Finance Applications and Theory 4th Edition By Cornett - Test Bank

Chapter 03 Analyzing Financial Statements Multiple Choice Questions 1. Which of the following refer to ratios that measure the relationship between a firm's liquid (or current) assets and its current liabilities? A. cross-section B. internal-growth C. liquidity D. market value 2. Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities? A. cross-section B. current C. internal-growth D. quick or acid-test 3. Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales? A. cash B. current C. internal-growth D. quick or acid-test 4. Which ratio measures a firm's ability to pay short-term obligations with its available cash and market securities? A. cash B. current C. internal-growth D. quick or acid-test 5. Which statement is true? A. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. B. The lower the liquidity ratios, the less liquidity risk a firm has. C. Liquid assets generate profits for the firm. D. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets. 6. Which of the following ratios measure how efficiently a firm uses its assets, as well as how efficiently the firm manages its accounts payable? A. asset management B. cash C. internal-growth D. quick or acid-test 7. Which ratio measures the number of dollars of sales produced per dollar of inventory? A. asset management B. cash C. internal-growth D. inventory turnover 8. Which of these statements is true? A. A low inventory turnover ratio or a low days' sales in inventory is a sign of good inventory management. B. A high inventory turnover ratio or a low days' sales in inventory is a sign of good inventory management. C. A low inventory turnover ratio or a high days' sales in inventory is a sign of good inventory management. D. A high inventory turnover ratio or a high days' sales in inventory is a sign of good inventory management. 9. Which of the following measures the number of days accounts receivable are held before the firm collects cash from the sale? A. accounts receivable turnover B. average collection period C. average payment period D. accounts payable turnover 10. Which of the following measures the number of days that the firm holds accounts payable before it has to extend cash to buy raw materials? A. accounts receivable turnover B. average collection period C. average payment period D. accounts payable turnover 11. Which of the following measures the number of dollars of sales produced per dollar of fixed assets? A. fixed asset to working capital ratio B. fixed asset turnover ratio C. fixed asset management ratio D. sales to working capital ratio 12. Which of these statements is true? A. The age of a firm's cash will affect the current ratio level. B. The age of a firm's accounts receivable will affect the current ratio level. C. The age of a firm's fixed assets will affect the fixed asset turnover ratio level. D. The age of a firm's fixed assets will affect the current ratio level. 13. Which of these statements is true? A. In general, the lower the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be. B. In general, the lower the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be. C. In general, the higher the total asset turnover and the lower the capital intensity ratio, the more efficient the overall asset management of the firm will be. D. In general, the higher the total asset turnover and the higher the capital intensity ratio, the more efficient the overall asset management of the firm will be. 14. Which of these ratios measure the extent to which the firm uses debt (or financial leverage) versus equity to finance its assets? A. debt management ratios B. equity ratios C. financial ratios D. liquidity ratios 15. Which ratio measures the percentage of total assets financed by debt? A. debt B. debt-to-equity C. equity multiplier D. liquidity 16. Which of the following refers to the amount of debt versus equity a firm has on its balance sheet? A. capital coverage B. capital structure C. debt structure D. financial structure 17. Which of these is NOT considered a coverage ratio? A. cash coverage ratio B. current ratio C. fixed-charge coverage ratio D. times interest earned 18. Which of these ratios show the combined effects of liquidity, asset management, and debt management on the overall operation results of the firm? A. liquidity B. coverage C. financial D. profitability 19. Which of the following measures the operating return on the firm's assets, irrespective of financial leverage and taxes? A. basic earnings power ratio B. profit margin C. return on assets D. return on equity 20. For publicly traded firms, which of these ratios measure what investors think of the company's future performance and risk? A. liquidity ratios B. market value ratios C. price value ratios D. profitability ratios 21. Which of these can be used by interested parties to identify changes in corporate performance? A. common-size financial statements B. industrialized financial statements C. sanitized financial statements 22. Which of the following is the maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings? A. internal growth rate B. retained earnings growth rate C. sustainable growth rate D. weighted growth rate 23. To interpret financial ratios, managers, analysts, and investors use which of the following type of benchmarks? A. competitive analysis B. cross-industry analysis C. time-industry analysis D. time series analysis 24. Which is true? Ratio analysis A. can provide useful information on a firm's current position but should never be used to forecast future performance. B. can provide useful information on a firm's current position and hint at future performance. C. can provide useful information on a firm's past but not current position. D. can provide useful information on a firm's past and current position, but should never be used to forecast future performance. 25. You are evaluating the balance sheet for Blue Jays Corporation. From the balance sheet you find the following balances: cash and marketable securities = $200,000, accounts receivable = $800,000, inventory = $1,000,000, accrued wages and taxes = $250,000, accounts payable = $400,000, and notes payable = $300,000. What are Blue Jays' current ratio, quick ratio, and cash ratio, respectively? A. 1.05263, 1.05263, 0.21053 B. 2.10526, 1.05263, 0.21053 C. 3.07692, 1.53846, 0.30769 D. 3.07692, 1.05263, 0.30769 The top part of Mars, Inc.'s 2018 balance sheet is listed as follows (in millions of dollars). Current assets: Current liabilities: Cash and marketable securities $ 10 Accrued wages and taxes $20 Accounts receivable 40 Accounts payable 30 Inventory 160 Notes payable 40 Total $ 210 Total $90 What are Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2018? A. 0.1111, 0.5556, 0.2 B. 2.3333, 0.5556, 0.1111 C. 4.2, 1.0, 0.2 D. 10.5, 6.0, 1.0 26. The top part of Rammy's Inc.'s 2018 balance sheet is listed as follows (in millions of dollars). Current assets: Current liabilities: Cash and marketable securities $ 5 Accrued wages and taxes $ 6 Accounts receivable 15 Accounts payable 10 Inventory 95 Notes payable 50 Total $ 115 Total $66 What are Mars, Inc.'s current ratio, quick ratio, and cash ratio for 2018? A. 1.74242, 0.30303, 0.07576 B. 7.1875, 1.25, 0.3125 C. 1.43939, 0.30303, 0.07576 D. 19.16667, 3.33333, 0.83333 27. 28. Tops N Bottoms Corp. reported sales for 2018 of $50 million. Tops N Bottoms listed $4 million of inventory on its balance sheet. Using a 365-day year, how many days did Tops N Bottoms' inventory stay on the premises? How many times per year did Tops N Bottoms' inventory turn over? A. 29.2 days, 12.5 times, respectively B. 12.5 days, 29.2 times, respectively C. 0.08 days, 12.5 times, respectively D. 29.2 days, 0.0345 times, respectively 29. Rachets R Us Corp. reported sales for 2013 of $200,000. Rachets R Us listed $25,000 of inventory on its balance sheet. Using a 365-day year, how many days did Rachets R Us's inventory stay on the premises? How many times per year did Rachets R Us's inventory turnover? A. 0.125 days, 8 times, respectively B. 0.125 days, 5 times, respectively C. 45.625 days, 8 times, respectively D. 45.625 days, 5 times respectively 30. CornProducts Corp. ended the year 2018 with an average collection period of 40 days. The firm's credit sales for 2011 were $9 million. What is the approximate year-end 2013 balance in accounts receivable for Corn Products? A. $225,000 B. $986,300 C. $4,444,400 D. $360,000,000 31. Trina'sTrikes, Inc. reported a debt-to-equity ratio of 2 times at the end of 2018. If the firm's total debt at year-end was $10 million, how much equity does Trina's Trikes have? A. $2 million B. $5 million C. $10 million D. $20 million 32. Will's Wheels, Inc. reported a debt-to-equity ratio of 0.65 times at the end of 2018. If the firm's total debt at year-end was $5 million, how much equity does Will's Wheels have? A. $0.65 million B. $3.25 million C. $5 million D. $7.69 million 33. You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms? A. LotsofDebt: 90 percent, 10 times, 9 times, respectively; and LotsofEquity: 10 percent, 1.11 times, 0.1111 times, respectively B. LotsofDebt: 10 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 90 percent, 10 times, 9 times, respectively C. LotsofDebt: 90 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 10 percent, 10 times, 9 times, respectively D. LotsofDebt: 10 percent, 10 times, 9 times, respectively; and LotsofEquity: 90 percent, 1.11 times, 0.1111 times, respectively 34. Bree's Tennis Supply's market-to-book ratio is currently 9.4 times and PE ratio is 20 times. If Bree's Tennis Supply's common stock is currently selling at $20.50 per share, what is the book value per share and earnings per share? A. $1.025, $2.1809, respectively B. $2.1809, $1.025, respectively C. $410.00, $192.70, respectively D. $192.70, $410.00, respectively 35. Tina's Track Supply's market-to-book ratio is currently 4.5 times and PE ratio is 10.5 times. If Tina's Track Supply's common stock is currently selling at $100 per share, what is the book value per share and earnings per share? A. $450, $1,050, respectively B. $1,050, $450, respectively C. $22.2222, $9.5238, respectively D. $9.5238, $22.2222, respectively 36. If Epic, Inc. has an ROE = 25 percent, equity multiplier = 4, a profit margin of 12 percent, what is the total asset turnover ratio? A. 0.0833 B. 0.192 C. 0.5208 D. 0.75 37. If Apex, Inc. has an ROE = 10 percent, equity multiplier = 3, and profit margin of 5 percent, what is the total asset turnover ratio? A. 0.0600 B. 0.0667 C. 0.1667 D. 0.6667 38. Last year Café Creations, Inc. had an ROA of 25 percent, a profit margin of 12 percent, and sales of $4 million. What is Café Creations' total assets? A. $0.12m. B. $0.48m. C. $1.00m. D. $1.92m. 39. Last year Mocha Java, Inc. had an ROA of 10 percent, a profit margin of 5 percent, and sales of $25 million. What is Mocha Java's total assets? A. $0.125m. B. $1.25m. C. $12.5m. D. $12m. 40. Last year Umbrellas Unlimited Corporation had an ROA of 10 percent and a dividend payout ratio of 50 percent. What is the internal growth rate? A. 1.00 percent B. 2.25 percent C. 5.26 percent D. 100.00 percent 41. Last year Rain Repel Corporation had an ROA of 5 percent and a dividend payout ratio of 90 percent. What is the internal growth rate? A. 4.75 percent B. 0.50 percent C. 50.00 percent D. 52.63 percent 42. Last year Poncho Villa Corporation had an ROA of 16 percent and a dividend payout ratio of 25 percent. What is the internal growth rate? A. 1.19 percent B. 13.64 percent C. 25.40 percent D. 33.33 percent 43. Last year Umbrellas Unlimited Corporation had an ROE of 16.5 percent and a dividend payout ratio of 40 percent. What is the sustainable growth rate? A. 13.17 percent B. 10.99 percent C. 27.50 percent D. 32.93 percent 44. Last year Rain Repel Corporation had an ROE of 10 percent and a dividend payout ratio of 80 percent. What is the sustainable growth rate? A. 1.11 percent B. 2.04 percent C. 44.44 percent D. 50.00 percent 45. Burt's TVs has current liabilities of $25 million. Cash makes up 40 percent of the current assets and accounts receivable makes up another 20 percent of current assets. Burt's current ratio = 0.85 times. What is the value of inventory listed on the firm's balance sheet? A. $4.25m. B. $8.5m. C. $10m. D. $40m. 46. Ernie's Mufflers has current liabilities of $45 million. Cash makes up 5 percent of the current assets and accounts receivable makes up another 50 percent of current assets. Ernie's current ratio = 1.5 times. What is the value of inventory listed on the firm's balance sheet? A. $13.75m. B. $20.25m. C. $30.375m. D. $33.75m. 47. You have the following information on Marco's Polo Shop: total liabilities and equity = $205 million, current liabilities = $45 million, inventory = $60 million, and quick ratio = 2.4 times. Using this information, what is the balance for fixed assets on Marco Polo's balance sheet? A. $37m. B. $97m. C. $145m. D. $157m. 48. You have the following information on Olivia's Bridle Shop: total liabilities and equity = $65 million, current liabilities = $10 million, inventory = $15 million, and quick ratio = 3 times. Using this information, what is the balance for fixed assets on Olivia's balance sheet? A. $20m. B. $40m. C. $45m. D. $135m. 49. Oasis Products, Inc. has current liabilities = $10 million, current ratio = 1.5 times, inventory turnover ratio = 12 times, average collection period = 20 days, and sales = $100 million. What is the value of their cash and marketable securities? A. $1,187,215 B. $8,333,333 C. $15,000,000 D. $17,146,188 50. Green Products, Inc. has current liabilities = $40 million, current ratio = 2.4 times, inventory turnover ratio = 8 times, average collection period = 40 days, and sales = $320 million. What is the value of their cash and marketable securities? A. $20.93m. B. $56.00m. C. $75.07m. D. $96.00m. 51. You have the following information on Universe It Ts, Inc.: sales to working capital = 10 times, profit margin = 25 percent, net income available to common stockholders = $3 million, and current liabilities = $1 million. What is the firm's balance of current assets? A. $1.075m B. $1.2m C. $2.2m D. $5m 52. You have the following information on Zip's Diner, Inc.: sales to working capital = 8 times, profit margin = 5 percent, net income available to common stockholders = $20 million, and current liabilities = $4 million. What is the firm's balance of current assets? A. $4.125m B. $6.5m C. $46m D. $54m 53. Use the following information to calculate current assets: sales = $12 million, capital intensity ratio = 4 times, debt ratio = 45 percent, and fixed asset turnover ratio = 2.5 times. A. $4.8m B. $21.6m C. $43.2m D. $48m 54. Use the following information to calculate current assets: sales = $100 million, capital intensity ratio = 0.5 times, debt ratio = 30 percent, and fixed asset turnover ratio = 5 times. A. $10m B. $15m C. $30m D. $50m 55. Zoe's Dog Toys, Inc. reported a debt to equity ratio of 0.5 times at the end of 2018. If the firm's total assets at year-end are $50 million, how much of their assets is financed with equity? A. $16.67m B. $25m C. $33.33m D. $50m 56. Nicole's Neon Signs, Inc. reported a debt to equity ratio of 1.9 times at the end of 2018. If the firm's total assets at year-end are $100 million, how much of their assets is financed with equity? A. $34.48m B. $65.52m C. $52.63m D. $100m 57. Tierre's Ts, Inc. reported a debt to equity ratio of 3 times at the end of 2018. If the firm's total assets at year-end are $15 million, how much of their assets is financed with equity? A. $3.75m B. $5m C. $11.25m D. $45m 58. Paige's Purses, Inc. reported a debt to equity ratio of 2.4 times at the end of 2018. If the firm's total assets at year-end are $27 million, how much of their assets is financed with equity? A. $7.94m B. $11.25m C. $19.06m D. $64.8m 59. Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax rate = 30 percent, and number of shares of common stock outstanding = 1,000. Tierre's Ts has no preferred stock outstanding. A. 0.1814 B. 0.4854 C. 0.685 D. 3.7756 60. Calculate the times interest earned ratio for Paige's Purses, Inc. using the following information: sales = $50,000,000, cost of goods sold = $15,000,000, depreciation expense = $2,000,000, addition to retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30 percent, and number of shares of common stock outstanding = 10,000,000. Paige's Purses has no preferred stock outstanding. A. 0.27 B. 3.30 C. 11.00 D. 16.67 61. You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2018: net income = $500,000, total debt = $12 million, and debt ratio = 40 percent. What is Tikki's ROE for 2018? A. 1.67 percent B. 2.78 percent C. 4.17 percent D. 10.42 percent 62. You are thinking of investing in Ski Sports, Inc. You have only the following information on the firm at year-end 2018: net income = $50,000, total debt = $1 million, and debt ratio = 70 percent. What is Ski's ROE for 2018? A. 2.94 percent B. 3.49 percent C. 7.14 percent D. 11.67 percent 63. You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2013: net income = $10 million, total debt = $65 million, and debt ratio = 35 percent. What is Wave Runnerz's ROE for 2018? A. 8.28 percent B. 15.38 percent C. 28.57 percent D. 43.96 percent 64. PJ's Ice Cream Parlour has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ's ROA? A. 4 percent B. 6 percent C. 10 percent D. 12 percent DJ's Soda Fountain has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $20 million, total debt = $3 million, debt ratio = 75 percent, ROE = 27 percent. Using this information, what is DJ's ROA? A. .0675 percent B. 6.75 percent C. 25.00 percent D. 27.00 percent 65. 66. Lab R Doors' year-end price on its common stock is $40. The firm has total assets of $75 million, the debt ratio is 60 percent, there is no preferred stock, and there are 4 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors. A. 2.13 B. 3.20 C. 5.33 D. 10.00 67. Fancy Paws' year-end price on its common stock is $20. The firm has total assets of $40 million, the debt ratio is 40 percent, there is no preferred stock, and there are 2 million shares of common stock outstanding. Calculate the market-to-book ratio for Fancy Paws. A. 0.47 B. 1.67 C. 8.00 D. 10.00 68. Lab R Doors' year-end price on its common stock is $40. The firm has a profit margin of 10 percent, total assets of $30 million, a total asset turnover ratio of 2, no preferred stock, and there are 4 million shares of common stock outstanding. What is the PE ratio for Lab R Doors? A. 0.375 B. 0.750 C. 6.667 D. 26.667 69. Fancy Paws' year-end price on its common stock is $20. The firm has a profit margin of 12 percent, total assets of $20 million, a total asset turnover ratio of 0.5, no preferred stock, and there are 2 million shares of common stock outstanding. What is the PE ratio for Fancy Paws? A. 3.33 B. 8.33 C. 10.00 D. 33.33 70. Last year, PJ's Ice Cream Parlours, Inc. reported an ROE = 12 percent. The firm's debt ratio was 40 percent, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year? A. $1.35m B. $2.40m C. $3.00m D. $18.75m 71. Last year, DJ's Soda Fountains, Inc. reported an ROE = 27 percent. The firm's debt ratio was 50 percent, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year? A. $1.22m B. $1.82m C. $2.43m D. $2.84m 72. You are considering investing in Totally Tire Services. You have been able to locate the following information on the firm: total assets = $50 million, accounts receivable = $10 million, ACP = 15 days, net income = $4.5 million, and debt-to-equity ratio = 0.75 times. What is the ROE for the firm? A. 1.58 percent B. 9.00 percent C. 15.75 percent D. 28.81 percent 73. You are considering investing in Lenny's Lube, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm? A. 2.5000 percent B. 13.9882 percent C. 35.0000 percent D. 87.50 percent 74. Leash N Collar reported a profit margin of 8 percent, total asset turnover ratio of 1.5 times, debt-to-equity ratio of 0.75 times, net income of $400,000, and dividends paid to common stockholders of $200,000. The firm has no preferred stock outstanding. What is Leash N Collar's internal growth rate? A. 5.2632 percent B. 7.3333 percent C. 8.6956 percent D. 6.383 percent 75. Saddle and Bridle reported a profit margin of 12 percent, total asset turnover ratio of 2 times, debt-to¬-equity ratio of 1.9 times, net income of $1 million, and dividends paid to common stockholders of $250,000. The firm has no preferred stock outstanding. What is Saddle and Bridle's internal growth rate? A. 13.64 percent B. 18.00 percent C. 24.00 percent D. 21.95 percent 76. You have located the following information on Rock Company: debt ratio = 40 percent, capital intensity ratio = 2.25 times, profit margin = 8 percent, and dividend payout ratio = 25 percent. What is the sustainable growth rate for Rock? A. 3.56 percent B. 6.00 percent C. 4.65 percent D. 8.00 percent 77. You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich? A. 2.70 percent B. 10.80 percent C. 25.00 percent D. 9.89 percent 78. You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize? A. 1.20 percent B. 10.10 percent C. 12.11 percent D. 73.26 percent 79. You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler? A. 12.00 percent B. 7.76 percent C. 20.00 percent D. 30.00 percent 80. Which of the following activities will increase a firm's current ratio? A. purchase inventory using cash B. buy equipment with a short-term bank loan C. accrued wages and taxes increase D. none of these statements will increase a firm's current ratio 81. Which of the following will increase a firm's quick ratio assuming no other accounts change? A. a reduction in accounts payable B. an increase in accounts receivable C. an increase in marketable securities D. all of these choices are correct. 82. Which of the following statements is correct? A. The cash ratio measures a firm's ability to pay long-term debt with its available cash and marketable securities. B. Holding extremely high levels of liquidity to guard against liquidity crises is an inappropriate goal for the firm. C. The quick (or acid-test) ratio measures a firm's ability to pay off short-term obligations with long-term debt. D. The current ratio is a more stringent measure of liquidity than the quick (or acid-test) ratio. 83. A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE? A. ROA = 6.6 percent; ROE = 14.52 percent B. ROA = 7.2 percent; ROE = 15.84 percent C. ROA = 9.5 percent; ROE = 20.9 percent D. ROA = 8.1 percent; ROE = 17.82 percent 84. Which of the following statements is correct? A. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity. B. An extremely low average collection period will maximize net income. C. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible. D. All of these choices are correct. 85. Which ratio assesses how efficiently a firm uses its fixed assets? A. capital intensity ratio B. current ratio C. average collection period D. fixed asset turnover 86. Which ratio measures how many days inventory is held before the final product is sold? A. inventory turnover B. days' sales in inventory C. total asset turnover D. inventory intensity ratio 87. A firm reported year-end sales of $20 million. It listed $7 million of inventory on its balance sheet. Using a 365-day year, how many days did the firm's inventory stay on the premises? A. 127.75 days B. 157.75 days C. 97.75 days D. 87.75 days 88. A firm ended the year with an average collection period of 50 days. The firm's credit sales were $11 million. What is the firm's year-end balance in accounts receivable? A. $1.27 million B. $0.85 million C. $1.51 million D. $2.05 million 89. A firm reported sales of $10 million. It had a debt ratio of 40 percent and total debt amounted to $3 million. What was the firm's capital intensity ratio? A. 1.25 times B. 2.02 times C. 0.40 times D. 0.75 times 90. A firm reported working capital of $5.5 million and fixed assets of $20 million. Its fixed asset turnover was 1.2 times. What was the firm's sales to working capital ratio? A. 2.21 times B. 4.36 times C. 5.19 times D. 6.03 times 91. Which of the following statements is correct? A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as "financial leverage" because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these choices are correct. 92. Calculate the times interest earned ratio using the following information. Sales = $1.5 million, cost of goods sold = $800,000, depreciation expense = $100,000, addition to retained earnings = $85,000, dividends per share = $1.2, tax rate = 30 percent, and number of shares of common stock outstanding = 100,000. Assume the firm has no preferred stock. A. 2.25 times B. 1.25 times C. 1.95 times D. 2.75 times 93. You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the equity multiplier for the two firms. A. Firm A: 15 times; Firm B: 1.00 times B. Firm A: 10 times; Firm B: 1.11 times C. Firm A: 10 times; Firm B: 9.99 times D. Firm A: 20 times; Firm B: 1.11 times 94. You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms. A. Firm A: 9 times; Firm B: 1.11 times B. Firm A: 19 times; Firm B: 0.11 times C. Firm A: 9 times; Firm B: 0.11 times D. Firm A: 19 times; Firm B: 1.11 times 95. Which of the following statements is correct? A. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time. B. Performing cross-sectional analysis is easy since industries are usually clustered with firms that are identical. C. Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical. D. To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry. 96. Common-size financial statements A. allow for an easy comparison of balance sheets and income statements across firms in the industry. B. provide quantitative clues about the direction that the firm is moving. C. are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. D. All of these choices are correct 97. A firm reported a profit margin of 8.5 percent, total asset turnover of 0.85 times, debt-to-equity ratio of 0.90 times, net income of $550,000, and dividends paid to common stockholders of $100,000. The firm has no preferred stock outstanding. What is the firm's internal growth rate? A. 3.61 percent B. 6.29 percent C. 5.91 percent D. 11.04 percent 98. A firm has a debt ratio of 45 percent, capital intensity ratio is 1.3 times, profit margin is 10 percent, and dividend payout ratio is 30 percent. Calculate the sustainable growth rate for the firm. A. 1.56 percent B. 2.96 percent C. 3.05 percent D. 4.79 percent 99. A corporation has a total asset turnover of 2 times, ROA of 12 percent and EM of 1.17. What is this firm's profit margin and debt ratio? A. profit margin: 2 percent; debt ratio: 19.45 percent B. profit margin: 3 percent; debt ratio: 31.81 percent C. profit margin: 4 percent; debt ratio: 12.94 percent D. profit margin: 6 percent; debt ratio: 14.53 percent 100. A firm's year-end price on its common stock is $55. The firm has a profit margin of 6 percent, total assets of $75 million, a total asset turnover ratio of 0.9, no preferred stock, and 2.5 million shares of common stock outstanding. Calculate the PE ratio for the firm. A. 16.94 times B. 17.98 times C. 24.16 times D. 33.95 times 101. A firm reported an ROE of 19 percent. The firm's debt ratio was 45 percent, sales were $12 million, and the capital intensity ratio was 1.1 times. Calculate the net income for the firm. A. 0.34 million B. 1.38 million C. 1.93 million D. 2.06 million 102. Firm A and Firm B have the same total assets, ROA and profit margin (greater than 0). However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct? A. Firm B must have a higher ROE than Firm A. B. Firm B must have a higher capital intensity ratio than Firm A. C. Firm B must have a higher fixed asset turnover than Firm A. D. Firm B must have a lower ACP than Firm A. 103. Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes? A. times interest earned B. fixed-charge coverage ratio C. cash coverage ratio D. operating coverage ratio 104. A firm has a ROE of 14 percent and a debt-to-equity ratio of 40 percent. If the total asset turnover is 3.4, what is the firm's profit margin? A. 2.94 percent B. 3.86 percent C. 4.29 percent D. 5.67 percent 105. The term "capital structure" refers to A. the amount of current versus long-term debt on the balance sheet. B. the amount of current versus fixed assets on the balance sheet. C. the amount of long-term debt versus equity on the balance sheet. 106. What is the debt ratio for a firm with an equity multiplier of 3.5? A. 44.09 percent B. 58.51 percent C. 66.25 percent D. 71.43 percent 107. A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio? A. 3.76 times B. 4.91 times C. 7.25 times D. 7.09 times 108. Which ratio measures the operating return on the firm's assets irrespective of financial leverage and taxes? A. basic earning power ratio B. profit margin C. return on assets D. operating leverage return 109. A firm has an ROA of 12 percent and an ROE of 52 percent. What is the firm's equity multiplier? A. 0.23 B. 4.33 C. 1.63 D. 2.90 110. Which company has the most risk from an investor's standpoint? Firm A has a PE of 92 times and Firm B has a PE of 16 times. Assume both firms operate in the same industry. Firm A has fewer shares outstanding than Firm B. A. Firm A because it has the higher PE ratio. B. Firm B because it has a lower PE ratio. C. Firm A because it has fewer shares outstanding. D. Firm B because it has more shares outstanding. 111. The maximum growth rate that can be achieved by financing asset growth with new debt and retained earnings is called the A. internal growth rate. B. retention rate. C. sustainable growth rate. D. operating expansion rate. 112. The maximum growth rate that can be achieved by financing asset growth with internal financing or retained earnings is called the A. internal growth rate. B. retention rate. C. sustainable growth rate. D. operating expansion rate. 113. Which of the following is NOT one of the cautions in using ratios to evaluate firm performance? A. The firm has seasonal cash flow differences. B. The firm has different accounting procedures. C. The firm has a different capital structure. D. The firm had a one-time event. 114. A firm that is efficient in inventory management will have A. a high inventory turnover ratio and a low days sales in inventory ratio. B. a low inventory turnover ratio and a low days sales in inventory ratio. C. a high inventory turnover ratio and a high days sales in inventory ratio. D. a low inventory turnover ratio and a high days sales in inventory ratio. 115. Which of the following statements is correct? A. A low average payment period and a high accounts payable turnover are a sign of good management. B. A high average payment period and a low accounts payable turnover are a sign of good management. C. A high average payment period and a high accounts payable turnover are a sign of good management. D. A low average payment period and a low accounts payable turnover are a sign of good management. 116. Which ratio measures the overall return on the firm's assets including financial leverage and taxes? A. ROA B. ROE C. basic earning power D. profit margin 117. A firm has an ACP of 38 days and its annual sales are $5.3 million. What is its account receivable balance? A. $551,781 B. $619,304 C. $692,098 D. $759,021 118. The term "spreading the financial statements" refers to A. creating common-size financial statements. B. comparing the statements to the industry average. C. calculating the internal and sustainable growth rate. D. evaluating the debt levels. 119. Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt? A. fixed-charge coverage ratio B. times interest earned C. cash coverage ratio D. ROA 120. Which ratio measures the number of dollars of operating earnings available to meet the firm's interest dollars and other fixed charges? A. times interest earned B. basic earning power C. fixed-charge coverage ratio D. ROA 121. Which of the following is unlikely to have a high capital intensity ratio? A. railroad B. automobile manufacturer C. law firm D. shipbuilder 122. All of the following are users of financial ratios EXCEPT A. managers. B. investors. C. analysts. D. auditors. 123. A strong liquidity position means that A. the firm is able to meet its short-term obligations. B. the firm uses little debt in its capital structure. C. the firm pays out a large portion of its net income in the form of dividends. D. the firm pays its creditors on time. 124. An investor wanting large returns will be interested in companies that have A. high ROAs. B. high ROEs. C. high current ratios. D. high times interest earned. 125. Which of the following statements is true about return on equity (ROE)? A. It measures the return on common stockholders’ investment in the assets of the firm. B. The value of the firm’s ROE is affected by net income. C. The value of the firm’s ROE is affected by the amount of financial leverage or debt that the firm uses. D. All of these choices are correct. 126. Which of the following statements is not correct regarding accounts payable management and average payment period (APP)? A. A firm wants to pay for its purchases as slowly as possible. B. The faster the firm pays for its supply purchases, the longer it can avoid financing such as notes payable or long-term debt. C. A high APP is generally a sign of good management. D. An extremely high APP could be a sign of bad firm management. 127. A firm has EBIT of $400,000 and depreciation expense of $20,000. Fixed charges total $50,000. Interest expense totals $7,000. What is the firm's cash coverage ratio? A. 7.60 times B. 8.00 times C. 8.40 times D. 8.54 times 128. A firm has EBIT of $1,000,000 and depreciation expense of $400,000. Fixed charges total $600,000. Interest expense totals $70,000. What is the firm's cash coverage ratio? A. 1.00 times B. 1.67 times C. 2.33 times D. 2.45 times 129. A firm has EBIT of $400,000 and depreciation expense of $20,000. Fixed charges total $50,000. Interest expense totals $7,000. What is the firm's fixed-charge coverage ratio? A. 7.60 times B. 8.00 times C. 8.40 times D. 8.54 times 130. A firm has EBIT of $1,000,000 and depreciation expense of $400,000. Fixed charges total $600,000. Interest expense totals $70,000. What is the firm's fixed-charge coverage ratio? A. 1.00 times B. 1.67 times C. 2.33 times D. 2.45 times 131. Which of the following activities will increase a firm's current ratio? A. sale of inventory for a profit B. buy equipment with a long-term bank loan C. pay the current month’s rent 132. A firm reported year-end cost of goods sold of $10 million. It listed $2 million of inventory on its balance sheet. Using a 365-day year, how many days did the firm's inventory stay on the premises? A. 73 days B. 20 days C. 18.25 days D. 2 days 133. A firm ended the year with an average collection period of 20 days. The firm's credit sales were $50 million. What is the firm's year-end balance in accounts receivable? A. $1.46 million B. $2.50 million C. $2.74 million D. $4.00 million 134. Which of the following statements is false regarding inventory management? A. In general, a firm wants to produce a low level of sales per dollar of inventory. B. In general, a firm wants to produce a high level of sales per dollar of inventory. C. A high inventory turnover ratio or a low days’ sales in inventory is generally a sign of good management. D. Extremely high levels for inventory turnover ratio and low levels for days’ sales in inventory ratio may actually be a sign of bad firm or production management.