Scientific Revolution review questions

Question: Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Answer Choices:

Answer: A – True

Question: Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin.

Answer Choices:

Answer: B – False

Question: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

Answer Choices:

Answer: B – False

Question: Other things held constant, the more debt a firm uses, the lower its operating margin will be.

Answer Choices:

Answer: B – False

Question: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Answer Choices:

Answer: A – True

Question: Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

Answer Choices:

Answer: A – True

Question: Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

Answer Choices:

Answer: B – False

Question: Market value ratios provide management with an indication of how investors view the firm’s past performance and especially its future prospects.

Answer Choices:

Answer: A – True

Question: In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Answer Choices:

Answer: B – False

Question: The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.

Answer Choices:

Answer: A – True

Question: The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.

Answer Choices:

Answer: A – True

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:

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:

Answer: B – False

Question: If supply exceeds demand, a surplus will result. The surplus will subsequently cause the market price to

Answer Choices:

Answer: B – Decrease

Question: A random sample of 85 graduate-level classes was selected and the number of enrolled students during the Fall 2017 semester was recorded for each. The data is displayed in the boxplot below. Use this boxplot to completely describe the center of the distribution of the number of enrolled students in this sample of 85 graduate-level classes.

Answer Choices:

Answer: D – Median=17.5

Question: What is the probability that a t with 28 degrees of freedom will take a value of 2.048 or less?

Answer Choices:

Answer: D – .975

Question: Which of the following is a correct statement?

Answer Choices:

Answer: C – The IQR is a measure of spread around the median.

Question: Of the four options below, which is the strongest negative correlation?

Answer Choices:

Answer: A – -.74

Question: A positive correlation means that as the values on X increase, the values on Y ____.

Answer Choices:

Answer: A – increase