Corporate Finance test

Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Answer Choices:

Answer: A – True

Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

Answer Choices:

Answer: A – True

Question: It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.

Answer Choices:

Answer: B – False

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: B – False

Question: The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers. a. True b. False

Answer Choices:

Answer: True

Question: The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share. a. True b. False

Answer Choices:

Answer: False

Question: Since managers’ central goal is to maximize stock price, managers’ personal incentives do not interfere with mergers that would benefit the target firm’s stockholders. a. True b. False

Answer Choices:

Answer: False

Question: If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger. a. True b. False

Answer Choices:

Answer: True

Question: Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team. a. True b. False

Answer Choices:

Answer: False

Question: Only if a target firm’s value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified. a. True b. False

Answer Choices:

Answer: True

Question: A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship. a. True b. False

Answer Choices:

Answer: True

Question: One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive. a. True b. False

Answer Choices:

Answer: True

Question: Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Answer Choices:

Answer: B – False