.
[ ] B. The company has a higher dividend payout ratio than peers.
[ ] C. The company's earnings are of lower quality than peers.
[ ] D. The company has a higher risk profile than peers.
CORRECT: A. The market expects lower future growth for the company.
A lower P/E often reflects lower expected growth prospects relative to the industry. A higher dividend payout
might increase P/E if investors value dividends, but it is not the primary driver. Lower earnings quality or
higher risk would typically also lower P/E, but the most direct interpretation is growth expectations.
6. Which of the following ratios is most useful for assessing a firm's ability to meet its
long-term debt obligations?
[ ] A. Times interest earned
[ ] B. Current ratio
[ ] C. Inventory turnover
[ ] D. Return on assets
CORRECT: A. Times interest earned
Times interest earned (EBIT/Interest) directly measures how many times operating earnings cover interest
expense, a key long-term solvency indicator. Current ratio assesses short-term liquidity; inventory turnover
measures efficiency; ROA measures profitability, not debt coverage.
7. A firm's operating cash flow is $5M, capital expenditures are $3M, and dividends paid
are $1.5M. What is the firm's free cash flow to equity (FCFE)?
[ ] A. $0.5M
HIGHP - Page 3 of 33
, [ ] B. $2.0M
[ ] C. $3.5M
[ ] D. $1.5M
CORRECT: A. $0.5M
FCFE = Operating Cash Flow - Capital Expenditures + Net Borrowing - Dividends. Assuming no net
borrowing, FCFE = $5M - $3M - $1.5M = $0.5M. Option B omits dividends; C omits capex; D is just
dividends.
8. When performing a common-size analysis of the income statement, each line item is
expressed as a percentage of:
[ ] A. Total assets
[ ] B. Net income
[ ] C. Sales
[ ] D. Total equity
CORRECT: C. Sales
Common-size income statements express each line as a percentage of sales, facilitating comparison across
firms of different sizes. Total assets and equity are used for balance sheet common-sizing; net income is not
a base for income statement common-sizing.
9. A company's return on assets (ROA) is 8%, and its return on equity (ROE) is 20%.
Which of the following is the most likely explanation for the difference?
[ ] A. The company has a high debt-to-equity ratio.
[ ] B. The company has a high profit margin.
[ ] C. The company has a high asset turnover.
[ ] D. The company has a low tax rate.
CORRECT: A. The company has a high debt-to-equity ratio.
ROE = ROA × Equity Multiplier. A large gap between ROE and ROA indicates significant financial leverage
(high debt-to-equity). High profit margin or asset turnover would affect both ratios similarly; a low tax rate
would increase both ROA and ROE, not create a gap.
10. In a table/exhibit format, classify each of the following actions as 'Anticipated',
'Nonessential', or 'Contraindicated' for a firm aiming to improve its cash conversion cycle
(CCC).
[ ] A. Anticipated
[ ] B. Nonessential
[ ] C. Contraindicated
[ ] D. Not applicable
HIGHP - Page 4 of 33
Analysis | 2026 Update with complete
solutions - SNHU.
Practice Question Bank & Answer Rationale
THIS PACK CONTAINS
98 exam-style multiple-choice questions. Each question includes the correct answer and a complete rationale
for focused revision.
COVERAGE
This exam assesses mastery of financial statement analysis, ratio interpretation, and performance evaluation
for strategic decision-making. It covers profitability, liquidity, solvency, efficiency, and market-based metrics,
with emphasis on DuPont decomposition, cash flow quality, and benchmarking.
STUDY GUIDE
Recommended duration: 3 hours. Passing target: 80%.
HIGHP - Page 1 of 33
,1. A firm reports net income of $2.4M, sales of $30M, total assets of $15M, and equity of
$6M. Using the three-step DuPont decomposition, what is the firm's return on equity
(ROE)?
[ ] A. 16.0%
[ ] B. 24.0%
[ ] C. 40.0%
[ ] D. 8.0%
CORRECT: C. 40.0%
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier = (2.4/30) × (30/15) × (15/6) = 0.08 × 2 × 2.5 =
0.40 or 40%. Option A incorrectly uses only net income/equity without the full decomposition; B uses
assets/equity only; D uses net income/assets.
2. A company's current ratio is 2.5, but its quick ratio is 0.8. Which of the following best
explains this discrepancy?
[ ] A. The firm has a high level of accounts receivable.
[ ] B. The firm carries a large amount of inventory.
[ ] C. The firm has significant short-term debt.
[ ] D. The firm has a low cash balance.
CORRECT: B. The firm carries a large amount of inventory.
A large gap between current and quick ratios typically indicates heavy inventory, which is excluded from the
quick ratio. High receivables would affect both ratios similarly; short-term debt is in the denominator but does
not explain the gap; low cash would lower both ratios.
3. Which of the following transactions would increase a firm's operating cash flow but not
its net income?
[ ] A. A decrease in accounts receivable
[ ] B. An increase in accounts payable
[ ] C. Depreciation expense
[ ] D. A gain on the sale of equipment
CORRECT: A. A decrease in accounts receivable
A decrease in accounts receivable means cash collections exceed credit sales, increasing operating cash
flow without affecting net income. An increase in accounts payable also increases OCF but does not affect
net income; however, it is a liability increase, not a direct cash inflow from customers. Depreciation reduces
net income but is added back in OCF, so it affects both. A gain on sale increases net income but is
subtracted in OCF.
HIGHP - Page 2 of 33
,4. A firm has an economic value added (EVA) of -$1.2M. Which of the following
conclusions is most appropriate?
[ ] A. The firm is generating positive net income but not covering its cost of capital.
[ ] B. The firm is experiencing negative operating cash flow.
[ ] C. The firm's return on equity is below the industry average.
[ ] D. The firm has excessive debt in its capital structure.
CORRECT: A. The firm is generating positive net income but not covering its cost of capital.
Negative EVA indicates that after-tax operating profit is less than the dollar cost of capital, meaning the firm is
not creating shareholder value even if net income is positive. Negative operating cash flow is a separate
liquidity issue; ROE comparison is not directly implied; excessive debt may contribute but is not the definitive
conclusion.
5. A company's price-to-earnings (P/E) ratio is 12, while its industry average is 18. Which
of the following is the most likely explanation?
[ ] A. The market expects lower future growth for the company.
[ ] B. The company has a higher dividend payout ratio than peers.
[ ] C. The company's earnings are of lower quality than peers.
[ ] D. The company has a higher risk profile than peers.
CORRECT: A. The market expects lower future growth for the company.
A lower P/E often reflects lower expected growth prospects relative to the industry. A higher dividend payout
might increase P/E if investors value dividends, but it is not the primary driver. Lower earnings quality or
higher risk would typically also lower P/E, but the most direct interpretation is growth expectations.
6. Which of the following ratios is most useful for assessing a firm's ability to meet its
long-term debt obligations?
[ ] A. Times interest earned
[ ] B. Current ratio
[ ] C. Inventory turnover
[ ] D. Return on assets
CORRECT: A. Times interest earned
Times interest earned (EBIT/Interest) directly measures how many times operating earnings cover interest
expense, a key long-term solvency indicator. Current ratio assesses short-term liquidity; inventory turnover
measures efficiency; ROA measures profitability, not debt coverage.
7. A firm's operating cash flow is $5M, capital expenditures are $3M, and dividends paid
are $1.5M. What is the firm's free cash flow to equity (FCFE)?
[ ] A. $0.5M
HIGHP - Page 3 of 33
, [ ] B. $2.0M
[ ] C. $3.5M
[ ] D. $1.5M
CORRECT: A. $0.5M
FCFE = Operating Cash Flow - Capital Expenditures + Net Borrowing - Dividends. Assuming no net
borrowing, FCFE = $5M - $3M - $1.5M = $0.5M. Option B omits dividends; C omits capex; D is just
dividends.
8. When performing a common-size analysis of the income statement, each line item is
expressed as a percentage of:
[ ] A. Total assets
[ ] B. Net income
[ ] C. Sales
[ ] D. Total equity
CORRECT: C. Sales
Common-size income statements express each line as a percentage of sales, facilitating comparison across
firms of different sizes. Total assets and equity are used for balance sheet common-sizing; net income is not
a base for income statement common-sizing.
9. A company's return on assets (ROA) is 8%, and its return on equity (ROE) is 20%.
Which of the following is the most likely explanation for the difference?
[ ] A. The company has a high debt-to-equity ratio.
[ ] B. The company has a high profit margin.
[ ] C. The company has a high asset turnover.
[ ] D. The company has a low tax rate.
CORRECT: A. The company has a high debt-to-equity ratio.
ROE = ROA × Equity Multiplier. A large gap between ROE and ROA indicates significant financial leverage
(high debt-to-equity). High profit margin or asset turnover would affect both ratios similarly; a low tax rate
would increase both ROA and ROE, not create a gap.
10. In a table/exhibit format, classify each of the following actions as 'Anticipated',
'Nonessential', or 'Contraindicated' for a firm aiming to improve its cash conversion cycle
(CCC).
[ ] A. Anticipated
[ ] B. Nonessential
[ ] C. Contraindicated
[ ] D. Not applicable
HIGHP - Page 4 of 33
