Investments Quiz

Topics: Financial ratios, Cash flow, Dividend yield Pages: 11 (2235 words) Published: September 30, 2014
ISC 388 Investments Quiz 1

Name:______________________________

1) A firm has a higher quick (or acid test) ratio than the industry average, which implies   
A. 
the firm has a higher P/E ratio than other firms in the industry. B. 
the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. 
the firm may be less profitable than other firms in the industry. D. 
the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry. E. 
the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

Current assets earn less than fixed assets; thus, a firm with a relatively high level of current assets may be less profitable than other firms. However, its high level of current assets makes it more liquid.

2) A firm has a higher asset turnover ratio than the industry average, which implies   
A. 
the firm has a higher P/E ratio than other firms in the industry. B. 
the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. 
the firm is more profitable than other firms in the industry. D. 
the firm is utilizing assets more efficiently than other firms in the industry. E. 
the firm has higher spending on new fixed assets than other firms in the industry.

The higher the asset turnover ratio, the more efficiently the firm is using assets.

3) If the interest rate on debt is higher than ROA, a firm will __________ by increasing the use of debt in the capital structure.   
A. 
increase the ROE
B. 
not change the ROE
C. 
decrease the ROE
D. 
change the ROE in an indeterminable manner

If ROA is less than the interest rate, then ROE will decline by an amount that depends on the debt to equity ratio.

4) A firm has a P/E ratio of 12 and a ROE of 13% and a market-to-book value of   
A. 
0.64.
B. 
0.92.
C. 
1.08.
D. 
1.56.

E/P = ROE/(P/B); 1/12 = 0.13 P/B; 0.0833 = 0.13/(P/B); 0.0833(P/B) = 0.13; P/B = 1.56.

Use the financial statements of Black Barn Company given below answer questions 5 to 7.

  

5) The firm's current ratio for 2009 is 
 
A. 
2.31.
B. 
1.87.
C. 
2.22.
D. 
2.46.

$3,240,000/$1,400,000 = 2.31.

6) The firm's average collection period for 2009 is 
 
A. 
59.31.
B. 
55.05.
C. 
61.31.
D. 
49.05.
E. 
None of the options

AR turnover = $8,000,000/[($1,200,000 + $950,000)/2] = 7.44; ACP = 365/7.44 = 49.05 days.

7) The firm's P/E ratio for 2009 is 
 
A. 
8.88.
B. 
7.63.
C. 
7.88.
D. 
7.32.

EPS = $660,000/130,000 = $5.08; $40/$5.08 = 7.88.

8) A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is   

A. 
0.3.
B. 
1.3.
C. 
2.3.
D. 
3.3.

17.82% = 0.625 × 0.9 × 8% × asset turnover × 1.2; asset turnover = 3.3.

9) A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is   
A. 
11.18%.
B. 
8.97%.
C. 
11.54%.
D. 
12.62%.

ROE = (1 - 0.35)[14% + (14% - 10%)0.8] = 11.18%.

10) A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is 

A. 
4.2%.
B. 
5.2%.
C. 
6.2%.
D. 
7.2%.
E. 
None of the options

ROE = 0.6 × 0.6 × 4% × 2.5 × 2 = 7.2%.

11) A measure of asset utilization is 
 
A. 
sales divided by working capital.
B. 
return on total assets.
C. 
return on equity capital.
D. 
operating profit divided by sales.
E. 
None of the options

The return on total assets measures how efficiently the firm is utilizing...
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