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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%.




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

TOP

Which of the following items is NOT in the numerator of the quick ratio?

A)

Inventory.

B)

Cash.

C)

Receivables.




Quick ratio = (cash + marketable securities + receivables) / current liabilities

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

TOP

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

A)

Cash Ratio.

B)

Equity Turnover.

C)

Net Profit Margin.




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

TOP

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

A)

Cash Ratio.

B)

Equity Turnover.

C)

Net Profit Margin.




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

TOP

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 current ratio?

A)

2.67.

B)

0.22.

C)

4.65.




Current ratio = [100(cash) + 750(AR) + 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short-term debt)] = (2,000 / 430) = 4.65

TOP

Assume a firm with a debt to equity ratio of 0.50 and debt equal to $35 million makes a commitment to acquire raw materials with a present value of $12 million over the next 3 years. For purposes of analysis the best estimate of the debt to equity ratio should be:

A)
0.500.
B)
0.573.
C)
0.671.



The original debt / equity ratio = 35 / 70 = 0.5. Now adjust the numerator but not the denominator. Why? You have commitments (liabilities) but no new equity because (non-current) liabilities and assets are increased by the same amount. D/E = (35 + 12) / 70 = 0.671.

TOP

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

Determine the current ratio and the cash ratio.

Current Ratio Cash Ratio

A)
1.98 1.86
B)
2.67 1.07
C)
4.65 0.93



Current ratio = [100(cash) + 750(accounts receivable)+ 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short term debt)] = (2000 / 430) = 4.65

Cash ratio = [100(cash) + 300(marketable securities)] / [300(AP) + 130(short term debt)] = (400 / 430) = 0.93

TOP

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 receivables turnover ratio?

A)

2.0.

B)

0.5.

C)

1.0.




Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

TOP

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 receivables turnover ratio?

A)

2.0.

B)

0.5.

C)

1.0.




Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

TOP

The cash conversion cycle is the:

A)
length of time it takes to sell inventory.
B)
sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases.
C)
sum of the time it takes to sell inventory and the time it takes to collect accounts receivable.



Cash conversion cycle = (average receivables collection period) + (average inventory processing period) ? (payables payment period)

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