Answer Choices:
a. Borrow using short-term notes payable and use the proceeds to reduce accruals.
b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
c. Use cash to reduce accruals.
Answer: b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
Question: The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called “reinvestment rate risk.”
Answer Choices:
a. True
b. False
Answer: a. True
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:
a. True
b. False
Answer: a. True
Question: Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT?
Answer Choices:
a. Company E probably has fewer growth opportunities.
b. Company E is probably judged by investors to be riskier.
c. Company E must have a higher market-to-book ratio.
d. Company E must pay a lower dividend.
e. Company E trades at a higher P/E ratio.
Answer: e. Company E trades at a higher P/E ratio.
Question: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
Answer Choices:
a. True
b. False
Answer: a. True
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 Choices:
a. True
b. False
Answer: a. True
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) the skill level of the economy’s labor force.
Answer Choices:
a. True
b. False
Answer: b. False
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 Choices:
a. True
b. False
Answer: b. False
Question: Other things held constant, the more debt a firm uses, the lower its profit margin will be.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. A reduction in inventories would have no effect on the current ratio.
b. An increase in inventories would have no effect on the current ratio.
c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.
e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.
Answer: c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Question: A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?
Answer Choices:
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: Since yield curves are based on a real risk-free rate plus the expected rate of inflation, at any given time there can be only one yield curve, and it applies to both corporate and Treasury securities.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following would be most likely to lead to a higher level of interest rates in the economy?
Answer Choices:
a. Households start saving a larger percentage of their income.
b. Corporations step up their expansion plans and thus increase their demand for capital.
c. The level of inflation begins to decline.
d. The economy moves from a boom to a recession.
e. The Federal Reserve decides to try to stimulate the economy.
Answer: b. Corporations step up their expansion plans and thus increase their demand for capital.
Question: Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength.
Answer Choices:
a. True
b. False
Answer: a. True