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| 1 | |
Which of the following is the most significant comparability problem encountered when using firms in the same industry as a benchmark for financial ratios? |
| | A) | The impact of inflation on financial statements |
| | B) | The size of the firm being analyzed |
| | C) | The flexibility of GAAP guidelines in accounting for depreciation |
| | D) | The flexibility of GAAP guidelines in accounting for corporate debt and equity |
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| 2 | |
Which of the following is a significant consideration in evaluating sustainable economic earnings? |
| | A) | The relationship between accrual accounting and cash basis accounting |
| | B) | The impact of GAAP guidelines on accounting earnings |
| | C) | The relationship between net income and operating cash flow |
| | D) | All of the above are significant considerations in evaluating sustainable economic earnings |
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| 3 | |
A(n) ____________ is ____________ net income when adjusting net income in order to compute cash provided by operations in the statement of cash flows. |
| | A) | increase in accounts receivable; added to |
| | B) | decrease in inventories; subtracted from |
| | C) | increase in accounts payable; added to |
| | D) | none of the above is a correct adjustment to net income |
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| 4 | |
A company with a tax rate of 30% and a debt/equity ratio of 0.50 has return on assets (ROA) greater than its interest rate on debt. Which of the following increases the firm's return on equity (ROE)? |
| | A) | an increase in the tax rate |
| | B) | a decrease in the debt/equity ratio |
| | C) | refinancing the firm's debt in order to reduce the interest rate |
| | D) | all of the above increase the company's ROE |
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| 5 | |
A company has EBIT equal to $100,000, an asset/equity ratio of 2.5, a tax rate of 40%, and interest expense of $20,000. The firm's compound leverage factor is ____________. |
| | A) | 0.5 |
| | B) | 1.0 |
| | C) | 2.0 |
| | D) | 2.5 |
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| 6 | |
A company in a 30% tax bracket has return on assets (ROA) equal to 16% and asset turnover ratio equal to 2. What is the firm's operating profit margin? |
| | A) | 8.0% |
| | B) | 9.6% |
| | C) | 12.4% |
| | D) | 32.0% |
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| 7 | |
The price-earnings (P/E) ratio that is computed from the firm's financial statements and the P/E multiple derived from equity valuation models differ in that _____________. |
| | A) | the P/E ratio uses past accounting earnings in the denominator while the P/E multiple uses expected future economic earnings |
| | B) | the P/E ratio uses past accounting earnings in the denominator while the P/E multiple uses expected future accounting earnings |
| | C) | the P/E ratio uses current price in the numerator while the P/E multiple uses forecast price in the numerator |
| | D) | none of the above correctly describes the difference between the P/E ratio and the P/E multiple |
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| 8 | |
A company has a tax rate of 25%, a debt/equity ratio of 0.50, interest burden ratio of 0.70 and operating profit margin of 10%. The firm generates $2.00 in sales per dollar of assets. Calculate the firm's return on equity (ROE). |
| | A) | 1.75% |
| | B) | 5.25% |
| | C) | 10.50% |
| | D) | 15.75% |
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| 9 | |
National Furniture Company has a return on equity (ROE) of 12%, a debt/equity ratio of 0.4, a tax rate of 20%, and the interest rate on its debt is 10%. Calculate the firm's operating return on assets (ROA). |
| | A) | 1.3% |
| | B) | 5.7% |
| | C) | 9.6% |
| | D) | 13.6% |
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| 10 | |
LCM, Inc., has a capital base of $150 million, a weighted average cost of capital equal to 16%, return on equity (ROE) equal to 20% and return on assets (ROA) equal to 10%. Calculate the economic value added (EVA) for LCM. |
| | A) | $15 million |
| | B) | $9 million |
| | C) | $6 million |
| | D) | -$6 million |
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| 11 | |
A company's asset turnover ratio is substantially below the industry average. In order to further evaluate the reason for this discrepancy, a security analyst is most likely to calculate and analyze the ratio ____________. |
| | A) | (cash plus marketable securities)/current liabilities |
| | B) | average fixed assets/sales |
| | C) | cost of goods sold/average accounts receivable |
| | D) | cost of goods sold/average inventory |
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| 12 | |
A company has a price-earnings (P/E) ratio of 20 and return on equity (ROE) of 15%. Calculate the firm's market-to-book-value ratio. |
| | A) | 3.00 |
| | B) | 3.33 |
| | C) | 5.75 |
| | D) | 0.33 |
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| 13 | |
Two otherwise identical companies (X and Y) use different inventory valuation methods during a period of increasing prices. Company X uses last-in first-out (LIFO) and Company Y uses first-in first-out (FIFO). Company X will have ____________ cost of goods sold, and ___________ inventory level on its balance sheet, compared to Company Y. |
| | A) | higher; higher |
| | B) | higher; the same |
| | C) | higher; lower |
| | D) | lower; higher |
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| 14 | |
Regarding the interpretation of financial statements, which of the following is generally considered the major additional complication when analyzing foreign firms? |
| | A) | fluctuating exchange rates |
| | B) | differences in accounting standards |
| | C) | lack of common benchmarks |
| | D) | differences in inflation rates |
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| 15 | |
The term 'quality of earnings' refers to the extent to which a firm's accounting earnings are ______________. |
| | A) | equivalent to the firm's operating cash flow |
| | B) | sustainable and reflect economic earnings |
| | C) | calculated in conformity with GAAP |
| | D) | unaffected by inflation and changes in interest rates |
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