Question

1. A firm has a current ratio of 1.8 and a quick ratio of 0.6. This indicates that:

		A. the firm has more current liabilities than it does current assets.
		B. the firm buys inventory on credit.
		C. cash is the largest component of current assets.
		D. inventory represents more than 50 percent of the firm's current assets.

2. Which one of the following will increase the net working capital of a firm?

		A. paying a supplier for a recent purchase
	B.	obtaining a 3-year loan to buy equipment
	C.	obtaining a 5-year loan to purchase inventory
	D.	collecting payment from a customer

3. A firm has sales for the year of $386,000. The profit margin is 7.8 percent and the retention ratio is 40 percent. What is the common-size percentage for the Net Income on the Income Statement?

A		5.80 percent
B		9.40 percent
C		7.80 percent
D		3.20 percent

4. Yam, Inc. has total assets of $642,000. There are 50,000 shares of stock outstanding with a market value of $22 a share. The firm has a profit margin of 7 percent and a total asset turnover of 1.6. What is the price-earnings ratio?

A		23.50
B		15.28
C		17.06
D		21.20

Answer 1

Q-1) Ans - Option D. inventory represents more than 50 percent of the firm's current assets

As the difference in Current ratio and Quick ratio is Inventory. Inventory does not form part of Quick ratio. SInce, Quick ratio decreases drastically it is beacuse Inventory forms more than 50% of current assets.

Q-2)

Ans- Option C

Obtaining Loan for Inventory will increase Inventory which will increase the net working capital of a firm, on the other hand 5-year loan will not form part of Current liabilities.

Q-3)

Ans- Option C

the common-size percentage for the Net Income is Net income divided by Sales whcih is equivalent to Profit margin.

Thus, it is 7.80%

Q-4)

Total asset turnover = Net sales/Total Assets

1.6 = Net sales/$642,000

Net sales = $1027,200

Net income = Net sales*profit margin

= $1027,200*7%

Net income = $71,904

Earnings per share = Net income/no of shares outstanding

= $71,904/50,000

Earnings per share = $1.44 per share

- P/E Ratio = Market price per share/Earnings per share

= $22/$1.44

P/E Ratio = 15.28

Option B