Question 1

How much will Gamma Inc.'s equityholders earn given a total asset turnover of .85, an operating profit margin of .15, and a debt-equity ratio of .25?

Accepted Answer

A)  9.56% 
B)  15.94% 
C)  16.96% 
D) 38.25% 
A)  9.56% 
B)  15.94% 
C)  16.96% 
D) 38.25%

Question 2

A firm reports an ROE of 14%, a leverage ratio of 1.5, an asset turnover of 1.667, and a profit margin of 9%. Calculate the firm's ROA and then comment on the ROA in relation to ROE. What is happening?

Accepted Answer

ROA = profit margin × asset turnover = .

Question 3

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%?

Accepted Answer

A)  7.50% 
B)  9.00% 
C)  10.95% 
D) 16.70% 
A)  7.50% 
B)  9.00% 
C)  10.95% 
D) 16.70%

Question 4

If a firm's cash coverage ratio is greater than its times interest earned ratio, then the:

Accepted Answer

A)  firm's assets are not fully depreciated. 
B)  firm has no lease obligations. 
C)  firm has very little long-term debt. 
D) firm has a high degree of liquidity. 
A)  firm's assets are not fully depreciated. 
B)  firm has no lease obligations. 
C)  firm has very little long-term debt. 
D) firm has a high degree of liquidity.

Question 5

Market value added is the same as economic value added.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  liquidity. 
B)  efficiency. 
C)  degree of leverage. 
D) profitability. 
A)  liquidity. 
B)  efficiency. 
C)  degree of leverage. 
D) profitability.

Question 7

Apex Corp. has current liabilities of $2 million, a current ratio of 3, a quick ratio of 2, 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

@#IMG-DLM& @#IMG-DLM& @#IMG-DLM& Thus, all three r

Question 8

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 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 total assets. 
D) it has more long-term debt than equity.

Question 9

Which of these assets is generally considered to be the most liquid?

Accepted Answer

A)  Buildings 
B)  Land 
C)  Finished goods inventory 
D) Accounts receivable 
A)  Buildings 
B)  Land 
C)  Finished goods inventory 
D) Accounts receivable

Question 10

A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.

Accepted Answer

A) True 
 B)False

Question 11

An asset turnover ratio of 1.75 can be interpreted as:

Accepted Answer

A)  $1.75 in sales are generated by every $1 of assets. 
B)  $1.75 in additional assets are generated by every $1 of sales. 
C)  $1.75 in assets are used to generate $1 of sales. 
D) $1 in sales are used to generate $1.75 in assets. 
A)  $1.75 in sales are generated by every $1 of assets. 
B)  $1.75 in additional assets are generated by every $1 of sales. 
C)  $1.75 in assets are used to generate $1 of sales. 
D) $1 in sales are used to generate $1.75 in assets.

Question 12

A firm has sales of $5 million, average total assets of $1.6 million, average fixed assets of $1 million, and average current liabilities of $300,000. Given this information, answer the following about the firm's efficiency:
a. Calculate asset turnover, fixed asset turnover, and NWC turnover ratios.
b. Can the fixed asset turnover be considered appropriate and yet the total asset turnover be considered low by industry standards? How?
c. What in general might improve NWC turnover?

Accepted Answer

a. @#IMG-DLM& b. This can occur if the average lev

Question 13

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 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 from the current level 
D) Decrease the debt burden from its current level

Question 14

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 15

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.

Question 16

A times interest earned ratio of 5 indicates 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% of EBIT. 
D) has a 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% of EBIT. 
D) has a low tax liability.

Question 17

The use of debt in the firm's capital structure will increase ROE if the firm:

Accepted Answer

A)  has more debt than equity. 
B)  pays less in taxes than in interest. 
C)  earns a higher return than the rate paid on debt. 
D) has a times interest earned ratio greater than 1.0. 
A)  has more debt than equity. 
B)  pays less in taxes than in interest. 
C)  earns a higher return than the rate paid on debt. 
D) has a times interest earned ratio greater than 1.0.

Question 18

How do measures such as market value added and economic value added help assess the firm's performance?

Accepted Answer

The ratio of the market value of the fir

Question 19

Which of the following will allow your firm to achieve its targeted 16% 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 return on equity of 25% 
D) A profit margin of 6.4% 
A)  A leverage ratio of .0667 
B)  A P/E ratio of 14 
C)  A return on equity of 25% 
D) A profit margin of 6.4%

Question 20

Travel Corp. has net income of $1.95 million, an effective tax rate of 35%, interest expense of $400,000, an asset turnover of 2, 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

@#IMG-DLM& (Note: Without any

Exam 4: Measuring Corporate Performance

How much will Gamma Inc.'s equityholders earn given a total asset turnover of .85, an operating profit margin of .15, and a debt-equity ratio of .25?

A firm reports an ROE of 14%, a leverage ratio of 1.5, an asset turnover of 1.667, and a profit margin of 9%. Calculate the firm's ROA and then comment on the ROA in relation to ROE. What is happening?

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%?

If a firm's cash coverage ratio is greater than its times interest earned ratio, then the:

Market value added is the same as economic value added.

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

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

Which of these assets is generally considered to be the most liquid?

A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.

An asset turnover ratio of 1.75 can be interpreted as:

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?

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

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 times interest earned ratio of 5 indicates the firm:

The use of debt in the firm's capital structure will increase ROE if the firm:

How do measures such as market value added and economic value added help assess the firm's performance?

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

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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Risk Management

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