Question 1

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

Accepted Answer

A) Firm has no long-term debt 
B) Firm's profit margin does not exceed its asset turnover 
C) Interest expense exceeds the tax liability 
D) Interest rate on debt exceeds the firm's ROA 
A) Firm has no long-term debt 
B) Firm's profit margin does not exceed its asset turnover 
C) Interest expense exceeds the tax liability 
D) Interest rate on debt exceeds the firm's ROA

Question 2

In the Dupont Equation, what effect does an increase in a firm's borrowing costs (i.e., a higher interest rate) have on its net profit margin?

Accepted Answer

A) Remain unchanged 
B) Decline by a lot with a high interest rate 
C) Decline by a little with a low interest rate 
D) It will increase 
A) Remain unchanged 
B) Decline by a lot with a high interest rate 
C) Decline by a little with a low interest rate 
D) It will increase

Question 3

Discuss some difficulties when comparing similar corporations from different countries.

Accepted Answer

The financial ratios of similar corporat

Question 4

The shareholders' equity as shown on a corporate balance sheet belongs to the:

Accepted Answer

A) Common shareholders 
B) Preferred shareholders 
C) All groups of shareholders 
D) All groups of shareholders and creditors 
A) Common shareholders 
B) Preferred shareholders 
C) All groups of shareholders 
D) All groups of shareholders and creditors

Question 5

The sum of the payout ratio and the plowback ratio will always equal 1.0.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following might be interpreted as a signal that stock price is currently too high?

Accepted Answer

A) An abnormally low dividend yield 
B) A high E/P ratio 
C) A low book value per share 
D) A low P/E ratio 
A) An abnormally low dividend yield 
B) A high E/P ratio 
C) A low book value per share 
D) A low P/E ratio

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

A sign that a firm is efficient is a:

Accepted Answer

A) high average collection period 
B) high day's sales in inventories 
C) low asset turnover 
D) high inventory turnover 
A) high average collection period 
B) high day's sales in inventories 
C) low asset turnover 
D) high inventory turnover

Question 9

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 of 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 of total assets 
D) It has more long-term debt than equity

Question 10

Net working capital is determined from the difference between current assets and current liabilities.

Accepted Answer

A) True 
 B)False

Question 11

What must happen to asset turnover to leave ROE unchanged from its original 16 percent level if the profit margin is reduced from 8 percent to 6 percent 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 14.58 to 2.33 
D) Increase from 4.76 to 9.60 Old ROE: .16 = .08 x Asset turnover x 1.2
\1)667 = Asset turnover
New ROE: .16 = .06 x Asset turnover x 1.6 
A) Remain constant 
B) Increase from 1.46 to 2.33 
C) Decrease from 14.58 to 2.33 
D) Increase from 4.76 to 9.60 Old ROE: .16 = .08 x Asset turnover x 1.2
\1)667 = Asset turnover
New ROE: .16 = .06 x Asset turnover x 1.6

Question 12

A company has announced $50,000 in net income after paying taxes of $26,000 and interest of $20,000.They intend to pay $17,000 of net income as dividends.Their assets have averaged $600,000 over the past year, during which their total debt ratio has averaged 40 percent.Given this information, answer the following about the company's profitability:
Calculate the ROA and ROE.
Calculate the payout and plowback ratios.
What effect will the plowback have on the company's growth in equity?

Accepted Answer

a.
Net income + tax + interest = EBIT
$5

Question 13

A firm reports a net profit margin of 10.0% 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) $700,000 
A) $100,000 
B) $300,000 
C) $500,000 
D) $700,000

Question 14

Look at and compare the financial ratios across industries.The retail industry has a much higher turnover of receivables (a shorter collection period) than other industries, while software companies have high inventory turnover (low days in inventory).What do you think accounts for these differences?

Accepted Answer

The major portion of retail sales is pai

Question 15

Which of the following is incorrect for a firm with a payout ratio of 0.15 and ROE of 20 percent:

Accepted Answer

A) It reinvests 85 percent of its earnings back into the firm 
B) The firm's retained earnings will increase the book value of equity by 17 percent 
C) It pays a dividend of 15 cents per share 
D) The firm's earnings and equity will grow by 17 percent per year 
A) It reinvests 85 percent of its earnings back into the firm 
B) The firm's retained earnings will increase the book value of equity by 17 percent 
C) It pays a dividend of 15 cents per share 
D) The firm's earnings and equity will grow by 17 percent per year

Question 16

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) 44.44% 
B) 33.33% 
C) 22.22% 
D) 11.11% 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 
A) 44.44% 
B) 33.33% 
C) 22.22% 
D) 11.11% 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

Question 17

By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?

Accepted Answer

A) $240,000 
B) $333,333 
C) $400,000 
D) $516,167 current ROA = (sales/assets) x profit margin
)10 = ($4 million/assets) x .05
)10 = $200,000/assets
$2 million = assets
Proposed ROA = (sales/assets) x profit margin
)12= ($4 million/assets) x .05
)12 = $200,000/assets
$1,666,667 = assets 
A) $240,000 
B) $333,333 
C) $400,000 
D) $516,167 current ROA = (sales/assets) x profit margin
)10 = ($4 million/assets) x .05
)10 = $200,000/assets
$2 million = assets
Proposed ROA = (sales/assets) x profit margin
)12= ($4 million/assets) x .05
)12 = $200,000/assets
$1,666,667 = assets

Question 18

A high dividend yield indicates:

Accepted Answer

A) investors expect high dividend growth 
B) investors require a high rate of return 
C) the stock price is relatively high 
D) investors require a low rate of return 
A) investors expect high dividend growth 
B) investors require a high rate of return 
C) the stock price is relatively high 
D) investors require a low rate of return

Question 19

Which of the following will increase a firm's times interest earned ratio?

Accepted Answer

A) An increase in debt 
B) A decrease in cost of goods sold 
C) An increase in interest expense 
D) A decrease in net income 
A) An increase in debt 
B) A decrease in cost of goods sold 
C) An increase in interest expense 
D) A decrease in net income

Question 20

Janzen Corporation had total capitalization of $890 million.It had sales of $900; cost of goods sold of $595 million, and operating expenses of $95 million.Tax rate is 40%.Calculate the company's Return of Capital.

Accepted Answer

A) 18% 
B) 16% 
C) 14% 
D) 12% 
A) 18% 
B) 16% 
C) 14% 
D) 12%

Exam 4: Measuring Corporate Performance

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

In the Dupont Equation, what effect does an increase in a firm's borrowing costs (i.e., a higher interest rate) have on its net profit margin?

Discuss some difficulties when comparing similar corporations from different countries.

The shareholders' equity as shown on a corporate balance sheet belongs to the:

The sum of the payout ratio and the plowback ratio will always equal 1.0.

Which of the following might be interpreted as a signal that stock price is currently too high?

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

A sign that a firm is efficient is a:

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

Net working capital is determined from the difference between current assets and current liabilities.

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

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

Which of the following is incorrect for a firm with a payout ratio of 0.15 and ROE of 20 percent:

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?

By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?

A high dividend yield indicates:

Which of the following will increase a firm's times interest earned ratio?

Janzen Corporation had total capitalization of $890 million.It had sales of $900; cost of goods sold of $595 million, and operating expenses of $95 million.Tax rate is 40%.Calculate the company's Return of Capital.

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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