Chapter 28 Financial Analysis Answer Key

Multiple Choice Questions

1. The following groups are stakeholders of a public company
!" #hareholders
!!" The go$ernment
!!!" #uppliers
!%" &mployees
%" 'ondholders
%!" (anagement
A. ! and !! only
'. !) !!) and !!! only
C. !) !!) !!!) and !% only
D. !) !!) !!!) !%) %) and %!

Type: Easy

2. !n the *.#.A. and the *.K. laws and accounting procedures are designed) generally) to
benefit the
A. #hareholders
'. (anagers
C. Creditors
+. &mployees

Type: Medium

,. -erman laws and accounting procedures are designed) generally) to protect interests of
the
A. #hareholders
'. (anagers
C. Creditors
+. &mployees

Type: Medium

.. Assets are listed on the balance sheet in order of
!" +ecreasing li/uidity
!!" +ecreasing si0e
!!!" !ncreasing si0e
!%" 1elati$e life
A. ! only
'. !!! and !% only
C. !! only
+. !% only

Type: Easy

2. The following are known as current assets
!" Cash
!!" (arketable securities
!!!" 1ecei$ables
!%" !n$entories
%" 3ayables
A. !) !! and !!! only
B. !) !!) !!! and !% only
C. !!) !!!) !% and % only
+. !!!) !% and % only

Type: Easy

4. The difference between Total Assets of a firm and its Total 5iabilities is called.
A. 6et working capital
'. 6et current assets
C. 6et worth
+. 6one of the abo$e

Type: Easy

7. !n$entory consists of
A. finished goods
'. raw material and finished goods
C. raw material) work in process) and finished goods
+. none of the abo$e

Type: Easy

8. The difference between Current Assets of a firm and its Current 5iabilities is called.
A. 6et worth
B. 6et working capital
C. -ross working capital
+. 6one of the abo$e

Type: Easy

8. 6et working capital 96:C" is calculated as
A. Total assets;total liabilities
'. Current assets < current liabilities
C. Current assets;current liabilities
+. 6one of the abo$e

Type: Medium

1=. &arnings before interest and ta>es is calculated as
A. Total re$enues;costs
B. Total re$enues;costs;depreciation
C. Total re$enues;costs;depreciation;ta>es
+. 6one of the abo$e

Type: Easy

11. Total uses of funds are calculated as
A. in$estments in net working capital < in$estments in fi>ed assets
'. in$estments in fi>ed assets < di$idend paid to shareholders
C. in$estments in net working capital < in$estments in fi>ed assets < di$idend paid to
shareholders
+. in$estments in net working capital < in$estments in fi>ed assets;di$idend paid to
shareholders

Type: Medium

12. Total sources of funds are calculated as
A. operating cash flows < new issues of e/uity
B. operating cash flows < new issues of e/uity < new issues of long;term debt
C. operating cash flows < new issues of e/uity;new issues of long;term debt
+. operating cash flows < new issues of e/uity;di$idend paid to shareholders

Type: Medium

1,. !f the debt ratio is =.2 what is the debt;e/uity ratio? 9assume no leases"
A. =.2
B. 1.=
C. 2.=
+. ..=
+ebt ratio @ +A9+ < &" @ =.2) +A& @ 1

Type: Medium

1.. :hich of the following is an e>ample of le$erage ratios?
A. +ebt;&/uity ratio
'. Buick ratio
C. 3ayout ratio
+. 1eturn on e/uity

Type: Easy

12. -i$en the following data 5ong term debt @ 1==C %alue of leases @ 2=C 'ook $alue of
e/uity @ 8=C (arket $alue of e/uity @ 1==) calculate the debt ratio.
A. =.24
'. =.2=
C. =.22
D. =.4=
+ebt ratio @ 91== < 2="A91== < 2= < 8=" @ =.4

Type: Medium

14. -i$en the following data 5ong term debt @ 1==C %alue of leases @ 2=C 'ook $alue of
e/uity @ 8=C (arket $alue of e/uity @ 1==) calculate the debt;e/uity ratio.
A. =.2=
'. =.4=
C. 1.2=
+. 1.=
+A& @ 12=A8= @ 1.2

Type: Medium

17. -i$en the following data &'!T @ 1==C +epreciation @ .=C !nterest @ 2=C +i$idends @
1=C calculate the Times !nterest &arned 9T!&" ratio.
A. 7.=
'. 2.=
C. ..7
+. 1..=
T!& @ 91== < .="A2= @ 7

Type: Medium

18. :hich of the following is an e>ample of li/uidity ratios?
A. Times interest earned 9T!&"
'. 3A& ratio
C. 1eturn on e/uity
D. Buick ratio

Type: Easy

18. -i$en the following data Current assets @ 2==C Current liabilities @ 22=C !n$entory @
2==C Account recei$ables @ 2==C calculate the current ratio
A. 2.=
'. 1.=
C. 1.2
+. 6one of the abo$e
Current 1atio @ 2==A22= @ 2.=

Type: Medium

2=. -i$en the following data Current assets @ 2==C Current liabilities @ 22=C !n$entory @
2==C Account recei$ables @ 2==C calculate the /uick ratio
A. 1.=
'. 2.=
C. 1.2
+. 6one of the abo$e
Buick ratio @ 92== ; 2=="A22= @ 1.2

Type: Medium

21. -i$en the following data Current assets @ 2==C Current liabilities @ 22=C !n$entory @
2==C Account recei$ables @ 2==C calculate the cash ratio 9assume that the firm has no
marketable securities"
A. =..
'. 2.=
C. 1.2
+. 6one of the abo$e
Cash ratio @ 92== ; 2== ; 2=="A22= @ =..

Type: Medium

22. -i$en the following data #ales @ ,2==C Cost of goods sold @ 14==C A$erage total
assets @ 14==C A$erage in$entory @ 2==) calculate the asset turno$er ratio
A. 2.=
'. =.8,72
C. 1.,,
+. 6one of the abo$e
Asset turno$er ratio @ ,2==A14== @ 2.=

Type: Medium

2,. -i$en the following data #ales @ ,2==C Cost of goods sold @ 14==C A$erage total
assets @ 14==C A$erage in$entory @ 2==) calculate the days in in$entory
A. 18.,
B. .2.4
C. 22.8
+. 6one of the abo$e
+ays in in$entory @ 2==A914==A,42" @ .2.4 days

Type: Medium

2.. -i$en the following data #ales @ ,2==C Cost of good sold @ 14==C A$erage
recei$ables @ 2==) calculate the a$erage collection period
A. 2..,
B. 22.8
C. 1,7
+. 6one of the abo$e
A$erage collection period @ 2==A9,2==A,42" @ 22.8 days

Type: Medium

22. :hen a firm impro$es 9lowers" its days in in$entories it generally
A. 1e/uires additional cash in$estment in in$entory
B. 1eleases cash locked up in in$entory
C. +oes not alter its cash position
+. A firm cannot reduce its in$entories

Type: Medium

24. :hen a firm impro$es 9lowers" its a$erage collection period it generally
A. 1e/uires additional cash in$estment in in$entory
B. 1eleases cash locked up in accounts recei$ables
C. +oes not alter its cash position
+. A firm cannot reduce its in$entories

Type: Medium

27. -i$en the following data &'!T @ .==C Ta> @ 1==C #ales @ ,===C A$erage Total Assets
@ 12==) calculate net profit margin
A. 1=D
'. 18.,D
C. 7.2D
+. 6one of the abo$e
6et profit margin @ 9.== ; 1=="A,=== @ =.1 @ 1=D

Type: Medium

28. -i$en the following data &'!T @ .==C Ta> @ 1==C #ales @ ,===C A$erage Total Assets
@ 12==) calculate the 1EA 91eturn on Assets"
A. 1=D
B. 2=D
C. 7.2D
+. 6one of the abo$e
1EA @ 9.== ; 1=="A12== @ 2=D

Type: Medium

28. 6et profit margin is calculated as
A. 9&'!T;ta>"A#ales
'. 6et incomeAsales
C. 6et incomeACost of goods sold
+. none of the abo$e

Type: Medium

,=. -i$en the following data &'!T @ .==C 6! @ 1==C A$erage &/uity @ 1===) calculate
the 1E& 91eturn on &/uity"
A. 1=D
'. 12D
C. 7.2D
+. 6one of the abo$e
1E& @ 6!AA$erage &/uity @ 1==A1=== @ 1=D

Type: Medium

,1. -i$en the following data &arnings per share @ F2C +i$idends per share @ F,C 3rice
per share @ F2=. calculate the di$idend yield
A. 1=D
B. 2D
C. 4=D
+. 6one of the abo$e
+i$idend yield @ ,A4= @ 2D

Type: Easy

,2. -i$en the following data &arnings per share @ F4C +i$idends per share @ F,C 3rice
per share @ F4=) calculate the 3A& ratio
A. 14.7
B. 1=
C. 22
+. 6one of the abo$e
3A& ratio @ 4=A4 @ 1=

Type: Easy

,,. -i$en the following data &arnings per share @ F2C +i$idends per share @ F,C 3rice
per share @ F2=. Calculate the payout ratio
A. 1=D
'. 2D
C. 4=D
+. 6one of the abo$e
+i$idend yield @ ,A2 @ 4=D

Type: Easy

,.. :hich measure would be most useful in comparing the operating profitability of two
firms in different industries?
A. 6et profit margin
'. 1eturn on e/uity
C. #ales to total assets
D. 1eturn on assets

Type: Difficult

,2. &fficiency ratios indicate
!" Gow producti$ely is the firm utili0ing its assets.
!!" Gow li/uid is the firm.
!!!" Gow profitable is the firm.
!%" Gow highly is the firm $alued by in$estors.
A. ! only
'. !! only
C. !!! only
+. !!! and !% only

Type: Easy

,4. 3rofitability ratios indicate
!" Gow producti$ely is the firm utili0ing its assets.
!!" Gow li/uid is the firm.
!!!" Gow profitable is the firm.
!%" Gow highly is the firm $alued by the in$estors.
A. ! only
'. !! only
C. !!! only
+. !!! and !% only

Type: Easy

,7. (arket $alue ratios indicate
!" Gow producti$ely is the firm utili0ing its assets.
!!" Gow li/uid is the firm.
!!!" Gow profitable is the firm.
!%" Gow highly is the firm $alued by the in$estors.
A. ! only
'. !! only
C. !! and !!! only
D. !% only

Type: Easy

,8. :hich of the following factors would be influential in a typical financial plan?
!" how a firm can generate superior long;term returns
!!" choice of industry
!!!" position within the industry
A. ! only
'. ! and !! only
C. !! and !!! only
D. !) !! and !!!

Type: Medium

,8. -i$en a book $alue per share of F1= and a market $alue of F2.) what is the market
capitali0ation of a firm with 2)===)=== outstanding shares?
A. F2)===)===
'. F2=)===)===
C. F28)===)===
D. F.8)===)===
2. > 2)===)=== @ .8)===)===

Type: Medium

.=. -i$en a book $alue per share of F2 and a market $alue of F12) what is the market
$alue added of a firm with 2)===)=== outstanding shares?
A. F1)===)===
'. F1=)===)===
C. F1.)===)===
+. F2.)===)===
912 ; 2" > 2)===)=== @ 1.)===)===

Type: Medium


True / False Questions

.1. 6et working capital is e/ual to total assets minus total liabilities.
FALSE

Type: Easy

.2. Total uses of funds is e/ual to in$estments in net working capital plus in$estments in
fi>ed assets plus di$idends paid to shareholders.
TRUE

Type: Medium

.,. 5e$erage ratios show how hea$ily the company is in debt.
TRUE

Type: Easy

... 1atios can help you to ask the right /uestions) they rarely answer these /uestions.
TRUE

Type: Easy

.2. &fficiency ratios indicate how producti$ely the company is using its assets to generate
profits.
FALSE

Type: Difficult

.4. (arket $alue ratios indicate how highly the firm is $alued by the managers.
FALSE

Type: Medium

.7. 3A& ratio measures the price that in$estors are prepared to for each dollar of earnings.
TRUE

Type: Medium

.8. According to the +u 3ont system

TRUE
1E& @ 9assetsAe/uity" 9salesAassets" H9&'!T ; Ta>"AsalesI H9&'!T ; Ta> ; !nterest"A
9&'!T ; Ta>"I

Type: Medium

.8. The calculation of market $alue added for a firm re/uires the use of the book $alue
per share.
TRUE

Type: Medium

2=. 1EA can be increased by increasing asset turno$er.

TRUE

Type: Medium


Short Answer Questions

21. 'riefly e>plain the relationship between accounting standards and the legal
traditions.
-enerally) companies from countries with &nglish or #candina$ian legal traditions
pro$ide more accounting information and ha$e higher accounting standards than
companies from countries with French or -erman legal traditions.

Type: Medium

22. :hat are the three basic financial statements?
The three basic financial statements are the balance sheet) the income statement) and the
sources and uses of funds.

Type: Easy

2,. Gow are Juses and sourcesJ of funds are calculated?
#ources and uses of funds are calculated as follows Total uses of funds @ !n$estment in
net working capital < in$estment in fi>ed assets < di$idends paid to shareholders Total
sources of funds @ operating cash flow < new issues of long;term debt < new issues of
e/uity

Type: Medium

2.. :hat are the common ratios used to measure li/uidity of a firm?
The ratios commonly used to measure li/uidity are the current ratio) /uick ratio) and cash
ratio.

Type: Medium

22. 'riefly e>plain the different categories of financial ratios.
There are fi$e categories of financial ratios. They are le$erage ratios) li/uidity ratios)
efficiency ratios) profitability ratios) and market $alue ratios.

Type: Easy

24. :hat are the primary reasons for a company to use debt in its capital structure?
Companies use debt for two main reasons 9a" debt is less e>pensi$e due to the ta>;
deductibility of interest charges) and 9b" the use of debt does not dilute shareholdersK
e/uity position.

Type: Difficult

27. +iscuss the +u3ont system.
The +u3ont system is a /uick way of looking at the performance of a firm or a di$ision.
1EA and 1E& can be thought of as comprising of se$eral ratios and hence pro$ide some
useful information about the interaction of these ratios.

Type: Medium

28. :hy is li/uidity rele$ant?
Firms ha$e a need to con$ert assets into cash /uickly. This is necessary to meet short
term obligations. :ithout li/uidity) e$en the most short term loans could force a company
into bankruptcy.

Type: Medium