Answer Options:
a. True
b. False
Answer: True
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 Options:
a. True
b. False
Answer: b. False
Question: The first major section of a typical statement of cash flows is “Operating Activities,” and the first entry in this section is “Net Income.” Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called “Net Cash Provided by Operating Activities.” This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
Answer Options:
a. True
b. False
Answer: False
Question: The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
Answer Options:
a. The company’s net income in 2014 was higher than in 2013.
b. The firm issued common stock in 2014.
c. The market price of the firm’s stock doubled in 2014.
d. The firm had positive net income in both 2013 and 2014, but its net income in 2014 was lower than it was in 2013.
e. The company has more equity than debt on its balance sheet.
Answer: b
Question: If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.
Answer Options:
a. True
b. False
Answer: b. False
Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
b. The total yield on a bond is derived from dividends plus changes in the price of the bond.
c. Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.
Answer: e
Question: The next-to-last line on the income statement shows the firm’s earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called “the bottom line.”
Answer Options:
a. True
b. False
Answer: b. False
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 Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
b. The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
c. Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
d. The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
e. The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.
Answer: d
Question: High current and quick ratios always indicate that the firm is managing its liquidity position well.
a. True
b. False
Answer: b. False
Question: The operating margin measures operating income per dollar of assets.
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 Options:
a. True
b. False
Answer: a. True
Question: There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.
Answer Options:
a. True
b. False
Answer: a. True
Question: Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength.
a. True
b. False
Answer Options:
a. True
b. False
Answer: True
Question: The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Answer Options:
a. Nantell’s taxable income will be lower.
b. Nantell’s operating income (EBIT) will increase.
c. Nantell’s cash position will improve (increase).
d. Nantell’s reported net income for the year will be lower.
e. Nantell’s tax liability for the year will be lower.
Answer: c
Question: Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
Answer Options:
a. Companies’ after-tax operating profits would decline.
b. Companies’ physical stocks of fixed assets would increase.
c. Companies’ cash flows would increase.
d. Companies’ cash positions would decline.
e. Companies’ reported net incomes would decline.
Answer: d