Question 1

When will ROE equal ROC?

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 2

EVA is the net profit of the firm adjusted for the cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

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 6

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 7

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 8

Which one of these ratios is commonly referred to as the acid-test ratio?

Accepted Answer

A)  times interest earned ratio. 
B)  quick ratio. 
C)  cash coverage ratio. 
D)  cash ratio. 
A)  times interest earned ratio. 
B)  quick ratio. 
C)  cash coverage ratio. 
D)  cash ratio.

Question 9

What is the residual income for a firm with $1 million in total capital,$300,000 in net income,and a 20% cost of capital?(Use the value in dollars)

Accepted Answer

A)  $100,000 
B)  $140,000 
C)  $240,000 
D)  $500,000 
A)  $100,000 
B)  $140,000 
C)  $240,000 
D)  $500,000

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

Which one of these changes indicates an improvement in a firm's asset management efficiency?

Accepted Answer

A)  an increase in the amount of assets per dollar of sales. 
B)  an increase in the inventory turnover rate. 
C)  a decrease in the receivables turnover rate. 
D)  an increase in the average days in inventory. 
A)  an increase in the amount of assets per dollar of sales. 
B)  an increase in the inventory turnover rate. 
C)  a decrease in the receivables turnover rate. 
D)  an increase in the average days in inventory.

Question 13

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 14

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 15

An increase in which one of the following will have no effect on the cash coverage ratio?

Accepted Answer

A)  depreciation 
B)  interest 
C)  sales 
D)  cost of goods sold 
A)  depreciation 
B)  interest 
C)  sales 
D)  cost of goods sold

Question 16

Market value added is the same as economic value added.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT (Operating Income)? The firm:

Accepted Answer

A)  will have a net loss. 
B)  will have no income-tax liability. 
C)  needs to lower its interest expense. 
D)  can still have a positive net income. 
A)  will have a net loss. 
B)  will have no income-tax liability. 
C)  needs to lower its interest expense. 
D)  can still have a positive net income.

Question 18

If a company has a healthy current ratio but a significantly lower quick ratio,then you can assume that:

Accepted Answer

A)  the cost of goods sold represents more than half of sales. 
B)  current liabilities exceed current assets. 
C)  the firm sells only on a cash basis. 
D)  inventory represents a large portion of the firm's current assets. 
A)  the cost of goods sold represents more than half of sales. 
B)  current liabilities exceed current assets. 
C)  the firm sells only on a cash basis. 
D)  inventory represents a large portion of the firm's current assets.

Question 19

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 20

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?

Accepted Answer

A)  firms have different dividend payout ratios. 
B)  some firms use fully depreciated assets. 
C)  financial leverage varies among firms. 
D)  unprofitable firms will not have any tax liability. 
A)  firms have different dividend payout ratios. 
B)  some firms use fully depreciated assets. 
C)  financial leverage varies among firms. 
D)  unprofitable firms will not have any tax liability.

Exam 4: Measuring Corporate Performance

When will ROE equal ROC?

EVA is the net profit of the firm adjusted for the cost of capital.

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?

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?

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

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

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

Which one of these ratios is commonly referred to as the acid-test ratio?

What is the residual income for a firm with $1 million in total capital,$300,000 in net income,and a 20% cost of capital?(Use the value in dollars)

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

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?

Which one of these changes indicates an improvement in a firm's asset management efficiency?

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

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

An increase in which one of the following will have no effect on the cash coverage ratio?

Market value added is the same as economic value added.

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT (Operating Income)? The firm:

If a company has a healthy current ratio but a significantly lower quick ratio,then you can assume that:

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:

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?

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 and Payout 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

Options

Risk Management

Filters