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FIN350 exercise No. 5

1. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firm's ROE?

a. 14.39%

b. 14.69%

c. 14.99%

d. 15.29%

e. 15.59%

2. You are given the following information: Stockholders’ equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5. Calculate the market price of a share of the company’s stock.

a. $ 33.33

b. $ 75.00

c. $ 10.00

d. $166.67

e. $133.32

3. Potential problems and limitations of financial ratio analysis include:

a. Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions.

b. “Average” performance is not necessarily good, perhaps the firm should aim higher. Sometimes it is hard to tell if a ratio is “good” or “bad”.

c. “Window dressing” and “big baths” techniques can make statements and ratios look better.

d. Different operating and accounting practices can distort comparisons.

e. All of above

4. Ratios that measure how efficiently a firm uses its assets to generate sales are known as:

A) Asset management ratios.

B) Long-term solvency ratios.

C) Short-term solvency ratios.

D) Profitability ratios.

E) Market value ratios.

The balance sheet and income statement shown below are for Byrd Inc, and the data are to be used for the following questions. Note that the firm has no amortization charges, it does not lease any assets, and none of its debt must be retired during the next 5 years (notes payable will be rolled over).

BALANCE SHEET (in million)

|Cash |$ 140.0 | |Accounts payable |$ 800.0 |

|Accts. receivable |880.0 | |Notes payable |600.0 |

|Inventories |1,320.0 | |Accruals |400.0 |

|Total current assets |$2,340.0 | |Total current liabilities |$1,800.0 |

| | | |Long-term bonds |1,000.0 |

| | | |Total debt |$2,800.0 |

| | | |Common stock |200.0 |

| | | |Retained earnings |1,000.0 |

|Net plant & equip. |1,660.0 | |Total common equity |$1,200.0 |

|Total assets |$4,000.0 | |Total liabilities & equity |$4,000.0 |

INCOME STATEMENT (in million)

|Net sales |$ 6,000.0 |

|Operating costs |5,599.8 |

|Depreciation |100.2 |

|EBIT |$ 300.0 |

|Less: Interest |96.0 |

|EBT |$ 204.0 |

|Less: Taxes |81.6 |

|Net income |$ 122.4 |

OTHER DATA

|Shares outstanding (millions) |60.00 |

|Common dividends |$42.8 |

|Interest rate on N/P and long-term bonds |6.0% |

|Federal plus state income tax rate |40% |

|Year-end stock price |$30.60 |

5. What is the firm's current ratio?

a. 1.10

b. 1.20

c. 1.30

d. 1.40

e. 1.50

6. What is the firm's ROE?

a. 9.45%

b. 9.63%

c. 9.84%

d. 10.20%

e. 10.43%

7. What is the firm's total assets turnover?

a. 1.10

b. 1.20

c. 1.30

d. 1.40

e. 1.50

8. What is the firm's profit margin?

a. 2.04%

b. 2.16%

c. 2.28%

d. 2.40%

e. 2.52%

9. What is the firm's debt ratio?

a. 60.0%

b. 65.0%

c. 70.0%

d. 75.0%

e. 80.0%

10. What is the firm's market-to-book ratio?

a. 1.38

b. 1.53

c. 1.68

d. 1.83

e. 1.98

11. Beta is a statistical measure of

A) unsystematic risk.

B) total risk.

C) the standard deviation.

D) the relationship between an investment's returns and the market return.

|12. |The ___________ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected |

| |future inflation. |

|A) |default risk |

|B) |taxability |

|C) |liquidity |

|D) |inflation |

|E) |interest rate risk |

13. You form a portfolio by investing equally in stock A (beta=1.5), treasury bills (beta=0), and the market portfolio (beta=1). What is the closest estimate of your portfolio beta?

A) 0.5

B) 1.3

C) 1.2

D) 0.8

Key: bbeac deacb ddd

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