Answer Choices:
a. True
b. False
Answer: a. True
Question: The profit margin measures net income per dollar of sales.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?
Answer Choices:
a. Without more information, we cannot tell if HD or LD would have a higher or lower net income.
b. HD would have the lower equity multiplier for use in the DuPont equation.
c. HD would have to pay more in income taxes.
d. HD would have the lower net income as shown on the income statement.
e. HD would have the higher operating margin.
Answer: d. HD would have the lower net income as shown on the income statement.
Question: If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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 invested capital ratio must be 50%.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
b. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat.
c. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
d. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping.
e. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
Answer: c. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant.
b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.
d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm’s ability to pay current interest is affected by taxes.
e. All else equal, increasing the total debt to total capital ratio will increase the ROA.
Answer: b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
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 Choices:
a. True
b. False
Answer: a. True
Question: Because the maturity risk premium is normally positive, the yield curve is normally upward sloping.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
Answer Choices:
a. True
b. False
Answer: a. True
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: If a firm’s ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.
Answer Choices:
a. True
b. False
Answer: a. True