Question 1

Which one of these statements is correct?

Accepted Answer

A)  Market value added measures the difference between the total market value and the total book value of equity. 
B)  Net income is also called economic value added. 
C)  EVA measures the net profit of a firm after deducting the cost of the assets used in the production process. 
D)  EVA considers the cost of long-term debt financing but excludes the cost of equity financing. 
A)  Market value added measures the difference between the total market value and the total book value of equity. 
B)  Net income is also called economic value added. 
C)  EVA measures the net profit of a firm after deducting the cost of the assets used in the production process. 
D)  EVA considers the cost of long-term debt financing but excludes the cost of equity financing.

Question 2

Which one of these costs accounts for the difference between accounting income and economic value added?

Accepted Answer

A)  Depreciation 
B)  Cost of capital 
C)  Taxes 
D)  Dividends 
A)  Depreciation 
B)  Cost of capital 
C)  Taxes 
D)  Dividends

Question 3

Balsco's balance sheet shows total assets of $238,000 and total liabilities of $107,000.The firm has 55,000 shares of stock outstanding that sell for $11 a share.What is amount of market value added?

Accepted Answer

A)  $389,000 
B)  $474,000 
C)  $1,073,000 
D)  $123,712 
A)  $389,000 
B)  $474,000 
C)  $1,073,000 
D)  $123,712

Question 4

Which of the following is not a problem with EVA?

Accepted Answer

A)  EVA cannot be used to measure the profitability of a private company 
B)  EVA cannot be used to compare the effectiveness of managers with different amounts of assets under their control 
C)  EVA assumes that the book values of assets are equal to their current worth 
D)  EVA assumes that you know the cost of capital 
A)  EVA cannot be used to measure the profitability of a private company 
B)  EVA cannot be used to compare the effectiveness of managers with different amounts of assets under their control 
C)  EVA assumes that the book values of assets are equal to their current worth 
D)  EVA assumes that you know the cost of capital

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 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

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 10

The net working capital to total assets ratio is always a larger number than the current ratio.

Accepted Answer

A) True 
 B)False

Question 11

ROE is equal to ROC when the firm has no debt.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Which one of the following may be the best measure of company performance since it accounts for the opportunity cost of capital?

Accepted Answer

A)  EVA 
B)  Net income 
C)  Increase in sales 
D)  Current ratio 
A)  EVA 
B)  Net income 
C)  Increase in sales 
D)  Current ratio

Question 14

What is the debt ratio for a firm with a debt-equity ratio of 0.5?

Accepted Answer

A)  35% 
B)  33.3% 
C)  54% 
D)  66.7% 
A)  35% 
B)  33.3% 
C)  54% 
D)  66.7%

Question 15

Which one of these ratios is commonly referred to as the acid-test ratio?

Accepted Answer

A)  Times interest earned ratio 
B)  Quick ratio 
C)  Cash coverage ratio 
D)  Cash ratio 
A)  Times interest earned ratio 
B)  Quick ratio 
C)  Cash coverage ratio 
D)  Cash ratio

Question 16

Which of these indicates that a firm is efficient?

Accepted Answer

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

Question 17

Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment,Jay's Jams Inc.decides to lease the equipment on a long-term basis.How will the long-term debt ratio differ if the lease option is selected over the bank-debt option?

Accepted Answer

A)  The ratio will be lower under the leasing option. 
B)  The ratio will be higher under the leasing option. 
C)  The ratio will be the same regardless of the financing method selected. 
D)  The ratio effects are unknown without the amount of the lease obligation. 
A)  The ratio will be lower under the leasing option. 
B)  The ratio will be higher under the leasing option. 
C)  The ratio will be the same regardless of the financing method selected. 
D)  The ratio effects are unknown without the amount of the lease obligation.

Question 18

The board of directors is dissatisfied with last year's ROE of 15%.If the operating profit margin and asset turnover ratio remain unchanged at 8% and 1.25,respectively,by how much must the leverage ratio (i.e.,assets/equity)increase to achieve 20% ROE?

Accepted Answer

A)  0.50% 
B)  5% 
C)  16.67% 
D)  33.33% 
A)  0.50% 
B)  5% 
C)  16.67% 
D)  33.33%

Question 19

The reduction in value over time of intangible assets is known as amortization.

Accepted Answer

A) True 
 B)False

Question 20

Which one of the following changes will provide an increase in a firm's ROE?

Accepted Answer

A)  A decrease in the profit margin 
B)  An increase in the interest rate 
C)  An increase in equity 
D)  A decrease in the tax rate 
A)  A decrease in the profit margin 
B)  An increase in the interest rate 
C)  An increase in equity 
D)  A decrease in the tax rate

Exam 4: Measuring Corporate Performance

Which one of these statements is correct?

Which one of these costs accounts for the difference between accounting income and economic value added?

Balsco's balance sheet shows total assets of $238,000 and total liabilities of $107,000.The firm has 55,000 shares of stock outstanding that sell for $11 a share.What is amount of market value added?

Which of the following is not a problem with EVA?

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

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

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

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

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

The net working capital to total assets ratio is always a larger number than the current ratio.

ROE is equal to ROC when the firm has no debt.

An asset's liquidity measures its:

Which one of the following may be the best measure of company performance since it accounts for the opportunity cost of capital?

What is the debt ratio for a firm with a debt-equity ratio of 0.5?

Which one of these ratios is commonly referred to as the acid-test ratio?

Which of these indicates that a firm is efficient?

Instead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment,Jay's Jams Inc.decides to lease the equipment on a long-term basis.How will the long-term debt ratio differ if the lease option is selected over the bank-debt option?

The board of directors is dissatisfied with last year's ROE of 15%.If the operating profit margin and asset turnover ratio remain unchanged at 8% and 1.25,respectively,by how much must the leverage ratio (i.e.,assets/equity)increase to achieve 20% ROE?

The reduction in value over time of intangible assets is known as amortization.

Which one of the following changes will provide an increase in a firm's ROE?

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

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