Corporate Finance questions

Question: 30. Other things held constant, firms that use assets that can be sold easily (like trucks) tend to use more debt than firms whose assets are harder to sell (like those engaged in research and development).

Answer Choices:

Answer: A – True

Question: 31. Other things held constant, the lower a firm’s tax rate, the more logical it is for the firm to use debt.

Answer Choices:

Answer: B – False

Question: 32. A firm’s treasurer likes to be in a position to raise funds to support operations whenever such funds are needed, even in “bad times.” This is called “financial flexibility,” and the lower the firm’s debt ratio, the greater its financial flexibility, other things held constant.

Answer Choices:

Answer: A – True

Question: 33. If a firm utilizes debt financing, a 10% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than 10%, and the higher the debt ratio, the larger this difference will be.

Answer Choices:

Answer: A – True

Question: The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories. a. True b. False

Answer Choices:

Answer: A – True

Question: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position. a. True b. False

Answer Choices:

Answer: A – True

Question: High current and quick ratios always indicate that the firm is managing its liquidity position well. a. True b. False

Answer Choices:

Answer: B – False

Question: If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. a. True b. False

Answer Choices:

Answer: B – False

Question: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase. a. True b. False

Answer Choices:

Answer: A – True

Question: If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. a. True b. False

Answer Choices:

Answer: B – False

Question: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. a. True b. False

Answer Choices:

Answer: A – True

Question: A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. a. True b. False

Answer Choices:

Answer: B – False

Question: In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. a. True b. False

Answer Choices:

Answer: B – False

Question: The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time. a. True b. False

Answer Choices:

Answer: A – True

Question: If a firm’s fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. a. True b. False

Answer Choices:

Answer: B – False

Question: Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage. a. True b. False

Answer Choices:

Answer: A – True

Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be. a. True b. False

Answer Choices:

Answer: B – False

Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be. a. True b. False

Answer Choices:

Answer: B – False

Question: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. a. True b. False

Answer Choices:

Answer: A – True

Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results. a. True b. False

Answer Choices:

Answer: A – True