Chanakya Business School 2019

Ratio Analysis
1. If ROE 24%,preferred dividend 8%,opening equity 240000,closing equity 1.2 times
higher than opening equity .
Preferred stock value?
A. 186000
B. 214000
C. 192000
D. 168000

2. Times interest earned = 2 times

Interest paid = 42000 (includes previous year outstanding 4000 and next year advance of
8500)
Gain on sale of machinery = 14000 Salaries= 28000
Rent = 12000 Electricity= 8000
Net profit ratio = 14%
Gp ratio ?

A. 50.44
B. 44.13
C 56.28
D. 52 .00

3. A company has 120000 outstanding opening shares .

Cash dividend paid= 48000( it includes 5000 preferred dividend)
Stock dividend $12000
Par value 1 per share
10 % stock dividend declared
IACS = 535000
Dividend pay out ratio? (Show your calculations)

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4. A chief financial officer has been tracking the activities of the company’s nearest
competitor for several years. Among other trends, the CFO has noticed that this
competitor is able to take advantage of new technology and bring new products to market
more quickly than the CFO’s company. In order to determine the reason for this, the CFO
has been reviewing the following data regarding the two companies:

On the basis of this information, which one of the following is the best initial strategy for
the CFO to follow in attempting to improve the flexibility of the company?

A. Seek cost cutting measures that would increase the company’s profitability.
B. Investigate ways to improve asset efficiency and turnover times to improve liquidity.
C. Seek additional sources of outside financing for new product introductions.
D. Increase the company’s investment in short-term securities to increase the current
ratio.

5. The CFO of James Jeans Co. has asked you to prepare a vertical analysis of the recent
year's financial statements. You have identified the following: Gross profit as a
percentage of net sales increased from 30.2% last year to 35% this year, net income
increased from 9.4% to 10% of net sales, and James Jeans’ closest competitor had net
income this year at 11.8% of sales. What would you propose as an explanation for these
results?

A. James Jeans is an overall profitable business and has improved its profitability;
however, the company is still less profitable than its closest competitor.
B. James Jeans was successful in growing the business and bottom line and should be
able to overtake its closest competitor to become more profitable.
C. James Jeans is doing a better job running its business and improving profitability than
its closest competitor.
D. James Jeans has done a successful job negotiating raw materials prices and
compensating the sales team to improve financial results, but its competitor may be
doing this better.

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6. A corporation has $90 million in current assets. If the corporation has a current ratio of
1.2 and a quick ratio of 0.9, what is net working capital?
A. $10 million.
B. $15 million.
C. $81 million.
D. $108 million.

7. Which one of the following is not a form of off-balance-sheet financing?

A. Sale of receivables.
B. Foreign currency translations.
C. Operating leases.
D. Special purpose entities.

8. If the books of a foreign entity are maintained in a currency other than the functional
currency, foreign currency amounts must be re-measured into the functional currency. All
of the following items should be re-measured at the current rate except:
A. Prepaid expenses.
B. Accounts payable.
C. Inventory carried at market value.
D. Accounts receivable.

9. When Foster Research, a private medical research company, purchased its

spectrophotometer in 20x4, it calculated a salvage value of $3,000 for the machine.
However, now in 20x6, the software that runs the spectrophotometer is obsolete, and the
new salvage value is calculated at $500. How should this change be recorded?

A. The company should make an adjustment to the Depreciation Expense account for the
20x6 financial statements.
B. The company should make an adjustment to the Depreciation Expense account for the
years 20x4–20x6 and update the financial statements accordingly.
C. The company should make an adjustment to the Salvage Income account on the
income statement for 20x6.
D. The company should make an adjustment to the Salvage Income account on the
income statement for 20x4 and all subsequent years.

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10. A company has sales of $100,000, cost of sales of $40,000, interest expense of $4,000,
taxes of $18,000, and operating expenses of $15,000. What is the company’s operating
profit margin?

A. 60%
B. 45%
C. 41%
D. 23%

11. A corporation had 40,000 shares of common stock outstanding on November 30, Year 1.
On May 20, Year 2, a 10% stock dividend was declared and distributed. On June 1, Year
2, options were issued to its existing stockholders giving them the immediate right to
acquire one additional share of stock for each share of stock held. The option price of the
additional share was $6 per share, and no options have been exercised as of year end. The
average price of common stock for the year was $20 per share. The price of the stock as
of November 30, Year 2, the end of the fiscal year, was $30 per share, and the
corporation’s net income for the fiscal year was $229,680. The corporation had no
outstanding debt during the year, and its tax rate was 30%. The basic earnings per share
(rounded to the nearest cent) of common stock for the fiscal year ended November 30,
Year 2, was

A. $5.22 per share.

B. $3.82 per share.
C. $5.74 per share.
D. $3.38 per share.

12. A company located in China has reported on its first quarter balance sheet CNY 100,000
in cash, CNY 200,000 in accounts receivables, and CNY 90,000 in current liabilities. The
controller has forecasted that during the second quarter, there will be no change in the
accounts receivables, but the cash balance will increase by 5% and the current liabilities
will decrease by 10%. Based on the controller’s forecast, what is the forecasted quick
ratio for the second quarter?

A. 1.30

B. 3.39

C. 3.70

D. 3.77

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13. At the beginning of the fiscal year, June 1, Year 1, Boyd Corporation had 80,000 shares
of common stock outstanding. Also outstanding was $200,000 of 8% convertible bonds
that had been issued at $1,000 par. The bonds were convertible into 20,000 shares of
common stock; however, no bonds were converted during the year. The company's tax
rate is 34%, and the Aa bond interest rate has been 10%. Boyd's net income for the year
was $107,000. The fully diluted earnings per share (EPS) (rounded to the nearest cent) of
Boyd common stock for the fiscal year ended May 31, Year 2, was:

A. $1.18.
B. $1.47.
C. $1.34.
D. $1.07.

14. A drop in the market price of a firm’s common stock will immediately increase its

A. Return on equity.
B. Dividend payout ratio.
C. Market-to-book ratio.
D. Dividend yield.

15. The CFO of a publicly traded chemical manufacturer is in the process of evaluating the
company’s dividend policy in relation to shareholder value. The company’s dividend per
share has been held constant at $2.30 for the last 10 years. The CFO would like to
implement a 5% yearly dividend growth policy at the company starting next year. The
CFO has determined that the required return in the market for the company’s stock is
13%.
What is the forecasted value of the company stock in 5 years if the CFO’s dividend
growth policy is implemented?

A. $38.53
B. $36.69
C. $30.19
D. $23.71

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16. Windsor Company had 720,000 shares of common stock outstanding on December 31,
Year 1. An additional 240,000 shares of common stock were issued on April 1, Year 2,
and 360,000 more on July 1, Year 2. On October 1, Year 2, Windsor issued 5,000, $1,000
face value, 7% convertible bonds.
Each bond is convertible into 30 shares of common stock. The bonds were not considered
common stock equivalents at the time of their issuance, and no bonds were converted into
common stock in Year 2. If no other equity transactions will occur, the number of shares
to be used in computing primary earnings per share (EPS) and fully diluted earnings per
share (assuming dilution will occur), respectively, for the year ending December 31, Year
2, is:

A. 1,080,000 and 1,117,500.

B. 1,117,500 and 1,080,000.
C. 1,117,500 and 1,117,500.
D. 1,080,000 and $1,080,000.

17. Consider the following factors relating to Tech Manufacturing:

Sales $15,000,000
Cost of Goods Sold $ 6,000,000
Operating Expenses $ 4,500,000
Total Assets $ 6,500,000
Total Equity $ 2,000,000
Corporate Tax Rate 40%
Dividend Payout Ratio 30%

What is Tech Manufacturing's Sustainable Growth Rate if Tech has no interest-bearing

debt?
A. 0.700.
B. 1.350.
C. 0.405.
D. 0.945.

18. Eagle Company had a payout ratio of 18% and a price-earnings ratio of 8.6 times.
During the same period, its net income was $430,000. What was the amount of dividends
declared on common stock by Eagle?
A. $114,380
B. $36,980
C. $77,400
D. $352,600

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19. Bull & Bear Investment Banking is working with the management of Clark Inc. in order
to take the company public in an initial public offering. Selected financial information for
Clark is as:

If public companies in Clark's industry are trading at twelve times earnings, what is the
estimated value per share of Clark?
A. $6.00.
B. $1.25.
C. $15.00.
D. $12.00.

20. A corporation just paid a dividend of $2.00 per common share. Historical data indicate
that dividends grow at a steady rate of 5% per year. The required rate of return for
investing in such stock is 18%. The current value of one share of common stock is
A. $16.15
B. $15.38
C. $11.67
D. $11.11

21. A company is projecting an annual growth rate for the foreseeable future of 9%. The
most recent dividend paid was $3.00 per share. New common stock can be issued at $36
per share. Using the constant growth model, what is the approximate cost of capital for
retained earnings?
A. 9.08%
B. 17.33%
C. 18.08%
D. 19.88%

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22. Hayes Manufacturing had a payout ratio of 24% and a price-earnings ratio of 12.4 times.
During the same period, its net income was $210,000. What was the amount of dividends
declared on common stock by Hayes?
A. $76,440
B. $26,040
C. $50,400
D. $159,600

23. All of the following ratios will increase as a result of inventory being sold at a profit
except :
A. Return on Assets.
B. Current Ratio.
C. Debt to Equity Ratio.
D. Inventory Turnover.

24. Given an acid test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the
value of current liabilities is

A. $1,500

B. $2,500

C. $3,500

D. $6,000

25. Gemini Group sold some of its major assets in 20x7 while having higher sales than in
20x6. What would be the effect on its asset turnover?
A. Gemini Group would see a higher asset turnover in 20x7 than in 20x6.
B. Gemini Group would see a lower asset turnover in 20x7 than in 20x6.
C. Gemini Group would see no change in its asset turnover between 20x6 and 20x7.
D. Gemini Group would see either an increase or a decrease in asset turnover but
comparing the two years would require knowing how much sales increased in 20x7
compared to 20x6.

26. ABC Corporation has fully diluted earnings per share of $5, pays a dividend of $1 per
share, and has a current market price of $60 per share. What is ABC Corporation 's
dividend payout ratio?
A. 0.1
B. 0.2
C. 0.017
D. 0.083

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27. Residco Inc. expects net income of $800,000 for the next fiscal year. Its targeted and
current capital structure is 40% debt and 60% common equity. The director of capital
budgeting has determined that the optimal capital spending for next year is $1.2 million.
If Residco follows a strict residual dividend policy, what is the expected dividend payout
ratio for next year?
A. 90%.
B. 10%.
C. 67%.
D. 40%.

28. If a company sells inventory and records a profit, what impact does this have on the
quick ratio?
A. The quick ratio will decrease.
B. The quick ratio will increase.
C. There will be no effect on the quick ratio.
D. Unable to determine from information provided.

29. Which of the following are limitations of ratio analysis?

I. Ratios must have something to compare to in order to have meaning.

II. There must be a relationship between the two accounts used in the ratio.
III. The analyst must be aware of the accounting principles employed by the business.
IV. The analyst must be certified by the PAA.

A. I only.
B. I and III only.
C. I, II, III, and IV.
D. I, II, and III only.

30. Susan Hines has developed an estimate of the earnings per share (EPS) for her firm for
the next year using the following parameters.

Sales $20 million

Cost of goods sold 70% of sales
General & administrative expenses $300,000
Selling expense $100,000 plus 10% of sales
Debt outstanding $5 million @ 8% interest rate
Effective tax rate 35%
Common shares outstanding 2 million

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She is now interested in the sensitivity of earnings per share to sales forecast changes. A
10% sales increase would increase earnings per share by:

A. 13 cents per share.

B. 26 cents per share.
C. 20 cents per share.
D. 0 cents per share.

31. Which of the following statements is not correct concerning the price to earnings (PE)
ratio?
A. PEs tend to be larger in industries experiencing high growth.
B. PEs tend to vary a great deal; however, they tend to be similar within industries.
C. Assume that a firm gives stock options to its managers and net income and the PE
ratio remain relatively steady. The result of the stock option issuance would be an
increase in stock price.
D. The PE ratio is a measure of investor confidence in the management of a firm. A high
ratio implies greater confidence.

32. Which of the following is not considered a weakness of ratio analysis?

A. A firm in multiple industries has difficulty comparing its ratios to any one industry.
B. Firms may use different valuation methods on inventory (FIFO, LIFO, Weighted-
average, etc.).
C. Firms may use different depreciation methods (straight-line, double-declining
balance, etc.).
D. Markets change from year to year, and comparing ratios over time is problematic.

33. An increase in the gross profit margin for a merchandising firm indicates that the firm:
A. is increasing its revenues.
B. is decreasing its fixed costs.
C. has been managing its quality control better, which results in fewer returns.
D. is doing a better job of managing cost of sales.

34. A company’s cash ratio will decrease if the company

A. Purchases commercial paper.

B. Purchases materials on account.

C. Sells goods for cash at a selling price lower than cost.

D. Receives cash by issuing a short-term note payable.

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35. Two car dealerships have similar annual net sales. One car dealership has a gross profit
rate of 52.6%, whereas the other car dealership has a gross profit rate of 23.7%. Which of
the following explanations is the most likely reason for this difference?

A. The car dealership with a gross profit rate of 52.6% sells high-end sports and luxury
vehicles, whereas the car dealership with a gross profit rate of 23.7% sells sedans and
used vehicles.
B. The car dealership with a gross profit rate of 52.6% sells sedans and used vehicles,
whereas the car dealership with a gross profit rate of 23.7% sells high-end sports and
luxury vehicles.
C. The car dealership with a gross profit rate of 52.6% has higher inventory turnover,
whereas the car dealership with a gross profit rate of 23.7% has lower inventory
turnover.
D. The car dealership with a gross profit rate of 52.6% has lower inventory turnover,
whereas the car dealership with a gross profit rate of 23.7% has higher inventory
turnover.

36. Colonie Inc. expects to report net income of at least $10 million annually for the
foreseeable future. Colonie could increase its return on equity by taking which of the
following actions with respect to its inventory turnover and the use of equity financing?

A. Inventory Turnover: Decrease; Use of Equity Financing: Decrease.

B. Inventory Turnover: Increase; Use of Equity Financing: Decrease.
C. Inventory Turnover: Increase; Use of Equity Financing: Increase.
D. Inventory Turnover: Decrease; Use of Equity Financing: Increase.

37. Assume that a firm has a positive return on assets (ROA) that is less than 100%. What is
the effect on ROA if this firm purchases a new asset for cash and the result is an increase
in net income?
A. ROA is not calculated using net income.
B. ROA will decrease.
C. ROA will increase.
D. ROA will remain the same.

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38. An investor is deciding whether to invest in either of two companies (Company A and
Company B) within the same industry. Both companies have a 15% profit margin and
total assets of $15,000,000. Which of the following is true when measuring these
companies based on their Return on Assets (ROA)?

A. The company with the lower sales per year will be more attractive.
B. The company with the higher sales per year will be more attractive.
C. Each company is equally attractive as their assets are equal.
D. Both are equally profitable, therefore they are equally attractive.

39. A company could negatively affect its earnings quality if it frequently

A. Constructed plants in countries with unstable currency.
B. Invested long-term in an erratic stock or bond market.
C. Materially changed accounting estimates.
D. Offered significant sales discounts.

40. A corporation has the option to use either a shorter period or a longer period to amortize
a patent, and it can use either the declining-balance method or the straight-line method to
depreciate a fixed asset. The corporation would be considered to have better earnings
quality if it uses the

A. Longer period to amortize the patent and the declining-balance method to depreciate
the fixed asset.
B. Longer period to amortize the patent and the straight-line method to depreciate the
fixed asset.
C. Shorter period to amortize the patent and the declining-balance method to depreciate
the fixed asset.
D. Shorter period to amortize the patent and the straight-line method to depreciate the
fixed asset

41. A firm earned $10,000 before interest and taxes, has a 36% tax rate, and has the
following debt outstanding:

First mortgage bond, 9.0% $ 5,000

Debenture, 10.2% 10,000
Subordinated bond, 12.0% 6,000
Total long-term debt $21,000

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The annual coverage of the firm’s debt is

A. 4.57 times.
B. 2.92 times.
C. 11.85 times.
D. 3.57 times.

42. The interest expense for a company is equal to its earnings before interest and taxes
(EBIT). The company’s tax rate is 40%. The company’s times interest earned ratio is
equal to
A. 2.0
B. 1.0
C. 0.6
D. 1.2

43. Since incorporating 3 years ago, a company has estimated bad debts at a rate of 3% using
the income statement approach. During its fourth year in business, after recording the
uncollectible accounts expense based on its previous estimate, the company determined
that its estimate of bad debts should be increased to 4.5%. During this fourth year, the
company recorded sales of $25,000,000 and had an ending accounts receivable balance of
$2,000,000. This change would decrease

A. Both operating leverage and times interest earned.

B. The current year’s income by $1,125,000 and decrease the firm’s operating leverage.
C. The current year’s income by $375,000 and increase the firm’s operating leverage.
D. The current year’s income by $30,000 and decrease the firm’s financial leverage.

44. A company has $500,000 in current assets and $1,500,000 in fixed assets. Its paid-in
capital is $100,000 and retained earnings are $1,400,000. 40% of the debt is considered to
be current. What is its long-term debt-to-equity capital ratio?
a. 5.
b. 0.2.
c. 0.15.
d. 0.33.

45. Which stakeholder would be most interested in the liquidity of a company?

A. Investor
B. Competitor
C. Bondholder
D. Supplier

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46. When using the statement of cash flows to evaluate a company's continuing solvency,
the most important factor to consider is the cash:

A. flows from (used for) investing activities.

B. balance at the end of the period.
C. flows from (used for) operating activities.
D. flows from (used for) financing activities.

47. Consider the statements below comparing financial ratios based on historical cost to
those based on fair value. Which statements are correct?

I. Fair Value disclosures can supplement historical cost ratio analysis.

II. If market prices decline, then ratios using fair value prices will show better results than
those using historical cost.

III. If market prices decline, then ratios using fair value prices will show worse results
than those using historical cost.

IV. If market prices increase, ratios using fair value prices will show higher ratios than
those using historical cost.

A. I, III, and IV, only.

B. I and III, only.
C. II, III and IV, only.
D. I, II and IV, only.

48. Dividends paid to company shareholders would be shown on the statement of cash flows
as:
A. cash flows from investing activities.
B. operating cash inflows.
C. cash flows from financing activities.
D. operating cash outflows.

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49. In which of the following circumstances would financial leverage be likely to increase?
A. Firm issues bonds to repurchase some of its own common stock.
B. Firm purchases assets with cash.
C. Firm signs a contract to rent a new manufacturing site.
D. Firm accepts a large order from a new customer. Excess capacity exists to fill the
order.

50. A company has a current ratio of 2.0. Cash is 20%, accounts receivable is 40%, and
inventory is 40% of total current assets. What is the acid-test ratio for the company?

A. 0.8

B. 1.2

C. 1.6

D. 2.0.

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