##### Document Text Contents

Page 41

44. Which of the following ratios is not considered to be a test of profitability?

A. Current ratio

B. Profit margin

C. Return on assets

D. Earnings per share

The current ratio measures liquidity.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: Easy

Learning Objective: 14-04 Compute and interpret profitability ratios.

Learning Objective: 14-05 Compute and interpret liquidity ratios.

Libby - Chapter 14 #44

Topic Area: Ratio and Percentage Analysis

45. The records of Everyday Electronics Corporation for a particular period include the following:

What is the return on equity ratio?

A. 13.2%.

B. 23.8%.

C. 24.0%.

D. 8.4%.

The return on equity ratio (23.8%) = Net income ($200,500 - $135,000) ÷ Average stockholders' equity

($760,000 + $485,000)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: Medium

Learning Objective: 14-04 Compute and interpret profitability ratios.

Libby - Chapter 14 #45

Topic Area: Ratio and Percentage Analysis

Page 79

119. MNF Corporation gathered the following data at the end of the accounting period, December 31, 2009:

Part 1: Calculate each of the following ratios:

A. Profit margin

B. Return on equity

C. Earnings per share

D. Dividend yield ratio

E. Price/earnings ratio

F. Return on assets

G. Financial leverage percentage

Part 2: Interpret the financial leverage percentage.

Answers will vary

Feedback: Part 1:

A. $60,000 ÷ $1,200,000 = 5%

B. $60,000 ÷ $300,000 = 20%

C. $60,000 ÷ 50,000 shares = $1.20

D. ($22,500 ÷ 50,000 shares) ÷ $9 = 5%

E. $9.00 ÷ $1.20 = 7.5

F. [$60,000 + ($25,000 x .60)] ÷ $500,000 = 15%

G. 20% - 15% = 5%

Part 2: The advantage is favorable to the stockholders if the ratio is positive, and it is unfavorable to the

stockholders if the ratio is negative because of the difference between earnings on total assets and the

cost of debt (interest expense net of income tax). For MNF Corporation, the company's stockholders

are benefiting from financial leverage because the cost of borrowing is less than the return to the

shareholders.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: Medium

Learning Objective: 14-04 Compute and interpret profitability ratios.

Learning Objective: 14-07 Compute and interpret market test ratios.

Libby - Chapter 14 #119

Topic Area: Ratio and Percentage Analysis

44. Which of the following ratios is not considered to be a test of profitability?

A. Current ratio

B. Profit margin

C. Return on assets

D. Earnings per share

The current ratio measures liquidity.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: Easy

Learning Objective: 14-04 Compute and interpret profitability ratios.

Learning Objective: 14-05 Compute and interpret liquidity ratios.

Libby - Chapter 14 #44

Topic Area: Ratio and Percentage Analysis

45. The records of Everyday Electronics Corporation for a particular period include the following:

What is the return on equity ratio?

A. 13.2%.

B. 23.8%.

C. 24.0%.

D. 8.4%.

The return on equity ratio (23.8%) = Net income ($200,500 - $135,000) ÷ Average stockholders' equity

($760,000 + $485,000)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: Medium

Learning Objective: 14-04 Compute and interpret profitability ratios.

Libby - Chapter 14 #45

Topic Area: Ratio and Percentage Analysis

Page 79

119. MNF Corporation gathered the following data at the end of the accounting period, December 31, 2009:

Part 1: Calculate each of the following ratios:

A. Profit margin

B. Return on equity

C. Earnings per share

D. Dividend yield ratio

E. Price/earnings ratio

F. Return on assets

G. Financial leverage percentage

Part 2: Interpret the financial leverage percentage.

Answers will vary

Feedback: Part 1:

A. $60,000 ÷ $1,200,000 = 5%

B. $60,000 ÷ $300,000 = 20%

C. $60,000 ÷ 50,000 shares = $1.20

D. ($22,500 ÷ 50,000 shares) ÷ $9 = 5%

E. $9.00 ÷ $1.20 = 7.5

F. [$60,000 + ($25,000 x .60)] ÷ $500,000 = 15%

G. 20% - 15% = 5%

Part 2: The advantage is favorable to the stockholders if the ratio is positive, and it is unfavorable to the

stockholders if the ratio is negative because of the difference between earnings on total assets and the

cost of debt (interest expense net of income tax). For MNF Corporation, the company's stockholders

are benefiting from financial leverage because the cost of borrowing is less than the return to the

shareholders.

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: Medium

Learning Objective: 14-04 Compute and interpret profitability ratios.

Learning Objective: 14-07 Compute and interpret market test ratios.

Libby - Chapter 14 #119

Topic Area: Ratio and Percentage Analysis