Question 1

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

Accepted Answer

A)  times interest earned 
B)  net profit margin 
C)  operating return on assets 
D)  operating efficiency quotient 
A)  times interest earned 
B)  net profit margin 
C)  operating return on assets 
D)  operating efficiency quotient

Question 2

A high debt ratio can be favorable because higher leverage may result in a higher return on equity.

Accepted Answer

A) True 
 B)False

Question 3

The current ratio and the acid test ratio both measure financial leverage.

Accepted Answer

A) True 
 B)False

Question 4

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?

Accepted Answer

A)  Markets are inefficient and fail to recognize the benefits of leverage 
B)  The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased 
C)  Shareholders are not interested in return on equity 
D)  the high levels of debt increased the riskiness of HighLev relative to its competitors 
A)  Markets are inefficient and fail to recognize the benefits of leverage 
B)  The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased 
C)  Shareholders are not interested in return on equity 
D)  the high levels of debt increased the riskiness of HighLev relative to its competitors

Question 5

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
  
-Based on the information in Table 4-1,the total asset turnover ratio is

Accepted Answer

A)  1.11. 
B)  1.41. 
C)  2.33. 
D)  4.45. 
A)  1.11. 
B)  1.41. 
C)  2.33. 
D)  4.45.

Question 6

Acme Incorporated has a debt ratio of .42,noncurrent liabilities of $20,000 and total assets of $70,000.What is Acme's level of current liabilities?

Accepted Answer

A)  $8,400 
B)  $9,400 
C)  $12,348 
D)  $10,600 
A)  $8,400 
B)  $9,400 
C)  $12,348 
D)  $10,600

Question 7

Given an accounts receivable turnover of 10 and annual credit sales of $900,000,the average collection period is

Accepted Answer

A)  18.25 days. 
B)  36.50 days. 
C)  90 days. 
D)  40.56 days. 
A)  18.25 days. 
B)  36.50 days. 
C)  90 days. 
D)  40.56 days.

Question 8

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

Accepted Answer

A) True 
 B)False

Question 9

For a retailer with inventory to sell,the acid-test ratio will be

Accepted Answer

A)  less than the current ratio, thus providing a more stringent measure of liquidity. 
B)  greater than the current ratio, thus providing a more stringent measure of liquidity. 
C)  greater than the current ratio, thus providing a less stringent measure of liquidity. 
D)  unimportant because it doesn't include inventory. 
A)  less than the current ratio, thus providing a more stringent measure of liquidity. 
B)  greater than the current ratio, thus providing a more stringent measure of liquidity. 
C)  greater than the current ratio, thus providing a less stringent measure of liquidity. 
D)  unimportant because it doesn't include inventory.

Question 10

Please refer to Table 4-4 for the following questions.
Table 4-4
Wes Donnell, Inc.
Balance Sheet
   Wes Donnell, Inc.
Income Statement
For the year ended December 31, 2010
  
-In addition to the information contained in Table 4-4,you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010.What is Wes Donnell's cash balance for 2010?

Accepted Answer

A)  $2,500 
B)  $13,600 
C)  $4,000 
D)  $6,500 
A)  $2,500 
B)  $13,600 
C)  $4,000 
D)  $6,500

Question 11

KPR,Inc.has current assets of $10,000,000,current liabilities of $4,500,000,inventory of $1,000,000,and sales of $12,000,000.What is the acid test ratio?

Accepted Answer

A)  2.0 
B)  1.67 
C)  0.22 
D)  0.1 
A)  2.0 
B)  1.67 
C)  0.22 
D)  0.1

Question 12

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
  
-Based on the information in Table 4-1,the accounts receivable turnover is

Accepted Answer

A)  10.00. 
B)  11.11. 
C)  8.11. 
D)  9.50. 
A)  10.00. 
B)  11.11. 
C)  8.11. 
D)  9.50.

Question 13

Economic value added is calculated by taking (net income less the cost of all capital)times total assets.

Accepted Answer

A) True 
 B)False

Question 14

Seasonality causes comparability problems in ratio analysis.A common solution is to use an average account balance as opposed to an ending account balance.

Accepted Answer

A) True 
 B)False

Question 15

Financial ratios are used by personnel in marketing,human resources,and other groups within a firm,not just by the finance and accounting personnel.

Accepted Answer

A) True 
 B)False

Question 16

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
  
-XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10.It is likely that

Accepted Answer

A)  XYZ's earnings per share are twice the earnings per share of EFG. 
B)  investors expect XYZ's earnings to grow faster than EFG's earnings. 
C)  investors believe that for the same level of earnings growth, XYZ is a higher risk company. 
D)  investors believe XYZ stock is overvalued. 
A)  XYZ's earnings per share are twice the earnings per share of EFG. 
B)  investors expect XYZ's earnings to grow faster than EFG's earnings. 
C)  investors believe that for the same level of earnings growth, XYZ is a higher risk company. 
D)  investors believe XYZ stock is overvalued.

Question 17

The current ratio of a firm would be increased by which of the following?

Accepted Answer

A)  land held for investment is sold for cash 
B)  equipment is purchased, financed by a long-term debt issue 
C)  inventories are sold for cash 
D)  inventories are sold on a credit basis 
A)  land held for investment is sold for cash 
B)  equipment is purchased, financed by a long-term debt issue 
C)  inventories are sold for cash 
D)  inventories are sold on a credit basis

Question 18

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Accepted Answer

A)  equal to one. 
B)  greater than one. 
C)  less than one. 
D)  greater than or less than one, but not equal to one. 
A)  equal to one. 
B)  greater than one. 
C)  less than one. 
D)  greater than or less than one, but not equal to one.

Question 19

Please refer to Table 4-1 for the following questions.
Table 4-1
Stewart Company
Balance Sheet
  
-Based on the information in Table 4-1,the current ratio is

Accepted Answer

A)  1.92. 
B)  1.98. 
C)  2.86. 
D)  2.88. 
A)  1.92. 
B)  1.98. 
C)  2.86. 
D)  2.88.

Question 20

A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods.This is referred to as trend analysis.

Accepted Answer

A) True 
 B)False

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A high debt ratio can be favorable because higher leverage may result in a higher return on equity.

The current ratio and the acid test ratio both measure financial leverage.

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the total asset turnover ratio is

Acme Incorporated has a debt ratio of .42,noncurrent liabilities of $20,000 and total assets of $70,000.What is Acme's level of current liabilities?

Given an accounts receivable turnover of 10 and annual credit sales of $900,000,the average collection period is

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

For a retailer with inventory to sell,the acid-test ratio will be

KPR,Inc.has current assets of $10,000,000,current liabilities of $4,500,000,inventory of $1,000,000,and sales of $12,000,000.What is the acid test ratio?

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the accounts receivable turnover is

Economic value added is calculated by taking (net income less the cost of all capital)times total assets.

Seasonality causes comparability problems in ratio analysis.A common solution is to use an average account balance as opposed to an ending account balance.

Financial ratios are used by personnel in marketing,human resources,and other groups within a firm,not just by the finance and accounting personnel.

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10.It is likely that

The current ratio of a firm would be increased by which of the following?

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the current ratio is

A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods.This is referred to as trend analysis.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

Exam 4: Evaluating a Firms Financial Performance

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

A high debt ratio can be favorable because higher leverage may result in a higher return on equity.

The current ratio and the acid test ratio both measure financial leverage.

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the total asset turnover ratio is

Acme Incorporated has a debt ratio of .42,noncurrent liabilities of $20,000 and total assets of $70,000.What is Acme's level of current liabilities?

Given an accounts receivable turnover of 10 and annual credit sales of $900,000,the average collection period is

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

For a retailer with inventory to sell,the acid-test ratio will be

KPR,Inc.has current assets of $10,000,000,current liabilities of $4,500,000,inventory of $1,000,000,and sales of $12,000,000.What is the acid test ratio?

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the accounts receivable turnover is

Economic value added is calculated by taking (net income less the cost of all capital)times total assets.

Seasonality causes comparability problems in ratio analysis.A common solution is to use an average account balance as opposed to an ending account balance.

Financial ratios are used by personnel in marketing,human resources,and other groups within a firm,not just by the finance and accounting personnel.

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10.It is likely that

The current ratio of a firm would be increased by which of the following?

A company borrows $10,000 and puts the money into its checking account.This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

Please refer to Table 4-1 for the following questions. Table 4-1 Stewart Company Balance Sheet -Based on the information in Table 4-1,the current ratio is

A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods.This is referred to as trend analysis.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters