Sample Questions
Question 1
Easy
A company has sales of $1,000,000 and cost of goods sold of $600,000. What is the gross profit margin?
Solution
B is correct. Gross profit equals sales minus COGS: . Gross profit margin equals gross profit divided by sales: , or 40%.
Question 2
Medium
A company's income statement shows net income of $180,000, income tax expense of $60,000, and interest expense of $40,000. What is the company's times-interest-earned (TIE) ratio?
Solution
A is correct.
Times-interest-earned (TIE) ratio = EBIT / interest expense, where EBIT adds interest and taxes back to net income.
| Item | Amount | Why |
|---|---|---|
| Net income | $180,000 | Starting point |
| Interest expense | +$40,000 | Add back to reach EBIT |
| Tax expense | +$60,000 | Add back to reach EBIT |
| EBIT | $280,000 | Numerator |
| Interest expense | $40,000 | Denominator |
| **TIE ratio** | **7.0 times** | $280,000 / $40,000 |
Times-interest-earned (TIE) ratio = EBIT / interest expense, where EBIT adds interest and taxes back to net income.
| Item | Amount | Why |
|---|---|---|
| Net income | $180,000 | Starting point |
| Interest expense | +$40,000 | Add back to reach EBIT |
| Tax expense | +$60,000 | Add back to reach EBIT |
| EBIT | $280,000 | Numerator |
| Interest expense | $40,000 | Denominator |
| **TIE ratio** | **7.0 times** | $280,000 / $40,000 |
Question 3
Hard
A company reports net income of $90,000, total equity of $600,000, and paid dividends of $36,000 during the year. Assuming the company maintains its current capital structure and profit margins, what is the maximum sustainable growth rate?
Solution
C is correct. The sustainable growth rate (SGR) equals ROE multiplied by the retention ratio. Step 1: ROE = . Step 2: Dividend payout ratio = . Step 3: Retention ratio = . Step 4: SGR = , or 9.0%.
