Question: Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
Answer Choices:
A. True
B. False
Answer: B – False
Question: Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to repurchase some of the company’s own stock.
Answer Choices:
A. True
B. False
Answer: B – False
Question: Considered alone, which of the following would increase a company’s current ratio?
Answer Choices:
A. An increase in net fixed assets.
B. An increase in accrued liabilities.
C. An increase in notes payable.
D. An increase in accounts receivable.
E. An increase in accounts payable.
Answer: D – An increase in accounts receivable.
Question: Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?
Answer Choices:
A. The TIE declines.
B. The DSO increases.
C. The quick ratio increases.
D. The current ratio declines.
E. The total assets turnover decreases.
Answer: C – The quick ratio increases.
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Answer Choices:
A. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B. Use cash to repurchase some of the company’s own stock.
Answer: A – Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
Question: Which of the following statements is CORRECT? a. A reduction in inventories would have no effect on the current ratio. b. An increase in inventories would have no effect on the current ratio. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.
Answer Choices:
Answer: C – If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Question: Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT? a. Company E probably has fewer growth opportunities. b. Company E is probably judged by investors to be riskier. c. Company E must have a higher market-to-book ratio. d. Company E must pay a lower dividend. e. Company E trades at a higher P/E ratio.
Answer Choices:
Answer: E – Company E trades at a higher P/E ratio.
Question: Which of the following statements is CORRECT? a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.” b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.” c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of “window dressing.” d. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.” e. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value.
Answer Choices:
Answer: B – Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
Question: Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company’s total assets or operating income. Which of the following effects would occur as a result of this action? a. The company’s current ratio increased. b. The company’s times interest earned ratio decreased. c. The company’s basic earning power ratio increased. d. The company’s equity multiplier increased. e. The company’s total debt to total capital ratio increased.
Answer Choices:
Answer: A – The company’s current ratio increased.
Question: A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger? a. Increase accounts receivable while holding sales constant. b. Increase EBIT while holding sales and assets constant. c. Increase accounts payable while holding sales constant. d. Increase notes payable while holding sales constant. e. Increase inventories while holding sales constant.
Answer Choices:
Answer: B – Increase EBIT while holding sales and assets constant.
Question: If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. a. The division’s basic earning power ratio is above the average of other firms in its industry. b. The division’s total assets turnover ratio is below the average for other firms in its industry. c. The division’s total debt to total capital ratio is above the average for other firms in the industry. d. The division’s inventory turnover is 6x, whereas the average for its competitors is 8x. e. The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
Answer Choices:
Answer: A – The division’s basic earning power ratio is above the average of other firms in its industry.
Question: Which of the following would indicate an improvement in a company’s financial position, holding other things constant? a. The inventory and total assets turnover ratios both decline. b. The total debt to total capital ratio increases. c. The profit margin declines. d. The times-interest-earned ratio declines. e. The current and quick ratios both increase.
Answer Choices:
Answer: E – The current and quick ratios both increase.
Question: If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT? a. The lower the company’s inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm. b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge. c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge. d. The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge. e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
Answer Choices:
Answer: C – Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
Question: Which of the following statements is CORRECT? a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant. b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm’s ability to pay current interest is affected by taxes. e. All else equal, increasing the total debt to total capital ratio will increase the ROA.
Answer Choices:
Answer: B – A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. b. Issue new common stock and use the proceeds to increase inventories. c. Speed up the collection of receivables and use the cash generated to increase inventories. d. Use some of its cash to purchase additional inventories. e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Answer Choices:
Answer: E – Issue new common stock and use the proceeds to acquire additional fixed assets.
Question: Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable.
Answer Choices:
Answer: E – Use cash to reduce accounts payable.