Homework Chapter 3 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing such as preferred stock and long-term debt. 1) A) Operating leverage B) Financial leverage C) Fixed-payment coverage D) The acid-test 2) The higher the value of A) average payment period C) average collection period ratio, the better able the firm is to fulfill its interest obligations. B) times interest earned 2) D) debt on the 3) The is a popular approach for evaluating profitability in relation to sales by expressing each income statement as a percent of sales. 3) A) profit and loss statement B) retained earnings statement C) common-size income statement D) source and use statement Table 2.2 Industry Actual 2013 Dana Dairy Products Key Ratios Actual Average 2012 Current Ratio 1.3 10 Quick Ratio 0.6 0.75 Average collection Period 23 days 30 days Inventory Tumove 217 19 Debt Ratio 6479. 50. Tim. Inteet Earned 18 5.5 Grozs Profit Margin 13.8. 12.09. Net Profit Margin 1.09. 0.57. Return outotaleset 299. 209 Return on Equity 8.2% 109. 1 US$ 100.000 87.000 $15.000 Income Statement Dana Dairy Products For the Year Ended December 31, 2013 Sale Revenue Les Costof Goods Sold GreeProfits Les Operating Erse Ope ating Profits Les Inteet Expese Net Profits Before Taxe Les: Taxe (209 Net Profits Afte Taxe $2.000 $1.500 $900 US$ 1.000 5900 Balance Sheet Dana Dairy Products December 31, 2013 Assets Cash Account Receivable Inventorie Total Cuent Assets Gross Fixed Assets $35.000 Les Accumulated Depreciation 13250 Net F bied Assets Total Assets $14250 21.750 $36 000 Liabilities & Sockelolders' Equit Account Paable Accrual Total Cuent Liabilities Long-tem Debt Total Liabilities Com..on Stock Retained Earnings Total Stockholdes Equity Total Liabilities & Stockholdas Equity US$ 9.000 6975 $15675 125 $19 300 1.000 15200 $16 200 $36.000 4) 4) The debt ratio for Dana Dairy Products in 2013 was (See Table 2.2) A) 11 percent. B) 55 percent. C) 50 percent. D) 44 percent. 5) Dana Dairy Products' gross profit margin was inferior to the industry standard. This may have resulted from (See Table 2 2.2) 5) A) the high cost of goods sold. B) a high sales price. C) excessive interest expense. D) excessive selling and administrative expenses. 6) 6) The gross profit margin and net profit margin for Dana Dairy Products in 2013 were (See Table 2.2) A) 2 percent and 0.9 percent, respectively. B) 2 percent and 1.5 percent, respectively. ) 13 percent and 1.5 percent, respectively. D) 13 percent and 0.9 percent, respectively. 7) The return on total assets for Dana Dairy Products for 2013 was (See Table 2.2) 7) A) 5.5 percent. B) 25 percent. C) 2.5 percent. D) 0.9 percent. 8) 8) The return on equity for Dana Dairy Products for 2013 was (See Table 2.2) A) 0.9 percent. B) 0.6 percent. C) 50 percent. D) 5.6 percent. 9) Using the modified DuPont formula allows the analyst to break Dana Dairy Products return on equity into 3 components: the net profit margin, the total asset turnover, and a measure of leverage (the financial leverage multiplier). Which of the following mathematical expressions represents the modified DuPont formula relative to Dana Dairy Products' 2013 performance? (See Table 2.2) 9) A) 5.6(ROE) - 3.3(ROA)* 1.70(Financial leverage multiplier) B) 2.5(ROE) - 5.6(ROA) * 0.44(Financial leverage multiplier) C) 4.0(ROE) -2.0(ROA) 2.00(Financial leverage multiplier) D) 5.6(ROE) - 2.5(ROA) * 2.24(Financial leverage multiplier) 10) As the financial leverage multiplier increases this may result in 10) A) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases. B) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases. an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases. D) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases. 3