- A company reports cash of $50,000, marketable securities of $30,000, accounts receivable of $120,000, inventory of $200,000, prepaid expenses of $20,000, and current liabilities of $100,000. The company uses $40,000 of its cash to purchase additional inventory. What is the company's quick (acid-test) ratio after the purchase, rounded to two decimal places?
Answer: 1.60
Quick (acid-test) ratio = (cash + marketable securities + accounts receivable) / current liabilities. The inventory purchase uses $40,000 of cash, so cash falls to $10,000 and inventory rises to $240,000; current liabilities are unchanged at $100,000. Quick assets = $10,000 + $30,000 + $120,000 = $160,000, so the quick ratio = $160,000 / $100,000 = 1.60. The 1.80 figure adds prepaid expenses to the numerator; prepaid expenses are not quick assets. The 2.00 figure is the quick ratio before the purchase — it ignores the cash outlay. The 4.20 figure uses all current assets, including inventory and prepaids ($420,000 / $100,000), which computes the current ratio rather than the quick ratio.
- A company reports net income of $3,000,000 for the year. It paid $600,000 in dividends on its preferred stock and declared $720,000 in dividends on its common stock. The company had 800,000 shares of common stock outstanding throughout the year. What is the company's dividend payout ratio on its common stock?
Answer: 30%
Dividend payout ratio = common dividends / earnings available to common shareholders (equivalently, dividends per share / earnings per share). Earnings available to common = $3,000,000 - $600,000 = $2,400,000. EPS = $2,400,000 / 800,000 = $3.00; dividends per share = $720,000 / 800,000 = $0.90; payout = $0.90 / $3.00 = 30% (or $720,000 / $2,400,000 = 30%). The 24% figure divides common dividends by net income of $3,000,000, ignoring the preferred dividend claim on earnings. The 20% figure uses the preferred dividend of $600,000 over net income — the wrong dividend and the wrong earnings base. The 55% figure adds preferred dividends to common dividends ($1,320,000) and divides by earnings available to common; the payout ratio on common stock includes only common dividends.
- A firm has annual sales of $12,500,000, a net profit margin of 6%, a total asset turnover of 1.25, and a debt-to-equity ratio of 1.0. The firm has no preferred stock. Based on this information, the firm's return on equity is most nearly:
Answer: 15.0%
Return on equity (ROE) is ROE = net income ÷ common equity, which equals net profit margin × total asset turnover × equity multiplier. Net income is 6% of $12,500,000, or $750,000. Total assets are $12,500,000 ÷ 1.25, or $10,000,000. With a debt-to-equity ratio of 1.0, debt equals common equity, so common equity is half of total assets, or $5,000,000; ROE = $750,000 ÷ $5,000,000 = 15% (equivalently, 6% × 1.25 × 2 = 15%). The 7.5% figure is the return on assets (net income divided by total assets); it reflects the margin and asset turnover but omits the leverage multiplier. The 12% figure multiplies the 6% margin by the 2.0 leverage factor but omits asset turnover. The 6% figure stops at the net profit margin and ignores both turnover and leverage.
- A company has current assets of $2,400,000, of which $800,000 is inventory, and current liabilities of $800,000. The company then purchases $400,000 of additional inventory on credit. After the purchase, the company's quick ratio is most nearly:
Answer: 1.33
The quick ratio is quick ratio = (current assets - inventory) ÷ current liabilities. A credit purchase increases both inventory and accounts payable by $400,000, so current assets become $2,800,000, inventory becomes $1,200,000, and current liabilities become $1,200,000. The quick ratio is ($2,800,000 - $1,200,000) ÷ $1,200,000 = 1.33. Because the $400,000 adds equally to current assets and inventory, the numerator is unchanged; the ratio falls because current liabilities rose. The 1.50 figure treats the purchase as a cash purchase, leaving current assets at $2,400,000 and current liabilities at $800,000: ($2,400,000 - $1,200,000) ÷ $800,000. The 2.00 figure ignores the $400,000 increase in current liabilities (equivalently, it is the pre-purchase quick ratio). The 2.33 figure is the current ratio after the purchase, $2,800,000 ÷ $1,200,000, not the quick ratio.
- A stock trades at $54.00 per share. The company reported earnings per share of $2.25 for the most recent year, and analysts project earnings per share of $2.70 for the coming year. Using the trailing price-to-earnings ratio and the expected growth rate for the coming year, the stock's PEG ratio is most nearly:
Answer: 1.20
The PEG ratio is PEG = trailing price-to-earnings ratio ÷ expected earnings growth rate. The trailing P/E is $54.00 ÷ $2.25 = 24. Expected EPS growth is ($2.70 - $2.25) ÷ $2.25 = 20%. Therefore PEG = 24 ÷ 20 = 1.20. The 1.00 figure uses the forward P/E ($54.00 ÷ $2.70 = 20) with the same 20% growth. The 1.44 figure uses the correct trailing P/E but computes growth on the higher base: $0.45 ÷ $2.70 = 16.7%. The 0.83 figure inverts the calculation, dividing the 20% growth by the 24 P/E.
- A company has total assets of $5,000,000, current liabilities of $1,200,000, long-term debt of $1,800,000, and stockholders' equity of $2,000,000. The company issues $500,000 of common stock for cash and uses the proceeds to retire long-term debt. Treat debt as total liabilities (current liabilities plus long-term debt). What is the company's debt-to-equity ratio after the transaction, rounded to two decimal places?
Answer: 1.00
Debt-to-equity ratio = total liabilities / stockholders' equity. The stock issue increases equity by $500,000 and the debt retirement reduces liabilities by $500,000. After the transaction: total liabilities = $1,200,000 + $1,800,000 - $500,000 = $2,500,000, and stockholders' equity = $2,000,000 + $500,000 = $2,500,000. Debt-to-equity = $2,500,000 / $2,500,000 = 1.00. The 0.50 figure divides total liabilities by total assets ($2,500,000 / $5,000,000), which is the debt-to-assets ratio. The 1.20 figure records the stock issue (equity of $2,500,000) but leaves liabilities at $3,000,000, forgetting the debt retirement. The 1.25 figure records the debt retirement (liabilities of $2,500,000) but leaves equity at $2,000,000, forgetting the stock issue.
- A company's balance sheet shows total stockholders' equity of $10,000,000, which includes preferred stock with a liquidation preference of $2,000,000. The balance sheet also shows goodwill of $1,000,000. The company has 500,000 shares of common stock outstanding, and the common stock trades at $24.00 per share. Compute book value per share from common stockholders' equity, with intangible assets such as goodwill included in book value. What is the stock's price-to-book ratio, rounded to two decimal places?
Answer: 1.50
Price-to-book ratio = market price per share / book value per share. As the stem directs, book value per share is based on common equity with goodwill included: $10,000,000 total stockholders' equity less the $2,000,000 preferred liquidation preference = $8,000,000, or $16.00 per share ($8,000,000 / 500,000). Price-to-book = $24.00 / $16.00 = 1.50. The 0.67 figure inverts the relationship, dividing book value per share by market price. The 1.20 figure uses total stockholders' equity of $10,000,000 ($20.00 per share) and ignores the preferred stock's claim. The 1.71 figure also subtracts the $1,000,000 goodwill, producing $14.00 of tangible book value per share; some texts use that tangible measure, but the stem defines book value to include goodwill.
An analyst is reviewing a manufacturing company. The company's net profit margin is 8%, total asset turnover is 1.5, and total debt is 40% of total assets.
Using the DuPont formula, what is the company's return on equity? Answer: 20.0%
The DuPont formula decomposes return on equity into net profit margin × total asset turnover × equity multiplier: ROE = 0.08 × 1.5 × 1.67 = 20%. With debt at 40% of assets, equity is 60% of assets, so the equity multiplier is 1 / 0.60 = 1.67. The 12.0% figure multiplies margin by turnover only, ignoring leverage entirely. The 16.8% figure uses an equity multiplier of 1.4 (adding the debt ratio to 1 instead of inverting the equity ratio). The 30.0% figure inverts the debt ratio (1 / 0.40 = 2.5) instead of the equity ratio (1 / 0.60 = 1.67).
- A company has 1,000,000 shares of common stock outstanding, earnings per share of $2.00, and book value per share of $20.00. The company repurchases 100,000 shares in the open market at $20.00 per share using cash on hand. Assuming net income is unchanged, which of the following statements is true?
Answer: Earnings per share increases to approximately $2.22 because fewer shares remain outstanding.
Earnings per share is EPS = net income ÷ shares outstanding. Net income is $2.00 × 1,000,000 = $2,000,000. Retiring 100,000 shares leaves 900,000 shares outstanding, so EPS = $2,000,000 ÷ 900,000 = $2.22; the statement that EPS remains $2.00 ignores the reduced share count. Book equity falls by the $2,000,000 paid to $18,000,000, but the share count also falls to 900,000, so book value per share remains $18,000,000 ÷ 900,000 = $20.00; the $18.00 figure wrongly divides the remaining book equity by the original 1,000,000 shares. Return on equity before the repurchase was $2,000,000 ÷ $20,000,000 = 10%; afterwards the denominator is the lower $18,000,000, so ROE rises to approximately 11.1%, not 10%.
A company's current assets consist of cash of $60,000, marketable securities of $30,000, accounts receivable of $90,000, inventory of $120,000, and prepaid expenses of $30,000. Current liabilities total $150,000.
What is the company's quick ratio? Answer: 1.2
Under the quick ratio definition — (cash + marketable securities + accounts receivable) ÷ current liabilities — the numerator is $60,000 + $30,000 + $90,000 = $180,000, giving $180,000 / $150,000 = 1.2. Inventory and prepaid expenses are excluded because they are not readily convertible to cash. The 2.2 ratio includes inventory and prepaids as well, effectively computing the current ratio. The 1.4 ratio excludes inventory but improperly includes prepaid expenses. The 0.6 ratio omits accounts receivable entirely, limiting the numerator to cash and marketable securities.
- A company reports cash of $60,000, accounts receivable of $140,000, inventory of $200,000, and prepaid expenses of $40,000. Its liabilities consist of accounts payable of $160,000, the current portion of long-term debt of $40,000, and a note payable of $100,000 that matures in 18 months. The company uses cash to pay $40,000 of its accounts payable and $20,000 of the current portion of its long-term debt. What is the company's current ratio after these payments, rounded to two decimal places?
Answer: 2.71
Current ratio = current assets / current liabilities. After the payments, cash is $0 ($60,000 - $40,000 - $20,000), so current assets = $0 + $140,000 + $200,000 + $40,000 = $380,000. Current liabilities = accounts payable of $120,000 plus the remaining $20,000 current portion of long-term debt = $140,000; the note maturing in 18 months is long-term, not current. Current ratio = $380,000 / $140,000 = 2.71. The 1.58 figure treats the 18-month note as a current liability, making the denominator $240,000. The 2.20 figure is the current ratio before the payments ($440,000 / $200,000) — it ignores both cash payments. The 3.17 figure excludes the remaining $20,000 current portion of long-term debt from the denominator ($380,000 / $120,000), treating a liability due within one year as non-current.
A company reported net income of $30 million, total assets of $480 million, and stockholders' equity of $240 million. The company paid $6 million in cash dividends.
What is the company's sustainable growth rate? Answer: 10.0%
Under the sustainable growth formula, the growth rate equals return on equity × retention ratio: ROE = 30 / 240 = 12.5% and the retention ratio is (30 - 6) / 30 = 80%, giving 12.5% × 0.80 = 10%. The 2.5% result multiplies ROE by the payout ratio (20%) instead of the retention ratio. The 12.5% result is ROE alone, omitting the retention step. The 5.0% result computes ROA (net income ÷ total assets = 6.25%) and then applies the 80% retention ratio, using the wrong denominator from the balance sheet.
An investor is comparing two stocks in the same industry. Stock X trades at a P/E of 28, with expected EPS growth of 20% per year. Stock Y trades at a P/E of 18, with expected EPS growth of 8% per year.
Which of the following statements about the two stocks is correct? Answer: Stock X has a PEG of 1.4 and is undervalued relative to Stock Y.
Under the PEG ratio (P/E divided by expected earnings growth), Stock X = 28 ÷ 20 = 1.4 and Stock Y = 18 ÷ 8 = 2.25. A lower PEG means the stock is cheaper per unit of expected growth, so Stock X is the more attractive value on a growth-adjusted basis. A PEG of 0.9 for Stock Y incorrectly pairs Y's P/E with X's growth rate. A PEG of 3.5 for Stock X incorrectly pairs X's P/E with Y's growth rate. The statement that Stock Y is undervalued pairs the correct PEG of 2.25 with a conclusion that contradicts what the ratio measures, since 2.25 exceeds Stock X's 1.4.
A stock just paid an annual dividend of $2.50. The dividend is expected to grow at 4% per year indefinitely, and the investor requires a 12% return.
Using the dividend discount model, what is the stock's intrinsic value? Answer: $32.50
Under the constant-growth dividend discount model, value equals the next dividend divided by (required return − growth rate): D1 = $2.50 × 1.04 = $2.60, so value = $2.60 / (0.12 - 0.04) = $32.50. The $21.67 figure divides the $2.60 next dividend by the required return alone (0.12), omitting the growth subtraction from the denominator. The $31.25 figure discounts the $2.50 current dividend rather than the projected $2.60. The $65.00 figure divides the next dividend by the growth rate alone (0.04), omitting the required return from the denominator.
- At the beginning of the year, a company had 4,000,000 shares of common stock outstanding. On July 1, it issued 1,000,000 additional shares. The company reported net income of $10,000,000 for the year and paid $1,000,000 in preferred stock dividends. The common stock trades at $30.00 per share. What is the company's price-to-earnings ratio, rounded to two decimal places?
Answer: 15.00
Price-to-earnings ratio = market price per share / earnings per share, where EPS = (net income - preferred dividends) / weighted-average common shares. Weighted-average shares = 4,000,000 + (1,000,000 x 6/12) = 4,500,000. EPS = ($10,000,000 - $1,000,000) / 4,500,000 = $2.00, so P/E = $30.00 / $2.00 = 15.00. The 13.50 figure divides net income of $10,000,000 by 4,500,000 shares, ignoring the preferred dividend claim. The 13.33 figure uses 4,000,000 shares, the beginning-of-year count, and ignores the July issuance. The 16.67 figure uses 5,000,000 shares, counting the July shares as if they were outstanding for the entire year instead of weighting them for six months.
