Question 1

Tobin's Q relates the market value of a firm's assets to which one of the following?
A)initial cost of creating the firm
B)current book value of the firm
C)average asset value of similar firms
D)average market value of similar firms
E)today's cost to duplicate those assets

Accepted Answer

Tobin's Q relates the market value of a firm's assets to today's cost to duplicate those assets. It is used to determine if a firm is undervalued or overvalued in the market.

Question 2

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)turnover

Accepted Answer

Profitability ratios are used to measure how efficiently a firm manages its assets and operations to generate net income. Examples include return on assets (ROA) and return on equity (ROE).

Question 3

Which one of the following accurately describes the three parts of the Du Pont identity?
A)operating efficiency, equity multiplier, and profitability ratio
B)financial leverage, operating efficiency, and profitability ratio
C)equity multiplier, profit margin, and total asset turnover
D)debt-equity ratio, capital intensity ratio, and profit margin
E)return on assets, profit margin, and equity multiplier

Accepted Answer

The three parts of the Du Pont identity are the equity multiplier, profit margin, and total asset turnover. The equity multiplier measures the amount of debt used to finance assets, the profit margin measures the firm's ability to generate profits from sales, and the total asset turnover measures the efficiency of the firm's use of assets.

Question 4

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
A)accounts payable
B)cash
C)inventory
D)accounts receivable
E)fixed assets

Accepted Answer

The quick ratio is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. Increasing accounts receivable improves the quick ratio without affecting the cash ratio, which is calculated as (Cash + Marketable Securities) / Current Liabilities.

Question 5

An increase in which of the following will increase the return on equity,all else constant?
I.sales
II.net income
III.depreciation
IV.total equity
A)I only
B)I and II only
C)II and IV only
D)II and III only
E)I, II, and III only

Accepted Answer

The return on equity is calculated as net income divided by total equity, which means increasing sales and net income will result in a higher return on equity. Depreciation does not impact net income, and increasing total equity without an increase in net income would actually decrease the return on equity.

Question 6

Which of the following can be used to compute the return on equity?
I.Profit margin × Return on assets
II.Return on assets × Equity multiplier
III.Net income/Total equity
IV.Return on assets × Total asset turnover
A)I and III only
B)II and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

II and III are correct methods for computing the return on equity. II uses the DuPont identity, which breaks down ROE into three components: profit margin, asset turnover, and equity multiplier, where ROA (Return on Assets) multiplied by the equity multiplier gives ROE. III is the direct calculation method of ROE, using net income divided by total equity.

Question 7

Which one of the following statements is correct?
A)If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B)Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C)The debt-equity ratio can be computed as 1 plus the equity multiplier.
D)An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E)An increase in the depreciation expense will not affect the cash coverage ratio.

Accepted Answer

The cash coverage ratio is calculated by adding depreciation back to earnings before interest and taxes (EBIT) and then dividing by the interest expense. Since depreciation is added back in the calculation, an increase in depreciation expense will not affect the cash coverage ratio, making statement E correct.

Question 8

The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level.Assume that both the cost per unit and the selling price per unit also remained constant.This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?
A)decrease in the inventory turnover rate
B)decrease in the net working capital turnover rate
C)no change in the fixed asset turnover rate
D)decrease in the day's sales in inventory
E)no change in the total asset turnover rate

Accepted Answer

The success of increasing the amount of goods sold without increasing the amount of inventory on hand translates to a decrease in the number of days the inventory is held, which is reflected in the day's sales in inventory ratio. Therefore, a decrease in the day's sales in inventory is the correct answer. The other options are not affected by changes in inventory levels.

Question 9

Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?
A)Al's has more net income than Ben's.
B)Ben's is increasing its earnings at a faster rate than the Al's.
C)Al's has a higher market value per share than does Ben's.
D)Ben's has a lower market-to-book ratio than Al's.
E)Al's has a higher net income than Ben's.

Accepted Answer

The PEG ratio is calculated by dividing the price-earnings ratio by the annual earnings growth rate of the company. If Al's has a higher PEG ratio than Ben's, it means that Al's is growing more slowly than Ben's. Therefore, choice B must be true: Ben's is increasing its earnings at a faster rate than Al's. The other choices cannot be determined based on the given information.

Question 10

If a firm has a debt-equity ratio of 1.0,then its total debt ratio must be which one of the following?
A)0.0
B)0.5
C)1.0
D)1.5
E)2.0

Accepted Answer

A debt-equity ratio of 1.0 means that the firm's total debt is equal to its total equity. The total debt ratio is calculated as total debt divided by total debt plus total equity. If debt equals equity, then the total debt ratio is 0.5 (or 50%), because the debt represents half of the financing.

Question 11

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88.Both companies have similar operations.Based on this information,Dee's must be doing which one of the following?
A)utilizing its fixed assets more efficiently than Sam's
B)utilizing its total assets more efficiently than Sam's
C)generating $1 in sales for every $1.12 in net fixed assets
D)generating $1.12 in net income for every $1 in net fixed assets
E)maintaining the same level of current assets as Sam's

Accepted Answer

Dee's has a higher total asset turnover rate (0.91) compared to Sam's (0.88), indicating that Dee's is utilizing its total assets more efficiently to generate sales.

Question 12

Which one of the following will decrease if a firm can decrease its operating costs,all else constant?
A)return on equity
B)return on assets
C)profit margin
D)total asset turnover
E)price-earnings ratio

Accepted Answer

The answer of Which one of the following will decrease...

Question 13

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?
A)payment to supplier
B)payment to employee
C)payment of interest to a lender
D)payment of principle to a lender
E)payment of a dividend to a shareholder

Accepted Answer

The cash coverage ratio measures how much cash a company generates to cover its interest payments. Therefore, it directly measures a firm's ability to pay interest to a lender.

Question 14

A supplier,who requires payment within ten days,should be most concerned with which one of the following ratios when granting credit?
A)current
B)cash
C)debt-equity
D)quick
E)total debt

Accepted Answer

The cash ratio is the most relevant for a supplier requiring quick payment, as it measures a company's ability to pay off short-term liabilities with cash and cash equivalents, indicating liquidity.

Question 15

If a firm produces a twelve percent return on assets and also a twelve percent return on equity,then the firm:
A)may have short-term, but not long-term debt.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)has a debt-equity ratio of 1.0.
E)has an equity multiplier of 1.0.

Accepted Answer

If the return on assets equals the return on equity, it implies that there is no financial leverage, meaning the firm has no debt. Therefore, the equity multiplier, which measures financial leverage, is 1.0.

Question 16

Shareholders probably have the most interest in which one of the following sets of ratios?
A)return on assets and profit margin
B)long-term debt and times interest earned
C)price-earnings and debt-equity
D)market-to-book and times interest earned
E)return on equity and price-earnings

Accepted Answer

Shareholders are most interested in the return on equity, as it measures the return they are receiving on their investment. Price-earnings ratio is also important to shareholders, as it indicates the market's perception of the company's future earnings potential.

Question 17

The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A)volatile market prices
B)negative earnings
C)positive PEG ratios
D)a negative Tobin's Q
E)increasing sales

Accepted Answer

The price-sales ratio is particularly useful for analyzing firms with negative earnings because it allows investors to value a company even when it's not profitable, unlike metrics that rely on earnings.

Question 18

A firm has an interval measure of 48.This means that the firm has sufficient liquid assets to do which one of the following?
A)pay all of its debts that are due within the next 48 hours
B)pay all of its debts that are due within the next 48 days
C)cover its operating costs for the next 48 hours
D)cover its operating costs for the next 48 days
E)meet the demands of its customers for the next 48 hours

Accepted Answer

An interval measure of 48 means that the firm has sufficient liquid assets to cover its operating costs for the next 48 days. It does not necessarily mean that it can pay all of its debts that are due within the next 48 days, as some debts may have shorter payment terms than that.

Question 19

Ratios that measure a firm's financial leverage are known as _____ ratios.
A)asset management
B)long-term solvency
C)short-term solvency
D)profitability
E)book value

Accepted Answer

Long-term solvency ratios measure a firm's ability to meet its long-term obligations and are also referred to as leverage ratios as they indicate the level of debt used in the capital structure of the company. Examples include debt-to-equity ratio and interest coverage ratio.

Question 20

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?
A)The total asset turnover rate increased.
B)The days' sales in receivables increased.
C)The net working capital turnover rate increased.
D)The fixed asset turnover decreased.
E)The receivables turnover rate decreased.

Accepted Answer

Since sales increased while current accounts remained constant, the net working capital turnover rate, which is sales divided by net working capital, must have increased.

Quiz 3: Working With Financial Statements

Tobin's Q relates the market value of a firm's assets to which one of the following?

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

Which one of the following accurately describes the three parts of the Du Pont identity?

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

An increase in which of the following will increase the return on equity,all else constant? I.sales II.net income III.depreciation IV.total equity

Which of the following can be used to compute the return on equity? I.Profit margin × Return on assets II.Return on assets × Equity multiplier III.Net income/Total equity IV.Return on assets × Total asset turnover

Which one of the following statements is correct?

Al's has a price-earnings ratio of 18.5.Ben's also has a price-earnings ratio of 18.5.Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's?

If a firm has a debt-equity ratio of 1.0,then its total debt ratio must be which one of the following?

Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88.Both companies have similar operations.Based on this information,Dee's must be doing which one of the following?

Which one of the following will decrease if a firm can decrease its operating costs,all else constant?

The cash coverage ratio directly measures the ability of a firm's revenues to meet which one of its following obligations?

A supplier,who requires payment within ten days,should be most concerned with which one of the following ratios when granting credit?

If a firm produces a twelve percent return on assets and also a twelve percent return on equity,then the firm:

Shareholders probably have the most interest in which one of the following sets of ratios?

The price-sales ratio is especially useful when analyzing firms that have which one of the following?

A firm has an interval measure of 48.This means that the firm has sufficient liquid assets to do which one of the following?

Ratios that measure a firm's financial leverage are known as _____ ratios.

Jasper United had sales of $21,000 in 2011 and $24,000 in 2012.The firm's current accounts remained constant.Given this information,which one of the following statements must be true?