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Question 1
Which of the following statements
is CORRECT?
a. Since companies can deduct
dividends paid but not interest paid, our tax system favors the use of equity
financing over debt financing, and this causes companies’ debt ratios to be
lower than they would be if interest and dividends were both deductible.
b. Interest paid to an individual
is counted as income for tax purposes and taxed at the individual’s regular tax
rate, which in 2008 could go up to 35%, but dividends received were taxed at a
maximum rate of 15%.
c. The maximum federal tax rate
on corporate income in 2008 was 50%.
d. Corporations obtain capital
for use in their operations by borrowing and by raising equity capital, either
by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid
on the debt, and the cost of the equity is the dividends paid on the
stock. Both of these costs are
deductible from income when calculating income for tax purposes.
d. The maximum federal tax rate
on personal income in 2008 was 50%.
Question 2
Which of the following statements
is CORRECT?
The four most important financial
statements provided in the annual report are the balance sheet, income
statement, cash budget, and the statement of retained earnings.
The balance sheet gives us a picture of the firm’s financial position at a point in time.
The income statement gives us a picture of the firm’s financial position at a point in time.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
The balance sheet gives us a picture of the firm’s financial position at a point in time.
The income statement gives us a picture of the firm’s financial position at a point in time.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
Question 3
For managerial purposes, i.e.,
making decisions regarding the firm's operations, the standard financial
statements as prepared by accountants under Generally Accepted Accounting
Principles (GAAP) are often modified and used to create alternative data and
metrics that provide a somewhat different picture of a firm's operations.
Related to these modifications, which of the following statements is CORRECT?
The standard statements make
adjustments to reflect the effects of inflation on asset values, and these
adjustments are normally carried into any adjustment that managers make to the
standard statements.
The standard statements focus on
accounting income for the entire corporation, not cash flows, and the two can
be quite different during any given accounting period. However, for valuation purposes we need to
discount cash flows, not accounting income.
Moreover, since many firms have a number of separate divisions, and
since division managers should be compensated on their divisions’ performance,
not that of the entire firm, information that focuses on the divisions is
needed. These factors have led to the
development of information that is focused on cash flows and the operations of
individual units.
The standard statements provide
useful information on the firm’s individual operating units, but management
needs more information on the firm’s overall operations than the standard
statements provide.
The standard statements focus on
cash flows, but managers are less concerned with cash flows than with
accounting income as defined by GAAP.
The best feature of standard
statements is that, if they are prepared under GAAP, the data are always
consistent from firm to firm. Thus,
under GAAP, there is no room for accountants to “adjust” the results to make
earnings look better.
Question 4
On its 2010 balance sheet,
Barngrover Books showed $510 million of retained earnings, and exactly that
same amount was shown the following year.
Assuming that no earnings restatements were issued, which of the
following statements is CORRECT?
a. If the company lost money in
2010, they must have paid dividends.
b. The company must have had zero
net income in 2010.
c. The company must have paid out
half of its earnings as dividends.
d. The company must have paid no
dividends in 2010.
e. Dividends could have been paid
in 2010, but they would have had to equal the earnings for the year.
Question 5
Other things held constant, which
of the following actions would increase the amount of cash on a company’s
balance sheet?
The company repurchases common
stock.
The company pays a dividend.
The company issues new common
stock.
The company gives customers more
time to pay their bills.
The company purchases a new piece
of equipment.
Question 6
The CFO of Shalit Industries
plans to have the company issue $300 million of new common stock and use the
proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay
any dividends, takes this action, and that total assets, operating income
(EBIT), and its tax rate all remain constant. Which of the following would
occur?
The company’s taxable income
would fall.
The company’s interest expense
would remain constant.
The company would have less
common equity than before.
The company’s net income would
increase.
The company would have to pay
less taxes.
Question 7
Which of the following factors
could explain why Dellva Energy had a negative net cash flow last year, even
though the cash on its balance sheet increased?
a. The company sold a new issue of bonds.
b. The company made a large
investment in new plant and equipment.
c. The company paid a large
dividend.
d. The company had high
amortization expenses.
e. The company repurchased 20% of
its common stock.
Question 8
Which of the following statements
is CORRECT?
Since depreciation is a source of
funds, the more depreciation a company has, the larger its retained earnings
will be, other things held constant.
A firm can show a large amount of
retained earnings on its balance sheet yet need to borrow cash to make required
payments.
Common equity includes common
stock and retained earnings, less accumulated depreciation.
The retained earnings account as
shown on the balance sheet shows the amount of cash that is available for
paying dividends.
If a firm reports a loss on its
income statement, then the retained earnings account as shown on the balance
sheet will be negative.
Question 9
Below is the common equity
section (in millions) of Teweles Technology’s last two year-end balance sheets:
2009 2008
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
Teweles has never paid a dividend
to its common stockholders. Which of the
following statements is CORRECT?
a. The company’s net income in
2009 was higher than in 2008.
b. Teweles issued common stock in
2009.
c. The market price of Teweles'
stock doubled in 2009.
d. Teweles had positive net
income in both 2008 and 2009, but the company’s net income in 2009 was lower
than it was in 2008.
e. The company has more equity
than debt on its balance sheet.
Question 10
Assume that Congress recently
passed a provision that will enable Bev's Beverages Inc. (BBI) to double its
depreciation expense for the upcoming year but will have no effect on its sales
revenue or tax rate. Prior to the new provision, BBI’s net income after taxes
was forecasted to be $4 million. Which of the following best describes the impact
of the new provision on BBI’s financial statements versus the statements
without the provision? Assume that the
company uses the same depreciation method for tax and stockholder reporting
purposes.
The provision will reduce the
company’s net cash flow.
The provision will increase the
company’s tax payments.
Net fixed assets on the balance
sheet will increase.
The provision will increase the
company’s net income.
Net fixed assets on the balance
sheet will decrease.
Question 11
A start-up firm is making an
initial investment in new plant and equipment. Assume that currently its
equipment must be depreciated on a straight-line basis over 10 years, but
Congress is considering legislation that would require the firm to depreciate
the equipment over 7 years. If the legislation becomes law, which of the
following would occur in the year following the change?
a. The firm’s operating income
(EBIT) would increase.
b. The firm’s taxable income
would increase.
c. The firm’s net cash flow would
increase.
d. The firm’s tax payments would
increase.
e. The firm’s reported net income
would increase.
Question 12
Which of the following statements
is CORRECT?
The income of certain small
corporations that qualify under the Tax Code is completely exempt from
corporate income taxes. Thus, the
federal government receives no tax revenue from these businesses.
All businesses, regardless of
their legal form of organization, are taxed under the Business Tax Provisions
of the Internal Revenue Code.
Small businesses that qualify
under the Tax Code can elect not to pay corporate taxes, but then their owners
must report their pro rata shares of the firm’s income as personal income and
pay taxes on that income.
Congress recently changed the tax
laws to make dividend income received by individuals exempt from income taxes.
Prior to the enactment of that law, corporate income was subject to double
taxation, where the firm was first taxed on the income and stockholders were
taxed again on the income when it was paid to them as dividends.
All corporations other than
non-profit corporations are subject to corporate income taxes, which are 15%
for the lowest amounts of income and 35% for the highest amounts of income.
Question 13
Which of the following statements
is CORRECT?
a. One way to increase EVA is to
achieve the same level of operating income but with more investor-supplied
capital.
b. If a firm reports positive net
income, its EVA must also be positive.
c. One drawback of EVA as a
performance measure is that it mistakenly assumes that equity capital is free.
d. One way to increase EVA is to
generate the same level of operating income but with less investor-supplied
capital.
e. Actions that increase reported
net income will always increase net cash flow.
Question 14
Which of the following statements
is CORRECT?
The more depreciation a firm
reports, the higher its tax bill, other things held constant.
People sometimes talk about the
firm’s net cash flow, which is shown as the lowest entry on the income
statement, hence it is often called "the bottom line.”
Depreciation reduces a firm’s
cash balance, so an increase in depreciation would normally lead to a reduction
in the firm’s net cash flow.
Net cash flow (NCF) is often
defined as follows:
Net Cash Flow = Net Income +
Depreciation and Amortization Charges.
Depreciation and amortization are
not cash charges, so neither of them has an effect on a firm’s reported
profits.
Question 15
Which of the following items is
NOT included in current assets?
Accounts receivable.
Inventory.
Bonds.
Cash.
Short-term, highly liquid,
marketable securities.
Question 16
A firm’s new president wants to
strengthen the company’s financial position.
Which of the following actions would make it financially stronger?
a. Increase accounts receivable
while holding sales constant.
b. Increase EBIT while holding
sales constant.
c. Increase accounts payable
while holding sales constant.
d. Increase notes payable while
holding sales constant.
e. Increase inventories while
holding sales constant.
Question 17
Which of the following statements
is CORRECT?
a. Borrowing by using short-term
notes payable and then using the proceeds to retire long-term debt is an
example of “window dressing.” Offering discounts to customers who pay with cash
rather than buy on credit and then using the funds that come in quicker to
purchase additional inventories is another example of “window dressing.”
b. Borrowing on a long-term basis
and using the proceeds to retire short-term debt would improve the current
ratio and thus could be considered to be an example of “window dressing.”
c. Offering discounts to
customers who pay with cash rather than buy on credit and then using the funds
that come in quicker to purchase additional inventories is an example of
“window dressing.”
d. Using some of the firm’s cash
to reduce long-term debt is an example of “window dressing.”
e. “Window dressing” is any
action that improves a firm’s fundamental, long-run position and thus increases
its intrinsic value.
to be an example of “window
dressing.”
Question 18
Which of the following statements
is CORRECT?
a. If a firm has the highest
price/earnings ratio of any firm in its industry, then, other things held
constant, this suggests that the board of directors should fire the president.
b. If a firm has the highest
market/book ratio of any firm in its industry, then, other things held
constant, this suggests that the board of directors should fire the president.
c. Other things held constant,
the higher a firm’s expected future growth rate, the lower its P/E ratio is
likely to be.
d. The higher the market/book
ratio, then, other things held constant, the higher one would expect to find
the Market Value Added (MVA).
e. If a firm has a history of
high Economic Value Added (EVA) numbers each year, and if investors expect this
situation to continue, then its market/book ratio and MVA are both likely to be
below average.
Question 19
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 also increasing and trending still higher, this would be interpreted as a
sign of strength.
b. If a firm increases its sales
while holding its accounts receivable constant, then, other things held constant,
its days’ sales outstanding (DSO) will increase.
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.
Question 20
Taggart Technologies is
considering issuing new common stock and using the proceeds to reduce its
outstanding debt. The stock issue would
have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax
rate. Which of the following is likely
to occur if the company goes ahead with the stock issue?
a. The ROA will decline.
b. Taxable income will decrease.
c. The tax bill will increase.
d. Net income will decrease.
e. The times interest earned
ratio will decrease.
Question 21
Casey Communications recently
issued new common stock and used the proceeds to pay off some of its short-term
notes payable. This action had no effect
on the company’s total assets or operating income. Which of the following effects would occur as
a result of this action?
a. The company’s current ratio
increased.
b. The company’s times interest
earned ratio decreased.
c. The company’s basic earning
power ratio increased.
d. The company’s equity
multiplier increased.
e. The company’s debt ratio
increased.
Question 22
Which of the following statements
is CORRECT?
a. If Firms X and Y have the same
P/E ratios, then their market-to-book ratios must also be the same.
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 also to 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.
Question 23
Companies HD and LD have the same
sales, tax rate, interest rate on their debt, total assets, and basic earning
power. Both companies have positive net
incomes. Company HD has a higher debt
ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a. Company HD pays less in taxes.
b. Company HD has a lower equity
multiplier.
c. Company HD has a higher ROA.
d. Company HD has a higher times
interest earned (TIE) ratio.
e. Company HD has more net
income.
Question 24
You observe that a firm’s ROE is above
the industry average, but its profit margin and debt ratio are both below the
industry average. Which of the following
statements is CORRECT?
a. Its total assets turnover must
be above the industry average.
b. Its return on assets must
equal the industry average.
c. Its TIE ratio must be below
the industry average.
d. Its total assets turnover must
be below the industry average.
e. Its total assets turnover must
equal the industry average.
Question 25
Which of the following would
indicate an improvement in a company’s financial position, holding other things
constant?
a. The inventory and total assets
turnover ratios both decline.
b. The debt ratio increases.
c. The profit margin declines.
d. The EBITDA coverage ratio
declines.
e. The current and quick ratios
both increase.
Question 26
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.
Question 27
If a bank loan officer were
considering a company’s request for a loan, which of the following statements
would you consider to be CORRECT?
a. The lower the company’s EBITDA
coverage ratio, other things held constant, the lower the interest rate the
bank would charge the firm.
b. Other things held constant,
the higher the debt ratio, the lower the interest rate the bank would charge
the firm.
c. Other things held constant,
the lower the debt ratio, the lower the interest rate the bank would charge the
firm.
d. The lower the company’s TIE
ratio, other things held constant, the lower the interest rate the bank would
charge the firm.
e. Other things held constant,
the lower the current ratio, the lower the interest rate the bank would charge
the firm.
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Question 1
Which of the following statements
is CORRECT?
a. Since companies can deduct
dividends paid but not interest paid, our tax system favors the use of equity
financing over debt financing, and this causes companies’ debt ratios to be
lower than they would be if interest and dividends were both deductible.
b. Interest paid to an individual
is counted as income for tax purposes and taxed at the individual’s regular tax
rate, which in 2008 could go up to 35%, but dividends received were taxed at a
maximum rate of 15%.
c. The maximum federal tax rate
on corporate income in 2008 was 50%.
d. Corporations obtain capital
for use in their operations by borrowing and by raising equity capital, either
by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid
on the debt, and the cost of the equity is the dividends paid on the
stock. Both of these costs are
deductible from income when calculating income for tax purposes.
d. The maximum federal tax rate
on personal income in 2008 was 50%.
Question 2
Which of the following statements
is CORRECT?
The four most important financial
statements provided in the annual report are the balance sheet, income
statement, cash budget, and the statement of retained earnings.
The balance sheet gives us a picture of the firm’s financial position at a point in time.
The income statement gives us a picture of the firm’s financial position at a point in time.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
The balance sheet gives us a picture of the firm’s financial position at a point in time.
The income statement gives us a picture of the firm’s financial position at a point in time.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
Question 3
For managerial purposes, i.e.,
making decisions regarding the firm's operations, the standard financial
statements as prepared by accountants under Generally Accepted Accounting
Principles (GAAP) are often modified and used to create alternative data and
metrics that provide a somewhat different picture of a firm's operations.
Related to these modifications, which of the following statements is CORRECT?
The standard statements make
adjustments to reflect the effects of inflation on asset values, and these
adjustments are normally carried into any adjustment that managers make to the
standard statements.
The standard statements focus on
accounting income for the entire corporation, not cash flows, and the two can
be quite different during any given accounting period. However, for valuation purposes we need to
discount cash flows, not accounting income.
Moreover, since many firms have a number of separate divisions, and
since division managers should be compensated on their divisions’ performance,
not that of the entire firm, information that focuses on the divisions is
needed. These factors have led to the
development of information that is focused on cash flows and the operations of
individual units.
The standard statements provide
useful information on the firm’s individual operating units, but management
needs more information on the firm’s overall operations than the standard
statements provide.
The standard statements focus on
cash flows, but managers are less concerned with cash flows than with
accounting income as defined by GAAP.
The best feature of standard
statements is that, if they are prepared under GAAP, the data are always
consistent from firm to firm. Thus,
under GAAP, there is no room for accountants to “adjust” the results to make
earnings look better.
Question 4
On its 2010 balance sheet,
Barngrover Books showed $510 million of retained earnings, and exactly that
same amount was shown the following year.
Assuming that no earnings restatements were issued, which of the
following statements is CORRECT?
a. If the company lost money in
2010, they must have paid dividends.
b. The company must have had zero
net income in 2010.
c. The company must have paid out
half of its earnings as dividends.
d. The company must have paid no
dividends in 2010.
e. Dividends could have been paid
in 2010, but they would have had to equal the earnings for the year.
Question 5
Other things held constant, which
of the following actions would increase the amount of cash on a company’s
balance sheet?
The company repurchases common
stock.
The company pays a dividend.
The company issues new common
stock.
The company gives customers more
time to pay their bills.
The company purchases a new piece
of equipment.
Question 6
The CFO of Shalit Industries
plans to have the company issue $300 million of new common stock and use the
proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay
any dividends, takes this action, and that total assets, operating income
(EBIT), and its tax rate all remain constant. Which of the following would
occur?
The company’s taxable income
would fall.
The company’s interest expense
would remain constant.
The company would have less
common equity than before.
The company’s net income would
increase.
The company would have to pay
less taxes.
Question 7
Which of the following factors
could explain why Dellva Energy had a negative net cash flow last year, even
though the cash on its balance sheet increased?
a. The company sold a new issue of bonds.
b. The company made a large
investment in new plant and equipment.
c. The company paid a large
dividend.
d. The company had high
amortization expenses.
e. The company repurchased 20% of
its common stock.
Question 8
Which of the following statements
is CORRECT?
Since depreciation is a source of
funds, the more depreciation a company has, the larger its retained earnings
will be, other things held constant.
A firm can show a large amount of
retained earnings on its balance sheet yet need to borrow cash to make required
payments.
Common equity includes common
stock and retained earnings, less accumulated depreciation.
The retained earnings account as
shown on the balance sheet shows the amount of cash that is available for
paying dividends.
If a firm reports a loss on its
income statement, then the retained earnings account as shown on the balance
sheet will be negative.
Question 9
Below is the common equity
section (in millions) of Teweles Technology’s last two year-end balance sheets:
2009 2008
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
Teweles has never paid a dividend
to its common stockholders. Which of the
following statements is CORRECT?
a. The company’s net income in
2009 was higher than in 2008.
b. Teweles issued common stock in
2009.
c. The market price of Teweles'
stock doubled in 2009.
d. Teweles had positive net
income in both 2008 and 2009, but the company’s net income in 2009 was lower
than it was in 2008.
e. The company has more equity
than debt on its balance sheet.
Question 10
Assume that Congress recently
passed a provision that will enable Bev's Beverages Inc. (BBI) to double its
depreciation expense for the upcoming year but will have no effect on its sales
revenue or tax rate. Prior to the new provision, BBI’s net income after taxes
was forecasted to be $4 million. Which of the following best describes the impact
of the new provision on BBI’s financial statements versus the statements
without the provision? Assume that the
company uses the same depreciation method for tax and stockholder reporting
purposes.
The provision will reduce the
company’s net cash flow.
The provision will increase the
company’s tax payments.
Net fixed assets on the balance
sheet will increase.
The provision will increase the
company’s net income.
Net fixed assets on the balance
sheet will decrease.
Question 11
A start-up firm is making an
initial investment in new plant and equipment. Assume that currently its
equipment must be depreciated on a straight-line basis over 10 years, but
Congress is considering legislation that would require the firm to depreciate
the equipment over 7 years. If the legislation becomes law, which of the
following would occur in the year following the change?
a. The firm’s operating income
(EBIT) would increase.
b. The firm’s taxable income
would increase.
c. The firm’s net cash flow would
increase.
d. The firm’s tax payments would
increase.
e. The firm’s reported net income
would increase.
Question 12
Which of the following statements
is CORRECT?
The income of certain small
corporations that qualify under the Tax Code is completely exempt from
corporate income taxes. Thus, the
federal government receives no tax revenue from these businesses.
All businesses, regardless of
their legal form of organization, are taxed under the Business Tax Provisions
of the Internal Revenue Code.
Small businesses that qualify
under the Tax Code can elect not to pay corporate taxes, but then their owners
must report their pro rata shares of the firm’s income as personal income and
pay taxes on that income.
Congress recently changed the tax
laws to make dividend income received by individuals exempt from income taxes.
Prior to the enactment of that law, corporate income was subject to double
taxation, where the firm was first taxed on the income and stockholders were
taxed again on the income when it was paid to them as dividends.
All corporations other than
non-profit corporations are subject to corporate income taxes, which are 15%
for the lowest amounts of income and 35% for the highest amounts of income.
Question 13
Which of the following statements
is CORRECT?
a. One way to increase EVA is to
achieve the same level of operating income but with more investor-supplied
capital.
b. If a firm reports positive net
income, its EVA must also be positive.
c. One drawback of EVA as a
performance measure is that it mistakenly assumes that equity capital is free.
d. One way to increase EVA is to
generate the same level of operating income but with less investor-supplied
capital.
e. Actions that increase reported
net income will always increase net cash flow.
Question 14
Which of the following statements
is CORRECT?
The more depreciation a firm
reports, the higher its tax bill, other things held constant.
People sometimes talk about the
firm’s net cash flow, which is shown as the lowest entry on the income
statement, hence it is often called "the bottom line.”
Depreciation reduces a firm’s
cash balance, so an increase in depreciation would normally lead to a reduction
in the firm’s net cash flow.
Net cash flow (NCF) is often
defined as follows:
Net Cash Flow = Net Income +
Depreciation and Amortization Charges.
Depreciation and amortization are
not cash charges, so neither of them has an effect on a firm’s reported
profits.
Question 15
Which of the following items is
NOT included in current assets?
Accounts receivable.
Inventory.
Bonds.
Cash.
Short-term, highly liquid,
marketable securities.
Question 16
A firm’s new president wants to
strengthen the company’s financial position.
Which of the following actions would make it financially stronger?
a. Increase accounts receivable
while holding sales constant.
b. Increase EBIT while holding
sales constant.
c. Increase accounts payable
while holding sales constant.
d. Increase notes payable while
holding sales constant.
e. Increase inventories while
holding sales constant.
Question 17
Which of the following statements
is CORRECT?
a. Borrowing by using short-term
notes payable and then using the proceeds to retire long-term debt is an
example of “window dressing.” Offering discounts to customers who pay with cash
rather than buy on credit and then using the funds that come in quicker to
purchase additional inventories is another example of “window dressing.”
b. Borrowing on a long-term basis
and using the proceeds to retire short-term debt would improve the current
ratio and thus could be considered to be an example of “window dressing.”
c. Offering discounts to
customers who pay with cash rather than buy on credit and then using the funds
that come in quicker to purchase additional inventories is an example of
“window dressing.”
d. Using some of the firm’s cash
to reduce long-term debt is an example of “window dressing.”
e. “Window dressing” is any
action that improves a firm’s fundamental, long-run position and thus increases
its intrinsic value.
to be an example of “window
dressing.”
Question 18
Which of the following statements
is CORRECT?
a. If a firm has the highest
price/earnings ratio of any firm in its industry, then, other things held
constant, this suggests that the board of directors should fire the president.
b. If a firm has the highest
market/book ratio of any firm in its industry, then, other things held
constant, this suggests that the board of directors should fire the president.
c. Other things held constant,
the higher a firm’s expected future growth rate, the lower its P/E ratio is
likely to be.
d. The higher the market/book
ratio, then, other things held constant, the higher one would expect to find
the Market Value Added (MVA).
e. If a firm has a history of
high Economic Value Added (EVA) numbers each year, and if investors expect this
situation to continue, then its market/book ratio and MVA are both likely to be
below average.
Question 19
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 also increasing and trending still higher, this would be interpreted as a
sign of strength.
b. If a firm increases its sales
while holding its accounts receivable constant, then, other things held constant,
its days’ sales outstanding (DSO) will increase.
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.
Question 20
Taggart Technologies is
considering issuing new common stock and using the proceeds to reduce its
outstanding debt. The stock issue would
have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax
rate. Which of the following is likely
to occur if the company goes ahead with the stock issue?
a. The ROA will decline.
b. Taxable income will decrease.
c. The tax bill will increase.
d. Net income will decrease.
e. The times interest earned
ratio will decrease.
Question 21
Casey Communications recently
issued new common stock and used the proceeds to pay off some of its short-term
notes payable. This action had no effect
on the company’s total assets or operating income. Which of the following effects would occur as
a result of this action?
a. The company’s current ratio
increased.
b. The company’s times interest
earned ratio decreased.
c. The company’s basic earning
power ratio increased.
d. The company’s equity
multiplier increased.
e. The company’s debt ratio
increased.
Question 22
Which of the following statements
is CORRECT?
a. If Firms X and Y have the same
P/E ratios, then their market-to-book ratios must also be the same.
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 also to 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.
Question 23
Companies HD and LD have the same
sales, tax rate, interest rate on their debt, total assets, and basic earning
power. Both companies have positive net
incomes. Company HD has a higher debt
ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a. Company HD pays less in taxes.
b. Company HD has a lower equity
multiplier.
c. Company HD has a higher ROA.
d. Company HD has a higher times
interest earned (TIE) ratio.
e. Company HD has more net
income.
Question 24
You observe that a firm’s ROE is above
the industry average, but its profit margin and debt ratio are both below the
industry average. Which of the following
statements is CORRECT?
a. Its total assets turnover must
be above the industry average.
b. Its return on assets must
equal the industry average.
c. Its TIE ratio must be below
the industry average.
d. Its total assets turnover must
be below the industry average.
e. Its total assets turnover must
equal the industry average.
Question 25
Which of the following would
indicate an improvement in a company’s financial position, holding other things
constant?
a. The inventory and total assets
turnover ratios both decline.
b. The debt ratio increases.
c. The profit margin declines.
d. The EBITDA coverage ratio
declines.
e. The current and quick ratios
both increase.
Question 26
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.
Question 27
If a bank loan officer were
considering a company’s request for a loan, which of the following statements
would you consider to be CORRECT?
a. The lower the company’s EBITDA
coverage ratio, other things held constant, the lower the interest rate the
bank would charge the firm.
b. Other things held constant,
the higher the debt ratio, the lower the interest rate the bank would charge
the firm.
c. Other things held constant,
the lower the debt ratio, the lower the interest rate the bank would charge the
firm.
d. The lower the company’s TIE
ratio, other things held constant, the lower the interest rate the bank would
charge the firm.
e. Other things held constant,
the lower the current ratio, the lower the interest rate the bank would charge
the firm.
Question 28
Companies HD and LD are both
profitable, and they have the same total assets (TA), Sales (S), return on
assets (ROA), and profit margin (PM). However, Company HD has the higher debt
ratio. Which of the following statements
is CORRECT?
a. Company HD has a lower total
assets turnover than Company LD.
b. Company HD has a lower equity
multiplier than Company LD.
c. Company HD has a higher fixed
assets turnover than Company B.
d. Company HD has a higher ROE
than Company LD.
e. Company HD has a lower
operating income (EBIT) than Company LD.
Question 29
Which of the following statements
is CORRECT?
a. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10% and its debt increases from 40% of total assets to
60%. Under these conditions, the ROE will
increase.
b. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10% and its debt increases from 40% of total assets to
60%. Without additional information, we
cannot tell what will happen to the ROE.
c. The modified Du Pont equation
provides information about how operations affect the ROE, but the equation does
not include the effects of debt on the ROE.
d. Other things held constant, an
increase in the debt ratio will result in an increase in the profit margin on
sales.
e. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10%, and its debt increases from 40% of total assets to
60%. Under these conditions, the ROE
will decrease.
Question 30
Considered alone, which of the
following would increase a company’s current ratio?
a. An increase in net fixed
assets.
b. An increase in accrued
liabilities.
c. An increase in notes payable.
d. An increase in accounts
receivable.
e. An increase in accounts payable.
Question 28
Companies HD and LD are both
profitable, and they have the same total assets (TA), Sales (S), return on
assets (ROA), and profit margin (PM). However, Company HD has the higher debt
ratio. Which of the following statements
is CORRECT?
a. Company HD has a lower total
assets turnover than Company LD.
b. Company HD has a lower equity
multiplier than Company LD.
c. Company HD has a higher fixed
assets turnover than Company B.
d. Company HD has a higher ROE
than Company LD.
e. Company HD has a lower
operating income (EBIT) than Company LD.
Question 29
Which of the following statements
is CORRECT?
a. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10% and its debt increases from 40% of total assets to
60%. Under these conditions, the ROE will
increase.
b. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10% and its debt increases from 40% of total assets to
60%. Without additional information, we
cannot tell what will happen to the ROE.
c. The modified Du Pont equation
provides information about how operations affect the ROE, but the equation does
not include the effects of debt on the ROE.
d. Other things held constant, an
increase in the debt ratio will result in an increase in the profit margin on
sales.
e. Suppose a firm’s total assets
turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin
rises from 9% to 10%, and its debt increases from 40% of total assets to
60%. Under these conditions, the ROE
will decrease.
Question 30
Considered alone, which of the
following would increase a company’s current ratio?
a. An increase in net fixed
assets.
b. An increase in accrued
liabilities.
c. An increase in notes payable.
d. An increase in accounts
receivable.
e. An increase in accounts payable.
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