CH4

Question 1

What is the current asset turnover ratio if last year’s ratio was 2.0, sales increased by 25%, and total assets increased by 10%?

Answer 1

2.15

Question 2

High levels of liquidity may indicate:

Answer 2

• low levels of net working capital.
• high levels of economic value added.
• low profit margins.
• inefficient use of assets.

Question 3

Efficiency ratios are used to measure:

Answer 3

• how well the company uses its assets.
• the profits generated by a firm’s equity and assets.

Question 4

Which of the following is the least effective measure of operating performance?

Answer 4

ROC

Question 5

Which change indicates an improvement in a firm’s asset management efficiency?

Answer 5

An increase in the inventory turnover rate

Question 6

What is the ROA of a firm with $150,000 in receivables, assets of $750,000, and an operating profit margin of 9%?

Answer 6

10.95%

Question 7

Which cost accounts for the difference between accounting income and economic value added?

Answer 7

Cost of capital

Question 8

Calculate the average collection period for Dots Inc. if accounts receivables were $550 and the firm generated $3,000 of sales.

Answer 8

67 days

Question 9

What indicates that a firm is efficient?

Answer 9

A high inventory turnover

Question 10

What might you assume about Tri-C Corp. with a higher current ratio and lower inventory turnover?

Answer 10

Its average inventory is relatively high.

Question 11

Which action would be most detrimental to a firm’s current ratio if it is currently 2?

Answer 11

Paying off accounts payable with cash

Question 12

If a firm’s debt ratio is greater than 0.5, then it has:

Answer 12

more long-term debt than equity.

Question 13

What does a total debt ratio of 0.35 indicate?

Answer 13

would exist if a firm had liabilities of $700 and assets of $2,000.

Question 14

What will be Gamma Inc.’s return on equity if total asset turnover is 0.85, operating profit margin is 0.15, and two-thirds of assets are financed through equity?

Answer 14

16.96%

Question 15

If the cash coverage ratio exceeds the times interest earned ratio, then the firm has:

Answer 15

a positive cash flow.

Question 16

Which measure accounts for the opportunity cost of capital?

Answer 16

EVA

Question 17

Lease obligations are included in leverage ratios because leases:

Answer 17

represent long-term fixed obligations.

Question 18

An asset turnover ratio of 1.75 can be interpreted as:

Answer 18

$1.75 in sales are generated by every $1 of assets.

Question 19

The current ratio is a good proxy for a firm’s:

Answer 19

liquidity

Question 20

If a company uses cash to pay off accounts payables, how will this affect its liquidity ratios?

Answer 20

The quick ratio and current ratio will both decrease.

Question 21

An asset’s liquidity measures its:

Answer 21

ease and cost of being converted to cash.

Question 22

If BDS acquired its main supplier and profit margin increased but ROA remained constant, which ratio likely decreased?

Answer 22

Asset turnover

Question 23

What asset turnover ratio is necessary for XYZ Corp. to achieve an ROE of 18% with a 7% profit margin?

Answer 23

4.02

Question 24

Which of the following is not a problem with EVA?

Answer 24

EVA assumes that the book values of assets are equal to their current worth.

Question 25

How will the long-term debt ratio differ if leasing is selected over bank-debt?

Answer 25

The ratio will be lower under the leasing option.

Question 26

Which will have no effect on the cash coverage ratio?

Answer 26

Depreciation

Question 27

After-tax operating income for a leveraged firm is defined as:

Answer 27

EBIT × (1 − tax rate).

Question 28

If a firm has $600,000 in current assets and $150,000 in current liabilities, what happens if it pays off $50,000 in accounts payable?

Answer 28

Current ratio will increase.

Question 29

If a company has a healthy current ratio but a lower quick ratio, you can assume that:

Answer 29

inventory represents a large portion of the firm's current assets.

Question 30

Which ratio is commonly referred to as the acid-test ratio?

Answer 30

Quick ratio

Question 31

By how much will shareholders' equity increase if a corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends?

Answer 31

$17 million

Question 32

If a firm's quick ratio is equal to its current ratio, what does this imply?

Answer 32

It has no inventory.

Question 33

Which asset is generally considered to be the most liquid?

Answer 33

Accounts receivable

Question 34

The inventory turnover ratio compares:

Answer 34

Cost of goods sold to inventory

Question 35

What is primarily responsible for potential distortion among ROA when net income is used?

Answer 35

Financial leverage varies among firms

Question 36

What is the long-term debt ratio for a firm with total assets of $1,000, total liabilities of $350, and current liabilities of $130?

Answer 36

0.36

Question 37

On average, how many days does it take a firm with average daily expenses of $2.13 million and average accounts payable of $112.7 million to pay its bills?

Answer 37

52.91 days

Question 38

Which will increase a firm’s times interest earned ratio?

Answer 38

a decrease in cost of goods sold

Question 39

What is the market price of a share of stock for a firm with 100,000 shares outstanding and a market-to-book ratio of 3?

Answer 39

$30

Question 40

A retail store with zero net working capital has:

Answer 40

no current debt.

Question 41

What best represents the return on capital for a firm with $1,000,000 in after-tax operating income and total capital of $8,000,000?

Answer 41

12.5%

Question 42

If ROC is less than a firm’s cost of capital, what must be true?

Answer 42

The firm’s EVA is negative.

Question 43

A firm with no leases has a long-term debt ratio of 50%. This means that the book value of equity:

Answer 43

equals the book value of long-term debt.

Question 44

A times interest earned ratio of 5 indicates the firm:

Answer 44

earns significantly more than its interest obligations.

Question 45

What is likely true for a company with a cash ratio close to 1.95?

Answer 45

Sufficient money exists for capital projects.

Question 46

Which change will provide an increase in a firm's ROE?

Answer 46

A decrease in the tax rate

Question 47

When a firm's long-term debt-equity ratio is .98, what does this imply?

Answer 47

has less long-term debt than equity.

Question 48

To calculate which measure do you need to know the cost of capital?

Answer 48

EVA

Question 49

Which statement is correct regarding market value added?

Answer 49

Market value added measures the difference between the total market value and the total book value of equity.

Question 50

The use of debt in the firm's capital structure will increase ROE if the firm:

Answer 50

earns a higher return than the rate paid on debt.

Question 51

What is the firm's times interest earned ratio if it has revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000?

Answer 51

3.75

Question 52

What is a deficiency of standard measures of liquidity?

Answer 52

ignore a firm's reserve borrowing capacity.

Question 53

What is the debt ratio for a firm with a debt-equity ratio of 0.5?

Answer 53

33.3%

Question 54

What is the market value added for Balsco with total assets of $238,000 and total liabilities of $107,000?

Answer 54

$123,712

Question 55

What will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?

Answer 55

An operating profit margin of 6.4%

Question 56

A firm's profit margin when ignoring financing effects is 20% with EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes?

Answer 56

$300,000

Question 57

What is a return on equity of 25% indicative of?

Answer 57

A firm's profitability relative to shareholders' equity

Question 58

What does a P/E ratio of 14 signify?

Answer 58

The price investors are willing to pay for $1 of earnings

Question 59

What does an operating profit margin of 6.4% represent?

Answer 59

The percentage of revenue that remains after covering operating expenses

Question 60

What is a leverage ratio of 0.0667 indicative of?

Answer 60

The proportion of a firm's capital that is financed by debt

Question 61

If a firm's profit margin is 20% with an EBIT of $1.5 million and sales of $5 million, how much did the firm pay in taxes?

Answer 61

$300,000

Question 62

What is the book value per share for a firm with 2 million shares outstanding at a price of $50 and a market-to-book ratio of 0.75?

Answer 62

$37.50

Question 63

Which firm has recently had a negative market value added?

Answer 63

Bank of America

Question 64

For a firm with an average collection period of 90 days, which statement is most likely correct?

Answer 64

Its average daily sales are low

Question 65

What will Gamma Inc.'s equity holders earn if the total asset turnover is 0.85 and the operating profit margin is 0.15?

Answer 65

11.42%

Question 66

How much liquid assets does TSI Inc. have to finance its operations for 67 days?

Answer 66

$1,000

Question 67

What is TSI's average daily expenditures from operations?

Answer 67

$14.93

Question 68

Which factor will cause a reduction in the NWC turnover ratio all else held constant?

Answer 68

An increase in average inventory