What is the main purpose of financial ratio analysis?, To evaluate a firm’s financial condition and operating performance, To replace financial statements, To determine the exact intrinsic value of a stock, To calculate only the firm’s tax liability, Which three groups most commonly use financial ratio analysis?, Auditors, tax officers, and marketing managers, Credit analysts, stock analysts, and managers, Regulators, consumers, and competitors, Customers, suppliers, and employees, Credit analysts are usually most interested in ratios that measure:, Advertising effectiveness, Brand awareness and customer satisfaction, Ability to repay debt and financial risk, Employee productivity, Stock analysts are usually most interested in ratios that help evaluate:, A firm’s tax filing process, A firm’s payroll system, A firm’s ability to repay short-term bank loans only, A firm’s future earnings, risk, and stock value, Which of the following is NOT one of the five major categories of financial ratios?, Liquidity ratios, Asset management ratios, Marketing efficiency ratios, Market value ratios, Why is inventory turnover especially important when analyzing a grocery store chain?, Grocery stores do not use financial statements, Inventory is a major asset and must be sold quickly, Inventory turnover is only relevant for service firms, Grocery stores usually have no inventory, Which statement best explains why inflation can distort ratio analysis?, Inflation can cause book values of assets to differ from current market values, Inflation affects only stock prices, not accounting data, Inflation eliminates the need for trend analysis, Inflation makes all ratios automatically higher, Why can seasonal factors distort financial ratio analysis?, Seasonal firms do not have current liabilities, Seasonal firms never report inventories, Seasonality affects only market value ratios, Ratios calculated at one point in time may reflect unusual seasonal conditions, Why can it be misleading to compare ratios of firms in the same broad industry?, Industry ratios are always perfectly accurate, Firms may differ in product mix, strategy, accounting methods, and growth rates, Financial ratios cannot be used for comparison, Firms in the same industry always have identical business models, In DuPont analysis, ROE is broken into which three components?, Profit margin, total assets turnover, and equity multiplier, Liquidity, solvency, and market value, Current ratio, quick ratio, and debt ratio, EBIT, EBITDA, and net income, If a firm increases its debt while keeping operations unchanged, what may happen to ROE?, ROE must always decrease, ROE is not affected by debt, ROE becomes zero, ROE may increase because of financial leverage, Which statement best distinguishes ROE from ROIC?, ROE and ROIC are always equal, ROE measures return to all investors, while ROIC measures return only to common shareholders, ROE uses net income and common equity, while ROIC uses after-tax operating income and total invested capital, ROIC ignores operating performance, A firm has current assets of $1,500,000 and current liabilities of $750,000. What is its current ratio?, 0.50, 1.50, 2.50, 2.00, A firm has current assets of $1,500,000, inventories of $600,000, and current liabilities of $750,000. What is its quick ratio?, 0.80, 2.00, 1.20, 1.50, A company has annual sales of $4,000,000 and inventories of $800,000. What is its inventory turnover ratio?, 2.0 times, 5.0 times, 8.0 times, 4.0 times, A firm has annual sales of $3,650,000 and accounts receivable of $400,000. Using a 365-day year, what is its days sales outstanding?, 40 days, 45 days, 35 days, 30 days, A firm has sales of $5,000,000 and net fixed assets of $2,000,000. What is its fixed assets turnover ratio?, 1.5 times, 2.5 times, 3.0 times, 2.0 times, A firm has sales of $6,000,000 and total assets of $3,000,000. What is its total assets turnover ratio?, 2.00 times, 1.00 times, 3.00 times, 0.50 times, A firm has total debt of $800,000 and common equity of $1,200,000. What is its total debt-to-total capital ratio?, 60%, 67%, 30%, 40%, A company has EBIT of $500,000 and interest expense of $100,000. What is its times-interest-earned ratio?, 4.0 times, 3.0 times, 5.0 times, 2.0 times, A firm has EBIT of $300,000 and sales of $3,000,000. What is its operating margin?, 10%, 5%, 15%, 8%, A firm has net income of $180,000 and sales of $3,600,000. What is its profit margin?, 3%, 10%, 5%, 8%, A company has net income of $240,000 and total assets of $3,000,000. What is its ROA?, 12%, 8%, 10%, 6%, A company has net income of $300,000 and common equity of $1,500,000. What is its ROE?, 10%, 15%, 25%, 20%, A firm has EBIT of $500,000, tax rate of 40%, and total invested capital of $2,000,000. What is its ROIC?, 15%, 10%, 12%, 20%, A firm has EBIT of $360,000 and total assets of $2,400,000. What is its basic earning power ratio?, 12%, 18%, 15%, 10%, A company’s stock price is $45 and its earnings per share are $3. What is its P/E ratio?, 12.0 times, 15.0 times, 10.0 times, 18.0 times, A company has a stock price of $30, common equity of $600 million, and 30 million shares outstanding. What is its market/book ratio?, 2.0, 2.5, 1.0, 1.5, A company has market value of equity of $1,200 million, market value of debt of $700 million, cash of $200 million, and EBITDA of $340 million. What is its EV/EBITDA ratio?, 6.0 times, 5.0 times, 4.0 times, 7.0 times, A firm has a profit margin of 4%, total assets turnover of 2.5, and equity multiplier of 2.0. What is its ROE using the DuPont equation?, 15%, 25%, 20%, 10%.

Chapter 4: Financial Statement Analysis

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