Answer Options:
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: b) Increase EBIT while holding sales and assets constant.
Question: Which of the following statements is CORRECT?
Answer Options:
a. The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned.
b. Two metrics that are used to measure a company’s financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
c. To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue.
d. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to discourage the use of debt financing by corporations.
e. If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2014, this would lower their free cash flows for 2014.
Answer: b.
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 Options:
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: e) The current and quick ratios both increase.
Question: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
Answer Options:
a. True
b. False
Answer: False
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?
Answer Options:
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: a. The company’s current ratio increased.
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.
Answer Options:
a. True
b. False
Answer: 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.
Answer Options:
a. True
b. False
Answer: False
Question: A firm wants to strengthen its financial position. Which of the following actions would tend to make it financially stronger? 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 Options:
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: e) Issue new common stock and use the proceeds to acquire additional fixed assets.
Question: A time line is meaningful even if all cash flows do not occur annually. a. True b. False Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT? a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. d. An increase in the DSO, other things held constant, could be expected to increase the ROE. e. An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Answer: e) An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
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.
Answer Options:
a. True
b. False
Answer: True
Question: Starting to invest early for retirement increases the benefits of compound interest. a. True b. False Correct Answer: a
Answer:
Question: HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT? a. Without more information, we cannot tell if HD or LD would have a higher or lower net income. b. HD would have the lower equity multiplier for use in the DuPont equation. c. HD would have to pay more in income taxes. d. HD would have the lower net income as shown on the income statement. e. HD would have the higher operating margin. Correct Answer: d
Answer:
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.
Answer Options:
a. True
b. False
Answer: 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 Options:
a. True
b. False
Answer: 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 Options:
a. True
b. False
Answer: False
Question: Considered alone, which of the following would increase a company’s current ratio?
Answer Options:
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: 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 Options:
a. True
b. False
Answer: True
Question: For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT? a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flow tells us how much the firm can distribute to its investors. c. The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide. d. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP. e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
Answer: b
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 Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? a. If firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. b. If firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. c. If firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio. d. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. e. If firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
Answer: b) If firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
Question: Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company HD pays less in taxes. b. Company HD has a lower equity multiplier. c. Company HD has a higher ROA. d. Company HD has a higher times-interest-earned (TIE) ratio. e. Company HD has more net income. Correct Answer: a
Answer:
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.
Answer Options:
a. True
b. False
Answer: True
Question: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.
Answer Options:
a. True
b. False
Answer: True
Question: Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The ROA will decline. b. Taxable income will decline. c. The tax bill will increase. d. Net income will decrease. e. The times-interest-earned ratio will decrease.
Answer: b) Taxable income will decline.