Question 1

An asset's liquidity measures its:

Accepted Answer

A) Potential for generating a profit 
B) Cash requirements 
C) Ease and cost of being converted to cash 
D) Proportion of debt financing 
A) Potential for generating a profit 
B) Cash requirements 
C) Ease and cost of being converted to cash 
D) Proportion of debt financing

Question 2

Last year's return on equity was 30 percent, and while the same amount of earnings was generated this year, the ROE has decreased to 20 percent.The firm has no preferred stock.What caused the decrease?

Accepted Answer

A) Equity decreased by 10 percent 
B) Equity decreased by 50 percent 
C) Equity increased by 10 percent 
D) Equity increased by 50 percent 
A) Equity decreased by 10 percent 
B) Equity decreased by 50 percent 
C) Equity increased by 10 percent 
D) Equity increased by 50 percent

Question 3

A firm reports a net profit margin of 10.0 percent on sales of $3 million when ignoring the effects of financing.If taxes are $200,000, how much is EBIT?

Accepted Answer

A) $100,000 
B) $300,000 
C) $500,000 
D) $800,000 Net profit margin = 
A) $100,000 
B) $300,000 
C) $500,000 
D) $800,000 Net profit margin =

Question 4

A firm's net profit margin when ignoring the effects of financing is 20 percent with an EBIT of $1.5 million and sales of $5 million.How much did the firm pay in taxes?

Accepted Answer

A) $50,000 
B) $300,000 
C) $350,000 
D) $500,000 net profit margin = 
A) $50,000 
B) $300,000 
C) $350,000 
D) $500,000 net profit margin =

Question 5

A total debt ratio of 0.35:

Accepted Answer

A) Indicates that the firm is financed with 35 percent 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 percent 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 6

Which of the following is most likely to result in a higher P/E ratio for a firm, other things equal?

Accepted Answer

A) Lower growth rate in dividends 
B) Reduction in the stock's required rate of return 
C) Lower dividend yield 
D) Lower stock price 
A) Lower growth rate in dividends 
B) Reduction in the stock's required rate of return 
C) Lower dividend yield 
D) Lower stock price

Question 7

A company with long-term debt of 80, lease obligations of 20, total assets of 1,000, and total liabilities of 350 has a:

Accepted Answer

A) Total debt ratio of approximately .10 
B) Total debt ratio of approximately .23 
C) Long-term debt ratio of approximately .15 
D) debt-to-equity ratio of approximately .15 Equity = 1000 - 350 = 650 
A) Total debt ratio of approximately .10 
B) Total debt ratio of approximately .23 
C) Long-term debt ratio of approximately .15 
D) debt-to-equity ratio of approximately .15 Equity = 1000 - 350 = 650

Question 8

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 percent?

Accepted Answer

A) 7.50 percent 
B) 9.00 percent 
C) 10.95 percent 
D) 16.70 percent 60 = 
A) 7.50 percent 
B) 9.00 percent 
C) 10.95 percent 
D) 16.70 percent 60 =

Question 9

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?

Accepted Answer

A) 35 percent 
B) 39 percent 
C) 54 percent 
D) 65 percent If total debt/equity = .65
Then total liabilities/total assets = .65/1.65 
A) 35 percent 
B) 39 percent 
C) 54 percent 
D) 65 percent If total debt/equity = .65
Then total liabilities/total assets = .65/1.65

Question 10

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 1.0 before the payoff?

Accepted Answer

A) The quick ratio and current ratio will both increase 
B) The quick ratio and the 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 the 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 11

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3.0?

Accepted Answer

A) $1,333,333 
B) $1,200,000 
C) $1,800,000 
D) $3,000,000 
A) $1,333,333 
B) $1,200,000 
C) $1,800,000 
D) $3,000,000

Question 12

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 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 tax liability

Question 13

A disadvantage of 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 14

Instead of increasing its long-term debt by borrowing money to purchase new stereo equipment, Jay's Jams Inc.decides to lease the equipment.How does this affect its long-term debt ratio?

Accepted Answer

A) It will decrease 
B) It will increase 
C) It will remain unchanged 
D) Unknown without the amount of the lease obligation 
A) It will decrease 
B) It will increase 
C) It will remain unchanged 
D) Unknown without the amount of the lease obligation

Question 15

Which of the following is correct for a firm with EPS of $2 per share and a 40 percent payout ratio?

Accepted Answer

A) 40 percent of earnings will be plowed back into the firm 
B) Dividends will equal 60' per share 
C) Book value per share of equity will increase by $1.20 
D) Retained earnings will be unchanged 
A) 40 percent of earnings will be plowed back into the firm 
B) Dividends will equal 60' per share 
C) Book value per share of equity will increase by $1.20 
D) Retained earnings will be unchanged

Question 16

Which of the following facts might make a firm's interval measure too optimistic?

Accepted Answer

A) The cost of raw materials has been decreasing 
B) The average collection period continues to increase 
C) A large component of marketable securities will mature soon 
D) The firm's cash is not earning any interest 
A) The cost of raw materials has been decreasing 
B) The average collection period continues to increase 
C) A large component of marketable securities will mature soon 
D) The firm's cash is not earning any interest

Question 17

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?

Accepted Answer

A) 9.15% 
B) 9.75% 
C) 10.15% 
D) 10.60% Given D/E ratio then leverage ratio:
1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25 
A) 9.15% 
B) 9.75% 
C) 10.15% 
D) 10.60% Given D/E ratio then leverage ratio:
1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25

Question 18

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?

Accepted Answer

A) $33.33 
B) $44.44 
C) $55.55 
D) $66.67 market-to-book ratio = stock price/book value per share
)75 = $50/book value per share 
A) $33.33 
B) $44.44 
C) $55.55 
D) $66.67 market-to-book ratio = stock price/book value per share
)75 = $50/book value per share

Question 19

XYZ Corp.has a profit margin of 7 percent, 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 percent?

Accepted Answer

A) 1.26 
B) 1.61 
C) 2.14 
D) 4.02 ROE = leverage ratio x asset turnover x profit margin x debt burden
)18 = 1.5 x asset turnover x .07 x .8
)18 = .084 asset turnover 
A) 1.26 
B) 1.61 
C) 2.14 
D) 4.02 ROE = leverage ratio x asset turnover x profit margin x debt burden
)18 = 1.5 x asset turnover x .07 x .8
)18 = .084 asset turnover

Question 20

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?

Accepted Answer

A) 9.56 percent 
B) 15.94 percent 
C) 16.96 percent 
D) 38.25 percent Given D/E ratio then leverage ratio:
1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25 
A) 9.56 percent 
B) 15.94 percent 
C) 16.96 percent 
D) 38.25 percent Given D/E ratio then leverage ratio:
1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25

Exam 4: Measuring Corporate Performance

An asset's liquidity measures its:

Last year's return on equity was 30 percent, and while the same amount of earnings was generated this year, the ROE has decreased to 20 percent.The firm has no preferred stock.What caused the decrease?

A firm reports a net profit margin of 10.0 percent on sales of $3 million when ignoring the effects of financing.If taxes are $200,000, how much is EBIT?

A firm's net profit margin when ignoring the effects of financing is 20 percent with an EBIT of $1.5 million and sales of $5 million.How much did the firm pay in taxes?

A total debt ratio of 0.35:

Which of the following is most likely to result in a higher P/E ratio for a firm, other things equal?

A company with long-term debt of 80, lease obligations of 20, total assets of 1,000, and total liabilities of 350 has a:

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 percent?

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?

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 1.0 before the payoff?

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3.0?

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

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

Instead of increasing its long-term debt by borrowing money to purchase new stereo equipment, Jay's Jams Inc.decides to lease the equipment.How does this affect its long-term debt ratio?

Which of the following is correct for a firm with EPS of $2 per share and a 40 percent payout ratio?

Which of the following facts might make a firm's interval measure too optimistic?

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?

XYZ Corp.has a profit margin of 7 percent, 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 percent?

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?

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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