Q&A Hero

Q: The present value factor increases as the number of period decreases. A) True B) False

Q: The present value technique uses discounting to find the present value of each cash flow at the beginning of a project. A) True B) False

Q: The present value is simply the current value of a future cash flow that has been discounted at an appropriate discount rate. A) True B) False

Q: To calculate the present value of a future amount, we divide the future amount by the future value factor. A) True B) False

Q: The future value factor for 10 years at 15% is calculated as (1 + 0.15)10. A) True B) False

Q: The future value of an investment of $5,000 to be received in three years at a discount rate of 10 percent is $6,655. A) True B) False

Q: The future value of an investment of $5,000 earning an annual interest of 10 percent equals $6,000 at the end of one year. A) True B) False

Q: If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A. A) True B) False

Q: The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period. A) True B) False

Q: The higher the interest rate on an investment, the more money that is accumulated for any time period. A) True B) False

Q: William invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000. A) True B) False

Q: The growth in the future value of an investment over time is not linear, but exponential. A) True B) False

Q: Due to compounding effects, the growth in the future value of an investment over time is linear. A) True B) False

Q: Compounding accelerates the growth of the total interest earned. A) True B) False

Q: Compound interest increases as the number of year decreases. A) True B) False

Q: Compound interest consists of both simple interest and interest on interest. A) True B) False

Q: Compounding is the process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest previously earned as well as the original principal. A) True B) False

Q: The process of converting the initial amount into future value is called discounting. A) True B) False

Q: The future value technique uses discounting to find the future value of each cash flow at the end of a project's life. A) True B) False

Q: The higher the rate of interest, the more likely you will elect to invest your funds and forgo current consumption. A) True B) False

Q: The further in the future you receive a dollar, the more it is worth today. A) True B) False

Q: The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future. A) True B) False

Q: The value of a dollar invested at a positive interest rate grows over time. A) True B) False

Q: The time value of money is based on the belief that people have a positive time preference for consumption. A) True B) False

Q: The higher the times-interest-earned ratio, the more comfortable a firm is in meeting its interest obligations. A) True B) False

Q: The equity multiplier of a firm is computed by dividing the total equity by its total assets. A) True B) False

Q: Financial leverage refers to the use of preferred stock in a firm's capital structure. A) True B) False

Q: Total asset turnover is more relevant for service-industry firms, while the fixed asset turnover ratio is more relevant for manufacturing industry firms. A) True B) False

Q: A firm increased its day's sales outstanding from 35 days to 43 days. This implies the firm is more efficient in collecting the debts. A) True B) False

Q: Turnover ratios are useful for managers in identifying inefficient use of current and long-term assets. A) True B) False

Q: The purchase of additional inventory by a firm should decrease a firm's quick ratio. A) True B) False

Q: A company can improve its liquidity by increasing its accounts payable, while maintaining the other accounts constant. A) True B) False

Q: A firm's current ratio changed from 1.4 times in the previous year to 1.6 times in the current year. Based on this information, we can conclude that the firm's liquidity has improved. A) True B) False

Q: Liquidity ratios are concerned with a firm's ability to pay its current bills without putting the firm in financial difficulty. A) True B) False

Q: The most frequent method used for creating a common-size balance sheet is to divide each of the accounts by total assets, expressing each account as a percentage of total assets. A) True B) False

Q: A typical way in which a common-size income statement is constructed is by dividing all expense items in an income statement by net income. A) True B) False

Q: A financial statement analysis conducted over a period of time is called trend analysis. A) True B) False

Q: Managers' decisions regarding financing, investment, and working capital are reflected in the financial statements. A) True B) False

Q: Stockholders are primarily concerned on the value of their stock, but not on how much cash they can expect to receive from dividends and/or capital appreciation over time. A) True B) False

Q: Financial statement analysis can help us determine why a firm's cash flows are increasing or decreasing. A) True B) False

Q: Explain the different ways that a firm's ratios can be benchmarked.

Q: What are some of the main limitations of ratio analysis?

Q: Compare how a firm's creditor would analyze a firm's financial statements relative to those of a firm's shareholders.

Q: Which of the following is a limitation of ratio analysis? A) Ratios depend on accounting data based on historical costs. B) Differences in accounting practices like FIFO versus LIFO make comparison difficult. C) Trend analysis could be distorted by financial statements affected by inflation. D) All of the above are limitations of ratio analysis.

Q: Which of the following is NOT a method of "benchmarking"? A) Conducting an industry group analysis. B) Utilizing the DuPont system to analyze a firm's performance. C) Evaluating a single firm's performance over time. D) Identifying a group of firms that compete with the company being analyzed.

Q: Peer group analysis can be performed by: A) management choosing a set of firms that are similar in size or sales, or who compete in the same market. B) using the average ratios of this peer group, which would then be used as the benchmark. C) identifying firms in the same industry that are grouped by size, sales, and product lines in order to establish benchmark ratios. D) Only a and b relate to peer group analysis.

Q: Which one of the following statements about trend analysis is NOT correct? A) The benchmark for trend analysis is based on a firm's historical performance. B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm. C) It uses the Standard Industrial Classification (SIC) Systemto benchmark firms. D) A ratio value that is changing typically prompts the financial manager to sort out the issues surrounding the change.

Q: There are people who believe that the analysis of financial statements has limitations. Which of the statements below would qualify as a limitation of financial statement analysis? A) Ratio analysis requires the analyst to evaluate a firm's performance over a period of time to be of any value. B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated. C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret. D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market values.

Q: Sorenstam Corp. has an equity multiplier of 2.34 times, total assets of $4,512,895, a ROE of 17.5 percent, and a total assets turnover of 3.1 times. Calculate the firm's ROA. Round your percentage answer to two decimal places.A) 6.23%B) 4.53%C) 7.48%D) 5.79%

Q: Saunders, Inc., has a ROE of 18.7 percent, an equity multiplier of 2.53 times, sales of $2.75 million, and a total assets turnover of 2.7 times. What is the firm's net income? Round your final answer to two decimal places.A) $75,281.80B) $514,250.00C) $51,425.00D) $7,528.10

Q: Which one of the following is NOT an advantage of using return on equity (ROE) as a goal? A) ROE is highly correlated with shareholder wealth maximization. B) ROE and the DuPont analysis allow management to break down the performance and identify areas of strengths and weaknesses. C) ROE does not consider risk. D) All of the above are advantages of using ROE as a goal.

Q: Which one of the following is a criticism of equating the goals of maximizing the return on equity (ROE) of a firm and maximizing the firm's shareholder wealth? A) ROE is based on after-tax earnings, not cash flows. B) ROE does not consider risk. C) ROE ignores the size of the initial investment as well as future cash flows. D) All of the above are criticisms of ROE as a goal.

Q: The DuPont equation shows that a firm's (return on equity) ROE is determined by three factors: A) net profit margin, total asset turnover, and the equity multiplier. B) operating profit margin, return on assets (ROA), and the total assets turnover. C) net profit margin, total asset turnover, the return on assets (ROA). D) return on assets (ROA), total assets turnover, and the equity multiplier.

Q: Which one of the following statements is NOT correct? A) The DuPont system is based on two equations that relate a firm's return on asset (ROA) and return on equity (ROE). B) The DuPont system is a set of related ratios that links the items of balance sheet and the income statement. C) Both management and shareholders can use this tool to understand the factors that drive a firm's return on equity (ROE). D) All of the above are correct.

Q: Which of the following is true of a firm that has both debt and equity? A) Its return on equity (ROE) will be greater than its return on asset (ROA). B) Its return on equity (ROE) will be lesser than its return on asset (ROA). C) Its return on equity (ROE) will be equal to its return on asset (ROA). D) None of the above.

Q: Which of the following is true of a firm that has no debt in its capital structure? A) Its return on equity (ROE) will be greater than its return on asset (ROA). B) Its return on equity (ROE) will be lesser than its return on asset (ROA). C) Its return on equity (ROE) will be equal to its return on asset (ROA). D) None of the above.

Q: In the latest year, Photon, Inc. reported $276,000 in net income. The firm maintains a debt ratio of 30% and has total assets of $3,000,000. What is Photon's return on equity? (Round your percentage answer to one decimal place.) A) 13.1% B) 14.6% C) 22.5% D) 18.7%

Q: Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio? A) The quick ratio more accurately reflects a firm's profitability. B) It omits the least liquid current asset from the numerator of the ratio. C) The current ratio does not include accounts receivable. D) It measures how "quickly" cash flows through the firm.

Q: Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place.A) 7.1%B) 34.7%C) 28.1%D) 43.2%

Q: Tigger Corp. has reported the financial results for the year-ended 2006. Based on the information given, calculate the firm's gross profit margin and operating profit margin. Round your final answers to one decimal place.Net sales = $4,156,700 Net income = $778,321Cost of goods sold = $2,715,334 EBIT = $1,356,098A) 34.7%; 32.6%B) 32.6%; 18.7%C) 34.7%; 18.7%D) None of the above.

Q: GenTech Pharma has reported the following information:Sales/Total assets = 2.89; ROA = 10.74%; ROE = 20.36%What are the firm's profit margin and equity multiplier? Round your profit margin answer to one decimal place, and equity multiplier answer to 2 decimal places.A) 7.1%; 0.53B) 7.1%; 1.90C) 3.7%; 0.53D) 3.7%; 1.90

Q: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465. Their net profit margin for the year is 18 percent. What is Juventus's return on assets (ROA)? Round intermediate calculations to nearest dollar and percentage answer to one decimal place.A) 25.6%B) 18%C) 27.4%D) None of the above

Q: Perez Electronics Corp. has reported that its net income for 2006 is $1,276,351. The firm has 420,000 shares outstanding and a PE ratio of 11.2 times. What is the firm's share price?Round your intermediate and final answer to two decimal places.A) $34.05B) $3.68C) $11.20D) $36.80

Q: RTR Corp. has reported a net income of $812,425 for the year. The company's share price is $13.45, and the company has 312,490 shares outstanding. Compute the firm's price-earnings ratio. Round your final answer to two decimal places.A) 4.87 timesB) 8.12 timesC) 5.17 timesD) None of the above

Q: Dreisen Traders has total debt of $1,233,837 and total assets of $2,178,990. What are the firm's equity multiplier and debt-to-equity ratio? Round your final answers to two decimal places. A) 2.31; 1.31 B) 1.75; 0.75 C) 0.75; 1.75 D) 1.31; 2.31

Q: What will be a firm's equity multiplier given a debt ratio of 0.45? Round your final answer to two decimal places.A) 1.82B) 1.28C) 2.22D) None of the above

Q: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? Round your final answer to two decimal places. A) 0.60 B) 1.47 C) 1.74 D) 3.47

Q: Fahr Company had depreciation expenses of $630,715, interest expenses of $112,078, and an EBIT of $1,542,833 for the year ended June 30, 2006. What are the times interest earned and cash coverage ratios for this company? Round your final answers to one decimal place.A) 19.4 times; 12.7 timesB) 17.3 time; 11.4 timesC) 13.8 times; 19.4 timesD) None of the above

Q: Sectors, Inc., has an EBIT of $7,221,643 and interest expense of $611,800. Its depreciation for the year is $1,434,500. What is its cash coverage ratio? Round your final answer to two decimal places.A) 15.42 timesB) 18.34 timesC) 14.15 timesD) None of the above

Q: Trident Corp., has debt of $3.35 million with an interest rate of 6.875 percent. The company has an EBIT of $2,766,009. What is its times-interest-earned ratio? Round your final answer to nearest number.A) 13 timesB) 12 timesC) 11 timesD) None of the above

Q: Deutsche Bearings has total sales of $9,745,923, inventories of $2,237,435, cash and equivalents of $755,071, and day's sales outstanding of 49 days. If the firm's management wanted its day's sales outstanding (DSO) to be 35 days, by how much will the accounts receivable have to change? Round your final answer to two decimal places.A) $373,816.23B) -$373,816.23C) -$379,008.12D) $379,008.12

Q: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and a gross profit margin of 67.3 percent. What is the firm's cost of goods sold? Round your final answer to the nearest dollar.A) $2,074,557B) $2,745,640C) $274,560D) None of the above.

Q: Jet, Inc., has net sales of $712,478 and accounts receivable of $167,435. What are the firm's accounts receivable turnover and day's sales outstanding? Round your accounts receivable turnover to two decimal places and day's sales outstanding to nearest day.A) 0.24 times; 79 daysB) 4.26 times; 86 daysC) 5.2 times; 61 daysD) None of the above.

Q: Gateway Corp. has an inventory turnover ratio of 5.6. What is its day's sales in inventory? Round your final answer to nearest day.A) 65 daysB) 64 daysC) 61 daysD) 57 days

Q: If Viera, Inc., has an accounts receivable turnover of 3.9 times and net sales of $3,436,812, what is its level of receivables? Round your final answer to the nearest dollar.A) $881,234B) $13,403,567C) $1,340,357D) $81,234

Q: If Randolph Corp. has accounts receivables of $654,803 and net sales of $1,932,349, what is its accounts receivable turnover? Round your final answer to two decimal places.A) 0.34 timesB) 1.78 timesC) 2.95 timesD) None of the above

Q: Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, if their total current assets equal $3.5 million? Round your final answer to the nearest dollar.A) $0B) $777,777C) $1 millionD) None of the above

Q: Zidane Enterprises has a current ratio of 1.92, current liabilities of $272,934, and inventory of $197,333. What is the firm's quick ratio? Round your final answer to two decimal places.A) 0.72B) 1.20C) 1.92D) None of the above

Q: Bathez Corp. has receivables of $334,227, inventory of $451,000, cash of $73,913, and accounts payables of $469,553. What is the firm's current ratio? Round your final answer to two decimal places.A) 1.83B) 0.73C) 1.67D) None of the above

Q: Lionel, Inc., has current assets of $623,122, including inventory of $241,990, and current liabilities of $378,454. What is the quick ratio? Round your final answer to two decimal places.A) 1.65B) 0.64C) 1.01D) None of the above