Question 1

After-tax operating income for a leveraged firm is defined as:

Accepted Answer

A) net income + after-tax interest. 
B) EBIT × (1 - tax rate) + after-tax interest 
C) net income + depreciation. 
D) profit margin × sales. 
A) net income + after-tax interest. 
B) EBIT × (1 - tax rate) + after-tax interest 
C) net income + depreciation. 
D) profit margin × sales. A

Question 2

Which one of the following statements is most likely correct for a firm with an average collection period of 90 days?

Accepted Answer

A) its average daily sales are low. 
B) its average daily sales are high. 
C) its current ratio will be high. 
D) it is providing financing for approximately 25% of its annual sales. 
A) its average daily sales are low. 
B) its average daily sales are high. 
C) its current ratio will be high. 
D) it is providing financing for approximately 25% of its annual sales. D

Question 3

Market value added is the difference between the market value of the firm's equity and its book value.

Accepted Answer

A) True 
 B)False  True

Question 4

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9%?

Accepted Answer

A) 7.50% 
B) 9.00% 
C) 10.95% 
D) 16.70% 
A) 7.50% 
B) 9.00% 
C) 10.95% 
D) 16.70%

Question 5

A deficiency of the standard measures of liquidity is that the measures:

Accepted Answer

A) ignore a firm's reserve borrowing capacity. 
B) fail to include accounts receivable as an asset. 
C) give inventories equal weighting in the quick ratio. 
D) do not include the current portions of long-term debt. 
A) ignore a firm's reserve borrowing capacity. 
B) fail to include accounts receivable as an asset. 
C) give inventories equal weighting in the quick ratio. 
D) do not include the current portions of long-term debt.

Question 6

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1 before the payoff?

Accepted Answer

A) the quick ratio and current ratio will both increase. 
B) the quick ratio and current ratio will both decrease. 
C) the quick ratio will increase but the current ratio will remain unchanged. 
D) the current ratio will increase but the quick ratio will remain unchanged. 
A) the quick ratio and current ratio will both increase. 
B) the quick ratio and current ratio will both decrease. 
C) the quick ratio will increase but the current ratio will remain unchanged. 
D) the current ratio will increase but the quick ratio will remain unchanged.

Question 7

A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million.On average, how many days does it take the firm to pay its bills?

Accepted Answer

A) 63.47 days 
B) 52.91 days 
C) 48.19 days 
D) 59.03 days 
A) 63.47 days 
B) 52.91 days 
C) 48.19 days 
D) 59.03 days

Question 8

What is the inventory turnover ratio for ABC Corp.if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?

Accepted Answer

A) 2.78 times 
B) 4.17 times 
C) 5.56 times 
D) 8.33 times 
A) 2.78 times 
B) 4.17 times 
C) 5.56 times 
D) 8.33 times

Question 9

High levels of liquidity are most apt to indicate:

Accepted Answer

A) low levels of net working capital. 
B) low profit margins. 
C) high levels of economic value added. 
D) inefficient use of assets. 
A) low levels of net working capital. 
B) low profit margins. 
C) high levels of economic value added. 
D) inefficient use of assets.

Question 10

What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:

Accepted Answer

A) remain constant. 
B) increase from 1.46 to 2.33. 
C) decrease from 1.74 to 1.67. 
D) increase from 1.38 to 1.67. 
A) remain constant. 
B) increase from 1.46 to 2.33. 
C) decrease from 1.74 to 1.67. 
D) increase from 1.38 to 1.67.

Question 11

Other things equal, an increase in average accounts receivable will increase a firm's return on assets.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10% and the leverage ratio equals 1?

Accepted Answer

A) decrease the leverage ratio. 
B) increase the debt burden from its current level. 
C) decrease assets turnover from the current level. 
D) decrease the debt burden from its current level. 
A) decrease the leverage ratio. 
B) increase the debt burden from its current level. 
C) decrease assets turnover from the current level. 
D) decrease the debt burden from its current level.

Question 13

A total debt ratio of.35:

Accepted Answer

A) indicates that the firm is financed with 35% long-term debt. 
B) would exist if a firm had liabilities of $700 and assets of $2,000. 
C) indicates that 35 cents of every dollar of capital is in the form of short-term debt. 
D) indicates that 35 cents of every dollar of capital is in the form of long-term debt. 
A) indicates that the firm is financed with 35% long-term debt. 
B) would exist if a firm had liabilities of $700 and assets of $2,000. 
C) indicates that 35 cents of every dollar of capital is in the form of short-term debt. 
D) indicates that 35 cents of every dollar of capital is in the form of long-term debt.

Question 14

Increasing leverage will always act to increase a firm's ROE.
FALSE

Accepted Answer

A) True 
 B)False

Question 15

Economic value added is the net profit of the firm adjusted for the cost of capital.

Accepted Answer

A) True 
 B)False

Question 16

The inventory turnover ratio compares:

Accepted Answer

A) current assets to average inventory. 
B) cost of goods sold to average inventory. 
C) average receivables to average inventory. 
D) average assets to average inventory. 
A) current assets to average inventory. 
B) cost of goods sold to average inventory. 
C) average receivables to average inventory. 
D) average assets to average inventory.

Question 17

The use of financial leverage will be detrimental to a firm's ROE if the:

Accepted Answer

A) firm currently has no long-term debt. 
B) firm's current ratio is greater than 1. 
C) interest expense exceeds the tax liability. 
D) interest rate on debt exceeds the firm's ROA. 
A) firm currently has no long-term debt. 
B) firm's current ratio is greater than 1. 
C) interest expense exceeds the tax liability. 
D) interest rate on debt exceeds the firm's ROA.

Question 18

ROE is equal to ROA when the firm has no debt.

Accepted Answer

A) True 
 B)False

Question 19

Which one of the following would likely be most detrimental to a firm's current ratio if that ratio is currently 2?

Accepted Answer

A) collecting payment on an accounts receivable. 
B) selling marketable securities at cost. 
C) paying off accounts payable with cash. 
D) purchasing inventory on credit. 
A) collecting payment on an accounts receivable. 
B) selling marketable securities at cost. 
C) paying off accounts payable with cash. 
D) purchasing inventory on credit.

Question 20

An asset turnover ratio of 1.75 can be interpreted as:

Accepted Answer

A) $1.75 in sales are generated by every $1 of assets. 
B) $1.75 in additional assets are generated by every $1 of sales. 
C) $1.75 in assets are used to generate $1 of sales. 
D) $1 in sales are used to generate $1.75 in assets. 
A) $1.75 in sales are generated by every $1 of assets. 
B) $1.75 in additional assets are generated by every $1 of sales. 
C) $1.75 in assets are used to generate $1 of sales. 
D) $1 in sales are used to generate $1.75 in assets.

Exam 4: Measuring Corporate Performance

After-tax operating income for a leveraged firm is defined as:

Which one of the following statements is most likely correct for a firm with an average collection period of 90 days?

Market value added is the difference between the market value of the firm's equity and its book value.

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9%?

A deficiency of the standard measures of liquidity is that the measures:

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1 before the payoff?

A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million.On average, how many days does it take the firm to pay its bills?

What is the inventory turnover ratio for ABC Corp.if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?

High levels of liquidity are most apt to indicate:

What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:

Other things equal, an increase in average accounts receivable will increase a firm's return on assets.

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10% and the leverage ratio equals 1?

A total debt ratio of.35:

Increasing leverage will always act to increase a firm's ROE. FALSE

Economic value added is the net profit of the firm adjusted for the cost of capital.

The inventory turnover ratio compares:

The use of financial leverage will be detrimental to a firm's ROE if the:

ROE is equal to ROA when the firm has no debt.

Which one of the following would likely be most detrimental to a firm's current ratio if that ratio is currently 2?

An asset turnover ratio of 1.75 can be interpreted as:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

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Risk, Return, and Capital Budgeting

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Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

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