Answer Choices:
a. If a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well.
b. 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.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
e. 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 Options for Question 75:
a. If a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well.
b. 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.
c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline.
d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
e. 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: for Question 75: e. 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.
Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position.
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: 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: Which of the following statements is CORRECT?
Answer Choices:
a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.”
b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of “window dressing.”
d. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”
e. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value.
Answer: b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
Question: High current and quick ratios always indicate that the firm is managing its liquidity position well.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT, other things held constant?
Answer Choices:
a. If companies have fewer good investment opportunities, interest rates are likely to increase.
b. If individuals increase their savings rate, interest rates are likely to increase.
c. If expected inflation increases, interest rates are likely to increase.
d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
Answer: c. If expected inflation increases, interest rates are likely to increase.
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?
Answer Choices:
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.
Answer: a. Company HD pays less in taxes.
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant.
Answer Choices:
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?
Answer Choices:
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 c. The tax bill will increase.
Question: If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.
Answer Choices:
a. True
b. False
Answer: a. True
Question: In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio 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.
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 to deal with situations where some of the cash flows occur annually but others occur quarterly.
d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Answer Options for Question 38:
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 to deal with situations where some of the cash flows occur annually but others occur quarterly.
d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Answer: for Question 38: e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
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 Choices:
a. True
b. False
Answer: a. True
Question: Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public. Other things held constant, what would be the most likely effect on short-term securities’ prices and interest rates?
Answer Choices:
a. Prices and interest rates would both rise.
b. Prices would rise and interest rates would decline.
c. Prices and interest rates would both decline.
d. Prices would decline and interest rates would rise.
e. There is no reason to expect a change in either prices or interest rates.
Answer: d. Prices would decline and interest rates would rise.
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Answer Choices:
a. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
b. Use cash to repurchase some of the company’s own stock.
c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
e. Use cash to increase inventory holdings.
Answer: d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
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 Choices:
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: 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 Choices:
a. True
b. False
Answer: b. False
Question: The return on invested capital measures the total return that a company has provided for its investors.
Answer Choices:
a. True
b. False
Answer: a. True