Financial Analysis Test
Which of the following are traded in the capital markets?
a. Convertible securities
c. Common stock
d. Preferred stock
e. All of the above
Why do you not subtract interest expense from operating profit when calculating Return on Investment Capital?
a. Denominator includes debt capital
b. Numerator includes debt capital
c. Interest is not material in the calculation
d. It is important to include interest as it is part of expenses
Government mandated requirements, such as installing pollution control equipment ______.
a. increase a company’s profits in the long run
b. drive many companies out of business
c. have resulted in many instances of unethical behavior on the part of managers
d. may reduce a company’s earnings but are considered a necessary social responsibility for the firm
e. do not affect a firm’s profit potential
What does the Price to Earnings (P/E) ratio demonstrate?
a. The price of the company’s products relative to how much they earn on the sale of those products
b. A company’s stock price relative to its earnings. Higher growth companies have higher P/E ratios
c. The prices paid for goods relative to how much the company earns on those goods
d. The ability of a company to pay dividends
Which of the following is a flaw with financial analysis?
a. Each company uses different formulas to calculate the ratios
b. Ratios are too difficult to calculate and require a specialist
c. Auditors do not look at financial ratios
d. One ratio alone does not tell much about the entire financial situation of a company
What is the purpose of measuring solvency?
a. To determine a firm’s ability to pay its creditors in the long term
b. To determine a firm’s ability to pay its creditors in the short term
c. To measure a firm’s cash flow turnover
d. To measure a firm’s current assets to current liabilities
Why would a company calculate their Risk Adjusted Return on Capital?
a. Is required by the SEC
b. Auditors will overlook other abnormalities if a firm demonstrates a favorable RAROC
c. Gives companies the ability to allocate capital in the optimal structure
d. Keeps the financial analysis department busy
What is financial analysis?
a. Comparing ratios using numbers from the income statement and balance sheet
b. Determining a company’s financing needs
c. Determining the pricing model for the next year
d. Determining the company’s stock price