Answer:
a. True
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? 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: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payments lags. b. Depreciation. c. Cumulative cash. d. Repurchases of common stock. e. Payment for plant construction.
Answer Options:
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
Answer:
b
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:
c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
Question: Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no “excess” cash.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm’s profitability.
Answer Options:
a. True
b. False
Answer:
a. True
Question: If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.
Answer Options:
a. True
b. False
Answer:
a. True
Question: When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payment lags. b. Payment for plant construction. c. Cumulative cash. d. Repurchases of common stock. e. Writing off bad debts.
Answer Options:
a. Payment lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
Answer:
e
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. b. Issue new common stock and use the proceeds to increase inventories. c. Speed up the collection of receivables and use the cash generated to increase inventories. d. Use some of its cash to purchase additional inventories. e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Answer:
e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Question: Which of the following statements is CORRECT? a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased. b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Answer Options:
a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased.
b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased.
e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Answer:
b
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.