Answer Options:
a. True
b. False
Answer: a. True
Question: One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
Answer Options:
a. True
b. False
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 Options:
a. True
b. False
Answer: a. 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: c. The tax bill will increase.
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer: a. True
Question: Other things held constant, the more debt a firm uses, the lower its profit margin will be.
Answer Options:
a. True
b. False
Answer: a. True
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: a. True
Question: Which of the following statements is CORRECT?
a. Other things held constant, the more debt a firm uses, the higher its operating margin will be.
b. 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.
c. Other things held constant, the more debt a firm uses, the higher its profit margin will be.
d. Other things held constant, the higher a firm’s total debt to total capital ratio, the higher its TIE ratio will be.
e. Debt management ratios show the extent to which a firm’s managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.
Answer: b. 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.
Question: An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.
Answer Options:
a. True
b. False
Answer: a. 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: b. False
Question: Starting to invest early for retirement reduces the benefits of compound interest.
True
False
Answer: False
Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results.
Answer Options:
a. True
b. False
Answer: a. True