Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? a. 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. b. The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects. c. 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. d. 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 more risky and/or less likely to enjoy future growth. Correct Answer: c
Answer:
Question: If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. a. The division’s basic earning power ratio is above the average of other firms in its industry. b. The division’s total assets turnover ratio is below the average for other firms in its industry. c. The division’s total debt to total capital ratio is above the average for other firms in the industry. d. The division’s inventory turnover is 6x, whereas the average for its competitors is 8x. e. The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
Answer Options:
a) The division’s basic earning power ratio is above the average of other firms in its industry.
b) The division’s total assets turnover ratio is below the average for other firms in its industry.
c) The division’s total debt to total capital ratio is above the average for other firms in the industry.
d) The division’s inventory turnover is 6x, whereas the average for its competitors is 8x.
e) The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
Answer: a) The division’s basic earning power ratio is above the average of other firms in its industry.
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 Options:
a. True
b. False
Answer: False
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 Options:
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: 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 Options:
a. True
b. False
Answer: False
Question: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
Answer Options:
a. True
b. False
Answer: 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 Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
Answer Options:
a. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
b. After-tax operating income is calculated as EBIT(1 – T) + Depreciation.
c. Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have two different operating incomes by definition
d. 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.
e. Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.
Answer: a.
Question: Other things held constant, the higher a firm’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)), the higher its TIE ratio will be.
Answer Options:
a. True
b. False
Answer: False
Question: Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total invested capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company HD has a lower equity multiplier. b. Company HD has more net income. c. Company HD pays more in taxes. d. Company HD has a lower ROE. e. Company HD has a higher times-interest-earned (TIE) ratio. Correct Answer: d
Answer:
Question: Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?
Answer Options:
a. The TIE declines.
b. The DSO increases.
c. The quick ratio increases.
d. The current ratio declines.
e. The total assets turnover decreases.
Answer: c. The quick ratio increases.
Question: Which of the following statements is CORRECT? a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be. b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes. c. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder’s viewpoint, than the return on total assets (ROA). d. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. e. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A’s total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin. Correct Answer: b
Answer:
Question: Market value ratios provide management with an indication of how investors view the firm’s past performance and especially its future prospects.
Answer Options:
a. True
b. False
Answer: True
Question: The operating margin measures operating income per dollar of assets.
Answer Options:
a. True
b. False
Answer: False
Question: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
Answer Options:
a. True
b. False
Answer: True
Question: Other things held constant, the more debt a firm uses, the lower its return on total assets will be.
Answer Options:
a. True
b. False
Answer: True
Question: Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? 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. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable.
Answer Options:
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.
d) Use cash to reduce short-term notes payable.
e) Use cash to reduce accounts payable.
Answer: b) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
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: False