Question 1

Sappy Syrup's ROA equals the industry average, but its ROE exceeds the industry average. How is this possible?

Accepted Answer

If ROA equals the industry average but ROE exceeds the industry average, the firm must have above-average leverage. As long as ROA exceeds the borrowing rate, leverage will increase ROE.

Question 2

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. C

Question 3

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. A

Question 4

The inventory turnover ratio compares:

Accepted Answer

A)  current assets to average inventory. 
B)  cost of goods sold to average inventory. 
C)  average receivables to average inventory. 
D) average assets to average inventory. 
A)  current assets to average inventory. 
B)  cost of goods sold to average inventory. 
C)  average receivables to average inventory. 
D) average assets to average inventory.

Question 5

Compared to accounting profits, why is EVA a better measure of a company's performance? What might happen to a manager if his or her plant earns a negative EVA?

Accepted Answer

Accounting profits are calculated after

Question 6

Which one of the following will cause a reduction in the NWC 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 7

When a firm's long-term debt-equity ratio is .98, the firm:

Accepted Answer

A)  has too much long-term debt in relation to leases. 
B)  has less long-term debt than equity. 
C)  is nearing insolvency. 
D) has as much in long-term liabilities as in equity. 
A)  has too much long-term debt in relation to leases. 
B)  has less long-term debt than equity. 
C)  is nearing insolvency. 
D) has as much in long-term liabilities as in equity.

Question 8

Which one 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 9

What are some potential pitfalls of ratio analysis based on accounting data?

Accepted Answer

Financial ratio analysis will rarely be

Question 10

Which one of these firms has recently had a negative market value added?

Accepted Answer

A)  Google 
B)  FedEx 
C)  Walmart 
D) Bank of America 
A)  Google 
B)  FedEx 
C)  Walmart 
D) Bank of America

Question 11

Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

Accepted Answer

A)  Converting marketable securities to cash 
B)  Paying accounts payable with cash 
C)  Buying inventory on credit 
D) Selling inventory at cost 
A)  Converting marketable securities to cash 
B)  Paying accounts payable with cash 
C)  Buying inventory on credit 
D) Selling inventory at cost

Question 12

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

Accepted Answer

A)  $240,000 
B)  $333,333 
C)  $400,000 
D) $516,167 
A)  $240,000 
B)  $333,333 
C)  $400,000 
D) $516,167

Question 13

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

Accepted Answer

A)  .19 
B)  .25 
C)  .36 
D) .31 
A)  .19 
B)  .25 
C)  .36 
D) .31

Question 14

A firm's profit margin when ignoring the effects of financing is 20% 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 
A)  $50,000 
B)  $300,000 
C)  $350,000 
D) $500,000

Question 15

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?

Accepted Answer

A)  2.78 times 
B)  4.17 times 
C)  5.56 times 
D) 8.33 times 
A)  2.78 times 
B)  4.17 times 
C)  5.56 times 
D) 8.33 times

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

After-tax operating income for a leveraged firm is defined as:

Accepted Answer

A)  net income + after-tax interest. 
B)  EBIT × (1 - tax rate). 
C)  net income + depreciation. 
D) profit margin × sales. 
A)  net income + after-tax interest. 
B)  EBIT × (1 - tax rate). 
C)  net income + depreciation. 
D) profit margin × sales.

Question 19

A firm with no leases has a long-term debt 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 20

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

Accepted Answer

A) True 
 B)False

Exam 4: Measuring Corporate Performance

Sappy Syrup's ROA equals the industry average, but its ROE exceeds the industry average. How is this possible?

An asset's liquidity measures its:

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:

The inventory turnover ratio compares:

Compared to accounting profits, why is EVA a better measure of a company's performance? What might happen to a manager if his or her plant earns a negative EVA?

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

When a firm's long-term debt-equity ratio is .98, the firm:

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

What are some potential pitfalls of ratio analysis based on accounting data?

Which one of these firms has recently had a negative market value added?

Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

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

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

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

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?

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

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

After-tax operating income for a leveraged firm is defined as:

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

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

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

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