Financial Analysis Quiz

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Questions and Answers

What is the effect on the current ratio if Niska Corporation uses $100,000 cash to pay down $100,000 of accounts payable?

The current ratio will remain unchanged. (correct)

The current ratio will fluctuate unpredictably.

The current ratio will increase.

The current ratio will decrease.

By how much did the net income of Niska Corporation change from Year 1 to Year 2?

Increased by $60. (correct)

Decreased by $180.

Increased by $180.

Decreased by $60.

Which company's net profit margin was the highest among the applicants for Marble Savings Bank?

Sonex (correct)

Industry Average

Bailey

Nutron

What was the operating income for Niska Corporation in Year 2?

$600 Signup and view all the answers

Which option correctly describes the trend in operating income and net income for Niska Corporation from Year 1 to Year 2?

Both operating income and net income increased. Signup and view all the answers

What financial leverage does Nutron exhibit according to the provided data?

1.02 Signup and view all the answers

Which company has the lowest current ratio compared to the industry average?

Bailey Signup and view all the answers

What should Marble Savings Bank consider most when selecting a loan application based on the data?

Select based on current ratio matching industry average. Signup and view all the answers

What determines the optimal capital budget for a firm?

Calculating the point at which marginal cost of capital meets the projected rate of return, assuming that the most profitable projects are accepted first. Signup and view all the answers

What is the primary advantage of a call provision for an organization?

Allows redemption of bonds before maturity if interest rates fall. Signup and view all the answers

A firm's optimal capital structure primarily aims to achieve which of the following?

Maximizes the price of the firm's stock. Signup and view all the answers

Kielly Machines Inc. is planning to raise funds based on their target capital structure. What is the proportion of equity they plan to utilize?

0.46 Signup and view all the answers

In calculating Kielly's weighted average cost of capital, which cost is factored in for debt, after considering the marginal tax rate?

6.6% Signup and view all the answers

If Kielly Machines Inc. had a 40% marginal tax rate, what is the after-tax cost of debt based on a before-tax cost of 11%?

8.8% Signup and view all the answers

What percentage of Kielly's net income was paid out in dividends?

75% Signup and view all the answers

What is the weighted average cost of capital for Kielly Machines Inc. given the data provided?

13.54% Signup and view all the answers

What distinguishes risk in investing from other types of risk?

Investing risk can result in both gains and losses, while other risks only result in losses. Signup and view all the answers

Which method should a portfolio manager use to estimate the worst-case expected loss at an 80% confidence level?

Value-at-Risk Signup and view all the answers

If a portfolio has a mean return of 8% and a standard deviation of 25%, what does the standard deviation represent?

The potential range of returns around the mean. Signup and view all the answers

What is the primary focus of the Capital Asset Pricing Model in investment risk?

To analyze the relationship between systemic risk and expected return. Signup and view all the answers

Why is it not possible to manage investment risk with insurance like other types of risks?

Investment risks can yield positive results as well. Signup and view all the answers

Which statements accurately reflect Mega's investment strategy regarding internal rates of return and the overall average cost of capital?

I, II, III, and IV. Signup and view all the answers

What is the primary purpose of sensitivity analysis in capital budgeting?

Determine the amount that a variable can change without generating unacceptable results. Signup and view all the answers

What can logically be inferred about Company A having a formal corporate code of ethics compared to Company B?

Company A exhibits a higher standard of ethical behavior than Company B. Signup and view all the answers

Which statement is true regarding the implications of a company's code of conduct stating 'Our employees are our most valuable asset'?

Management declines bonuses if no raises are given to employees. Signup and view all the answers

In capital budgeting, which of the following is NOT a focus of sensitivity analysis?

Estimating project net present value. Signup and view all the answers

Which inference can be made about the ethical environment of Company B lacking a corporate code of ethics?

Employees may lack clear behavioral guidelines. Signup and view all the answers

How does the presence of a corporate code of ethics affect employee behavior in Company A compared to Company B?

It creates objective criteria for performance evaluation. Signup and view all the answers

Which of the following best reflects a commitment to ethical leadership in a company?

Management actively participating in training for employees. Signup and view all the answers

What is the company's acid test (quick) ratio?

2.31 Signup and view all the answers

What is Lancaster's average accounts receivable turnover ratio for the year?

10.87 Signup and view all the answers

What are the fixed costs incurred by Carlisle Company in a year?

$28,000 Signup and view all the answers

What is the degree of operating leverage for Carlisle Company?

2.4 Signup and view all the answers

If Birch's current liabilities are $1,300,000, what will happen to the firm's quick ratio if $100,000 cash is used to purchase inventory?

The quick ratio will decrease. Signup and view all the answers

Which financial metric assesses a company’s ability to meet its short-term liabilities with its most liquid assets?

Acid test (quick) ratio Signup and view all the answers

What is the total current assets value for Birch Products Inc.?

$2,600,000 Signup and view all the answers

What is the selling price of each bottle of perfume produced by Carlisle Company?

$1.00 Signup and view all the answers

Study Notes

Liquidity Ratios

Acid test (quick) ratio formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
Current assets: Accounts receivable ($200,000), cash ($100,000), total current liabilities ($80,000 + $10,000 + $50,000).
Calculate quick ratio to determine short-term liquidity position.

Accounts Receivable Turnover

Net accounts receivable decrease from $168,000 to $147,000; net income at $204,000 from total sales of $1,700,000.
Cash sales account for 6% of total sales, affecting accounts receivable collection.
Accounts receivable turnover ratio assesses efficiency in managing receivables; multiple-choice question provides answer choices.

Operating Leverage

Carlisle Company sells 400,000 bottles of perfume at $1.00 each with a variable cost of $0.84.
Annual fixed costs amount to $28,000 with interest expense of $6,000 and preferred stock dividends of $2,000.
Degree of operating leverage indicates sensitivity of EBIT to changes in sales volume.

Current Ratio Analysis

Birch Products Inc. totals current assets at $2,600,000 against current liabilities of $1,300,000.
Current ratio results influence liquidity assessment based on cash utilization for inventory or accounts payable.
Impacts on quick and current ratios determined by strategic cash management choices.

Financial Performance Metrics

Niska Corporation shows asset growth from $18,000 to $26,000; market value of equity increased from $18,000 to $60,000.
Analyzing sales ($1,000 to $1,300) and operating income ($500 to $600) helps gauge operational efficiency.
Common-size income statement facilitates year-over-year performance evaluations.

Strategic Loan Evaluation

Marble Savings Bank compares potential loan applicants (Bailey, Nutron, Sonex) based on financial metrics against industry averages.
Variables include total sales, net profit margin, current ratio, return on assets, debt/equity ratio, and financial leverage.

Capital Budgeting Decisions

Firms optimize capital budgets by assessing marginal cost of capital against projected investment returns.
Accepting projects exceeding marginal cost maximizes profitability and efficiency.

Corporate Governance and Ethics

A formal corporate code of ethics aids in establishing standards and guiding employee behavior.
Company A's code may indicate higher ethical standards than Company B, impacting audit feasibilities.

Risk Management in Investments

Risk in investing encompasses both potential gains and losses, unlike other risks that may only represent potential losses.
Investment risk can often be greater due to volatility and market dynamics versus operational risks which are manageable.

Portfolio Risk Assessment

A portfolio manager estimates potential loss using Value-at-Risk (VaR) methodology given mean return, standard deviation, and current portfolio value.
VaR demonstrates the worst-case expected loss at a specific confidence level.

Weighted Average Cost of Capital (WACC)

Kielly Machines Inc.'s funding strategy aims to maintain optimal capital structure via debt, preferred stock, and equity percentages.
Considerations include tax impacts and cost of capital calculations for financial decision-making.

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Description

Test your knowledge on financial ratios with this quiz focusing on the acid-test ratio and working capital management. Analyze the provided balance sheet data and compute key metrics necessary for evaluating a company's liquidity. Perfect for accounting students and finance professionals.