Answer Options:
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.
Answer: a. Reduce the company’s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
Question: Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength.
Answer Options:
a. True
b False
Answer: True
Question: Which of the following statements is CORRECT? a. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant. b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. c. Common equity includes common stock and retained earnings, less accumulated depreciation. d. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. e. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer: b
Question: High current and quick ratios always indicate that the firm is managing its liquidity position well.
Answer Options:
a. True
b. False
Answer: False
Question: If a firm’s ROE is equal to 9% and its ROA is equal to 6%. The firm finances only with short-term debt, long-term debt, and common equity, so assets equal total invested capital. The firm’s total debt to total capital ratio must be 50%.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? a. If a security analyst saw that a firm’s days sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm’s credit terms. c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Answer Options:
a) If a security analyst saw that a firm’s days sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this
Answer:
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 Options:
a. True
b. False
Answer: True
Question: The profit margin measures net income per dollar of sales.
Answer Options:
a. True
b. False
Answer: 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 Options:
a. True
b. False
Answer: 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: True
Question: Other things held constant, the more debt a firm uses, the lower its operating margin will be.
Answer Options:
a. True
b. False
Answer: False
Question: A time line is not meaningful unless all cash flows occur annually. a. True b. False Correct Answer: b
Answer:
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 Options:
a. True
b. False
Answer: False
Question: If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT? 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 Options:
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.