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Examples of Questions on Ratio Analysis

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Autor: arianagranada  •  January 8, 2017  •  Exam  •  957 Words (4 Pages)  •  20 Views

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Examples of Questions on Ratio Analysis

A: Multiple Choice Questions

1. Which of the following is considered a profitability measure?

  1. Days sales in inventory
  2. Fixed asset turnover
  3. Price-earnings ratio
  4. Cash coverage ratio
  5. Return on Assets

2.  Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4.  From this we know that

  1. Firm A has a higher profit margin than firm B
  2. Firm B has a higher profit margin than firm A
  3. Firm A and B have the same profit margin
  4. Firm A has a higher equity multiplier than firm B
  5. You need more information to say anything about the firm's profit margin

  1. If a firm has $100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm's Net Working Capital?
  1. $0
  2. $100
  3. $200
  4. $1,000
  5. $1,200
  1. To measure a firm's solvency as completely as possible, we need to consider
  1. The firm's relative proportion of debt and equity in its capital structure
  2. The firm's capital structure and the liquidity of its current assets
  3. The firm's ability to use Net Working Capital to pay off its current liabilities
  4. The firms leverage and its ability to make interest payments on its long-term debt
  5. The firm leverage and its ability to turn its assets over into sales

B: Problem Solving Questions

You have been hired as an analyst for Mellon Bank and your team is working on an independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the production of freshly imported farm products from France.  Your assistant has provided you with the following data for Flipper Inc and their industry.

Ratio

1999

1998

1997

1999-

Industry Average

Long-term debt

0.45

0.40

0.35

0.35

Inventory Turnover

62.65

42.42

32.25

53.25

Depreciation/Total Assets

0.25

0.014

0.018

0.015

Days’ sales in receivables

113

98

94

130.25

Debt to Equity

0.75

0.85

0.90

0.88

Profit Margin

0.082

0.07

0.06

0.075

Total Asset Turnover

0.54

0.65

0.70

0.40

Quick Ratio

1.028

1.03

1.029

1.031

Current Ratio

1.33

1.21

1.15

1.25

Times Interest Earned

0.9

4.375

4.45

4.65

Equity Multiplier

1.75

1.85

1.90

1.88

  1. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations.  We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).”  Is the CEO correct?  Explain and use only relevant information in your analysis.
  1. What can you say about the firm's asset management? Be as complete as possible given the above information, but do not use any irrelevant information.
  1. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.

ANSWERS:

Answer 1: e

Answer 2: b (Profit margin of firm A=5.33% and for firm B=7.5% - use Du Pont Identity)

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