Financial Analysis Techniques

9 questions

1. 1. 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:
   Firm A has a higher profit margin than firm BFirm B has a higher profit margin than firm AFirm A and B have the same profit margin
2. 2. 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?
   $0$100$200
3. 3. Company A is financed with 90 percent debt, whereas Company B, which has the same amount of total assets, is financed entirely with equity. Both companies have a marginal tax rate of 35 percent. Which of the following statements is most correct?
   If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.If the two companies have the same return on assets, Company B will have a higher return on equity.If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.
4. 4. A firm has a higher quick (or acid test) ratio than the industry average. According to this, which of the following statements is FALSE?
   The firm has a higher P/E ratio than other firms in the industry.The firm is more likely to avoid insolvency in short run than other firms in the industry.The firm may be less profitable than other firms in the industry.
5. 5. A firm has a lower asset turnover ratio than the industry average, which implies:
   The firm is less likely to avoid insolvency in the short run than other firms in the industry.The firm is less profitable than other firms in the industry.The firm is utilizing assets less efficiently than other firms in the industry.
6. 6. If the interest rate on debt is higher than ROA, then what will be the impact of increasing the debt in capital structure?
   ROE will increaseROE will decreaseROE will remain unchanged.
7. 7. A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average. What does this imply?
   The firm has a higher P/E ratio than other firms in the industry.The firm is more likely to avoid insolvency in the short run than other firms in the industry.The firm is more profitable than other firms in the industry.
8. 8. A company has gross profit of $50,000 on sales of $200,000. The average total assets on the balance sheet are $100,000. The company's average inventory is $20,000. Calculate the company's total asset turnover.
   240.5
9. 9. A company has gross profit of $50,000 on sales of $200,000. The average total assets on the balance sheet are $100,000. The company's average inventory is $20,000. Calculate the company's inventory turnover.
   247.5