Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2

56 The current ratio for XYZ industry is 3.00. Data for a firm in XYZ industry is presented below:

As at June 30	$‘000s
Cash	800
Accounts receivable	700
Inventory	2,500
Accounts payable	500
Taxes payable	300
Installment loan payable,due in two equal annual payments on Dec 31	800

The firm’s current ratio relative to that of the industry is best described as being:

Current ratio = Current assets / Current liabilities
The higher the current ratio, the more liquid the company. Thus, with a current ratio of 3.33 (4,000 ÷ 1,200), the company is more liquid than the industry, with a current ratio of 3.00.

57 The financial ratios of a company are given below:

Operating profit margin	23.8%
Net profit margin	14%
Total asset turnover	0.9
Return on assets	12.6%
Financial leverage	1.88
Debt to equity	0.88

The company’s return on equity (ROE) is closest to:

ROE = ROA * Financial leverage = 12.6% x 1.88 = 23.7%.

58 Selected information for a company and the common size data for its industry are provided below:

	Company (£)	Common Size IndustryData (% of sales)
EBIT	100,000	22.0
Pretax profit	85,500	18.2
Net Income	74,200	13.5
Sales	350,000	100
Total assets	650,000	150
Total equity	400,000	65.5
ROE	18.6%	20.6%

The company’s inferior ROE compared to that of the industry is most likely
due to its:

As shown below, the company’s financial leverage is lower that the industry’s leverage. The low ROE of the company is most likely because it has low financial leverage.

	Company	Industry
Tax burden ratio	74.2/85.5 = 0.87	13.5/18.2 = 0.74
Financial leverage	650/400 = 1.625	150/65.5 = 2.29
Interest burden ratio	85.5/100 = 0.855	18.2/22 = 0.83

59 The following financial data is available for a company:

ROA	5.6%
Total asset turnover	2.12
Financial leverage	1.89
Dividend payout ratio	52.3%

The company’s sustainable growth rate is closest to:

Sustainable growth rate = retention ratio (b) × ROE.
b = 1 - Dividend payout ratio = 1 - 0.523 = 0.477
ROE = ROA x Financial leverage = .056 x 1.89 = 0.10584
Sustainable growth rate = b x ROE = 0.477 x 0.10584 = 0.0505 = 5.05%.

60 A computer generated analysis based on probability models for factors that drive outcomes is most likely to be known as:

A computer generated analysis based on probability models for the factors that drive outcomes is known as simulation.