Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The current ratio is a good proxy for a firm's:

Accepted Answer

A) Liquidity 
B) Efficiency 
C) Leverage 
D) Profitability 
A) Liquidity 
B) Efficiency 
C) Leverage 
D) Profitability

Question 3

Apex Corp.has current liabilities of $2 million, a current ratio of 3.0, a quick ratio of 2.0, and a cash ratio of .75.Given this information, answer the following about the firm's liquidity:
a.What is the value of inventory?
b.What is the value of receivables?
c.What will happen to each of the three ratios if $1 million in current liabilities is refunded with long-term debt?

Accepted Answer

The answer of Apex Corp.has current liabilities of $2 million,...

Question 4

What was a major goal of the Sarbanes-Oxley Act? Does this come with any price to U.S.financial markets and companies?

Accepted Answer

Enron was only one in a series of accoun

Question 5

Which 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 percent 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 percent of its annual sales

Question 6

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10 percent and the leverage ratio equals 1.0?

Accepted Answer

A) Increase the leverage ratio 
B) Increase the debt burden from its current level 
C) Decrease assets from the current level 
D) Decrease the debt burden from its current level 
A) Increase the leverage ratio 
B) Increase the debt burden from its current level 
C) Decrease assets from the current level 
D) Decrease the debt burden from its current level

Question 7

The inventory turnover ratio compares:

Accepted Answer

A) Sales to average inventory 
B) Cost of goods sold to average inventory 
C) Average receivables to average inventory 
D) Average assets to average inventory 
A) Sales to average inventory 
B) Cost of goods sold to average inventory 
C) Average receivables to average inventory 
D) Average assets to average inventory

Question 8

TuPont Corp.has net income of $1.95 million, an effective tax rate of 35 percent, interest expense of $400,000, an asset turnover of 2.0, and $14 million in total assets, of which $7 million is debt.Use the DuPont system to calculate its ROE, decomposed into leverage ratio, asset turnover, profit margin, and debt burden.

Accepted Answer

EBIT =
= $3.4 millio

Question 9

The net working capital of a firm will decrease when accrued wages are paid with cash.

Accepted Answer

A) True 
 B)False

Question 10

Lease obligations are included in certain leverage ratios because leases:

Accepted Answer

A) Require the payment of interest 
B) Represent long-term fixed obligations 
C) Must be financed through a bank 
D) Are a measure of efficiency, just like debt 
A) Require the payment of interest 
B) Represent long-term fixed obligations 
C) Must be financed through a bank 
D) Are a measure of efficiency, just like debt

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 effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?

Accepted Answer

A) The growth rate can increase from 6 percent to 10.5 percent 
B) The growth rate can increase from 6 percent to 12 percent 
C) The growth rate can increase from 8 percent to 14 percent 
D) The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE
= )3 x .2 = 6% 
A) The growth rate can increase from 6 percent to 10.5 percent 
B) The growth rate can increase from 6 percent to 12 percent 
C) The growth rate can increase from 8 percent to 14 percent 
D) The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE
= )3 x .2 = 6%

Question 13

"Inventory turnover ratio" times the "days' sales in inventories" equals 365.

Accepted Answer

A) True 
 B)False

Question 14

A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends.By how much will shareholders' equity increase on the balance sheet?

Accepted Answer

A) $17 million 
B) $18 million 
C) $19 million 
D) $25 million 
A) $17 million 
B) $18 million 
C) $19 million 
D) $25 million

Question 15

A times interest earned ratio of 5.0 indicates that the firm:

Accepted Answer

A) Pays 5 times its earnings in interest expense 
B) Earns significantly more than its interest obligations 
C) Has interest expense equal to 5 percent of EBIT 
D) Has low tax liability 
A) Pays 5 times its earnings in interest expense 
B) Earns significantly more than its interest obligations 
C) Has interest expense equal to 5 percent of EBIT 
D) Has low tax liability

Question 16

Which of the following will allow your firm to achieve its targeted 16 percent 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 profit margin of 15 percent 
D) A profit margin of 6.4 percent ROE = Profit margin x Asset turnover
)16 = Profit margin x 2.50 
A) A leverage ratio of .0667 
B) A P/E ratio of 14 
C) A profit margin of 15 percent 
D) A profit margin of 6.4 percent ROE = Profit margin x Asset turnover
)16 = Profit margin x 2.50

Question 17

What is the ROE for a firm with 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?

Accepted Answer

A) -33.33 percent 
B) 30.00 percent 
C) 33.33 percent 
D) 50.00 percent Times interest earned = EBIT/interest = 2
Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million
= $)5 million
ROE = net income/equity
= $)5 million/$1.5 million 
A) -33.33 percent 
B) 30.00 percent 
C) 33.33 percent 
D) 50.00 percent Times interest earned = EBIT/interest = 2
Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million
= $)5 million
ROE = net income/equity
= $)5 million/$1.5 million

Question 18

The use of leverage will always act to increase a firm's ROE.

Accepted Answer

A) True 
 B)False

Question 19

Last year's asset turnover ratio was 2.0.Sales have increased by 25 percent and average total assets have increased by 10 percent since that time.What is the current asset turnover ratio?

Accepted Answer

A) 1.82 
B) 2.05 
C) 2.15 
D) 2.27 sales/average total assets = 2.0 
A) 1.82 
B) 2.05 
C) 2.15 
D) 2.27 sales/average total assets = 2.0

Question 20

A firm with zero net working capital has:

Accepted Answer

A) No cash or marketable securities 
B) Insufficient inventories 
C) Excessive current liabilities 
D) A quick ratio of less than 1.0 
A) No cash or marketable securities 
B) Insufficient inventories 
C) Excessive current liabilities 
D) A quick ratio of less than 1.0

Exam 4: Measuring Corporate Performance

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

The current ratio is a good proxy for a firm's:

What was a major goal of the Sarbanes-Oxley Act? Does this come with any price to U.S.financial markets and companies?

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

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10 percent and the leverage ratio equals 1.0?

The inventory turnover ratio compares:

The net working capital of a firm will decrease when accrued wages are paid with cash.

Lease obligations are included in certain leverage ratios because leases:

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

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?

"Inventory turnover ratio" times the "days' sales in inventories" equals 365.

A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends.By how much will shareholders' equity increase on the balance sheet?

A times interest earned ratio of 5.0 indicates that the firm:

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

What is the ROE for a firm with 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?

The use of leverage will always act to increase a firm's ROE.

Last year's asset turnover ratio was 2.0.Sales have increased by 25 percent and average total assets have increased by 10 percent since that time.What is the current asset turnover ratio?

A firm with zero net working capital has:

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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