Question

1) Price-to-book is a multiple that would be least relevant for which of the following companies?

	a.	Software company
	b.	Supermarket chain
	c.	Cement manufacturer
	d.	Specialty clothing retailer

2) Investment analysts employ ratio and trend analysis when assessing a company’s financial statements. Some trends reveal company improvement and others suggest possible “red flags” – trends that reveal possible deterioration in operational success. Which of the following would suggest a “red flag?”

(1)Rising accounts receivable versus sales ratio

(2)Rising inventory versus sales ratio

(3)Rising debt versus total asset ratio

(4)Rising shareholder equity to total assets ratio

	a.	1 and 2
	b.	1, 2 and 3
	c.	2 and 4
	d.	3 and 4

3) The Coastal Company had revenues of $120,000 in the last fiscal period. The cost-of-goods were $62,000, operational expenses were $15,000, interest was $8,000 and tax was $11,900. What is the return on equity if the company’s total assets and total liabilities are $630,000 and $320,000, respectively?

	a.	7.5%
	b.	3.7%
	c.	7.2%
	d.	13.9%

Answer 1

1) Answer: d. Specialty clothing retailer
This is because low sales leads to low profits, so low price. The Book value
always high due to specialty clothing always valued high.
2) Answer : b. 1, 2 and 3
This is because all the three conditions creates risk and red flag for the company. These
increases the cost of operation.
3)Net income = 120000 - (62000+15000+8000+11900) = $23100
Total SH Equity = 630000 - 320000 = 310000
Return on equity = 23100/310000 = 7.5%
So, Answer : a. 7.5%