财务管理试题3

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Chapter 3: Working with Financial Statements

CHAPTER 3

Working with Financial Statements

DEFINITIONS

Topic: SOURCES OF CASH

Activities of the firm that generate cash are known as: A) Sources of cash. B) Uses of cash. C) Cash payments. D) Cash receipts. E) Cash on hand. Answer: A

Topic: USES OF CASH

Activities of the firm in which cash is spent are known as: A) Sources of cash. B) Uses of cash. C) Cash payments. D) Cash receipts. E) Cash on hand. Answer: B

Topic: STATEMENT OF CASH FLOWS

The financial statement that summarizes the sources and uses of cash over a specified period is: A) The income statement. B) The balance sheet.

C) The tax reconciliation statement. D) The statement of cash flows.

E) The statement of operating position. Answer: D

Topic: COMMON-SIZE STATEMENTS

A __________ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively. A) tax reconciliation statement B) statement of standardization C) statement of cash flows

D) common-base year statement E) common-size statement Answer: E

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Topic: COMMON-BASE YEAR STATEMENTS

A __________ standardizes items on the income statement and balance sheet relative to a point in time.

A) statement of standardization B) statement of cash flows

C) common-base year statement D) common-size statement E) tax reconciliation statement Answer: C

Topic: FINANCIAL RATIOS

Relationships determined from a firm's financial information and used for comparison purposes are known as:

A) Financial ratios.

B) Comparison statements. C) Dimensional analysis. D) Scenario analysis. E) Solvency analysis. Answer: A

Topic: SHORT-TERM SOLVENCY RATIOS

Financial ratios that measure the firm's ability to pay its bills over the short run without undue stress are known as:

A) Asset management ratios. B) Long-term solvency ratios. C) Short-term solvency ratios. D) Profitability ratios. E) Market value ratios. Answer: C

Topic: CURRENT RATIO The current ratio is measured as:

A) Current assets minus current liabilities. B) Current assets divided by current liabilities.

C) Current liabilities minus inventory, divided by current assets. D) Cash on hand divided by current liabilities. E) Current liabilities divided by current assets. Answer: B

Topic: QUICK RATIO

The quick ratio is measured as:

A) Current assets divided by current liabilities.

B) Cash on hand plus current liabilities, divided by current assets. C) Current liabilities divided by current assets, plus inventory. D) Current assets minus inventory, divided by current liabilities. E) Current assets minus inventory minus current liabilities. Answer: D

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Topic: CASH RATIO

The cash ratio is measured as:

A) Current assets divided by current liabilities.

B) Current assets minus cash on hand, divided by current liabilities. C) Current liabilities plus current assets, divided by cash on hand. D) Cash on hand plus inventory, divided by current liabilities. E) Cash on hand divided by current liabilities. Answer: E

Topic: INTERVAL MEASURE

The financial ratio measured as current assets divided by average daily operating costs is the: A) Cash ratio.

B) NWC to total assets ratio. C) Acid-test ratio. D) Interval measure. E) Operating measure. Answer: D

Topic: LONG-TERM SOLVENCY RATIOS

Ratios that measure the firm's financial leverage are known as: A) Asset management ratios. B) Long-term solvency ratios. C) Short-term solvency ratios. D) Profitability ratios. E) Market value ratios. Answer: B

Topic: TOTAL DEBT RATIO

The financial ratio measured as total assets minus total equity, divided by total assets, is the: A) Total debt ratio. B) Equity multiplier. C) Debt-equity ratio. D) Current ratio.

E) Times interest earned ratio. Answer: A

Topic: DEBT-EQUITY RATIO The debt-equity ratio is measured as: A) Total equity minus total debt. B) Total equity divided by total debt. C) Total debt divided by total equity. D) Total debt plus total equity.

E) Total debt minus total assets, divided by total equity. Answer: C

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Topic: EQUITY MULTIPLIER

15. The equity multiplier ratio is measured as: A) Total equity divided by total assets. B) Total equity plus total debt.

C) Total assets minus total equity, divided by total assets. D) Total assets plus total equity, divided by total debt.

E) Total assets divided by total equity. Answer: E

Topic: TOTAL CAPITALIZATION

16. The total long-term debt and equity of the firm is frequently called: A) Total assets.

B) Total capitalization. C) Total borrowing.

D) Debt-equity consolidation.

E) Debt-equity reconciliation. Answer: B

Topic: LONG-TERM DEBT RATIO

17. The financial ratio measured as the firm's long-term debt divided by its total capitalization is: A) The interval measure. B) The equity multiplier. C) The total debt ratio.

D) The long-term debt ratio.

E) The debt-equity ratio. Answer: D

Topic: TIMES INTEREST EARNED RATIO

18. The financial ratio measured as EBIT divided by interest expense is the __________. A) cash coverage ratio B) debt-equity ratio

C) times interest earned ratio D) gross margin

E) total debt ratio Answer: C

Topic: CASH COVERAGE RATIO

19. The financial ratio measured as EBIT plus depreciation, divided by interest expense, is the: A) Cash coverage ratio. B) Debt-equity ratio.

C) Times interest earned ratio. D) Gross margin.

E) Total debt ratio. Answer: A

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Topic: ASSET MANAGEMENT RATIOS

Ratios that measure how efficiently a firm uses its assets to generate sales are known as: A) Asset management ratios. B) Long-term solvency ratios. C) Short-term solvency ratios. D) Profitability ratios. E) Market value ratios. Answer: A

Topic: INVENTORY TURNOVER

The inventory turnover ratio is measured as: A) Total sales minus inventory. B) Inventory times total sales.

C) Cost of goods sold divided by inventory. D) Inventory times cost of goods sold. E) Inventory plus cost of goods sold. Answer: C

Topic: DAYS' SALES IN INVENTORY

The financial ratio days' sales in inventory is measured as: A) Inventory turnover plus 365 days. B) Inventory times 365 days.

C) Inventory plus cost of goods sold, divided by 365 days. D) 365 days divided by inventory.

E) 365 days divided by inventory turnover. Answer: E

Topic: RECEIVABLES TURNOVER

The receivables turnover ratio is measured as: A) Sales plus accounts receivable.

B) Sales divided by accounts receivable.

C) Sales minus accounts receivable, divided by sales. D) Accounts receivable times sales.

E) Accounts receivable divided by sales. Answer: B

Topic: DAYS' SALES IN RECEIVABLES

The financial ratio days' sales in receivables is measured as: A) Receivables turnover plus 365 days. B) Accounts receivable times 365 days.

C) Accounts receivable plus sales, divided by 365 days. D) 365 days divided by receivables turnover. E) 365 days divided by accounts receivable. Answer: D

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Topic: NET WORKING CAPITAL TURNOVER 25. The net working capital turnover ratio is measured as: A) Sales divided by net working capital. B) Sales minus net working capital. C) Sales times net working capital.

D) Net working capital divided by sales.

E) Net working capital plus sales. Answer: A

Topic: FIXED ASSET TURNOVER

26. The fixed asset turnover ratio is measured as: A) Sales minus net fixed assets. B) Sales times net fixed assets.

C) Sales divided by net fixed assets. D) Net fixed assets divided by sales.

E) Net fixed assets plus sales. Answer: C

Topic: TOTAL ASSET TURNOVER

27. The total asset turnover ratio is measured as: A) Sales minus total assets. B) Sales divided total assets. C) Sales times total assets.

D) Total assets divided by sales.

E) Total assets plus sales. Answer: B

Topic: DIVIDEND PAYOUT RATIO 28. The dividend payout ratio is calculated as:

A) Net income minus additions to retained earnings. B) Cash dividends divided by shares outstanding. C) Cash dividends divided by net income. D) Net income minus cash dividends.

E) One plus the retention ratio. Answer: C

Topic: RETENTION RATIO 29. The retention ratio is calculated as: A) One plus the dividend payout ratio.

B) Additions to retained earnings divided by net income.

C) Additions to retained earnings divided by shares outstanding. D) Net income minus additions to retained earnings.

E) Net income minus cash dividends. Answer: B

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Topic: PROFITABILITY RATIOS

Ratios that measure how efficiently a firm's management uses its assets in operations to generate bottomline net income are known as: A) Asset management ratios. B) Long-term solvency ratios. C) Short-term solvency ratios. D) Profitability ratios. E) Market value ratios. Answer: D

Topic: PROFIT MARGIN

The financial ratio measured as net income divided by sales is known as the firm's: A) Profit margin. B) Return on assets. C) Return on equity. D) Asset turnover.

E) Earnings before interest and taxes (EBIT). Answer: A

Topic: RETURN ON ASSETS

The financial ratio measured as net income divided by total assets is known as the firm's: A) Profit margin. B) Return on assets. C) Return on equity. D) Asset turnover.

E) Earnings before interest and taxes (EBIT). Answer: B

Topic: RETURN ON EQUITY

The financial ratio measured as net income divided by total equity is known as the firm's: A) Profit margin. B) Return on assets. C) Return on equity. D) Asset turnover.

E) Earnings before interest and taxes (EBIT). Answer: C

Topic: PRICE-EARNINGS RATIO

The financial ratio measured as the price per share of stock divided by earnings per share is known as the:

A) Return on assets. B) Return on equity. C) Debt-equity ratio. D) Price-earnings ratio. E) Du Pont identity. Answer: D

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Topic: MARKET-TO-BOOK RATIO The market-to-book ratio is measured as: A) Total equity divided by total assets.

B) Net income times market price per share of stock.

C) Net income divided by market price per share of stock.

D) Market price per share of stock divided by earnings per share.

E) Market value of equity per share divided by book value of equity per share. Answer: E

Topic: DU PONT IDENTITY

The __________ breaks down return on equity into three component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage. A) Du Pont identity B) return on assets

C) statement of cash flows D) asset turnover ratio E) equity multiplier Answer: A

Topic: SIC CODES

The U.S. government coding system that classifies firms by their specific type of business operations is known as the: A) NASDAQ 100.

B) Standard & Poor's 500.

C) Standard industrial classification (SIC) system. D) Governmental ID system.

E) Government engineering enterprise (GEE) system. Answer: C

Topic: INTERNAL GROWTH RATE

The internal growth rate of a firm is best described as:

A) The minimum growth rate achievable if the firm does not pay out any cash dividends. B) The minimum growth rate achievable if the firm maintains a constant equity multiplier. C) The maximum growth rate achievable without external financing of any kind.

D) The maximum growth rate achievable without using any external equity financing, while

maintaining a constant debt-equity ratio.

E) The maximum growth rate achievable without any limits on the amount of debt financing used. Answer: C

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Topic: SUSTAINABLE GROWTH RATE

The sustainable growth rate of a firm is best described as:

D) The maximum growth rate achievable without using any external equity financing, while

maintaining a constant debt-equity ratio.

E) The maximum growth rate achievable without any limits on the amount of debt financing used. Answer: D

CONCEPTS

Topic: CURRENT RATIO

Which of the following statements about the current ratio is FALSE?

A) This ratio is a meaningful measure of liquidity because the book value of the assets and

liabilities used in the calculation tend to deviate only slightly from market values. B) This ratio is calculated by dividing current assets by current liabilities.

C) It will always be greater than the quick ratio in companies that carry inventory. D) This ratio is intended to indicate the short run liquidity position of the firm. E) The higher the current ratio, the higher the level of cash must be for the firm. Answer: E

Topic: USES OF CASH

A decrease in a(n) __________ account would be considered a/an __________ of funds.

I. asset; source II. liability; source III. expense; use

A) I only B) II only

C) I and II only D) I and III only E) II and III only Answer: A

Topic: STATEMENT OF CASH FLOWS

On a typical statement of cash flows, fixed asset acquisitions would be classified under the heading called _________ activities. A) recognition B) operating C) investment D) financing E) income Answer: C

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Topic: STATEMENT OF CASH FLOWS

Which of the following does NOT generally appear in a typical statement of cash flows? A) Subsidiary activities B) Financing activities C) Operating activities D) Investment activities

E) Beginning and end of year cash levels Answer: A

Topic: FINANCIAL STATEMENTS

Comparison of the financial statements of two firms in the same general industry may be difficult if:

I. Unusual or transient events affect one or both of the firms.

II. The firms use different accounting methodologies, such as FIFO and LIFO. III. The firms' financial statements are prepared using different fiscal year-ends.

A) I only B) III only C) I and II only D) I and III only E) I, II and III Answer: E

Topic: FINANCIAL STATEMENTS

You are comparing two companies by looking at their financial ratios. You know that:

I. You must be careful because not all financial statement ratios are calculated the same way. II. The balance sheet ratios of a large firm and a medium size firm may have important structural differences.

III. The industries in which the two firms operate do not affect their financial ratios.

A) I only B) II only C) III only D) I and II only E) I and III only Answer: D

Topic: DU PONT IDENTITY

Which of the following explicitly appears in the Du Pont identity? A) Debt ratio

B) Equity multiplier C) Current ratio

D) Times interest earned ratio E) Receivables turnover Answer: B

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Topic: PROFIT MARGIN

Which of the following could be calculated with only the use of an income statement? A) Total asset turnover B) Equity multiplier C) Receivables turnover D) Profit margin E) Return on equity Answer: D

Topic: USES OF CASH

Which of the following would be considered a use of cash?

I. Accounts receivable increase. II. Accounts payable decrease.

III. Common stock and surplus increases.

IV. Net fixed assets decrease by the amount of depreciation.

A) I only B) II only

C) I and II only D) I and III only

E) II, III, and IV only Answer: C

Topic: SOURCES OF CASH

Which of the following are considered a source of cash?

I. Common stock and surplus increase. II. Accounts payable decrease. III. Accounts receivable increase. IV. Inventory decreases.

A) I only

B) II and III only C) I and IV only D) I, II, and III only E) I, II, III, and IV Answer: C

Topic: STATEMENT OF CASH FLOWS

Which of the following is included in the operating activities portion of the statement of cash flows?

A) Changes in notes payable B) Changes in accounts payable C) Changes in long-term debt D) Dividends paid

E) Fixed asset acquisitions Answer: B

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Topic: STATEMENT OF CASH FLOWS

Which of the following is NOT included in the financing activities portion of a typical statement of cash flows?

A) Changes in notes payable B) Depreciation

C) Changes in long-term debt D) Dividends paid

E) Changes in common stock Answer: B

Topic: SUSTAINABLE GROWTH

Which of the following is NOT a factor in calculating sustainable growth? A) Current ratio B) Profit margin C) Asset turnover D) Equity multiplier E) Retention ratio Answer: A

Topic: DU PONT IDENTITY

Return on equity will increase if the __________. A) profit margin decreases B) return on assets increases C) debt-equity ratio decreases

D) accounts receivable turnover increases E) total asset turnover decreases Answer: B

Topic: INTERVAL MEASURE

A financial manager who needs to find out how long it will take before their firm runs out of cash if no further cash comes in should consider the __________. A) current ratio B) quick ratio

C) asset turnover ratio

D) net working capital to total assets ratio E) interval measure Answer: E

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Topic: GROWTH FACTORS

The determinants of sustainable growth include which of the following?

I. Equity multiplier II. Receivables turnover III. Total asset turnover

A) I only B) II only

C) II and III only D) I and III only E) I, II and III Answer: D

Topic: MARKET VALUES VS BOOK VALUES

Which of the following statements is true concerning the use of accounting data versus market value data?

A) Accounting data has no probative value and should be ignored.

B) Whenever market value information is available, it should be used instead of accounting data. C) If market value and accounting data conflict, the accounting data should be given precedence. D) If a firm primarily has fixed assets and long-term liabilities, book values will likely be

reasonable approximations of market values.

E) Market value information never exists for privately held and not-for-profit businesses. Answer: B

Topic: LIQUIDITY RATIOS

A very short-term creditor would likely be least interested in a firm's __________. A) current ratio B) quick ratio

C) interval measure D) cash ratio

E) equity multiplier Answer: E

Topic: LIQUIDITY RATIOS

Which of the following statements is FALSE?

A) The larger the current ratio the more liquid the firm.

B) Inventory is excluded in the calculation of the quick ratio.

C) A current ratio of greater than one indicates net working capital is positive. D) In firms with inventory the quick ratio will always exceed the current ratio. E) Accounts receivable are excluded in the calculation of the cash ratio. Answer: D

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59. Topic: DAYS' SALES IN RECEIVABLES

Conceptually, what does the days' sales in receivables ratio measure for a firm?

A) The number of days it takes to generate dollar sales equal to the outstanding accounts

receivable balance.

B) The number of days it would take to collect outstanding receivables if no new ones are created. C) The number of days it takes for a firm to pay its bills assuming no new payables are created. D) The number of times during the year a firm collects and reloans its receivables.

E) The number of days it takes before the firm's working capital becomes negative. Answer: B

Topic: DAYS' SALES IN INVENTORY

60. What would your best interpretation be for the days' sales in inventory ratio? A) The number of days it takes before the current ratio falls to zero.

B) The number of days needed to make a profit from selling off inventory.

C) How long it takes, on average, to entirely deplete the firm's inventory account. D) The time it takes to completely replace total current assets.

E) The rate at which inventory is replaced. Answer: C

Topic: ASSET TURNOVER

61. Which of the following is a correct interpretation of a total asset turnover of 3.0? A) For each $1 of sales generated by the firm it requires $3 in assets. B) For each $1 of assets owned by the firm it generates $3 in sales. C) For each $3 of sales, the firm makes $1 in net profit after taxes.

D) The firm completely replenishes its available assets 3 times per year.

E) The firm completely replenishes its available assets every 3.0 days. Answer: B

Topic: SUSTAINABLE GROWTH RATE

62. Which of the following is a determinant of the sustainable growth rate? A) Price/earnings ratio B) Quick ratio

C) Inventory turnover ratio D) Cash coverage ratio

E) Dividend payout ratio Answer: E

Topic: SUSTAINABLE GROWTH RATE

63. All else the same, sustainable growth will increase with decreases in __________. A) dividend payouts B) net income

C) total asset turnover D) profit margin

E) debt outstanding Answer: A

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Topic: DU PONT IDENTITY

Which of the following is NOT a component of the Du Pont identity? A) Operating efficiency B) Dividend policy C) Asset use efficiency D) Financial leverage E) Profitability Answer: B

Topic: FINANCIAL STATEMENTS

The financial statements of a company ____________________.

A) are always useless because they employ accounting figures and not actual cash flows B) provide a complete and accurate snapshot of a firm's financial health at a point in time

C) are generally considered a useful second best source of information for analysts of the firm if

only because this information is often all that is readily available

D) are rarely useful for looking at the trends in financial performance of a firm

E) are rarely comparable from year to year since accountants are constantly changing accounting

methods resulting in very little consistency Answer: C

Topic: PROFIT MARGIN

In words, what does a profit margin of 0.10 mean?

A) For each $1 of sales generated by the firm it incurs 10 cents in operating expenses. B) For each $1 of sales generated by the firm it earns 10 cents in net income. C) For each $1 of profits generated by the firm pretax, it keeps 10 cents aftertax. D) For each $1 of net income generated, 10 cents in sales are required.

E) The firm completely sells off its production level 10 times on average during the year. Answer: B

Topic: EQUITY MULTIPLIER

In words, what does an equity multiplier of 4 mean?

A) Each dollar in assets the firm owns is supported by $4 in equity. B) Each dollar in assets the firm owns is supported by $4 in debt. C) Each dollar in equity the firm has supports $4 in assets.

D) Each dollar in assets the firm owns is supported by $8 in equity. E) Each dollar in equity the firm has supports 25 cents in assets. Answer: C

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Topic: SUSTAINABLE GROWTH

If a firm believes its costs and assets grow at the same rate as sales, the dividend payout ratio is fixed, no new equity is possible, and the current debt-equity ratio is optimal, then which of the following is true?

I. The sustainable growth rate gives the maximum rate at which sales can grow. II. External financing will be zero.

III. Asset growth must completely come from increases in accounts payable and retained earnings. IV. If the firm pays out all of its net income as dividends, sales can grow without limit.

A) I only

B) I, II, and III only C) I and IV only

D) II, III, and IV only E) I, II, III, and IV Answer: A

Topic: RATIO CATEGORIES

Bankers providing revolving credit to a firm tend to be most interested in which ratios? A) profitability B) market value C) liquidity

D) asset management E) financial leverage Answer: C

Topic: RATIO CATEGORIES

A firm that reduces its employee base by consolidating existing job functions will likely see the most direct impact in which category of financial ratios? A) liquidity B) market value

C) short-term solvency D) long-term solvency E) profitability Answer: E

Topic: DAYS' SALES IN INVENTORY

If a firm's sales have decreased recently while inventory has increased, you would expect that: A) Inventory turnover has increased and the days' sales in inventory has decreased. B) Inventory turnover has decreased and the days' sales in inventory has decreased. C) Inventory turnover has decreased and the days' sales in inventory has increased. D) Inventory turnover has increased and the days' sales in inventory has increased. E) Inventory turnover has not changed. Answer: C

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Topic: SOURCES AND USES OF CASH

Which of the following regarding sources and uses of cash is FALSE?

A) If a current asset account and a current liability account both increase by the same amount,

there is no net use of funds.

B) If fixed assets decrease by the amount of depreciation for the year, there is no net use of funds. C) Changes in income and expense accounts do not affect sources and uses of funds. D) If a liability account increases there is a source of funds.

E) If the common stock outstanding increases there is a source of funds. Answer: C

Topic: TIMES INTEREST EARNED

A firm has a times interest earned ratio of 4.5 times. This me

A) The firm generated enough cash to cover its interest expense by 4.5 times. B) The interest expense of this firm exceeded earnings before taxes by 4.5 times.

C) The net income of this firm is sufficient to cover its interest expense 4.5 times over. D) The firm has sufficient EBIT to cover its interest expense 4.5 times over. E) The firm earned $1.00 in EBIT for every $4.50 it paid out in interest. Answer: D

Topic: INVENTORY MANAGEMENT RATIOS

Last year, ABC and XYZ both had the same level of cost of goods sold, but ABC turned its

inventory over 8 times during the year while XYZ turned its inventory over every 55 days. If the objective is to keep inventory as low as possible on average, which of the following is true? A) ABC did a better job since its inventory turnover was higher. B) XYZ did a better job since its days sales in inventory was lower. C) ABC did a better job since its days sales in inventory was higher. D) XYZ did a better job since its inventory turnover was lower. E) ABC did a better job since its level of inventory was higher. Answer: A

Topic: RETURN ON EQUITY

If the total assets of a firm increase while all other components of ROE remain unchanged, you would expect the firm's: A) ROE to increase.

B) Total asset turnover to decrease. C) ROA to increase.

D) Equity multiplier to decrease. E) Profit margin to decrease. Answer: B

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Topic: CURRENT RATIO

If accounts receivable decrease, then the current ratio will always: A) Increase. B) Decrease.

C) Remain the same.

D) Increase or decrease, but cannot ever remain the same.

E) Increase, decrease, or remain the same, depending on the terms of credit and repayment. Answer: E

Topic: CURRENT AND QUICK RATIOS

If a firm sells inventory for cash, then the current ratio will always: A) Increase. B) Decrease.

C) Remain the same.

D) Increase or decrease, but cannot ever remain the same.

E) Increase, decrease, or remain the same, depending on the cost of inventory and the sale price. Answer: E

Topic: RETURN ON EQUITY AND RETURN ON ASSETS If the total debt ratio is zero:

A) The equity multiplier is zero as well. B) The debt to equity ratio is one. C) ROA is equal to ROE. D) ROE is equal to 100%.

E) The total asset turnover ratio is undefined. Answer: C

Topic: PRICE/EARNINGS RATIO

Which of the following is true regarding the price/earnings ratio?

A) A high P/E ratio is often taken to mean the firm has poor prospects for future growth. B) A P/E ratio of 15 means investors are willing to pay $1 for each $15 of current earnings. C) Care must be taken in interpreting very low P/E ratios since they can result from a firm having

very low earnings.

D) P/E ratios are sensitive to the accounting methods employed by the firm. E) A firm with high earnings per share will also have a very high P/E ratio. Answer: D

Topic: DU PONT IDENTITY

Two firms have identical asset turnover and profit margins. However, the two firms have different ROE values. Therefore, it must be true that:

A) The firms have different ROA values as well.

B) The firms have different levels of operating efficiency.

C) The firms differ in the efficiency of using their assets to generate sales. D) The firms have different degrees of financial leverage. E) The firms have different dividend policies. Answer: D

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Topic: NET PROFIT MARGIN

Which of the following would result in a higher profit margin, all else the same?

I. A decrease in cost of goods sold. II. A higher corporate tax rate.

III. Doubling the amount of long-term debt while decreasing common equity by the same amount.

A) I only B) II only C) III only

D) I and III only E) II and III only Answer: A

Topic: PROBLEMS ANALYZING FINANCIAL STATEMENTS

Problems with financial statement analysis include all of the following EXCEPT:

A) Many firms are conglomerates whose combined operations don't fit any neat industry

classification.

B) The financial statements of firms outside the US do not necessarily conform to GAAP, making

it difficult to compare them to US firms.

C) Firms may use different accounting procedures for inventory, making it difficult to compare

them using standard financial ratios.

D) If two firms with seasonal operations end their fiscal years at different times, their financial

statements may be difficult to compare.

E) Financial statements have little value since they cannot be used to calculate a firm's tax

liability. Answer: E

Topic: FINANCIAL STATEMENTS

Which of the following regarding financial statement analysis is NOT correct?

A) According to the Du Pont identity, ROE is affected by operating efficiency, asset use

efficiency, and financial leverage.

B) It is straightforward to calculate the market value based measures of firm performance using

financial statements prepared according to GAAP.

C) Asset management ratios measure the intensity and efficiency of asset use.

D) For common size statements, we divide asset and liability accounts by total assets and income

statement accounts by sales.

E) An increase in a firm's net fixed assets is considered to be a use of cash. Answer: B

62 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

III. PROBLEMS

Topic: EARNINGS PER SHARE

84. A firm has 1.5 million shares outstanding. EBIT is $5 million and interest paid is $2 million. If the

corporate tax rate is 35%, what is earnings per share? A) $0.50 B) $0.95 C) $1.30 D) $1.70 E) $2.50 Answer: C Response:

EBT = $5,000,000 - 2,000,000 = $3,000,000; NI = $3,000,000 - 1,050,000 = $1,950,000 EPS = $1,950,000 / 1,500,000 = $1.30

Topic: AVERAGE COLLECTION PERIOD

85. Your company had net sales of $70,000 over the past year. During that time, average receivables

were $10,000. What was the average collection period?

A) 7 days B) 12 days C) 30 days D) 43 days E) 52 days

Answer: E

Response: Rec. turnover = $70,000 / 10,000 = 7; Days' sales in receivables = 365 / 7 = 52 days

Topic: RECEIVABLES RATIOS

86. If the average collection period is 73 days and sales are $50,000, what is the average investment in

receivables?

A) $ 2,500 B) $ 3,650 C) $ 7,000 D) $10,000 E) $13,500

Answer: D

Response: Rec. turnover = 365 / 73 = 5; Accounts receivable = $50,000 / 5 = $10,000

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: DEBT RATIO AND EQUITY MULTIPLIER

87. If a firm has a total debt ratio of 1.5, what is its equity multiplier? A) –2.00 times B) 0.50 times C) 0.67 times D) 1.50 times E) 3.00 times

Answer: A

Response: Equity multiplier = 1 / (1-1.5) = -2.00

Topic: MARKET TO BOOK RATIOS

88. A firm has a total book value of equity of $300,000, a market to book ratio of 3, and a book value

per share of $8.00. What is the total market value of the firm's equity?

A) $ 37,500 B) $ 600,000 C) $ 800,000 D) $ 900,000 E) $1,200,000

Answer: D

Response: Shares = $300K / 8 = 37,500; MV per share = 3 x $8 = $24; MVE = 37,500 x $24 = $900,000

Topic: CURRENT RATIO

. Assume a firm's current ratio equals 3.5. Which of the following actions would increase it? A) Discarding and writing off spoiled inventory. B) Receiving a full cash payment on an account receivable. C) Paying off a short-term bank loan with the proceeds from new long-term debt. D) Purchasing new fixed assets using the proceeds from a new stock issue. E) Buying inventory on credit, thereby increasing accounts payable.

Answer: C

Topic: CASH COVERAGE RATIO

90. Net income is $504, interest expenses $175, and depreciation expense $300. The corporate tax rate

is 40%. What is the cash coverage ratio?

A) 1.8 times B) 4.2 times C) 5.0 times D) 6.5 times E) 7.5 times

Answer: E

Response: EBT = $504 / (1-.4) = $840; EBIT = $840 + 175 = $1,015; CCR = ($1,015 + 300) / 175 = 7.51

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: DIVIDENDS PER SHARE

91. A firm with net income of $80,000 pays out 32% of net income in dividends. If the firm has 40,000

shares of common stock outstanding, what is the dividend paid per share of stock?

A) $0.30 B) $0.44 C) $0. D) $1.23 E) $2.77

Answer: C

Response: dividends = $80,000 x .32 = $25,600; DPS = $25,600 / 40,000 = $0.

Topic: RETURN ON ASSETS

92. A firm has an ROA of 6%, sales of $80, and total assets of $90. What is its profit margin? A) 3.75% B) 4.25% C) 6.75% D) 7.50% E) 9.25%

Answer: C

Response: NI = $90 x .06 = $5.40; PM = $5.40 / 80 = .0675

Topic: CURRENT RATIO

93. If the current ratio is 1.5, it implies that if the firm liquidates its current assets in order to pay off its

current liabilities, it can sell the current assets for as little as:

A) 15% of book value. B) 25% of book value. C) 33% of book value. D) 67% of book value. E) 150% of book value.

Answer: D

Topic: TIMES INTEREST EARNED RATIO

94. The times interest earned ratio is 5.0. Based on this ratio, a creditor knows that EBIT must decline

by more than ______ before the firm will be unable to cover its interest expense.

A) 33% B) 67% C) 75% D) 80% E) 90%

Answer: D

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: CURRENT & QUICK RATIOS

95. A firm has current liabilities of $700, a current ratio of 1.4, and a quick ratio of 0.7. Calculate the

level of inventory for this firm.

A) $280 B) $340 C) $490 D) $550 E) $780

Answer: C

Response: CA = $700 x 1.4 = $980; Inventory = $980 (700 x .7) = $490

Topic: DU PONT IDENTITY

96. Given a profit margin = 15%, ROE = 25%, D/E = 1.25, and assets = $600, calculate sales. A) $ 333 B) $ 444 C) $ 555 D) $ 667 E) $1,000

Answer: B

Response: TAT = .25 / [.15(1 + 1.25)] = .741 times; Sales = TAT x A = .741 x $600 = $444

Topic: DAYS' SALES IN INVENTORY

97. Cost of goods sold are $350, net working capital $15, total current assets $90, and the quick ratio is

0.6. What is the days' sales in inventory?

A) 35.2 days B) 46.9 days C) 59.1 days D) 70.4 days E) 114.8 days

Answer: B

Response: CL = $90 - 15 = $75; Inventory = $90 - (75 x .6) = $45; Days' sales in inventory = 365 / ($350/45) = 46.9 days

Topic: AVERAGE COLLECTION PERIOD

98. The firm has a current ratio of 1.5, a quick ratio of 1.2, net income of $40,000, a profit margin of 9%,

and an accounts receivable balance of $20,000. What is the firm's average collection period?

A) 51.3 days B) 72.6 days C) 16.4 days D) 24.5 days E) 30.0 days

Answer: C

Response: Sales = $40,000 / .09 = $444,444; ACP = 365/ ($444,444 / 20,000) = 16.4 days

66 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

99.

Topic: RETURN ON ASSETS

You have the following data for a company. What is the return on assets (ROA)? Return on equity = 15%; Earnings before taxes = $50,000; Total asset turnover = 1.2; Profit margin = 7.5%; Tax rate = 35%. A) 9% B) 8% C) 7% D) 6% E) 5% Answer: A Response:

NI = $50,000 x .65 = 32,500; Sales = $32,500 / .075 = $433,333 TA = $433,333 / 1.2 = $361,111; ROA = $32,500 / 361,111 = .09

Topic: COST OF GOODS SOLD

Calculate the value of cost of goods sold for the firm given the following information: Current liabilities = $55,000; Quick ratio = 1.6; Inventory turnover = 6.0; Current ratio = 2.5. A) $297,000 B) $320,000 C) $385,000 D) $443,000 E) $567,000 Answer: A Response:

CA = $55,000 x 2.5 = $137,500;

Inventory = $137,500 - (55,000 x 1.6) = $49,500 COGS = 6 x $49,500 = $297,000

100.

Topic: DU PONT IDENTITY

101. A firm has sales of $800, total assets of $500, and a debt/equity ratio of 1.5. If its return on equity is

18%, what is its net income?

A) $15 B) $36 C) $45 D) $62 E) $90

Answer: B

Response: NI = (.18 x $500) / 2.5 = $36

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: SUSTAINABLE GROWTH RATE

102. A firm has a return on equity of 16%, a dividend payout ratio of 40%, an equity multiplier of 1.6,

and a profit margin of 4.2%. What is the sustainable growth rate?

A) 2.0% B) 2.9% C) 5.3% D) 8.7% E) 10.6%

Answer: E

Response: SGR = (.16 x .6) / (1 - .16 x .6) = .106

Topic: RETENTION RATIO

103. A firm earns net income of $40,000 in a given year and the firm's retained earnings increase

$30,000 for that same year. The retention ratio is:

A) 25% B) 60% C) 75% D) 85% E) 100%

Answer: C

Response: b = $30,000 / 40,000 = .75

Topic: INTERNAL GROWTH RATE

104. Profit margin is 15% and the retention ratio is 60%. Last year, sales were $900 and total assets were

$2,000. What is the internal growth rate?

A) 1.7% B) 2.6% C) 3.7% D) 4.2% E) 5.9%

Answer: D

Response: NI = .15 x $900 = $135; ROA = $135 / 2,000 = .0675; IGR = (.0675 x .6) / (1 - .0675 x .6)

= .0422

Topic: SUSTAINABLE GROWTH RATE

105. Given the following information: profit margin = 10%; sales = $150; retention ratio = 30%; assets =

$200; equity multiplier = 1.5. If the firm maintains a constant debt-equity ratio and no new equity is used, what is the maximum growth rate? (Assume a constant profit margin.)

A) 1.52% B) 2.04% C) 2.68% D) 3.49% E) 4.93%

Answer: D

Response: ROE = .1 x ($150/200) x 1.5 = .1125; SGR = (.1125 x .3) / (1 - .1125 x .3) = .0349

68 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

106.

Topic: SUSTAINABLE GROWTH RATE

Profit margin is 6% and the retention ratio is 50%. Last year, sales were $2,000 and total assets were $3,000. The desired total debt ratio is 65%. What is the sustainable growth rate? A) 2.5% B) 11.5% C) 8.1% D) 4.3% E) 6.1% Answer: E Response:

D = $3,000 x .65 = $1,950; E = $1,050;

NI = .06 x $2,000 = $120; ROE = $120 / 1,050 = .1143 SGR = (.1143 x .5) / (1 - .1143 x .5) = .061

Topic: SUSTAINABLE GROWTH

Suppose a firm has net income of $100, dividends of $35, assets of $4,000 and a debt-equity ratio of 4.0. What is the sustainable growth rate? A) 1.5% B) 4.0% C) 6.9% D) 8.8% E) 13.1% Answer: D Response:

D/E = 4 and assets = $4,000 so D = $3,200 and E = $800 ROE = $100 / 800 = .125; b = $65 / 100 = .65 SGR = (.125 x .65) / (1 .125 x .65) = .0884

107.

Topic: SUSTAINABLE GROWTH RATE

108. Assume a firm has sales of $2,750 on assets totaling $1,500, net income of $108, and dividends of

$30. What is the sustainable growth rate if the equity has a value of $600?

A) 22.9% B) 14.9% C) 11.1% D) 9.9% E) 1.3%

Answer: B

Response: ROE = $108 / 600 = .18; b = ($108 - 30) / 108 = .722; SGR = (.18 x .722) / (1 - .18 x .722) = .149

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Use the following to answer questions 109-111:

Net income = $400; Total assets = $3,000; Total liabilities = $1,200; Total asset turnover = 2.0

Topic: CAPITAL INTENSITY RATIO

109. What is the capital intensity ratio assuming dividends paid total $250? A) 0.00 B) 0.50 C) 0.25 D) 4.00 E) 2.00

Answer: B

Response: CIR = 1 / TAT = 1/2 = .5

Topic: INTERNAL GROWTH RATE

110. What is the internal growth rate assuming dividends paid total $250? A) 1.1% B) 2.5% C) 5.3% D) 8.3% E) 9.1%

Answer: C

Response: ROA = $400 / 3,000 = .1333; b = ($400 - 250) / 400 = .375 IGR = (.1333 x .375) / (1 - .1333 x .375) = .0526

Topic: SUSTAINABLE GROWTH RATE

111. What is the sustainable growth rate assuming dividends paid total $100? A) 4.5% B) 8.6% C) 12.5% D) 15.0% E) 20.0%

Answer: E

Response: E = $3,000 - 1,200 = $1,800; ROE = $400 / 1,800 = .222; b = ($400 - 100) / 400 = .75 SGR = (.222 x .75) / (1 - .222 x .75) = .20

70 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Use the following to answer questions 112-123:

ABC, Inc

2002 Income Statement

($ in millions)

Net sales $9,625 Less: Cost of goods sold 5,225 Less: Depreciation 1,0 Earnings Before interest and taxes 2,510 Less: Interest paid 850 Taxable income 1,660 Less: Taxes 581 Net income $1,079 Addition to retained earnings $679 Dividends paid 400

ABC, Inc.

2001 and 2002 Balance Sheet

($ in millions)

2001 2002 Cash $1,455 $260 Accounts payable Accounts rec. 2,460 3,975 Notes payable Inventory 1,405 885 Total Total $5,320 $5,120 Long-term debt Net fixed assets 19,300 21,720 Common stock Retained earnings Total assets $24,620 $26,840 Total liabilities

Topic: CURRENT RATIO

112. What is the current ratio for ABC in 2002? A) 1.97 B) 1.51 C) 1.23 D) 1.14 E) 1.02

Answer: D

Response: CR = $5,120 / 4,491 = 1.14

Topic: QUICK RATIO

113. What is the quick ratio for ABC for 2001? A) 1.04 B) 0.63 C) 0.76 D) 1.18 E) 1.53

Answer: A

Response: QR = ($5,320 - 1,405) / 3,750 = 1.04

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

2001 2002 $1,150 $2,863 2,600 1,628 $3,750 $4,491 7,000 7,600 5,500 5,700 8,370 9,049 $24,620 $26,840 71

Chapter 3: Working with Financial Statements

114. What is the total debt ratio for ABC for 2002? A) 0.27 B) 0.45 C) 0.53 D) 0.70 E) 0.82

Answer: B

Response: TDR = ($26,840 - 5,700 - 9,049) / 26,840 = .45

Topic: DEBT-EQUITY RATIO

115. What is the debt-equity ratio for 2001? A) 0.46 B) 1.41 C) 0.78 D) 2.15 E) 2.32

Answer: C

Response: D/E = ($3,750 + 7,000) / (5,500 + 8,370) = .78

Topic: TIMES INTEREST EARNED

116. What is the times interest earned ratio for 2002? A) 1.25 times B) 3.55 times C) 4.05 times D) 6.35 times E) 2.95 times

Answer: E

Response: TIE = $2,510 / 850 = 2.95 times

Topic: CASH COVERAGE RATIO

117. What is the cash coverage ratio for 2002? A) 3.24 B) 6.80 C) 8.76 D) 5.18

Answer: D

Response: CCR = ($2,510 + 1,0) / 850 = 5.18 times

Topic: INVENTORY TURNOVER

118. What was inventory turnover for 2002? A) 1.38 B) 2.42 C) 5.90 D) 3.15 E) 4.38

Answer: C

Response: Inv. turnover = $5,225 / 885 = 5.90 times

72 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: AVERAGE COLLECTION PERIOD

119. What was the average collection period for 2002? A) 92 days B) 151 days C) 112 days D) 211 days E) 256 days

Answer: B

Response: Rec. turnover = $9,625 / 3,975 = 2.421; ACP = 365 / 2.421 = 150.7 days

120. What was the total asset turnover in 2002? A) 0.23 B) 0.52 C) 0.36 D) 0.87 E) 1.44

Answer: C

Response: TAT = $9,625 / 26,840 = .36 times

Topic: PROFIT MARGIN

121. What was the profit margin in 2002? A) 7.9% B) 18.4% C) 22.7% D) 11.2% E) 60.0%

Answer: D

Response: PM = $1,079 / 9,625 = .112

Topic: RETURN ON EQUITY

122. What was the return on equity for 2002? A) 18.3% B) 7.3% C) 31.4% D) 14.8% E) 62.8%

Answer: B

Response: ROE = $1,079 / (5,700 + 9,049) = .0732

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: PRICE TO EARNINGS RATIO

123. If ABC stock sells for $30 and there are 500 million shares outstanding, what is the P/E ratio? A) 5.7 B) 10.3 C) 13.9 D) 15.6 E) 22.5

Answer: C

Response: EPS = $1,079M / 500M = $2.16; P/E = $30 / 2.16 = 13.9

Use the following to answer questions 124-133:

XYZ Corporation

Income Statement for Year Ending 2002

Sales $ 1,760 Less: Costs 1,120 Depreciation 180 EBIT 460 Less: Interest 70 EBT 390 Less: Taxes 156 Net Income $234 Dividends $100 Addition to ret. earnings $134

XYZ Corporation

Balance Sheet for End of Year 2001, 2002

2001 2002 2001 2002 Cash $ 50 $ 60 Accounts payable $ 35 $ 50 Accounts rec. 100 80 Notes payable 40 66 Inventory 365 510 Current liabilities 75 116 Current assets 515 650 Long-term debt 725 725 Fixed assets 840 930 Common stock 50 100 ($1 par value) Retained earnings 505 639 Total assets $1,355 $1,580 Total liab. & equity $1,355 $1,580

Topic: SOURCES OF CASH

124. What was the greatest source of funds for XYZ? A) Sale of inventory B) Increase in common stock C) Acquisition of more fixed assets D) Increase in notes payable E) Increase in long-term debt

Answer: B

74 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: USES OF CASH

125. What was the greatest use of funds for XYZ? A) Increase in accounts receivable B) Decrease in accounts payable C) Acquisition of more fixed assets D) Dividends E) Increased inventory on hand

Answer: C

Topic: QUICK RATIO

126. What was the quick ratio for XYZ for 2002? A) 0.21 B) 0.67 C) 0.80 D) 1.21 E) 1.40

Answer: D

Response: QR = ($650 - 510) / 116 = 1.21

Topic: OPERATING ACTIVITIES

127. If you prepare a statement of cash flows, what is the positive flow to cash from operating activities?

(Consider only inflows)

A) $234 B) $269 C) $414 D) $429 E) $449

Answer: E

Response: inflow from operating activities = $234 + 180 + 15 + 20 = $449

Topic: OPERATING ACTIVITIES

128. If you were to prepare a statement of cash flows, what is the negative flow from cash due to

operating activities? (Consider only outflows)

A) –$105 B) –$175 C) –$145 D) –$351 E) –$449

Answer: C

Response: outflow from operating activities = $365 - 510 = -145

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: INVESTMENT ACTIVITIES

129. If you were to prepare a statement of cash flows, what is the cash flow from investment activities? A) –$ 90 B) –$270 C) –$360 D) $ 90 E) $930

Answer: B

Response: cash flow from investment = ($930 - 840 + 180) = -270

Topic: FINANCING ACTIVITIES

130. If you were to prepare a statement of cash flows, what is the net cash flow from financing

activities?

A) –$100 B) –$ 74 C) –$ 24 D) $ 26 E) $ 76

Answer: C

Response: cash flow from financing = $26 + 50 - 100 =$24

Topic: DU PONT IDENTITY

131. Which of the following contains the components of the Du Pont identity for the company? Use

year-end 2002 values where appropriate.

A) 0.133; 1.77; 4.26 B) 0.169; 1.56; 2.14 C) 0.133; 1.11; 2.14 D) 0.194; 1.11; 5.46 E) 0.427; 1.40; 3.00

Answer: C

Response: PM = $234 /1,760 = .133; TAT = $1,760 / 1,580 =1.11 Equity multiplier = $1,580 / (100 + 639) = 2.14

Topic: INTERVAL MEASURE

132. If cash inflows for the company cease, the firm will be able to stay in business for about: A) 111 days. B) 212 days. C) 346 days. D) 1,872 days. E) 2,139 days.

Answer: B

Response: Interval measure = $650 / (1,120 / 365) = 212 days

76 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

Topic: PRICE TO EARNINGS RATIO

133. If the firm has a price/earnings ratio of 12 in late 2002, what is the firm's approximate market price

per share?

A) $ 8 B) $19 C) $28 D) $41 E) $90

Answer: C

Response: EPS = $234 / 100 = $2.34; Price = 12 x $2.34 = $28.08

Use the following to answer questions 134-140:

Placer Group Balance Sheets

Years ended 2001 and 2002

($ in millions)

2001 2002 Cash $ 725 $1,135 Accounts payable Accounts rec. 2,330 2,300 Notes payable Inventory 3,240 5,202 Current liabilities Current assets 6,295 8,637 Long-term debt Fixed assets 9,788 9,211 Common stock Retained earnings Total assets $16,083 $17,848 Total liab. & equity

Placer Group

2002 Income Statement

($ in millions)

Net sales $8,905 Less: Cost of goods sold 4,565 Less: General & adm. expenses 440 Less: Depreciation 2,100 EBIT 1,800 Less: Interest paid 675 Earnings before taxes 1,125 Less: Taxes 400 Net income $725

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

2001 $ 859 3,227 4,086 9,250 250 2,497 $16,083 2002 $1,031 4,020 5,051 9,750 250 2,797 $17,848 77

Chapter 3: Working with Financial Statements

134.

135.

Topic: PROFIT MARGIN The profit margin of Placer is: A) 3.6% B) 8.1% C) 13.1% D) 19.9% E) 22.3% Answer: B

Response: PM = $725 / 8,905 = .081

Topic: TIMES INTEREST EARNED RATIO Placer's times interest earned ratio is: A) 0.34 B) 1.46 C) 1.95 D) 2.67 E) 4.80 Answer: D

Response: TIE = $1,800 / 675 = 2.67

Topic: TOTAL DEBT RATIO

136. What was Placer's total debt ratio in 2002? A) 0.46 B) 0.83 C) 1.04 D) 1.39 E) 2.32

Answer: B

Response: DR = ($17,848 - 2,797 - 250) / 17,848 = .83

Topic: LIQUIDITY

137. Which of Placer's liquidity measures decreased from 2001 to 2002? A) Current ratio B) Cash ratio C) Quick ratio D) NWC to total assets E) Net working capital

Answer: C

78 Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

Chapter 3: Working with Financial Statements

138. Topic: DAYS' SALES IN INVENTORY

Assume Placer's days' sales in inventory ratio was 320 days in 2001. By how much did it change in 2002?

A) Increased by 96 days B) Increased by 32 days C) Increased by 48 days D) Decreased by 22 days E) Decreased by 44 days Answer: A Response:

Inventory turnover = $4,565 / 5,202 = 0.88 times;

Days' sales in inventory = 365 / 0.88 = 416 days

Topic: ROE AND ROA

139. Calculate Placer's ROE for 2002. A) 23.8% B) 26.1% C) 29.4% D) 32.6% E) 161.8%

Answer: A

Response: ROE = $725 / (250 + 2,797) = .238

Topic: NET WORKING CAPITAL TO TOTAL ASSETS

140. How did Placer's net working capital to total assets ratio change from 20001to 2002? A) Decreased from 0.66 to 0.43 B) Decreased from 0.17 to –0.01 C) Increased from 0.14 to 0.20 D) Increased from 0.21 to 0.67 E) Increased from 0.17 to 0.

Answer: C

Response: 2001 NWC to TA = $2,209 / 16,083 = .14; 2002 NWC to TA = $3,586 / 17,848 = .20

Ross/Westerfield/Jordan, Essentials of Corporate Finance, 4/e

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