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Q1 FS Analysis Set B With Answer

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14 views

Q1 FS Analysis Set B With Answer

Uploaded by

Danielle Llorente
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Quiz 1 – Financial Statement Analysis – SET B

Name:________________________________________________ Date:
_______________

Section: _______________

Instruction: Read each question/statement correctly and respond as


required. Write your answer on the left side of the paper before each number.

1. True or False: Market value ratios provide management with an


indication of how investors view the firm's past performance and
especially its future prospects

Answer: True

2. rue or False: The Return on Assets (ROA) takes into account how a
firm's assets are financed, so two firms with the same EBIT must have
different ROA if they have different financing structures.
Answer: False

3. True or False: The times-interest-earned ratio is an indicator of a


firm's ability to meet both long-term and short-term debt obligations,
but it is not the only indicator.
Answer: True

4. True or False: A company with strong growth prospects and lower


perceived risk generally has higher P/E and M/B ratios.
Answer: True

5. True or False: Determining whether a firm's financial position is


improving or deteriorating requires analyzing more than just the ratios
for a given year. Cross-sectional analysis is one method of examining
changes in a firm's performance over time.
Answer: False

6. True or False: If Firms A and B have the same current ratio, the same
sales, and the same current liabilities, but Firm A has a higher
inventory turnover ratio than Firm B, then Firm A's quick ratio must be
lower than Firm B's.
Answer: False

7. Even if Firm A's current ratio is higher than Firm B's, it's
possible that Firm B's quick ratio could be higher than Firm
A's. However, if Firm A's quick ratio is higher than Firm B's, it
is certain that Firm A's current ratio is also higher than Firm
B's.
Answer: False

8. True or False: Suppose a firm wants to maintain a specific Times


Interest Earned (TIE) ratio. Knowing the amount of its debt, the interest
rate on that debt, the applicable tax rate, and its operating costs, the
firm can calculate the amount of sales required to achieve that TIE
ratio without needing to know its Earnings Before Interest and Taxes
(EBIT).
Answer: False

9. True or False: If a firm uses only debt and common equity for
financing and has an equity multiplier of 3.0, then its debt ratio must
be 0.333.
Answer: True

10. True or False: The profit margin measures net income per dollar
of sales.
Answer: True

11. Companies X and Y have identical sales, tax rates,


interest rates on their debt, total assets, and basic earning
power. Both companies report positive net incomes. Company
X has a higher debt ratio and, consequently, a higher interest
expense. Which of the following statements is accurate?
a. Company X has a higher times-interest-earned (TIE) ratio.
b. Company X pays less in taxes.
c. Company X has more net income.
d. Company X has a lower equity multiplier.
e. Company X has a higher ROA.
Answer: b. Company X pays less in taxes.

12. Given that Companies R and B each have the same


earnings per share (EPS) but Company R's stock price is higher,
which of the following statements is accurate?
a. Company R likely has fewer growth prospects.
b. Company R is likely considered riskier by investors.
c. Company R must have a higher market-to-book ratio.
d. Company R must pay a lower dividend.
e. Company R has a higher P/E ratio.
Answer: e. Company R has a higher P/E ratio.

13. Which of the following would indicate an IMPROVEMENT


in a company’s financial position, holding other things
constant?
a. The inventory and total assets turnover ratios both decline.
b. The debt ratio increases.
c. The profit margin declines.
d. The times-interest-earned ratio declines.
e. The current and quick ratios both increase.
Answer: e. The current and quick ratios both increase

14. If the CEO of a large, diversified firm were evaluating a


division manager and assigning a performance grade, which of
the following scenarios would most likely result in a higher
grade for the manager, assuming all other factors remain
constant?
a. The division’s debt ratio is below the industry average.
b. The division’s basic earning power ratio is higher than the industry
average.
c. The division’s inventory turnover ratio is higher than the industry
average.
d. The division’s total assets turnover ratio is higher than the industry
average.
e. The division’s days’ sales outstanding (DSO) is lower than the
industry average.
Answer: b. The division’s basic earning power ratio is higher than the
industry average.

15. If a firm has an ROE that is higher than the industry


average, but its profit margin and debt ratio are both lower
than the industry average, which of the following statements
is accurate?
a. Its total assets turnover must be below the industry average.
b. Its total assets turnover must equal the industry average.
c. Its TIE ratio must be above the industry average.
d. Its return on assets must be higher than the industry average.
e. Its total assets turnover must be above the industry average.
Answer: e. Its total assets turnover must be above the industry
average.

16. Hello Inc.'s latest net income was $1,210,000, and it had 225,000
shares outstanding. The company wants to pay out 45% of its income.
What dividend per share should it declare?

a. $2.49
b. $2.06
c. $2.11
d. $2.69e. $2.42

Answer: e. $2.42

17. If ROA = 0.4 and the same company can convert its assets into sales 1.6
times, what is its profitability margin?
a. 0.25
b. 0.5
c. None of the above
d. Not enough information
Answer: a. 0.25
18. A company has a Return on Assets (ROA) of 0.40 and an asset turnover ratio of 2.0.
If the company's sales amount to $500,000, what is the company's net income?
a. $60,000
b. $40,000
c. None of the above
d. Not enough information
Answer: a. $100,000
19. A BC company began operations on January 1, 2024. After six months of operation,
they want to determine how long it takes to convert their inventory into sales. As of
that date, their cost of goods sold is $3,000,000 and their ending inventory is
$300,000. As the company’s accountant, what would your answer be? (Assume 1
year = 360 days)
a. 18 days
b. 36 days
c. None of the above
d. Information is not enough
Answer: b. 36 days
20. If a company’s average sales per day are $100,000 and the age of its receivables is 26
days, how many times was the company able to collect its accounts receivable?
a. 10 times
b. 13.98 times
c. 14 times
d. 20 times
e. 26 times
Answer: c. 14 times
21. Flexi Corp's sales for the past year were $460,000, its operating expenses were
$362,500, and its interest expenses were $12,500. What is the firm's times-interest-
earned (TIE) ratio?
a. 8.19
b. 9.75
c. 7.80
d. 7.18
e. 7.72
Answer: c. 7.80
22. Greenfield Inc.'s stock price at the end of the year was $30.00, and its book value
per share was $45.00. What is its market-to-book ratio?
a. 0.60
b. 0.67
c. 0.75
d. 0.80
e. 0.85
Answer: b. 0.67
23. Summit Corp has total assets of $850,000 and current total debt of $220,000. The
new CFO aims to achieve a debt ratio of 50%. The firm's asset size will remain the
same. How much debt must the company add or subtract to reach the target debt
ratio?
a. $90,000
b. $130,000
c. $120,000
d. None of the above
e. Not enough information to answer
Answer: a. $90,000
24. Redwood Corp. has $450,000 in assets and uses only common equity capital (zero
debt). Its sales for the last year were $600,000, and its net income was $30,000. The
new management team has promised to improve the return on equity to 18.0%.
What profit margin would the firm need in order to achieve the 18% ROE, holding
everything else constant?
a. 11.11%
b. 10.00%
c. 9.00%
d. 12.00%
e. 13.33%
Answer: e. 13.33%
25. Coco Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales
last year were $435,000, and its year-end receivables were $60,000. If the company's
average age of receivables is greater than the 45-day credit period, then customers are
paying late. Otherwise, they are paying on time. By how much are customers paying
early or late?

a. 5.18
b. 4.86
c. 5.29
d. 5.34
e. 5.40
Answer: d. 5.34

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