Gitman Chapter7
Gitman Chapter7
Gitman Chapter7
Analyzing Common Stocks
7.1 Learning Goal 1
1) An investor should buy a stock only if the prevailing market price exceeds the intrinsic value of the
stock.
Answer: FALSE
Question Status: Previous Edition
2) An investment should offer an expected return commensurate with the risk involved.
Answer: TRUE
Question Status: Previous Edition
3) Advocates of the efficient market hypothesis would argue that it is virtually impossible for any
investor to consistently outperform the market.
Answer: TRUE
Question Status: Previous Edition
4) One underlying premise of fundamental analysis is that the market price of any security
consistently represents the true value of the underlying firm.
Answer: FALSE
Question Status: Previous Edition
5) According to the efficient markets hypothesis, securities can be substantially mispriced in the
marketplace.
Answer: FALSE
Question Status: Previous Edition
6) One of the basic premises of security analysis, and in particular fundamental analysis, is that
A) a stockʹs price is based on its past cash flows rather than on anticipated future cash flows.
B) market sectors do not move in concert with business cycles.
C) all securities have an intrinsic value that their market value will approach over time.
D) a securityʹs risk has relatively little effect on the securityʹs return.
Answer: C
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 111
7) The intrinsic value of a security is based on the
I. amount of risk.
II. current market value of the security.
III. discount rate applicable to the security.
IV. estimated future cash flows from the security.
A) I and III only
B) III and IV only
C) I, II and III only
D) I, III and IV only
Answer: D
Question Status: Previous Edition
8) Top-down security analysis
A) starts with the fundamental analysis of a firm.
B) includes economic, industry, and fundamental analysis.
C) concentrates on the competency of the senior management of a firm.
D) centers on the past performance of a firm.
Answer: B
Question Status: Previous Edition
9) Fundamental analysis involves the in-depth study of the
A) role of nondiversifiable risk in an investorʹs portfolio.
B) financial condition and operating results of a given firm.
C) pattern of security prices as revealed in chart formations.
D) role of diversifiable risk in an investorʹs portfolio.
Answer: B
Question Status: Previous Edition
10) Some investment analysts believe that the market processes new information so well and so
quickly that securities trade very close to their intrinsic values at all times. These analysts are said
to be advocates of
A) fundamental analysis.
B) sector analysis.
C) the efficient market hypothesis.
D) the prevailing price hypothesis.
Answer: C
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112 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
7.2 Learning Goal 2
1) Firms tend to be more profitable and have higher stock values when the economy is strong.
Answer: TRUE
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2) The purpose of economic analysis is to gain an insight into the underlying health or vitality of the
economy and to formulate expectations about future security prices.
Answer: TRUE
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3) The business cycle reflects economic changes only in the industrial sectors of the economy.
Answer: FALSE
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4) Developing a general economic outlook assists in the identification of industries and firms that
might be good investment opportunities.
Answer: TRUE
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5) Stock prices tend to be a leading indicator of the level of economic activity.
Answer: TRUE
Question Status: Previous Edition
6) Economic analysis is relatively useless for investment purposes since the stock market is used to
forecast the economy.
Answer: FALSE
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7) Which measure of the business cycle represents the market value of all goods and services
produced in a country over a twelve-month period?
A) industrial production index
B) money supply
C) gross domestic product
D) productivity average
Answer: C
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 113
8) Which one of the following statements is true?
A) Monetary policy includes adjusting interest rates and determining the level of government
taxation.
B) Inflation has little, if any, impact on the economy or the financial markets.
C) Both consumer spending and business investment are key components of the economy.
D) Restrictive fiscal policy tends to increase economic activity.
Answer: C
Question Status: Previous Edition
9) The Federal Reserve through monetary policy can help expand the economy by
A) lowering income taxes on individuals.
B) reducing tariffs such that foreign exports can increase.
C) supporting a moderate growth of the money supply.
D) increasing government spending on the national infrastructure.
Answer: C
Question Status: Previous Edition
10) Increases in either interest rates or taxes tend to
A) contract the level of economic activity.
B) increase the level of business investment.
C) indicate governmental expansion of the economy.
D) signal the trough of a recessionary market.
Answer: A
Question Status: Previous Edition
11) The government has an expansionary economic policy when it
A) increases taxes.
B) increases government spending.
C) promotes rising interest rates.
D) limits exports of goods and services.
Answer: B
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114 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
12) A weak dollar tends to have a ________ effect on financial markets and a ________ effect on our
exports.
A) positive; positive
B) positive; negative
C) negative; positive
D) negative; negative
Answer: C
Question Status: Previous Edition
13) Which one of the following is a correct description of an economic measure?
A) The consumer price index is a monthly indicator of changes in the price of goods at various
stages of production.
B) The monthly estimate of total sales by the Commerce Department is known as the consumer
price index.
C) The unemployment rate shows the number of payroll jobs that exist in the economy.
D) The amount of funds in circulation, in checking, savings and money market accounts and in
CDs is referred to as the money supply.
Answer: D
Question Status: Previous Edition
14) Which of the following tend to increase security market prices?
I. An increase in industrial production.
II. An increase in corporate profits.
III. An increase in the federal deficit when the economy is strong.
IV. An increase in interest rates.
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV
Answer: A
Question Status: Previous Edition
15) Which one of the following statements is correct?
A) Stock prices are independent of the economic cycle.
B) Stock prices change simultaneously with the economy.
C) Stock prices are often used to predict changes in the economy.
D) Changes in stock prices generally lag changes in the economy.
Answer: C
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 115
7.3 Learning Goal 3
1) To predict the demand for an industrial sector, it is essential to understand the economic forces that
affect the industry.
Answer: TRUE
Question Status: Previous Edition
2) Economic factors such as a weak dollar will have a negative impact on all industrial sectors.
Answer: FALSE
Question Status: New
3) Industries in the rapid expansion stage will be especially sensitive to a slowing economy.
Answer: FALSE
Question Status: New
4) When the economic outlook for an industrial sector is strong, the outlook for many of the stocks of
firms within that sector will also be strong.
Answer: TRUE
Question Status: Previous Edition
5) Investors who conduct industry analyses typically favor companies with strong market positions
over companies with less secure market positions because firms with strong market positions tend
to
I. be price leaders.
II. benefit more from economies of scale.
III. have better R&D programs.
IV. have lower production costs.
A) II and IV only
B) I, II and IV only
C) I, II and III only
D) I, II, III and IV
Answer: D
Question Status: Previous Edition
116 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
6) Which of the following factors are considered when analyzing an industry?
I. the nature and conditions of governmental regulations
II. the involvement and relations, if any, with labor unions
III. the development of new technologies relevant to the industry
IV. the extent of competition within the industry
A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
Answer: D
Question Status: Previous Edition
7) Which stage of an industryʹs growth cycle is most influenced by economic events?
A) initial development
B) stability or decline
C) mature growth
D) rapid expansion
Answer: C
Question Status: Previous Edition
8) The stage in an industryʹs growth cycle in which product acceptance is spreading, investors can
foresee the industryʹs future, and overall economic variables have little to do with the industryʹs
overall performance, is known as the
A) initial development stage.
B) rapid expansion stage.
C) mature growth stage.
D) stability or decline stage.
Answer: B
Question Status: Previous Edition
9) Which stage of an industryʹs growth cycle offers the greatest opportunity for an investor who is
seeking capital gains?
A) initial development
B) mature growth
C) stability or decline
D) rapid expansion
Answer: D
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 117
10) List and explain the various stages of the growth cycle of an industry. Also discuss the merit of
investing in the industry during each of the various stages.
Answer: The 4 stages of the growth cycle are
1. initial development stagethe industry is new and untried; investment opportunities are
not available to most investors; risks are high;
2. rapid expansion stageproduct acceptance is spreading and investors can foresee the
industryʹs future; economic variables donʹt have a large effect on the industryʹs performance;
good time to invest in company;
3. mature growthheavily influenced by economic development; expansion comes from
the economyʹs growth; may provide defensive, cyclical or current income types of
investment opportunities
4. stability or declinedemand for the industryʹs products is diminishing; investment
opportunities are few.
Question Status: Previous Edition
Answer: Industry analysis.
1. focuses on the activities of one of more industries.
2. looks at the competitive position of an industry in relation to other industries.
3. seeks answers to questions such as: How is the industry regulated? What role does labor
play in the industry? What economic forces are especially important to the industry?
4. facilitates research by using published reports such as the S&P Industry Surveys.
Fundamental analysis.
1. rests on the belief that the value of a stock is influenced by the performance of the
company that issued the stock.
2. studies the financial condition and operating results of a firm.
3. uses financial ratios to understand relationships.
4. compares current ratios to historical and industry standards.
Question Status: Previous Edition
7.4 Learning Goal 4
1) Fundamental analysis is based on the presumption that the value of a stock is influenced by the
financial performance of the issuing company.
Answer: TRUE
Question Status: Previous Edition
2) Fundamental analysis encompasses return, but not risk, in the valuation process.
Answer: FALSE
Question Status: Previous Edition
3) The income statement and balance sheet are linked through the statement of cash flows.
Answer: TRUE
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118 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
4) The income statement indicates how successfully a company has utilized its assets.
Answer: TRUE
Question Status: Previous Edition
5) The statement of cash flows offers little value to the analysis of a company.
Answer: FALSE
Question Status: Previous Edition
6) If a company rewards executives with stock options, core earnings will be lower than net income.
Answer: TRUE
Question Status: New
7) EBITDA stands for earnings before inflation, taxes, depreciation, and adjustments.
Answer: FALSE
Question Status: New
8) For a company to remain in business for the long term, cash flow from operations must generally
be a positive number.
Answer: TRUE
Question Status: Previous Edition
9) Which of the following are considered in the company analysis phase of a fundamental analysis of
a firm?
I. the composition and growth in sales
II. the capital structure of the firm
III. the outlook of the national economy
IV. the composition and liquidity of the companyʹs assets
A) I and II only
B) I, II and IV only
C) II and IV only
D) I, II, III and IV
Answer: B
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 119
10) Which one of the following statements concerning accounting reports is correct?
A) The income statement reflects the position of a firm as of a single point in time.
B) The total equity of a firm is equal to the total assets plus the total liabilities.
C) The statement of cash flows identifies both the sources and the uses of cash.
D) The income statement reflects the amount of cash available for investment and financing
activities.
Answer: C
Question Status: Previous Edition
11) Cash flow from operations
A) represents the amount of cash generated by the company.
B) is the least important section of the Statement of Cash Flows.
C) is the amount of cash acquired from the borrowing activities of the firm.
D) represents the cash flows from the purchase and sale of long -term assets.
Answer: A
Question Status: Previous Edition
12) Which of the following measures excludes non-cash charges against income.
A) core earnings
B) EBITDA
C) net income before taxes
D) Income from operating activities
Answer: B
Question Status: New
13) Financial ratios
I. allow comparisons across firms without concern over firm size.
II. can compare a firmʹs operating and financial status to industry norms.
III. reflect the future outlook of a firm based on analysts projections.
IV. look at the liquidity, activity, leverage, profitability and market measures of a firm.
A) II and IV only
B) I and II only
C) I, II and IV only
D) I, II, III and IV
Answer: C
Question Status: Previous Edition
120 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
14) On September 30, the Simpson Company reported the following information on its financial
statements.
Total current assets $650,000
Total long-term assets $1,080,000
Total current liabilities $684,000
Total long-term debt $803,000
What is the amount of the stockholderʹs equity in the Simpson Company?
A) $243,000
B) $277,000
C) $927,000
D) $3,217,000
Answer: A
Question Status: Previous Edition
15) On March 31, Adolpha, Inc. reported the following information on its financial statements.
Total current assets $210,687
Total long-term assets $1,063,432
Total current liabilities $337,609
Total long-term debt $1,002,643
What is the available net working capital for Adolpha, Inc.?
A) -$126,922
B) -$66,133
C) $60,789
D) $936,510
Answer: A
Question Status: Previous Edition
7.5 Learning Goal 5
1) Ratio analysis is the study of the relationships between various financial statement accounts.
Answer: TRUE
Question Status: Previous Edition
2) Financial ratios can reveal a lot about a companyʹs liquidity, activity, and profitability.
Answer: TRUE
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 121
3) An accounts receivable turnover ratio of 5.5 indicates the firm holds about $5.50 in receivables for
each dollar of sales.
Answer: FALSE
Question Status: Previous Edition
4) Return on assets is a very important analytical tool because it measures how effectively
management is using a firmʹs assets to generate profits.
Answer: TRUE
Question Status: Previous Edition
5) A firm with a very low debt-equity ratio has a high risk of defaulting on their loans.
Answer: FALSE
Question Status: Previous Edition
6) The Allied Computer Co. has sales of $300 million, a net profit margin of 9%, and 10 million shares
of common stock outstanding. It has no preferred stock outstanding. If Allied stock trades at $50
per share, it has a price/earnings ratio of 20.9.
Answer: FALSE
Question Status: Previous Edition
7) Return on equity (ROE) measures the return to the firmʹs stockholders by relating profits to
shareholder equity.
Answer: TRUE
Question Status: Previous Edition
8) In seeking potential stock investments, most analysts look for companies that have PEG ratios that
are equal to or less than one.
Answer: TRUE
Question Status: Previous Edition
9) Banks can use the times interest earned ratio as a measure of a borrowerʹs ability to repay their
loan.
Answer: TRUE
Question Status: Previous Edition
10) If a firm has an equity multiplier of 3, this means that the firm has $3 in equity for every $1 in
long-term debt.
Answer: FALSE
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122 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
11) Return on equity can be expressed mathematically as ʺ(net profit margin)(total asset turnover)(debt
multiplier).ʺ
Answer: FALSE
Question Status: Previous Edition
12) A high P/E ratio may be an indication that a stock is overpriced.
Answer: TRUE
Question Status: Previous Edition
13) Price-to-book-value indicates how aggressively a stock is being priced.
Answer: TRUE
Question Status: Previous Edition
14) High dividend payout ratios are more of a concern to analysts than low payout ratios.
Answer: TRUE
Question Status: Previous Edition
15) Which of the following are measures of liquidity?
I. net working capital
II. accounts receivable turnover
III. current ratio
IV. times interest earned
A) I and III only
B) I, II and III only
C) I, II and IV only
D) I, III and IV only
Answer: A
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 123
16) On December 31, the Gold Standard Company reported the following information on its financial
statements.
Total current assets $680,000
Total long-term assets $1,850,000
Total current liabilities $490,000
Total long-term debt $975,000
According to this information, the companyʹs current ratio is approximately
A) 1.39.
B) 1.68.
C) 1.73.
D) 1.90.
Answer: A
Question Status: Previous Edition
17) A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5.
What is the return on assets?
A) 3.6%
B) 4.5%
C) 8.1%
D) 9.0%
Answer: D
Question Status: Previous Edition
18) For their last fiscal year, the Short Company reported the following information.
Accounts Receivable $160,000
Inventory $204,000
Sales $1,168,000
Cost of Goods Sold $724,000
What is the accounts receivables turnover rate?
A) 0.8
B) 2.8
C) 4.5
D) 7.3
Answer: D
Question Status: Previous Edition
124 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
19) The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In
this case, the firm is
A) selling its inventory slower than the industry.
B) underperforming the industry.
C) averaging less days of sales in inventory than the industry.
D) generating less sales per dollar of inventory.
Answer: C
Question Status: Previous Edition
20) A total asset turnover of 3 means that every
A) $1 in sales is supported by $3 of assets.
B) $3 in assets produces $1 in net earnings.
C) $1 in total assets is replaced on average every 3 years.
D) $1 in assets produces $3 in sales.
Answer: D
Question Status: Previous Edition
21) A company has annual sales of $160 million, a net profit margin of 4%, and total assets of $90
million. It carries $10 million in accounts receivable, $25 million in inventory, has $55 million in
total debt, and 5 million shares of common stock outstanding. Based on this information, the
companyʹs return on equity (ROE) is
A) 4.4%.
B) 7.1%.
C) 11.5%.
D) 18.3%.
Answer: D
Question Status: Previous Edition
22) The measure that indicates how efficiently assets are being used to support sales is called the
A) total asset turnover.
B) current ratio.
C) book value.
D) net profit margin.
Answer: A
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Chapter 7 Analyzing Common Stocks 125
Answer: C
Question Status: Previous Edition
24) Marcoʹs just reported an EPS of $1.68 on revenues of $440 million. The company has 12 million
shares outstanding. Total assets are $280 million, current liabilities equal $48 million, and
long-term debt is $112 million. Net fixed assets are worth $230 million. Given this information,
which one of the following statements is correct?
A) Marcoʹs debt-equity ratio is 0.75.
B) Marcoʹs current ratio is 1.75.
C) Marcoʹs total asset turnover is 3.67.
D) Marcoʹs net working capital is $2 million.
Answer: D
Question Status: Previous Edition
25) Other things being equal, you would look favorably upon a company if
A) both the accounts receivable and the inventory turnover rates are low.
B) the times interest earned ratio is low while the debt-equity ratio is high.
C) the return on equity and the net profit margin are both high.
D) the equity multiplier is low while the price-earnings ratio is high.
Answer: C
Question Status: Previous Edition
Answer: C
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126 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
27) Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset
turnover of 2, it follows that the firm must have a net profit margin of
A) 4%.
B) 6%.
C) 8%.
D) 12%.
Answer: A
Question Status: Previous Edition
28) Investors are most interested in which one of the following ratios?
A) return on assets
B) current ratio
C) net profit margin
D) return on equity
Answer: D
Question Status: Previous Edition
29) Which one of the following is a leverage measure?
A) times interest earned
B) net working capital
C) return on equity
D) net profit margin
Answer: A
Question Status: Previous Edition
30) If a companyʹs ROA is high, then an investor can assume that the company
A) is in danger of defaulting on its loans.
B) pays a high dividend.
C) is profitable.
D) has more equity than debt in its capital structure.
Answer: C
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 127
31) If a firm has an ROA of 10% and an ROE of 10%, then the
A) operating results of the firm are improving.
B) firm has no financial leverage.
C) firm must have enough cash on hand to pay some extra dividends.
D) firm is losing money.
Answer: B
Question Status: Previous Edition
32) Kim has gathered the following information on a company.
Sales $640,000
Dividends paid on common stock $18,000
Net profit margin 5%
Number of shares outstanding 128,000
What is the amount of the earnings per share?
A) $0.14
B) $0.25
C) $0.28
D) $0.30
Answer: B
Question Status: Previous Edition
33) A company has 2 million shares of common stock outstanding. Annual sales are $26 million. The
net profit margin is 8% and the dividend payout ratio is 40%. Currently the stock trades at $17.68
per share. Given this information, the company has a P/E ratio of
A) 16 and a dividend yield of 2.35%.
B) 16 and a dividend yield of 3.20%.
C) 17 and a dividend yield of 2.35%.
D) 17 and a dividend yield of 3.20%.
Answer: C
Question Status: Previous Edition
128 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
34) JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJʹs stock is currently selling
for
A) $16.74 per share.
B) $17.07 per share.
C) $18.00 per share.
D) $19.35 per share.
Answer: A
Question Status: Previous Edition
35) For most companies, the dividend payout ratio falls within the range of
A) 10 to 20%.
B) 20 to 40%.
C) 40 to 60%.
D) 60 to 80%.
Answer: C
Question Status: Previous Edition
36) Which of the following formulas are correct?
I. return on equity = (return on assets)(equity multiplier)
II. return on equity = (net profit margin)(total asset turnover)(equity multiplier)
III. equity multiplier = total assets/total equity
IV. return on assets = (equity multiplier)(total asset turnover)
A) I and III only
B) II and IV only
C) I, III and IV only
D) I, II and III only
Answer: D
Question Status: Previous Edition
37) The PEG ratio
A) preferred by investors is equal to 2.0 or higher.
B) compares the price/earnings ratio to the rate of growth of the companyʹs earnings.
C) is a measure of a firmʹs liquidity.
D) measures the ability of a firmʹs assets to generate growth for the firm.
Answer: B
Question Status: Previous Edition
Chapter 7 Analyzing Common Stocks 129
38) The cash realization ratio (cash flow from operating activities divided by net income) is a useful
measure of
A) quality of earnings.
B) liquidity.
C) leverage.
D) distortion of earnings by inflation.
Answer: A
Question Status: New
39) ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of using
this expanded version of the ROE formula versus using the simplified version which is net income
divided by total equity?
Answer: The expanded version provides more insight into a firmʹs operations. The net profit margin
reflects the efficiency of operations. The total asset turnover measures the ability of assets to
generate sales. The equity multiplier reflects the use of leverage.
Question Status: Previous Edition
130 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
40) The following information is available for the Oil Creek Corporation.
Accounts Receivable $19,000
Sales $195,000
Current assets $36,000
Total assets $147,000
Long term debt $48,000
Current liabilities $41,000
Profit margin 6%
Number of shares outstanding 15,000
Current stock price per share $14.43
(a) What is the current ratio?
(b) What is the net working capital?
(c) What is the net income?
(d) What is the return on equity?
(e) What is the total asset turnover?
(f) What is the debt-equity ratio?
(g) What is the accounts receivable turnover?
(h) What is the earnings per share (EPS)?
(i) What is the price to earnings (P/E) ratio?
7.6 Learning Goal 6
1) A companies ratios are more meaningful when compared to other companies in the same industry.
Answer: TRUE
Question Status: New
2) The debt to equity ratio should be approximately the same across all industrial sectors.
Answer: FALSE
Question Status: New
3) Historical comparisons will reveal whether a companyʹs performance is improving or
deteriorating.
Answer: TRUE
Question Status: New
Chapter 7 Analyzing Common Stocks 131
4) Generally, the market price of a stock is
A) below its book value.
B) above its book value.
C) equal to its par value.
D) equal to its book value.
Answer: B
Question Status: Previous Edition
5) To determine whether a pharmaceutical companyʹs profitability ratios indicate strength or
weakness, we should
I. compare them to others in the same industry.
II. compare them to companies in unrelated industries such as energy or banking.
III. compare them to previous years.
IV. compare them to absolute standards established by the CFA Institute.
A) I and II only
B) I and III only
C) III and IV only
D) IV only
Answer: B
Question Status: New
6) Which of the following is a readily available source of industry comparisons?
A) The Wall Street Journal
B) Company Annual Reports
C) Standard & Poors
D) EDGAR
Answer: C
Question Status: New
7) A comparison of a firmʹs current financial ratios to those of prior years allows one to
A) accurately predict the future performance of a firm.
B) see how a firmʹs performance compares to that of a competitor.
C) see trends that are developing.
D) determine if the firm is performing better than the overall industry.
Answer: C
Question Status: Previous Edition
132 Gitman/Joehnk · Fundamentals of Investing, Tenth Edition
8) Company A and Company B are in the same industry and have the following ratios.
Company A Company B
Current ratio 1.2 0.89
Debt/equity 0.20 0.40
Total asset turnover 1.9 2.1
Net profit margin 4.2% 3.8%
Return on equity 12.4% 14.8%
Dividend payout ratio 25.0% 10.0%
Discuss the relative natures of the two companies in terms of risk and return. Identify the more
growth-oriented firm and justify your selection. Support your discussion and conclusions by
referring to the ratios.
Answer: Company B is more risky because its debt/equity ratio is higher indicating more financial
risk and its current ratio is lower indicating less liquidity. Company B has a lower net profit
margin which may be caused by higher interest expenses due to the higher debt load.
Company B offers a higher return to shareholders based on the return on equity ratio.
Company B is probably growing faster than Company A because the dividend payout ratio
is lower and the total asset turnover rate is higher.
Question Status: Previous Edition