Answer Options:
a. True
b. False
Answer: b. False
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: 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.
Answer Options:
a. True
b. False
Answer: a. True
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: 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.
Answer Options:
a. True
b. False
Answer: a. 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: a. True
Question: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.
Answer Options:
a. True
b. False
Answer: True
Question: The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.
Answer Options:
a. True
b. False
Answer: a. True
Question: The profit margin measures net income per dollar of sales.
a. True
b. False
Answer: a. True
Question: If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.
Answer Options:
a. True
b. False
Answer: True
Question: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
Answer Options:
a. True
b. False
Answer: True
Question: Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
Answer Options:
a. True
b. False
Answer: False
Question: A patient comes to the clinic with superficial cuts on the left wrist. The patient paces around the room sobbing but cringes when approached and responds to questions with only shrugs or monosyllables. What is the nurse’s best initial statement to this patient?
Answer Options:
a. “Everything is going to be all right. You are here at the clinic, and the staff will keep you safe.”
b. “I see you are feeling upset. I am going to stay and talk with you to help you feel better.”
c. “You need to try to stop crying so we can talk about your problems.”
d. “Let’s set some guidelines and goals for your visit here.”
Answer: b. “I see you are feeling upset. I am going to stay and talk with you to help you feel better.”
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: b. False
Question: If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.
Answer Options:
a. True
b. False
Answer: a. True
Question: If a firm’s ROE is equal to 9% and its ROA is equal to 6%. The firm finances only with short-term debt, long-term debt, and common equity, so assets equal total invested capital. The firm’s total debt to total capital ratio must be 50%.
Answer Options:
a. True
b. False
Answer: b. False
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 Options:
a. True
b. False
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 Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. In most corporations, the CFO ranks above the CEO.
b. By law in most states, the chairman of the board must also be the CEO.
c. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
d. The CFO generally reports to the firm’s chief accounting officer, who is normally the controller.
e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.
Answer Options:
a. In most corporations, the CFO ranks above the CEO.
b. By law in most states, the chairman of the board must also be the CEO.
c. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
d. The CFO generally reports to the firm’s chief accounting officer, who is normally the controller.
e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.
Answer: c. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
Question: The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm’s stock, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
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.
Answer: d. HD would have the lower net income as shown on the income statement.
Question: The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
a. True
b. False
Answer: a. True
Question: If a retired individual lives on his or her investment income, then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.
Answer Options:
a. True
b. False
Answer: a. True