Financial Management for Project Managers Financial Ratio 4 — Questions and Answers
Question 1: Which ratio specifically helps a project manager assess whether the project can service its debt obligations from operating earnings?
- Current ratio
- Debt service coverage ratio (DSCR) (Correct answer)
- Gross margin ratio
- Inventory turnover ratio
Correct answer: Debt service coverage ratio (DSCR)
DSCR = Net Operating Income / Total Debt Service, measuring ability to cover debt payments from operations.
Question 2: A project generates $120,000 in net income on $800,000 in equity. What is the return on equity (ROE)?
- 6.67%
- 15% (Correct answer)
- 12%
- 9.6%
Correct answer: 15%
ROE = Net Income / Equity = $120,000 / $800,000 = 0.15 = 15%.
Question 3: In financial ratio analysis, what does a high inventory turnover ratio generally indicate for a project?
- Excess inventory is being carried
- Inventory is being sold and replenished efficiently (Correct answer)
- The project has poor cash flow
- Suppliers are being paid too slowly
Correct answer: Inventory is being sold and replenished efficiently
A high inventory turnover ratio indicates that inventory is being converted to sales quickly, reflecting operational efficiency.
Question 4: A project manager is reviewing a project with EBITDA of $200,000 and total debt of $800,000. What is the debt-to-EBITDA ratio?
- 0.25
- 4.0 (Correct answer)
- 2.5
- 0.4
Correct answer: 4.0
Debt-to-EBITDA = Total Debt / EBITDA = $800,000 / $200,000 = 4.0.
Question 5: What is the primary limitation of using financial ratios in isolation when evaluating a project?
- Ratios are too complex to calculate
- Ratios lack industry or benchmark context to determine whether values are good or bad (Correct answer)
- Ratios only apply to public companies
- Ratios cannot be used for multi-year projects
Correct answer: Ratios lack industry or benchmark context to determine whether values are good or bad
A ratio value is meaningless without comparison to industry benchmarks, historical trends, or project targets.
Question 6: A project has $30,000 cash, $70,000 accounts receivable, $50,000 inventory, and $100,000 current liabilities. What is the quick ratio?
- 1.5
- 1.0 (Correct answer)
- 0.5
- 0.7
Correct answer: 1.0
Quick Ratio = (Cash + Receivables) / Current Liabilities = ($30,000 + $70,000) / $100,000 = 1.0.
Question 7: Which scenario would cause a project's net profit margin to decrease while revenue stays constant?
- Reduction in cost of goods sold
- Increase in operating expenses (Correct answer)
- Decrease in tax rate
- Increase in gross profit
Correct answer: Increase in operating expenses
Higher operating expenses reduce net income while revenue remains unchanged, compressing the net profit margin.
Financial Management for Project Managers Financial Ratio 4
Which ratio specifically helps a project manager assess whether the project can service its debt obligations from operating earnings?