honeycfa

Which of the following is a measure of a firm's liquidity?

A) Cash Ratio.

B) Equity Turnover.

C) Net Profit Margin.

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Equity turnover and net profit margin are each measures of a company's operating performance.

honeycfa

An analyst has gathered the following information about a company:

Balance Sheet
Assets
	Cash	100
	Accounts Receivable	750
	Marketable Securities	300
	Inventory	850
	Property, Plant & Equip	900
	Accumulated Depreciation	(150)
Total Assets		2750
Liabilities and Equity
	Accounts Payable	300
	Short-Term Debt	130
	Long-Term Debt	700
	Common Stock	1000
	Retained Earnings	620
Total Liab. and Stockholder's equity		2750
Income Statement
Sales		1500
COGS		1100
Gross Profit		400
SG&A		150
Operating Profit		250
Interest Expense		25
Taxes		75
Net Income		150

What is the quick ratio?

A) 1.53.

B) 0.62.

C) 2.67.

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Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(short-term debt)] = (1,150 / 430) = 2.67

honeycfa

The main difference between the current ratio and the quick ratio is that the quick ratio excludes:

A) cost of goods sold.

B) inventory.

C) assets.

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Current ratio = (current assets / current liabilities) = [cash + marketable securities + receivables + inventory] / current liabilities

Quick ratio = [cash + marketable securities + receivables] / current liabilities

honeycfa

Given the following income statement:

Net Sales	200
Cost of Goods Sold	55
Gross Profit	145
Operating Expenses	30
Operating Profit (EBIT)	115
Interest	15
Earnings Before Taxes (EBT)	100
Taxes	40
Earnings After Taxes (EAT)	60

What are the gross profit margin and operating profit margin?

Gross Profit Margin

Operating Profit Margin

A) 2.630 1.226

B) 0.379 0.725

C) 0.725 0.575

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Gross profit margin = gross profit / net sales = 145 / 200 = 0.725

Operating profit margin = EBIT / net sales = 115 / 200 = 0.575

honeycfa

An analyst has gathered the following information about a firm:

• Net sales of $500,000.
• Cost of goods sold = $250,000. 
• EBIT of $150,000. 
• EAT of $90,000.

What is this firm’s operating profit margin?

A) 18%.

B) 50%.

C) 30%.

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Operating profit margin = (EBIT / net sales) = ($150,000 / $500,000) = 30%

honeycfa

Use the following data from Delta's common size financial statement to answer the question:

Earnings after taxes	=	18%
Equity	=	40%
Current assets	=	60%
Current liabilities	=	30%
Sales	=	$300
Total assets	=	$1,400

What is Delta's after-tax return on equity?

A) 9.6%.

B) 18.0%.

C) 5.0%.

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Net income after taxes = 300 × 0.18 = 54
Equity = 1400 × 0.40 = 560
ROE = Net Income / Equity = 54 / 560 = 0.0964 = 9.6%

honeycfa

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon's interest coverage ratio?

A) 1 time.

B) 3 times.

C) 4 times.

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ICR = operating profit ÷ I = EBIT ÷ I
= 100,000 ÷ 25000 = 4

honeycfa

If the inventory turnover ratio is 7, what is the average number of days the inventory is in stock?

A) 70 days.

B) 52 days.

C) 25 days.

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Average Inventory Processing Period = 365 / inventory turnover = 365 / 7 = 52 days.

honeycfa

The following footnote appeared in Crabtree Company’s 20X7 annual report:

“On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7.”

Based only on these changes, Crabtree’s net profit margin and fixed asset turnover ratio in 20X8 as compared to 20X7 will be?

Net profit margin

Fixed asset turnover

A) Higher Unchanged

B) Higher Higher

C) Lower Higher

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The restructuring charge and asset write-down are non-recurring transactions; thus, net income will be higher in 20X8, all else equal. In 20X8, fixed asset turnover will be the same as 20X7, all else equal. The asset impairment charge is a one-time charge, so fixed assets will not be reduced further in 20X8.

honeycfa

A firm has a cash conversion cycle of 80 days. The firm's payables turnover goes from 11 to 12, what happens to the firm's cash conversion cycle? It:

A) shortens.

B) lengthens.

C) may shorten or lengthen.

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CCC = collection period + Inv Period – Payment period.

Payment period = (365 / payables turnover) = (365 / 11) = 33; (365 / 12) = 30. This means the CCC actually increased to 83.