A. a. Company J must have a higher P/E ratio.

B. b. Company J must have a higher market to book ratio.

C. c. Company J must be riskier

D. d. Company J must have fewer growth opportunities.

E. e. All of the statements above are correct.

Question 2 of 20

A. a. Many large firms operate different divisions in different industries, and this makes it hard to develop a meaningful set of industry benchmarks for these types of firms.

B. b. Financial ratios should be interpreted with caution because there exist seasonal and accounting differences that can reduce their comparability.

C. c. Financial ratios should be interpreted with caution because it may be difficult to say with certainty what is a “good” value. For example, in the case of the current ratio, a “good” value is neither high nor low.

D. d. Ratio analysis facilitates comparisons by standardizing numbers.

E. e. All of the statements above are correct.

Question 3 of 20

A. a. Issue short-term debt and use the proceeds to buy back long-term debt with a maturity of more than one year.

B. b. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

C. c. Use cash to purchase additional inventory.

D. d. Statements a and b are correct.

E. e. None of the statements above is correct.

Question 4 of 20

A. a. $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit on the sale, which is added to retained earnings.

B. b. A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.)

C. c. Marketable securities are sold at cost.

D. d. All of the answers above.

E. e. Answers a and b above.

Question 5 of 20

A. a. If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.

B. b. If the two companies have the same return on assets, Company B will have a higher return on equity.

C. c. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.

D. d. All of the answers above are correct.

E. e. None of the answers above is correct.

Question 6 of 20

Sales/Total assets

2.0

Return on assets (ROA)

4%

Return on equity (ROE)

6%

A. a. 2% and 0.33

B. b. 4% and 0.33

C. c. 4% and 0.67

D. d. 2% and 0.67

E. e. 4% and 0.50

A. a. 7.5%

B. b. 10.0%

C. c. 12.2%

D. d. 13.1%

E. e. 14.5%

A. a. 0.20

B. b. 0.30

C. c. 0.33

D. d. 0.60

E. e. 0.66

A. a. $20.00

B. b. $ 8.00

C. c. $ 4.00

D. d. $ 2.00

E. e. $ 1.00

annual sales

$1,200,000

current liabilities

$375,000

days sales outstanding(DSO)(360-day year)

40

Inventory Turnover Ratio

4.8

current ratio

1.2

A. -$ 8,333

B. $ 66,667

C. $125,000

D. $200,000

E. $316,667

A. a. 51.20%

B. b. 26.00%

C. c. 39.36%

D. d. 65.00%

E. e. 60.00%

A. a. $2.85

B. b. $3.0

C. c. $4.0

D. d. $0.9

E. e. 1.9

Question 13 of 20

A. a. $238,090

B. b. $420,000

C. c. $280,000

D. d. $386,000

E. e. $400,000

A. a. 15

B. b. 12.5

C. c. 11.5

D. d. 15.8

E. e. 16

A. a. 6.40%

B. b. 4.85%

C. c. 9.60%

D. d. 8.50%

E. e. 6.90%

A. a. 0.50

B. b. 0.56

C. c. 0.88

D. d. 0.78

E. e. 0.44

A. a. 2.50%

B. b. 13.44%

C. c. 13.00%

D. d. 14.02%

E. e. 14.57%

A. a. Trend analysis.

B. b. Benchmarking.

C. c. Du Pont analysis.

D. d. Simple ratio analysis.

E. e. Industry analysis.

A. a. Having a high current ratio and a high quick ratio is always a good indication that a firm is managing its liquidity position well.

B. b. A decline in the inventory turnover ratio suggests that the firm’s liquidity position is improving.

C. c. If a firm’s times-interest-earned ratio is relatively high, then this is one indication that the firm should be able to meet its debt obligations.

D. d. Since ROA measures the firm’s effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

E. e. If, through specific managerial actions, a firm has been able to increase its ROA, then, because of the fixed mathematical relationship between ROA and ROE, it must also have increased its ROE.

A. a. Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets and that ROA is positive. However, one firm has a higher debt ratio. Under these conditions, the firm with the higher debt ratio will also have a higher rate of return on common equity.

B. b. One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is weak initially, for example, below 1.0.

C. c. Generally, firms with high profit margins have high asset turnover ratios and firms with low profit margins have low turnover ratios; this result is exactly as predicted by the extended Du Pont equation.

D. d. Firms A and B have identical earnings and identical dividend payout ratios. If Firm A’s growth rate is higher than Firm Bs, then Firm A’s P/E ratio must be greater than Firm B’s P/E ratio.

E. e. Each of the above statements is false.