An analyst has collected the following data about a firm:
• Receivables turnover = 10 times
• Inventory turnover = 8 times
• Payables turnover = 12 times
What is the cash conversion cycle?
A. 111 days.
B. Not enough information is given.
C. 51 days.
D. 41 days.
C
Cash conversion cycle = receivables collection period + inventory processing period – payables payment period.
Receivables collection period = 360/10 = 36
Inventory processing period = 360/8 = 45
Payables payment period = 360/12 = 30
Cash conversion cycle = 36 + 45 – 30 = 51
Given the following information about a company:
• Receivables turnover = 10 times
• Payables turnover = 12 times
• Inventory turnover = 8 times
What are the average receivables collection period, the average payables payment period, and the average inventory processing period respectively?
A. Average Receivables Average Payables Average Inventory
Collection Period Payment Period Processing Period
31 30 28
B. Average Receivables Average Payables Average Inventory
Collection Period Payment Period Processing Period
37 30 52
C. Average Receivables Average Payables Average Inventory
Collection Period Payment Period Processing Period
37 45 46
D. Average Receivables Average Payables Average Inventory
Collection Period Payment Period Processing Period
37 30 46
D
Ave. receivables collection period = 365/10 = 36.5 or 37
Ave. payables payment period = 365/12 = 30.4 or 30
Ave. inventory processing period = 365/8 = 45.6 or 46
When the return on equity equation (ROE) is decomposed, what three ratios comprise the components of ROE?
A. Net profit margin, asset turnover, asset multiplier.
B. Net profit margin, asset turnover, equity multiplier.
C. Net profit margin, inventory turnover, equity multiplier.
D. Gross profit margin, asset turnover, equity multiplier.
B
The three ratios can be further decomposed as follows:
Net profit margin = net income/sales
Asset turnover = sales/assets
Equity multiplier = assets/equity
An analyst has gathered the following information about a company:
Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750
Liabilities and Equity
Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Equity 1000
Retained Earnings 620
Total Liab. and Stockholder’s equity 2750
Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150
What is the ROE?
A. 10.9%.
B. 9.3%.
C. 9.9%.
D. 10.7%.
B
ROE = 150(NI)/[1000(common) + 620(RE)] = 150/1620 = 0.0926 or 9.3%
The equity multiplier for a firm with a total debt ratio equal to 45 percent is:
A. 1.8182 times.
B. 0.5495 times.
C. 2.2222 times.
D. 0.6897 times.
A
Given: L/A = 0.45. Restating as L = 0.45A and substituting into the basic accounting equation A = L + E . A = 0.45A + E, or 0.55 A = E. From this, the equity multiplier, A/E, can be stated as: A/E = 1 / 0.55 = 1.8182.
The two major types of risk affecting a firm are:
A. business risk and collection risk.
B. financial risk and cash flow risk.
C. bankruptcy risk and cash flow risk.
D. business risk and financial risk.
D
Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.
Cash that normally would have been used to pay the firm’s accounts payable is used instead to pay off some of the firm’s long-term debt. This will cause the firm’s:
A. cash conversion cycle to lengthen.
B. current ratio to rise.
C. payables turnover to rise.
D. quick ratio to fall.
D
The quick ratio = (cash + receivables) / current liabilities, thus if cash is reduced the numerator will decrease as will the ratio.
If a company has a net profit margin of 15 percent, an asset turnover ratio of 4.5 and a ROE of 18 percent, what is the equity multiplier?
A. 2.667.
B. .267.
C. .523.
D. 3.135.
B
There are many different ways to illustrate ROE one of which is:
ROE = (net profit margin)(asset turnover)(equity multiplier)
.18 = (.15)(4.5)(equity multiplier)
.18/[(.15)(4.5)]=equity multiplier
.18/0.675 = equity multiplier
.18/0.675 = 0.267
If a firm has a profit margin of .05, an asset turnover of 1.465, and an equity multiplier of 1.66, what is the firm’s ROE?
A. 3.18%.
B. 12.16%.
C. 5.87%.
D. 5.66%.
B
One of the many ways to express ROE = profit margin *asset turnover* equity multiplier = ROE = (0.05)(1.465)(1.66) = .1216
Assume that Q-Tell Incorporated is in the communications industry, which has an average receivables turnover ratio of 16 times. If the Q-Tell’s receivables turnover is less than that of the industry, Q-Tell’s average receivables collection period is most likely:
A. 12 days.
B. 16 days.
C. 20 days.
D. 25 days.
D
Average receivables collection period = 365 / receivables turnover, which is 22.81 days for the industry (= 365/16). If Q-Tell’s receivables turnover is less than 16, its average days collection period must be greater that 22.81 days.
Q-Tell Incorporated is in the communications industry and has the same absolute dollar level of current liabilities as the average firm in the industry. The current ratio and quick ratio for Q-Tell and the communications industry are as follows:
Industry: Current Ratio of 3.0, Quick Ratio of 2.5
Q-Tell: Current Ratio of 3.0, Quick Ratio of 2.1
Relative to the communications industry Q-Tell is most likely to have:
A. less inventory.
B. more inventory.
C. more payables.
D. more cash, marketable securities, and receivables.
B
The current ratio is current assets divided by current liabilities, (CA/CL), where current assets include cash, marketable securities, receivables, and inventory. The quick ratio is (CA – inventory) / current liabilities. Since current ratio and current liabilities are given as the same for both the industry and Q-Tell, (CA – inventory) for Q-Tell must be less than (CA – inventory) for the industry. This means that Q-Tell either has more inventory or less in cash and cash equivalents, and receivables.
Which of the following best explains why a firm’s ratio of “long-term debt to total capital” and its ratio of “income before interest and taxes to debt interest charges” are both lower than the industry average? The firm:
A. pays lower interest on its long-term debt than average.
B. has a high ratio of “current assets to current liabilities.”
C. has a high ratio of “total cash flow to total long-term debt.”
D. has more short-term debt than average.
D
If the interest coverage = earnings before interest and taxes / interest expense is lower than the industry, the firm is taking on more debt.
Common size income statements express all income statement items as a percentage of:
A. sales.
B. assets.
C. net income.
D. industry averages.
A
Common size income statements express all income statement items as a percentage of sales. Note that common size balance sheets express all balance sheet accounts as a percentage of total assets.
Common size balance sheets express all balance sheet items as a percentage of:
A. assets.
B. industry averages.
C. equity.
D. sales.
A
Common size balance sheets express all balance sheet items as a percentage of assets. Note that common size income statements express all income statement items as a percentage of sales.
An analyst has gathered the following information about a company:
• Net profit margin of 15%
• Asset turnover ratio of 4.5
• Equity multiplier of 0.267
• Dividend payout ratio of 30%
• What is the company’s growth rate?
A. 12.6%
B. 36.6%
C. 14.8%
D. 18.6%
A
g = (retention rate)(ROE)
ROE = (net profit margin)(asset turnover)(equity multiplier)
= (.15)(4.5)(0.267) = 0.180
g = (1-.3)(0.180) = (.7)(0.18) = 0.126 or 12.6%
Which of the following best explains a ratio of “net sales to average net fixed assets” that exceeds the industry average? The firm:
A. uses straight line depreciation.
B. expanded its plant and equipment in the past few years.
C. makes less than efficient use of its assets than competing firms.
D. has a substantial amount of old plant and equipment.
D
If a firm has a high fixed asset turnover = net sales/net fixed assets, it can be implied that the firm has not built or purchased many new assets such as plant and equipment. If the firm had recently purchased a new plant and equipment the net fixed asset number would be smaller.
Which of the following best explains a ratio of “net sales to average net fixed assets” that exceeds the industry average? The firm:
A. uses straight line depreciation.
B. expanded its plant and equipment in the past few years.
C. makes less than efficient use of its assets than competing firms.
D. has a substantial amount of old plant and equipment.
D
If a firm has a high fixed asset turnover = net sales/net fixed assets, it can be implied that the firm has not built or purchased many new assets such as plant and equipment. If the firm had recently purchased a new plant and equipment the net fixed asset number would be smaller.
Assume that the exercise price of an option is $5, and the average market price of the stock is $8. Assuming 816 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted EPS?
A. 306.
B. 510.
C. 272.
D. 816.
A
(816)(5) = $4,080. $4,080 / $8 = 510 shares. 816 - 510 = 306 new shares.
If a firm has a great deal of inventory built up which of the following ratios would be the largest?
A. Current Ratio.
B. Gross profit margin ratio.
C. Cash ratio.
D. Quick ratio.
A
The current ratio is the only one out of the current, cash, and quick ratios that has current assets in the numerator making it the largest of the three ratios.
Which of the following is NOT one of the major areas where financial ratios are used?
A. Stock valuation.
B. Capital budgeting.
C. Bankruptcy.
D. Systematic risk.
B
Besides using ratios to determine systematic risk, stock valuation, and forecasting bankruptcy, they are also used in creating bond ratings.