Q: Which formula correctly calculates the market-to-book ratio?

$$\frac{\text{Market Value of Equity}}{\text{Book Value of Equity}}$$

Q: If a firm’s net profit margin is 8% and its revenues are $200 million, what is its net income?

$$0.08 \times 200 = 16$ million

Question 1

Which of the following is NOT one of the four main financial statements found in a firm's 10-K filing?

Accepted Answer

Statement of market value

Question 2

Which group would most likely use financial statements to assess a firm's ability to repay a loan?

Accepted Answer

Creditors

Question 3

A company purchases equipment for $10 million, depreciated straight-line over 5 years. What is the annual depreciation expense, and how does this affect net income in the first year?

Accepted Answer

$$2 million; net income decreases by 2 $$million

Question 4

Suppose a firm issues $20 million of new equity. What is the immediate effect on the balance sheet?

Accepted Answer

Assets increase by $$20 million; equity increases by 20 $$million

Question 5

If a company has total assets of $$500 million and total liabilities of 350 $$million, what is the value of shareholders' equity?

Accepted Answer

$150 million

Question 6

Which formula correctly calculates the market-to-book ratio?

Accepted Answer

$$\frac{	ext{Market Value of Equity}}{	ext{Book Value of Equity}}$$

Question 7

A firm has net income of $$50 million, dividends of 10 $$million, and 5 million shares outstanding. What is the earnings per share (EPS)?

Accepted Answer

$10.00

Question 8

If a company repurchases 1 million shares at $20 per share, what is the immediate effect on total equity?

Accepted Answer

Equity decreases by $20 million

Question 9

Which of the following best describes the purpose of the statement of cash flows?

Accepted Answer

To show the sources and uses of cash over a period

Question 10

A company has the following data: cash = $$5 million, accounts receivable = 10 $$million, inventory = $$15 million, current liabilities = 20 $$million. What is the current ratio?

Accepted Answer

$$\frac{5 + 10 + 15}{20} = 1.5$$

Question 11

If a firm’s net profit margin is 8% and its revenues are $200 million, what is its net income?

Accepted Answer

$$0.08 	imes 200 = 16$ million

Question 12

Which of the following is a limitation of using book value to assess a company’s worth?

Accepted Answer

Book value does not reflect the current market value of assets

Question 13

A company’s balance sheet shows total assets of $$1,000 million and total equity of 400 $$million. What is the company’s debt-to-equity ratio if total liabilities are $600 million?

Accepted Answer

$$\frac{600}{400} = 1.5$$

Question 14

If a company’s operating margin falls from 10% to 8% while sales increase by 20%, what happens to operating income?

Accepted Answer

Operating income increases, but by less than 20%

Question 15

Which of the following best describes the difference between market value and book value of equity?

Accepted Answer

Market value reflects investors’ expectations; book value is based on historical costs

Question 16

A firm has EBIT of $$100 million, interest expense of 20 $$million, and a tax rate of 30%. What is net income?

Accepted Answer

$$100 - 20 = 80; 80 	imes (1 - 0.3) = 56$$ million

Question 17

If a company’s stock price is $$50 and book value per share is 25$$, what is the market-to-book ratio?

Accepted Answer

$$\frac{50}{25} = 2.0$$

Question 18

Which of the following is a reason why investors analyze a company’s financial statements?

Accepted Answer

To assess the firm’s profitability and ability to make future payments

Question 19

A company’s income statement shows revenues of $$300 million and cost of goods sold of 180 $$million. What is the gross profit margin?

Accepted Answer

$$\frac{300 - 180}{300} = 0.4 = 40\%$$

Question 20

If a company’s total assets increase by $$50 million and total liabilities increase by 30 $$million, what is the change in equity?

Accepted Answer

$$50 - 30 = 20$ million increase

Chapter 2: Introduction to Financial Statement Analysis: Key Concepts and Applications

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