Answer Choices:
a. True
b. False
Answer: b. False
Question: Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak.
Answer Choices:
a. True
b. False
Answer: a. True
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 increase 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 10 years rather than 5 years, hence that each payment is for $10,000 rather than $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
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 10 years rather than 5 years, hence that each payment is for $10,000 rather than $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
Answer: b. The discount rate decreases.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.
b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.
d. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate.
e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
Answer: b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
d. An increase in the DSO, other things held constant, could be expected to increase the ROE.
e. An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Answer: e. An increase in a firm’s total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Question: An upward-sloping yield curve is often call a “normal” yield curve, while a downward-sloping yield curve is called “abnormal.”
Answer Choices:
a. True
b. False
Answer: a. True
Question: The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called “interest rate risk,” or “price risk.”
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?
Answer Choices:
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: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
Answer Choices:
a. True
b. False
Answer: a. True
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.
Answer Choices:
a. The division’s basic earning power ratio is above the average for 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 for other firms in its industry.