Question 1

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

Accepted Answer

Increasing sales and net income will increase the numerator in the return on equity equation (net income/equity), thus increasing the return on equity. Depreciation does not directly impact net income or equity, so it is not a factor in this calculation. Total equity would only increase the denominator in the equation, resulting in a lower return on equity, so it is not a correct choice.

Question 2

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

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 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

The three parts of the Du Pont identity are equity multiplier (EM), profit margin (PM), and total asset turnover (TAT). EM indicates the amount of assets a company has relative to its equity, PM measures the amount of profit generated from each dollar of sales, and TAT shows how efficiently a company utilizes its assets to generate revenue.

Question 5

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

Accepted Answer

Long-term solvency ratios, such as debt-to-equity and interest coverage ratios, measure a firm's ability to meet long-term debt obligations and indicate the level of financial leverage used by the company.

Question 6

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

Accepted Answer

Shareholders are primarily concerned with the return on their investment, which is reflected in the return on equity ratio. They are also interested in the price-earnings ratio, which indicates how much they are willing to pay for each dollar of earnings. Both of these ratios are included in option E.

Question 7

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

Accepted Answer

The total debt ratio is calculated as:

Total Debt Ratio = Total Debt / Total Assets

Since the debt-equity ratio is 1.0, it means that the proportion of debt to equity is equal. This can be written as:

Debt / Equity = 1

Solving for debt, we get:

Debt = Equity

Now, substituting Debt = Equity into the total debt ratio formula, we get:

Total Debt Ratio = Debt / (Debt + Equity)

Total Debt Ratio = Debt / (2 x Debt)

Total Debt Ratio = 0.5

Therefore, the total debt ratio is 0.5 or 50% when the debt-equity ratio is 1.0. The correct answer is B.

Question 8

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

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 9

Which one of the following statements is correct?

Accepted Answer

The cash coverage ratio is calculated by adding depreciation and amortization back to earnings before interest and taxes (EBIT), 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.

Question 10

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

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 11

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

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 12

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

Accepted Answer

The cash coverage ratio is a solvency ratio that measures the ability of a firm to meet its interest payments out of operating cash flows. It is calculated by dividing the firm's earnings before interest and taxes (EBIT) by the total interest expense. Therefore, it directly measures the ability of a firm's revenues to meet its obligation to pay interest to lenders.

Question 13

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

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 the firm can pay all of its debts that are due within the next 48 days, as this would depend on the amount of those debts and the firm's overall financial health.

Question 14

-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?

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 15

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?

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 16

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

Accepted Answer

The answer of If a firm produces a twelve percent...

Question 17

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?

Accepted Answer

The answer of Jasper United had sales of $21,000 in...

Question 18

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?

Accepted Answer

The accomplishment of increasing sales while holding inventory at a constant level indicates that the firm is selling inventory at a faster rate. This will result in a decrease in the day's sales in inventory ratio, as the number of days it takes to sell through inventory decreases.

Question 19

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

Accepted Answer

The answer of A supplier,who requires payment within ten days,should...

Question 20

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

Accepted Answer

Profitability ratios measure how efficiently a firm generates net income in relation to its assets and operations.

Quiz 3: Working With Financial Statements

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