Question 1

A company has total assets of $1,000, current liabilities of $130, and total liabilities of $350.What is the long-term debt to asset ratio?

Accepted Answer

A) 19 
B) 22 
C) 36 
D) 31 
A) 19 
B) 22 
C) 36 
D) 31

Question 2

The only measure of firm performance that accounts for cost of capital is:

Accepted Answer

A) ROC. 
B) ROA. 
C) ROE. 
D) EVA. 
A) ROC. 
B) ROA. 
C) ROE. 
D) EVA.

Question 3

A firm with no leases has a long-term debt-equity ratio of 50%.This means that the book value of equity:

Accepted Answer

A) equals the book value of long-term debt. 
B) is less than the book value of long-term debt. 
C) is greater than the book value of long-term debt. 
D) is unknown in relation to the book value of long-term debt. 
A) equals the book value of long-term debt. 
B) is less than the book value of long-term debt. 
C) is greater than the book value of long-term debt. 
D) is unknown in relation to the book value of long-term debt.

Question 4

Which one of the following may be the best measure of company performance?

Accepted Answer

A) EVA 
B) net income 
C) ROA 
D) ROE 
A) EVA 
B) net income 
C) ROA 
D) ROE

Question 5

Return on assets and return on equity are both profitability ratios.

Accepted Answer

A) True 
 B)False

Question 6

Return on assets is always a larger number than the return on equity.

Accepted Answer

A) True 
 B)False

Question 7

When will return on equity equal return on capital?

Accepted Answer

A) whenever the firm has equal debt and equity financing. 
B) whenever the firm has no interest payments on debt. 
C) whenever the value of the firm's assets exceeds the value of its equity. 
D) ROE will never equal ROC. 
A) whenever the firm has equal debt and equity financing. 
B) whenever the firm has no interest payments on debt. 
C) whenever the value of the firm's assets exceeds the value of its equity. 
D) ROE will never equal ROC.

Question 8

XYZ Corp.has an operating profit margin of 7%, a debt burden of.8, and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18%?

Accepted Answer

A) 1.26 
B) 1.61 
C) 2.14 
D) 4.02 
A) 1.26 
B) 1.61 
C) 2.14 
D) 4.02

Question 9

Last year's return on equity was 30%.This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings.The firm has no preferred stock.What caused the decrease?

Accepted Answer

A) equity decreased by 10%. 
B) equity decreased by 50%. 
C) equity increased by 10%. 
D) equity increased by 50%. 
A) equity decreased by 10%. 
B) equity decreased by 50%. 
C) equity increased by 10%. 
D) equity increased by 50%.

Question 10

If a firm's total debt ratio is greater than.5, then:

Accepted Answer

A) its current liabilities are quite high. 
B) its debt-equity ratio exceeds 1.0. 
C) it has too few total assets. 
D) it has more long-term debt than equity. 
A) its current liabilities are quite high. 
B) its debt-equity ratio exceeds 1.0. 
C) it has too few total assets. 
D) it has more long-term debt than equity.

Question 11

The difference between the current and quick ratios is that inventory has been subtracted from current assets.

Accepted Answer

A) True 
 B)False

Question 12

What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million? (Use the values in dollars)

Accepted Answer

A) 26.67% 
B) 30.00% 
C) 33.33% 
D) 50.00% 
A) 26.67% 
B) 30.00% 
C) 33.33% 
D) 50.00%

Question 13

The inventory turnover ratio times the average days in inventory equals 365.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?

Accepted Answer

A) a leverage ratio of.0667 
B) a P/E ratio of 14 
C) a return on equity of 25% 
D) a profit margin of 6.4% 
A) a leverage ratio of.0667 
B) a P/E ratio of 14 
C) a return on equity of 25% 
D) a profit margin of 6.4%

Question 15

Which one of the following changes will provide an increase (if only in the short-run) in a firm's ROE?

Accepted Answer

A) a decrease in the profit margin. 
B) an increase in the dividend-payout ratio. 
C) an increase in equity. 
D) an increase in tax rates. 
A) a decrease in the profit margin. 
B) an increase in the dividend-payout ratio. 
C) an increase in equity. 
D) an increase in tax rates.

Question 16

A firm has $600,000 in current assets and $150,000 in current liabilities.Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?

Accepted Answer

A) current ratio will increase to 5.0. 
B) net working capital will increase to $500,000. 
C) current ratio will decrease. 
D) net working capital will not change. 
A) current ratio will increase to 5.0. 
B) net working capital will increase to $500,000. 
C) current ratio will decrease. 
D) net working capital will not change.

Question 17

Market value added is the same as economic value added.

Accepted Answer

A) True 
 B)False

Question 18

Which one of the following will cause a reduction in the net working capital turnover ratio all else held constant?

Accepted Answer

A) a decrease in sales. 
B) an increase in average payables. 
C) an increase in average inventory. 
D) an increase in the average cash balance. 
A) a decrease in sales. 
B) an increase in average payables. 
C) an increase in average inventory. 
D) an increase in the average cash balance.

Question 19

Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment, Jay's Jams Inc.decides to lease the equipment on a long-term basis.How will the long-term debt ratio differ if the lease option is selected over the bank-debt option?

Accepted Answer

A) the ratio will be lower under the leasing option. 
B) the ratio will be higher under the leasing option. 
C) the ratio will be the same regardless of the financing method selected. 
D) the ratio effects are unknown without the amount of the lease obligation. 
A) the ratio will be lower under the leasing option. 
B) the ratio will be higher under the leasing option. 
C) the ratio will be the same regardless of the financing method selected. 
D) the ratio effects are unknown without the amount of the lease obligation.

Question 20

When Tri-C Corp.compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a lower inventory turnover.What might you assume about Tri-C?

Accepted Answer

A) its cash balance is too low. 
B) its cost of goods sold is too low. 
C) its current liabilities are too low. 
D) its average inventory is too high. 
A) its cash balance is too low. 
B) its cost of goods sold is too low. 
C) its current liabilities are too low. 
D) its average inventory is too high.

Exam 4: Measuring Corporate Performance

A company has total assets of $1,000, current liabilities of $130, and total liabilities of $350.What is the long-term debt to asset ratio?

The only measure of firm performance that accounts for cost of capital is:

A firm with no leases has a long-term debt-equity ratio of 50%.This means that the book value of equity:

Which one of the following may be the best measure of company performance?

Return on assets and return on equity are both profitability ratios.

Return on assets is always a larger number than the return on equity.

When will return on equity equal return on capital?

XYZ Corp.has an operating profit margin of 7%, a debt burden of.8, and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18%?

Last year's return on equity was 30%.This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings.The firm has no preferred stock.What caused the decrease?

If a firm's total debt ratio is greater than.5, then:

The difference between the current and quick ratios is that inventory has been subtracted from current assets.

What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million? (Use the values in dollars)

The inventory turnover ratio times the average days in inventory equals 365.

Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?

Which one of the following changes will provide an increase (if only in the short-run) in a firm's ROE?

A firm has $600,000 in current assets and $150,000 in current liabilities.Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?

Market value added is the same as economic value added.

Which one of the following will cause a reduction in the net working capital turnover ratio all else held constant?

Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment, Jay's Jams Inc.decides to lease the equipment on a long-term basis.How will the long-term debt ratio differ if the lease option is selected over the bank-debt option?

When Tri-C Corp.compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a lower inventory turnover.What might you assume about Tri-C?

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

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

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Risk Management

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