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: If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT?
Answer Choices:
a. The lower the company’s inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm.
b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge.
c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
d. The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge.
e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
Answer: c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
Question: Other things held constant, the more debt a firm uses, the lower its return on total assets will be.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. 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.
b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
c. If a firm’s fixed assets turnover ratio is significantly lower 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.
d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be.
e. The days sales outstanding ratio 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 for Question 76:
a. 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.
b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
c. If a firm’s fixed assets turnover ratio is significantly lower 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.
d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be.
e. The days sales outstanding ratio 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: for Question 76: e. The days sales outstanding ratio 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.
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 Choices:
a. True
b. False
Answer: a. True
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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Considered alone, which of the following would increase a company’s current ratio?
Answer Choices:
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: Other things held constant, the more debt a firm uses, the lower its operating margin will be.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT?
Answer Choices:
a. The yield curve for U.S. Treasury securities will be upward sloping.
b. A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
c. A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
d. The real risk-free rate cannot be constant if inflation is not expected to remain constant.
e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
Answer: d. The real risk-free rate cannot be constant if inflation is not expected to remain constant.
Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If one firm has a higher total debt to total capital ratio than another, we can be certain that the firm with the higher total debt to total capital ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
b. A firm’s use of debt will have no effect on its profit margin.
c. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
d. The total debt to total capital ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.
e. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, operating costs, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a higher operating margin and return on assets.
Answer: c. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
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 Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
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 Options for Question 77:
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: for Question 77: 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: The operating margin measures operating income per dollar of assets.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.
c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
Answer Options for Question 36:
a. A time line is not meaningful unless all cash flows occur annually.
b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.
c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
Answer: for Question 36: d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
Question: Which of the following factors would be most likely to lead to an increase in nominal interest rates?
Answer Choices:
a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment opportunities.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. The Federal Reserve decides to try to stimulate the economy.
Answer: b. A new technology like the Internet has just been introduced, and it increases investment opportunities.
Question: Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
Answer Choices:
a. True
b. False
Answer: b. False
Question: If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?
Answer Choices:
a. The yield on a 10-year bond would be less than that on a 1-year bill.
b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yields on the two securities would be equal.
e. It is impossible to tell without knowing the relative risks of the two securities.
Answer: a. The yield on a 10-year bond would be less than that on a 1-year bill.
Question: You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
Answer Choices:
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than $10,000.
b. The discount rate increases.
c. The riskiness of the investment’s cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
e. The discount rate decreases.
Answer Options
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than $10,000.
b. The discount rate increases.
c. The riskiness of the investment’s cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
e. The discount rate decreases.
Answer: b. The discount rate increases.