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Q:
Based on the information in Table 4-1, the OROA is
A) 24.73%.
B) 39.50%.
C) 46.54%.
D) 52.78%.
Q:
Based on the information in Table 4-1, the debt ratio is
A) 24.1%.
B) 32.6%.
C) 45.0%.
D) 55.2%.
Q:
Based on the information in Table 4-1, the accounts receivable turnover is
A) 10.00.
B) 11.11.
C) 8.11.
D) 9.50.
Q:
Based on the information in Table 4-1, the average collection period is
A) 36.50 days.
B) 32.85 days.
C) 46.34 days.
D) 29.85 days.
Q:
Based on the information in Table 4-1, the acid-test ratio is
A) 1.71.
B) 1.67.
C) 1.02.
D) 0.98.
Q:
Please refer to Table 4-1 for the following questions.Table 4-1Stewart CompanyBalance SheetAssets:Cash and marketable securities$600,000Accounts receivable900,000Inventories1,500,000Prepaid expenses75,000Total current assets$3,075,000Fixed assets8,000,000Less: accum. depr.(2,075,000)Net fixed assets$5,925,000Total assets$9,000,000Liabilities:Accounts payable$800,000Notes payable700,000Accrued taxes50,000Total current liabilities$1,550,000Long-term debt2,500,000Owner's equity (1 million shares of common stock outstanding)4,950,000Total liabilities and owner's equity$9,000,000Net sales (all credit)$10,000,000Less: Cost of goods sold(3,000,000)Selling and administrative expense(2,000,000)Depreciation expense(250,000)Interest expense(200,000)Earnings before taxes4,550,000Income taxes(1,820,000)Net income$2,730,000Based on the information in Table 4-1, the current ratio isA) 1.92.B) 1.98.C) 2.86.D) 2.88.
Q:
Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection period isA) 18.25 days.B) 36.50 days.C) 90 days.D) 40.56 days.
Q:
The current ratio of a firm would equal its quick ratio whenever
A) the firm has no inventory.
B) the firm's inventory is equal to its other current assets.
C) the firm's inventory is equal to its current liabilities.
D) the firm's current ratio is equal to one.
Q:
The current ratio of a firm would be decreased by which of the following?
A) Land held for investment is sold for cash.
B) Equipment is purchased, financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a long-term credit basis.
Q:
The current ratio of a firm would be increased by which of the following?
A) Land held for investment is sold for cash.
B) Equipment is purchased, financed by a long-term debt issue.
C) Inventories are sold for cash.
D) Inventories are sold on a credit basis.
Q:
The acid-test ratio of a firm would be unaffected by which of the following?
A) Several short-term loans are consolidated and paid off using long-term debt.
B) Equipment is purchased, financed by a long-term debt issue.
C) Additional inventory is purchased for cash.
D) Large accounts receivable balances are collected.
Q:
The acid-test ratio of a firm would be unaffected by which of the following?
A) Accounts payable are reduced by obtaining a short-term loan.
B) Common stock is sold and the money is invested in marketable securities.
C) Inventories are sold for cash.
D) Inventories are sold on a short-term credit basis.
Q:
Which of the following statements concerning Economic Value Added (EVA) is MOST correct?
A) The higher the cost of capital, the higher the EVA, other things being held constant.
B) EVA can be negative even if operating profits are positive.
C) A company with positive net income will have positive EVA.
D) Higher operating return on assets will result in lower EVA for a company with a debt ratio over 50%.
Q:
Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price?
A) $60 per share
B) $96 per share
C) $240 per share
D) $360 per share
Q:
HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible?
A) Markets are inefficient and fail to recognize the benefits of leverage.
B) The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased.
C) Shareholders are not interested in return on equity.
D) The high levels of debt increased the riskiness of HighLev relative to its competitors.
Q:
Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a higher times interest earned ratio than Butler. If Nelson and Butler both have the same amount of total assets, then
A) Nelson must have higher operating income than Butler.
B) if both companies have the same operating income, Butler must be paying a higher interest rate on its long-term debt than Nelson is paying.
C) Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler has.
D) if both companies have the same operating income, a mistake was made in the calculations because the company with a higher debt ratio must have a lower times interest earned ratio.
Q:
Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from
A) Company B has more common stock.
B) Company A has a lower debt ratio.
C) Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
D) Company A has lower cost of goods sold, resulting in a higher net profit margin.
Q:
When comparing inventory turnover ratios, other things being equal,
A) a lower inventory turnover is preferred in order to keep inventory costs low.
B) a higher inventory turnover is preferred to improve liquidity.
C) higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet.
D) higher inventory turnover results from an increase in the selling price of the product.
Q:
Company A has a higher days sales outstanding ratio than Company B. Therefore,
A) Company A sells more on credit than Company B.
B) Company A has a higher percentage of cash to credit sales than Company B.
C) Company A must be collecting its accounts receivable faster than Company B, on average.
D) other things being equal, Company B has a cash flow advantage over Company A.
Q:
For a retailer with inventory to sell, the acid-test ratio will be
A) less than the current ratio, thus providing a more stringent measure of liquidity.
B) greater than the current ratio, thus providing a more stringent measure of liquidity.
C) greater than the current ratio, thus providing a less stringent measure of liquidity.
D) unimportant because it doesn't include inventory.
Q:
Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio?
A) The company collects $500,000 of its accounts receivable.
B) The company sells $1 million of inventory on credit.
C) The company pays back $50,000 of its long-term debt.
D) The company writes a $30,000 check to pay off some existing accounts payable.
Q:
Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of $6 million. Williams' inventory balance is
A) $2,000,000.
B) $2,400,000.
C) $4,000,000.
D) $4,800,000.
Q:
Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million?
A) $0.50 million
B) $1.67 million
C) $4.50 million
D) $6.00 million
Q:
All of the following measure liquidity EXCEPT
A) current ratio.
B) inventory turnover.
C) acid-test ratio.
D) operating return on assets.
Q:
Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that
A) the risk-free rate of interest is 3%.
B) the corporation's inventory turnover is high.
C) investors' required rate of return is 8%.
D) investors' required rate of return is 12%.
Q:
An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position?
A) Company B has much higher operating income than Company A.
B) Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
C) Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
D) Company B has more total assets than Company A.
Q:
Asset efficiency ratios for Fischer, Inc. are given in the table below. Based on this information, Fischer, Inc.'s fixed asset turnover ratio is likely to be ________. Fischer, Inc.
Peer Group Total Asset Turnover
1.58X
2.05X Accounts Receivable Turnover
17.55X
14.35X Inventory Turnover
6.34X
5.22X Fixed Asset Turnover
?????
3.50X A) equal to 3.50
B) less than 3.50
C) greater than 3.50
D) negative
Q:
Which of the following transactions will increase a corporation's operating return on assets?
A) sell stock and use the money to pay off some long-term debt
B) sell 10-year bonds and use the money to pay off current liabilities
C) negotiate a new contract that lowers raw material costs by 10%
D) increase sales by 10%
Q:
Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value.
Q:
The goal of most financial managers is to reduce the amount of long-term debt to zero, thus maximizing shareholder wealth.
Q:
Operating return on assets captures the effect of taxes and financing costs, and hence provides the broadest possible measure of profitability.
Q:
The computation of return on equity, or ROE, does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year.
Q:
How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has, not whether or not they paid for the assets with debt or equity.
Q:
Economic value added is calculated by taking (net income less the cost of all capital) times total assets.
Q:
Economic value added includes a charge for the cost of equity that is not included on financial statements prepared according to GAAP.
Q:
Economic Value Added attempts to measure a firm's economic profit rather than its accounting profit.
Q:
DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage (debt).
Q:
One weakness of the times interest earned ratio is that it includes only the annual interest expense as a finance expense and ignores other financing items such as lease payments that must be paid.
Q:
The astute financial manager will seek to attain the highest current ratio possible.
Q:
Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management.
Q:
The current ratio and the acid test ratio both measure financial leverage.
Q:
A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods. This is referred to as trend analysis.
Q:
A high debt ratio can be favorable because higher leverage may result in a higher return on equity.
Q:
Lower asset turnover ratios are generally indicative of more efficient asset management.
Q:
Operating return on assets (OROA) is equal to operating profit margin times fixed assets turnover.
Q:
Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing.
Q:
Net income is the best measure to use for evaluating a firm's profits on assets because it includes the effect of financing as well as the effect of operations.
Q:
If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover.
Q:
Financial ratios are useful for measuring performance because maximizing the return on equity for common shareholders is the primary goal of financial managers.
Q:
Total asset turnover is equal to accounts receivable turnover plus inventory turnover plus fixed asset turnover.
Q:
Operating return on assets is equal to the operating profit margin times total asset turnover.
Q:
Borrowing more money will always increase a company's return on equity because the company is using financial leverage, but it also adds to the riskiness of the company.
Q:
Borrowing money causes a corporation's return on operating assets to decrease because of the interest that must be paid.
Q:
Return on equity is driven by (1) the spread between the operating return on assets and the interest rate, and (2) changes in the debt ratio.
Q:
A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity.
Q:
How does a firm use financial ratios? Who else might use financial ratios and why?
Q:
In an ideal world, which of the following would be used to evaluate firm performance?
A) book value of assets
B) corporate retained earnings from the day of incorporation
C) accounting assets and profits
D) market value of assets
Q:
Common-sized income statements
A) assist in the comparison of companies of different sizes.
B) show each income statement account as a percentage of total assets.
C) compare companies with the same level of total sales.
D) compare companies with the same level of net income.
Q:
Common-sized balance sheets
A) show data for companies in the same industry.
B) show data for companies with approximately the same amount of assets.
C) show each balance sheet account as a percentage of total sales.
D) show each balance sheet account as a percentage of total assets.
Q:
Financial analysis
A) uses historical financial statements and is thus useful only to assess past performance.
B) relies on generally accepted accounting principles to make comparisons between companies valid.
C) uses historical financial statements to measure a company's performance and in making financial projections of future performance.
D) is accounting record-keeping using generally accepted accounting principles.
Q:
How managers choose to finance the business affects the company's risk, and as a result, the rate of return stockholders receive on their investments.
Q:
Trend analysis is the forecasting of the firm's financial ratios for a future time period by using its own ratios from previous periods.
Q:
Ratios are used to standardize financial information, thereby making it easier to interpret.
Q:
Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.
Q:
Common-size balance sheets are balance sheets of companies with almost identical total assets (within 2% of each other).
Q:
Ratios of almost all companies are easily comparable because all public companies prepare their financial reports based upon generally accepted accounting principles.
Q:
Accounting information is used in financial ratio analysis because it is theoretically the best data to guide financial decision-making.
Q:
Common stockholders may use financial ratios to monitor manager actions to help lessen agency problems.
Q:
Financial ratios cannot be used to evaluate the creation of shareholder wealth because they are based on accounting numbers that reflect historical cost and not current market values.
Q:
Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company.
Q:
Financial ratios are useful for evaluating performance but should not be used for making financial projections.
Q:
Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.
Q:
Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting numbers, but accounting numbers are used because they are more readily available.
Q:
When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis.
Q:
Why do differences in the accounting practices of firms limit the usefulness of financial ratios?
Q:
When comparing a firm to its peers, why is it difficult to determine the industry to which the firm belongs? Why should you be careful when comparing a firm with industry norms?
Q:
How could an analyst determine whether a company's ratio is good or bad?
Q:
Discuss five limitations to ratio analysis.
Q:
Seasonality is introduced into financial ratios by averaging monthly account balances, and thus it is recommended that ending account balances be used.
Q:
Seasonality causes comparability problems in ratio analysis. A common solution is to use an average account balance as opposed to an ending account balance.