award:

1. 0.80 points

Lease obligations are included in certain leverage ratios because leases:

Require the payment of interest
→ Represent long-term fixed obligations
Must be financed through a bank
Are a measure of efficiency, just like debt

award:

2. 0.80 points

A firm with no leases has a long-term debt ratio of 50 percent. This means that the book value of equity:
→ Equals the book value of long-term debt
Is less than the book value of long-term debt
is greater than the book value of long-term debt
is unknown in relation to the book value of long-term debt

award:

3. 0.80 points

When a firm's debt-equity ratio is 1.0, the firm:

Has too much long-term debt in relation to leases
Has less long-term debt than equity
Is nearing insolvency
→ has as much in long-term liabilities as in equity

award:

4. 0.80 points

If a firm's total debt ratio is greater than .5, then:

Its current liabilities are quite high
→ Its debt-equity ratio exceeds 1.0
It has too few of total assets
It has more long-term debt than equity

award:

5. 0.80 points

A times interest earned ratio of 5.0 indicates that the firm:

Pays 5 times its earnings in interest expense
→ Earns significantly more than its interest obligations
Has interest expense equal to 5 percent of EBIT
Has low tax liability

award:

6. 0.80 points

If a firm's cash coverage ratio is greater than its times interest earned ratio, then:
→ The firm's assets are not fully depreciated
The firm has no lease obligations
The firm has very little long-term debt
The firm has a high degree of liquidity

award:

7. 0.80 points

An asset's liquidity measures its:

1 of 25
 Potential for generating a profit
Cash requirements
→ Ease and cost of being converted to cash
Proportion of debt financing

award:

8. 0.80 points

Which of the following actions will improve a firm's current ratio if it is now less than 1.0?
Convert marketable securities to cash
Pay accounts payable with cash
→ Buy inventory on credit
Sell inventory at cost

award:

9. 0.80 points

A firm's quick ratio of .89 suggests that the firm:

Has a low level of current liabilities
Has been overstating the value of its inventory
→ Faces a potentially serious liquidity crisis
Should reduce its holdings of cash and/or marketable securities

award:

10. 0.80 points

A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if they use cash to pay off $50,000 in accounts payable?
Current ratio will increase to 5.0.
Net working capital will increase to $500,000
Current ratio will decrease
→ Net working capital will not change

award:

11. 0.80 points

How would you interpret an interval measure of 50 days?

It takes 50 days on average to collect receivables
Inventory is converted into sales every 50 days
→ The firm can pay its expenses for at least 50 days
Assets are converted into sales every 50 days

award:

12. 0.80 points

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3.0?
$1,333,333
$1,200,000
$1,800,000
→ $3,000,000

Assets = $1,000,000

Then,

And sales = $3,000,000

award:

13. 0.80 points

The inventory turnover ratio compares:

2 of 25
 Sales to average inventory
→ Cost of goods sold to average inventory
Average receivables to average inventory
Average assets to average inventory

award:

14. 0.80 points

When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about
Tri-C?
Its cash balance is too low
Its cost of goods sold is too low
Its current liabilities are too low
→ Its average inventory is too high

award:

15. 0.80 points

Which of the following statements is most likely correct for a firm with an average collection period of 90 days?
Its average daily sales are low
Its average daily sales are high
Its current ratio will be high
→ It is providing financing for approximately 25 percent of its annual sales

award:

16. 0.80 points

A firm reports a net profit margin of 10.0 percent on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?
$100,000
$300,000
→ $500,000
$800,000

Net profit margin = = .10

= .10

EBIT - 200,000 = 300,000

EBIT = $500,000

award:

17. 0.80 points

Which of the following will allow your firm to achieve its targeted 16 percent ROA with an asset turnover of 2.5?
A leverage ratio of .0667
A P/E ratio of 14
A profit margin of 15 percent
→ A profit margin of 6.4 percent

ROE = Profit margin x Asset turnover

.16 = Profit margin x 2.50
.064 = Profit margin

award:

18. 0.80 points

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9 percent?
7.50 percent
9.00 percent
→ 10.95 percent
16.70 percent

60 =

Then sales = $912,500

3 of 25
 ROA = Profit margin x asset turnover

= .09 x

= 10.95%

award:

19. 0.80 points

Last year's return on equity was 30 percent, and while the same amount of earnings was generated this year, the ROE has decreased to 20 percent. The firm has no preferred
stock. What caused the decrease?
Equity decreased by 10 percent
Equity decreased by 50 percent
Equity increased by 10 percent
→ Equity increased by 50 percent

\.3Old = .2New + .2Old

.1Old = .2New
.5Old = New

award:

20. 0.80 points

Which of the following is correct for a firm with EPS of $2 per share and a 40 percent payout ratio?
40 percent of earnings will be plowed back into the firm
Dividends will equal 60′ per share
→ Book value per share of equity will increase by $1.20
Retained earnings will be unchanged

award:

21. 0.80 points

Which of the following is most likely to result in a higher P/E ratio for a firm, other things equal?
Lower growth rate in dividends
→ Reduction in the stock's required rate of return
Lower dividend yield
Lower stock price

award:

22. 0.80 points

What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of $3,000,000, and a market/book ratio of 3.5?
$8.57
$30.00
$85.70
→ $105.00

= $30 book value per share.

$30 x 3.5 = $105 market value per share

award:

23. 0.80 points

Which of the following most effectively uses cost of capital as part its measure of company performance?
→ EVA
Net income
ROA
ROE

4 of 25
 award:

24. 0.80 points

The board of directors is dissatisfied with last year's ROE of 15 percent. If the profit margin and asset turnover remain unchanged at 8 percent and 1.25 respectively, by how
much must the total debt ratio increase to achieve 20 percent ROE?
Total debt ratio must increase by .5
Total debt ratio must increase by 5
Total debt ratio must increase by 5 percent
→ Total debt ratio must increase by 16.67 percent

Last Year:
ROE = .15 = Profit margin x Asset turnover x leverage rate
= .08 x 1.25 x 1.5
This Year:
ROE = .20 = .08 x 1.25 x?
Therefore, leverage ratio must be 2.0, which indicates a total debt ratio of 50 percent. Since the previous debt ratio was 33.3 percent, this represents an increase in debt by
16.67 percent of total assets.

award:

25. 0.80 points

What must happen to asset turnover to leave ROE unchanged from its original 16 percent level if the profit margin is reduced from 8 percent to 6 percent and the leverage ratio
increases from 1.2 to 1.6? Asset turnover must:
→ Remain constant
Increase from 1.46 to 2.33
Decrease from 14.58 to 2.33
Increase from 4.76 to 9.60

Old ROE: .16 = .08 x Asset turnover x 1.2

\1.667 = Asset turnover
New ROE: .16 = .06 x Asset turnover x 1.6
\1.667 = Asset turnover

award:

26. 0.80 points

The use of debt in the firm's capital structure will increase ROE if the firm:
Has more debt than equity
Pays less in taxes than in interest
→ Earns a higher return than the rate paid on debt
Has a times interest earned greater than 1.0

award:

27. 0.80 points

The financial ratios of a firm can best be compared to:

Ratios of firms in the same city
Ratios of firms having the same capital structure
→ Ratios of firms in the same industry
Ratios of firms having the same return on equity

award:

28. 0.80 points

A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends. By how much will shareholders' equity
increase on the balance sheet?
→ $17 million
$18 million
$19 million
$25 million

award:

29. 0.80 points

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:
Will have a net loss
Will have no income-tax liability
Needs to lower its interest expense

5 of 25
 → Can still have a positive net income

award:

30. 0.80 points

If the current liabilities now shown on a firm's balance sheet are not paid within one year then they will be:
Transferred to long-term liabilities
Deducted as bad debt
→ Listed as current liabilities one year from now
Deducted from retained earnings

award:

31. 0.80 points

The shareholders' equity as shown on a corporate balance sheet belongs to the:

→ Common shareholders
Preferred shareholders
All groups of shareholders
All groups of shareholders and creditors

award:

32. 0.80 points

Which of the following is correct for a firm with a debt-equity ratio of .45 if long-term debt equals 500 and equity equals 2,000? The firm has:
Current liabilities that is valued at 400
→ Current assets that is valued at 400
Retained earnings that are valued at 900
preferred stock of 400

Total Debt = Current Debt + Long Term Debt

Debt/Equity Ratio = .45
Therefore, Debt/Equity Ratio x Shareholder Equity = Value of Total Debt
.45 x 2,000 = 900 Total Debt
Therefore, if Total Debt = 900 = Current Debt + Long Term Debt
900 = Current Debt + 500
Current Debt = 400

award:

33. 0.80 points

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?
35 percent
→ 39 percent
54 percent
65 percent

If total debt/equity = .65

Then total liabilities/total assets = .65/1.65
= 39.39%

award:

34. 0.80 points

Which of the following will increase a firm's times interest earned ratio?
An increase in debt
→ A decrease in cost of goods sold
An increase in interest expense
A decrease in net income

award:

35. 0.80 points

Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?
Buy raw materials on credit
Sell marketable securities at cost
Pay off accounts payable with cash

6 of 25
 → Pay off a portion of long-term debt with cash

award:

36. 0.80 points

A firm with zero net working capital has:

No cash or marketable securities
Insufficient inventories
Excessive current liabilities
→ A quick ratio of less than 1.0

award:

37. 0.80 points

A disadvantage of standard measures of liquidity is that the measures:

→ Ignore a firm's reserve borrowing capacity
Fail to include accounts receivable as an asset
Give inventories equal weighting in the quick ratio.
Do not include the current portions of long-term debt

award:

38. 0.80 points

Which of the following facts might make a firm's interval measure too optimistic?
The cost of raw materials has been decreasing
→ The average collection period continues to increase
A large component of marketable securities will mature soon
The firm's cash is not earning any interest

award:

39. 0.80 points

Last year's asset turnover ratio was 2.0. Sales have increased by 25 percent and average total assets have increased by 10 percent since that time. What is the current asset
turnover ratio?
1.82
2.05
2.15
→ 2.27

sales/average total assets = 2.0

2.0 x 1.25/1.1 = 2.27

award:

40. 0.80 points

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3.0, quick ratio equals 1.5, and the firm has 1,800 in current assets?
2.78 times
4.17 times
→ 5.56 times
8.33 times

= 3.0 =

= 1.5

Then inventory = 1.5 x current liabilities

1.5 x 600 = $900

Inventory turnover ratio = = 5.56 times

award:

41. 0.80 points

7 of 25
 XYZ Corp. has improved its average collection period from 55 to 40 days. Which one of XYZ are other ratios may appear worse as a result of the improved receivables
collection?
Inventory turnover
→ Quick ratio
Net profit margin
Return on equity

award:

42. 0.80 points

A firm's net profit margin when ignoring the effects of financing is 20 percent with an EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes?
$50,000
$300,000
$350,000
→ $500,000

net profit margin =

.20 =

$1.0 million = 1.5 million - taxes

Taxes = $.5 million

award:

43. 0.80 points

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
Firms have different dividend payout ratios
Some firms use fully depreciated assets
→ Financial leverage varies among firms
Unprofitable firms will not have tax liability

award:

44. 0.80 points

Which of the following changes will provide an increase (if only in the short-run) in a firm's ROE?
An increase in total assets
→ An increase in the dividend-payout ratio
An increase in equity
The payment of a stock dividend

award:

45. 0.80 points

ABC Corp. has an ROE of 20 percent and a current dividend-payout ratio of 40 percent. Which of the following changes will allow their earnings to grow at a 15 percent rate?
A decrease in the dividend-payout ratio to 35 percent while holding ROE constant
A two-percentage-point decrease in ROE while holding dividend-payout ratio constant
→ A decrease in dividend-payout ratio to 25 percent while holding ROE constant
An increase in dividend payout ratio to 50 percent and an increase in ROE to 25 percent

current earnings growth rate = plowback ratio x ROE

= .6 x .20 = 12%
Desired earnings growth rate = plowback ratio x ROE
.15 = .75 x .20

award:

46. 0.80 points

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?
The growth rate can increase from 6 percent to 10.5 percent
→ The growth rate can increase from 6 percent to 12 percent
The growth rate can increase from 8 percent to 14 percent
The growth rate can increase from 11 percent to 14 percent

current growth rate in earnings = plowback ratio x ROE

8 of 25
 = .3 x .2 = 6%
Proposed growth rate in earnings = .60 x .2 = 12%

award:

47. 0.80 points

Which of the following might be interpreted as a signal that stock price is currently too high?
→ An abnormally low dividend yield
A high E/P ratio
A low book value per share
A low P/E ratio

award:

48. 0.80 points

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50 percent?
$33.33
$37.50
$62.50
→ $66.67

market-to-book ratio = stock price/book value per share

.75 = $50/book value per share
Book value per share = $66.67

award:

49. 0.80 points

What is the residual income or EVA for a firm with $1 million in total capital, $300,000 in net income, and a 20 percent cost of capital?
→ $100,000
$140,000
$240,000
$500,000

Total capital x cost of capital

$1 million x .2 = $200,000
Residual income = Net Income - Cost of Capital
= 300,000 - 200,000
= $100,000

award:

50. 0.80 points

By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?
$240,000
→ $333,333
$400,000
$516,167

current ROA = (sales/assets) x profit margin

.10 = ($4 million/assets) x .05
.10 = $200,000/assets
$2 million = assets
Proposed ROA = (sales/assets) x profit margin
.12= ($4 million/assets) x .05
.12 = $200,000/assets
$1,666,667 = assets
Therefore, assets must be reduced by $333,333

award:

51. 0.80 points

What is the ROE for a firm with times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million?
-33.33 percent
30.00 percent
→ 33.33 percent
50.00 percent

Times interest earned = EBIT/interest = 2

Therefore, EBIT = 3 million because interest = $1.5 million

9 of 25
 Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million
= $.5 million
ROE = net income/equity
= $.5 million/$1.5 million
= 33.33%

award:

52. 0.80 points

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10 percent and the leverage ratio equals 1.0?
Increase the leverage ratio
→ Increase the debt burden from its current level
Decrease assets from the current level
Decrease the debt burden from its current level

award:

53. 0.80 points

XYZ Corp. has a profit margin of 7 percent, a debt burden of .8, and has financed two-thirds of its assets through equity. What asset turnover ratio is necessary to achieve an
ROE of 18 percent?
1.26
1.61
→ 2.14
4.02

ROE = leverage ratio x asset turnover x profit margin x debt burden

.18 = 1.5 x asset turnover x .07 x .8
.18 = .084 asset turnover
2.14 ≈ asset turnover

award:

54. 0.80 points

The use of financial leverage will be detrimental to a firm's ROE if the:

Firm has no long-term debt
Firm's profit margin does not exceed its asset turnover
Interest expense exceeds the tax liability
→ Interest rate on debt exceeds the firm's ROA

award:

55. 0.80 points

Efficiency ratios:
Include the quick-ratio, asset turnover ratio, and return on equity
→ Are used to measure how well the company uses its assets
Are used to measure how liquid the company is
Help answer questions of firm stability

award:

56. 0.80 points

A total debt ratio of 0.35:

Indicates that the firm is financed with 35 percent long-term debt
→ Would exist if a firm had liabilities of $700 and assets of $2,000
Indicates that 35 cents of every dollar of capital is in the form of short-term debt
Indicates that 35 cents of every dollar of capital is in the form of long-term debt

Total debt ratio = (700/2,000) = 0.35

award:

57. 0.80 points

A company with long-term debt of 80, lease obligations of 20, total assets of 1,000, and total liabilities of 350 has a:
Total debt ratio of approximately .10
Total debt ratio of approximately .23

10 of 25
 Long-term debt ratio of approximately .15
→ debt-to-equity ratio of approximately .15

Equity = 1000 - 350 = 650

Debt-Equity Ratio = (80 + 20)/650 = 0.15

award:

58. 0.80 points

A cash coverage ratio of less than one indicates:

→ The firm does not have enough cash to make its interest payments
The firm does have enough cash to make its interest payments, but not its lease obligations
The firm has too little depreciation expense
Earnings need only to fall by a small amount before interest obligations cannot be covered

award:

59. 0.80 points

Instead of increasing its long-term debt by borrowing money to purchase new stereo equipment, Jay's Jams Inc. decides to lease the equipment. How does this affect its
long-term debt ratio?
It will decrease
It will increase
→ It will remain unchanged
Unknown without the amount of the lease obligation

award:

60. 0.80 points

An example of liquid assets would be:

Buildings
Company cars
→ Finished goods
Fixed assets

award:

61. 0.80 points

__________ are those expected to be turned into cash in the near future, while __________ are those expected to be fulfilled in the near future, and the difference between the
two is __________.
Current assets; current liabilities; shareholders' equity
→ Current assets; current liabilities; net working capital
Fixed assets; current liabilities; net working capital
Liquid assets; liquid liabilities; shareholders' equity

award:

62. 0.80 points

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

→ Liquidity
Efficiency
Leverage
Profitability

award:

63. 0.80 points

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1.0 before the payoff?
→ The quick ratio and current ratio will both increase
The quick ratio and the current ratio will both decrease
The quick ratio will increase but the current ratio will remain unchanged
The current ratio will increase but the quick ratio will remain unchanged

11 of 25
 award:

64. 0.80 points

TSI Inc. has enough liquid assets to finance its operations for 67 days and cash, marketable securities, and receivables totaling $1,000. TSI's average daily expenditures from
operations are:
$6.70
$8.23
→ $14.93
$22.28

67 days = 1000/average daily expenditures

Average daily expenditures = $14.93

award:

65. 0.80 points

An asset turnover ratio of 1.75 can be interpreted as:

→ $1.75 in sales are generated for every $1.00 of assets
$1.75 in additional assets are generated for every $1.00 of sales
$1.75 in assets are used to generate $1.00 of sales
$1.00 in sales are used to generate $1.75 in assets

award:

66. 0.80 points

A sign that a firm is efficient is a:

high average collection period
high day's sales in inventories
low asset turnover
→ high inventory turnover

award:

67. 0.80 points

Calculate the average collection period for Dotte Inc. if its accounts receivables were $500 and $600 at the end of each of the last two years, and its revenue over the last year
was $3,000:
60 days
61 days
→ 67 days
73 days

Average collection period = ((500 + 600)/2)/(3000/365)) = 67 days

award:

68. 0.80 points

In the Dupont Equation, what effect does an increase in a firm's borrowing costs (i.e., a higher interest rate) have on its net profit margin?
→ Remain unchanged
Decline by a lot with a high interest rate
Decline by a little with a low interest rate
It will increase

award:

69. 0.80 points

Calculate the dividend per share that is paid when the earnings per share are $6.00 and plowback ratio is 0.85:
$0.51
$0.71
→ $0.90
$5.10

Payout ratio = 1 - 0.85 = 0.15

0.15 = Dividend per share/$6
Dividend per share = 90 cents

12 of 25
 award:

70. 0.80 points

Measures of a firm's efficiency with respect to earnings include:
Profit margin, ROA, P/E ratio, ROE
Market-to-book, ROE, Payout ratio
→ Profit margin, ROA, ROE, Payout ratio
ROA, ROE, P/E ratio, Payout ratio

award:

71. 0.80 points

Which of the following is incorrect for a firm with a payout ratio of 0.15 and ROE of 20 percent:
It reinvests 85 percent of its earnings back into the firm
The firm's retained earnings will increase the book value of equity by 17 percent
→ It pays a dividend of 15 cents per share
The firm's earnings and equity will grow by 17 percent per year

award:

72. 0.80 points

A high dividend yield indicates:

investors expect high dividend growth
→ investors require a high rate of return
the stock price is relatively high
investors require a low rate of return

award:

73. 0.80 points

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?
9.56 percent
→ 15.94 percent
16.96 percent
38.25 percent

Given D/E ratio then leverage ratio:

1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25
= 0.0975 = 9.75%

award:

74. 0.80 points

A firm with below average earnings growth in one year is likely to:
have below average earnings growth in the following year
have had below average earnings growth in the previous year
→ have either above or below average earnings growth in the following year, (it is random)
continue this trend downward in the years to follow

award:

75. 0.80 points

If Dotte's Doors Corporation merges with its supplier, Wally's Wood, its profit margin will:
most likely decrease
most likely increase and continue to increase in the future
most likely increase but be offset by an increase in the turnover ratio
→ Most likely increase but be offset by a decrease in the turnover ratio

award:

76. 0.80 points

Cindex Corporation had total capitalization of $500 million. It had sales of $600; cost of goods sold of $375 million, and operating expenses of $75 million. Tax rate is 30%.
Calculate the company's Return of Capital.
→ 21%

13 of 25
 23%
25%
27%

award:

77. 0.80 points

Janzen Corporation had total capitalization of $890 million. It had sales of $900; cost of goods sold of $595 million, and operating expenses of $95 million. Tax rate is 40%.
Calculate the company's Return of Capital.
18%
16%
→ 14%
12%

award:

78. 0.80 points

Zulu Corporation had total assets of $475 million. It had sales of $300; cost of goods sold of $225 million, and operating expenses of $35 million. Tax rate is 40%. Calculate the
company's Return of Assets.
4.04%
→ 5.05%
6.06%
7.07%

14 of 25
 award:

79. 0.80 points

Net Corp. has an ROE of 30% and would like to see earnings grow at a 18% annual rate. What percent of earnings can they afford to pay out as dividends?
45%
→ 40%
35%
30%

Growth in earnings = Plowback x ROE

.18 = Plowback x .30
.18/.30 = 60% = Plowback
Payout ratio = 1 - Plowback = 1 - 60% = 40%

award:

80. 0.80 points

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?
32.1%
35.5%
37.6%
→ 39.4%

If total debt/equity = .65 then total liabilities/total assets = .65/1.65

= 39.39%

award:

81. 0.80 points

Last year's asset turnover ratio was 2.0. Sales have increased by 25% and average total assets have increased by 10% since that time. What is the current asset turnover
ratio?
→ 2.27
3.43
4.75
5.82

sales/average total assets = 2.0

2.0 x 1.25/1.1 = 2.27

award:

82. 0.80 points

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3.0, quick ratio equals 1.5, and the firm has 1,800 in current assets?
4.25
→ 5.56
6.75
7.85

award:

83. 0.80 points

A firm's net profit margin when ignoring the effects of financing is 20% with an EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes?
$600,000
→ $500,000
$400,000

15 of 25
 $300,000

award:

84. 0.80 points

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70% to 40% if the firm has an ROE of 20%?
The growth rate can increase from 6% to 10.5%.
→ The growth rate can increase from 6% to 12%.
The growth rate can increase from 8% to 14%.
The growth rate can increase from 11% to 14%.

current growth rate in earnings = plowback ratio x ROE = .3 x .2 = 6%

Proposed growth rate in earnings = .60 x .2 = 12%

award:

85. 0.80 points

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend payout ratio of 50%?
$33.33
$44.44
$55.55
→ $66.67

market-to-book ratio = stock price/book value per share

.75 = $50/book value per share
Book value per share = $66.67

award:

86. 0.80 points

What is the residual income for a firm with $1 million in total capital, $300,000 in net income, and a 20% cost of capital?
$400,000
$300,000
$200,000
→ $100,000

Total capital x cost of capital

$1 million x .2 = $200,000
Residual income = Net Income - Cost of Capital
= 300,000 - 200,000 = $100,000

award:

87. 0.80 points

What is the ROE for a firm with times interest earned ratio of 2, a tax liability of $1 million and interest expense of $1.5 million if equity equals $1.5 million?
44.44%
→ 33.33%
22.22%
11.11%

Times interest earned = EBIT/interest = 2

Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million = $.5 million
ROE = net income/equity
= $.5 million/$1.5 million = 33.33%

award:

88. 0.80 points

16 of 25
 Calculate the average collection period for Dotte Inc. if its accounts receivables were $500 and $600 at the end of each of the last two years, and its revenue over the last year
was $3,000.
69 days
68 days
→ 67 days
66 days

Average collection period = ((500 + 600)/2)/(3000/365) = 67 days

award:

89. 0.80 points

Calculate the dividend per share that is paid when the earnings per share are $6.00 and plowback ratio is 0.85.
$1.14/share
$1.05/share
→ $0.90/share
$0.85/share

Payout ratio = 1 - 0.85 = 0.15

0.15 = Dividend per share/$6
Dividend per share = $.90

award:

90. 0.80 points

How much will Gamma Inc.'s equity holders earn given the following information: total asset turnover is 0.85, profit margin is 0.15, and debt-equity ratio is 0.25?
9.15%
→ 9.75%
10.15%
10.60%

Given D/E ratio then leverage ratio:

1 + D/E = 1 + 0.25 = 1.25
ROE = PM x TAT x LR = 0.12 x 0.65 x 1.25
= 0.0975 = 9.75%

award:

91. 0.80 points

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9%?
5.60%
6.50%
8.85%
→ 10.95%

award:

92. 0.80 points

A firm reports a net profit margin of 10.0% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?
$100,000
$300,000
→ $500,000
$700,000

17 of 25
 award:

93. 0.80 points

The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
True
→ False

award:

94. 0.80 points

The higher the times interest earned ratio, the higher the interest expense.
True
→ False

award:

95. 0.80 points

The net working capital of a firm will decrease when accrued wages are paid with cash.
True
→ False

award:

96. 0.80 points

Net working capital is determined from the difference between current assets and current liabilities.
→ True
False

award:

97. 0.80 points

The difference between the current and quick ratios is that inventory has been subtracted from current assets.
→ True
False

award:

98. 0.80 points

Other things equal, an increase in average accounts receivable will increase a firm's return on assets.
True
→ False

award:

99. 0.80 points

The sum of the payout ratio and the plowback ratio will always equal 1.0.
→ True

18 of 25
 False

award:

100.0.80 points
EVA is the net profit of the firm adjusted for the cost of capital.
→ True
False

award:

101.0.80 points
ROE is equal to ROA when the firm has no debt.
→ True
False

award:

102.0.80 points
The use of leverage will always act to increase a firm's ROE.
True
→ False

award:

103.0.80 points
"Asset turnover ratio" and "inventory turnover ratio" are both efficiency ratios.
→ True
False

award:

104.0.80 points
"Inventory turnover ratio" times the "days' sales in inventories" equals 365.
→ True
False

award:

105.0.80 points
"Return on assets" and "return on equity" are both profitability ratios.
→ True
False

award:

106.0.80 points
"Return on assets" is always a larger number than the "return on equity."
→ True
False

award:

107.0.80 points
Apex Corp. has current liabilities of $2 million, a current ratio of 3.0, a quick ratio of 2.0, and a cash ratio of .75. Given this information, answer the following about the firm's
liquidity:

a. What is the value of inventory?

b. What is the value of receivables?
c. What will happen to each of the three ratios if $1 million in current liabilities is refunded with long-term debt?

19 of 25
 award:

108.0.80 points
A firm has sales of $5 million, average total assets of $1.6 million, average fixed assets of $1 million, and average current liabilities of $300,000. Given this information, answer
the following about the firm's efficiency:

Calculate asset turnover, fixed asset turnover, and NWC turnover ratios.
Can the fixed asset turnover be considered appropriate and yet the total asset turnover be considered low by industry standards? How?
What in general might improve NWC turnover?

a.

This can occur if the average level of current assets is too high in relation to sales. Alternatively, current assets could be appropriate but current liabilities too low; this will
have the same effect of making the current ratio too high.

Of course, an increase in sales while holding the same level of NWC will improve the ratio. Alternatively, becoming either more efficient with one or more forms of current
assets or allowing suppliers to finance more of your liabilities will also improve the ratio.

20 of 25
 award:

109.0.80 points
If a firm's average collection period is 42 days, and this compares favourably to the industry average, what questions may you want to ask before assuming that the firm is
"efficient?"

Does the firm offer the same terms on its credit sales as other firms? If not, the 42 days may be misleading. Does the firm generate the same proportion of credit sales as the
industry average? If not, efficiency may not be evident. Finally, has the level of sales changed appreciably over the period? While averaging can mitigate much of the
concern here, if sales are booming and credit policy is conservative, the average collection period may appear overly favourable.

award:

110.0.80 points
A company has announced $50,000 in net income after paying taxes of $26,000 and interest of $20,000. They intend to pay $17,000 of net income as dividends. Their assets
have averaged $600,000 over the past year, during which their total debt ratio has averaged 40 percent. Given this information, answer the following about the company's
profitability:

Calculate the ROA and ROE.

Calculate the payout and plowback ratios.
What effect will the plowback have on the company's growth in equity?

a.
Net income + tax + interest = EBIT
$50,000 + 26,000 + 20,000 = $96,000.

ROA =

= 11.67%

ROE =

= = 13.89%

b.

Payout ratio =

= 34%
Plowback ratio = 1 - payout ratio
= 66%
= 9.17%

c.
growth in equity = ROE × plowback
= 13.89% × 66%
= 9.17%

award:

111. 0.80 points

Value Corp. recently reported earnings of $2 per share and each of their 50,000 shares is currently selling for $20. The firm's book equity is $600,000. An analyst has estimated
that the firm's assets could be replaced for $1.8 million and that the Tobin's q for the firm is 1.4. [Note: Tobin's q is the ratio of market value of assets to replacement cost of the
assets.] Given this information, answer the following about the firm's market-value ratios:

Calculate the firm's price-to-earnings (P/E) and market-to-book ratios.

If the P/E ratio is said to compare favourably to that of the industry average, speculate on what could account for this fact.
Calculate the firm's market value of assets and comment on the magnitude of their Tobin's q.

P/E = $20/$2 = 10

21 of 25
 Market-to-book =

= $20/$12
= 1.67

If the firm's P/E ratio compares favourably with the industry average, it could be the case that investors expect high dividend growth, or that the firm is perceived to have low
(relative) risk, or that the firm can be expected to achieve average dividend growth and still maintain a high payout ratio.

The magnitude of Tobin's q reinforces the high P/E ratio for the firm. It looks beyond the firm's equity and also includes debt securities. For one or a combination of reasons,
this firm appears to have a comparative advantage or attractive investment opportunities when compared to the industry. It would be expected to continue investing in order
to exploit those opportunities.

Tobin's q =

1.4 =

$2.52 million = market value of assets

award:

112.0.80 points
How is Tobin's q similar and dissimilar to a firm's market-to-book ratio? Note that Tobin's q is the ratio of market value of assets to replacement cost of the assets.

The market-to-book ratio shows the relationship between investors' and analysts' views of the firm and its book value. Book value can of course be a quite misleading
indicator of the firm's value, and this ratio will attempt to alert stakeholders of that fact. In a similar sense, Tobin's q relates the market value of assets to the estimated
replacement cost of those assets. If the ratio is greater than 1 it can be presumed that the firm has attractive opportunities of one sort or another. Tobin's q is dissimilar in that
it includes all assets and thus all forms of balance sheet funding—both debt and equity—as opposed to merely equity values. An additional dissimilarity is that replacement
cost is substituted for book value, to correct for that potential bias in value determination.

award:

113.0.80 points
TuPont Corp. has net income of $1.95 million, an effective tax rate of 35 percent, interest expense of $400,000, an asset turnover of 2.0, and $14 million in total assets, of which
$7 million is debt. Use the DuPont system to calculate its ROE, decomposed into leverage ratio, asset turnover, profit margin, and debt burden.

EBIT =

= $3.4 million

ROE =

= 2 × 2 × .0839 × .8298
= 27.85%

award:

114.0.80 points
A firm reports an ROE of 14 percent, a leverage ratio of 1.5, an asset turnover of 1.667, and a profit margin of 9 percent. Calculate the firm's ROA and then comment on the
ROA in relation to ROE. What is happening?

The firm's ROA is 15 percent, which is 1 percent higher than the ROE. It is typically expected that a firm utilizing debt in its capital structure will have an ROE that exceeds its
ROA. This, however, relies upon the firm earning more on its assets than it pays on its debt. This is not the case in this firm, where it can be seen that the product of the
leverage ratio and the debt burden is .933. This indicates that an excessive amount of interest is being paid by the firm.
ROE = Profit margin × asset turnover
= .09 × 1.667
= 15%
.14 = 1.5 × 1.667 × 09 × debt burden
.14 = .225 debt burden
.6222 = debt burden

22 of 25
 award:

115.0.80 points
After calculating a firm's financial ratios, in what manner might they be analyzed to assess the firm's performance?

In the primary analysis, it would be informative to have several (at least three) observation points to detect any trends in the firm's ratios. This can suggest areas of
improvement or deterioration over recent years. Next, the firm's position should be viewed in relation to its industry, making sure that a true "industry" comparison is made.
This warning relates to the fact that many firms have subsidiaries in several industries, such that mere perusal of their statements may make for misleading comparisons.
Finally, the analyst may attempt to ascertain whether certain on- or off-balance sheet entries are misleading. An example of each, respectively, would be large amounts of
goodwill or heavy lease liabilities that could distort the ratio analysis.

award:

116.0.80 points
What may make simple comparisons of financial ratios misleading?

Generally accepted accounting principles have considerable leeway in accounting for asset/liability values and income, such that it is often difficult to make an absolute
comparison of one company's ratios with those of other companies or those of another industry.
a. Goodwill is difficult to assess. So, there are "dangers" associated with comparing the ratios of firms whose balance sheets include a substantial goodwill element with
those that do not.
b. Stock options are a form of employee compensation. However, companies are not required to treat them as an expense when calculating their incomes.
c. Research and development is an investment that hopefully will pay off in the form of higher future cash flows. However, unlike investments in plant and equipment, R&D
does not show up on the balance sheet. Instead, expenditures on R&D are treated as a current expense. This makes it difficult to compare the profitability of companies with
very different levels of expenditures on R&D.
d. For many firms their largest debts consist of the pension promises that they have made to their employees. However, balance sheets show a liability only when there are
insufficient assets in the pension fund to cover the pension promises.

award:

117.0.80 points
What are some potential pitfalls of ratio analysis based on accounting data?

Financial ratio analysis will rarely be useful if practiced mechanically. It requires a large dose of good judgment. Financial ratios seldom provide answers but they do help you
to ask the right questions. Moreover, accounting data do not necessarily reflect market values properly, and so must be used with caution. You need a benchmark for
assessing a company's financial position. Therefore, we typically compare financial ratios with the company's ratios in earlier years and with the ratios of other firms in the
same business.

award:

118.0.80 points
Name two types of distortions caused by increasing prices that have an impact on the balance sheet.

award:

119.0.80 points
Name five types of distortions caused by increasing prices that have an impact on the income statement.

1. Depreciation will be understated because replacement values on fixed assets will exceed historical costs.
2. Profits are exaggerated as a result of selling inventory that was purchased earlier and subsequently sold at higher prices.
3. Gains can also result from selling old fixed assets
4. Interest payments are lower in real terms
5. Firms realize gains on their accounts payable and incur losses on holdings of idle cash and receivables.

award:

120.0.80 points
Discuss some difficulties when comparing similar corporations from different countries.

The financial ratios of similar corporations in different countries can be quite different. This can be partly attributed to different GAAP's and accounting conventions in the

23 of 25
 various countries. Additionally, there may be other country-specific issues such as institutional, cultural, political, and tax differences that have to be accounted for. All of
these factors can have a major impact on the firm's financial ratios.

award:

121.0.80 points
How does the DuPont Formula help identify the determinants of the firm's return on its assets and equity?

The DuPont system provides a useful way to link ratios to explain the firm's return on assets and equity. The formula states that the return on equity is the product of the
firm's leverage ratio, asset turnover, operating profit margin, and debt burden. Return on assets is the product of the firm's asset turnover and operating profit margin.
The DuPont System is a process of analyzing component ratios (also called decomposition) of the ROA and ROE to explain their level or changes.
The ROA is comprised of the product of the profit margin, what the firm earns on every dollar of sales, times the asset turnover or the extent to which a business utilizes its
assets:

Both the profit margin and asset turnover can be broken down in subcomponents (decomposed) to assess the cause of the level or changes in the ROA. The ability to earn
on assets is comprised of expense control per sales (profit margin) and the effective use of assets to generate revenue (asset turnover). A level of ROA can be generated or
changed by affecting the margin or turnover.
The ROE is comprised of the ROA times the leverage ratio times the debt-burden ratio, or the ROE is related to the effective, profitable use of assets, the extent of financial
leverage, and the level of interest rates paid on debt:

= margin x turnover = ROA x leverage ratio x debt burden

award:

122.0.80 points
Why did Enron devise so many so-called special-purpose entities (SPEs)? What were the consequences of doing so? Why did Enron demonstrate the importance of
transparency?

Dishonest managers with creamy compensation packages may seek to hide the truth from investors. When the truth comes out, there can be big trouble. Think back to the
Enron scandal. Enron was in many ways an empty shell. Its stock price was supported more by investors' enthusiasm than by profitable operating businesses. The company
inflated its apparent performance by borrowing aggressively through so-called special-purpose entities (SPEs) and hiding these debts. Much of the SPE borrowing was
improperly excluded from Enron's financial statements.
The bad news started to leak out in the last months of 2001. In October, Enron announced a $1 billion write-off of its water and broadband business. In November, it
recognized its SPE debt retroactively, which increased its acknowledged indebtedness by $658 million and reduced its claims of past earnings by $591 million. Its public debt
was downgraded to junk status, and on December 2 it filed for bankruptcy.
Enron demonstrated the importance of transparency. If Enron had been more transparent to outsiders—that is, if they could have assessed its true profitability and
prospects—its problems would have shown up right away in a falling stock price. That in turn would have generated extra scrutiny from security analysts, bond rating
agencies, lenders, and investors.
With transparency, corporate troubles generally lead to corrective action. But the top management of a troubled and opaque company may be able to maintain its stock price
and postpone the discipline of the market. Market discipline caught up with Enron only a month or two before bankruptcy.

award:

123.0.80 points
What was a major goal of the Sarbanes-Oxley Act? Does this come with any price to U.S. financial markets and companies?

Enron was only one in a series of accounting scandals that came to light in 2001 and 2002. A major goal of the Sarbanes-Oxley Act is to increase transparency and ensure
that companies and their accountants provide directors, lenders, and shareholders with the information they need to monitor progress. Among other things, the act set up the
Public Company Accounting Oversight Board to oversee auditors; it bans accounting firms from offering their services to companies whose accounts they audit; it prohibits
any individual from heading a firm's audit for more than 5 years; and it requires that the board's audit committee consist of directors who are independent of the company's
management. Sarbanes-Oxley also requires that management (1) certify that the financial statements present a fair view of the firm's financial position and (2) demonstrate
that the firm has adequate controls and procedures for financial reporting.
All this comes at a price. The costs of SOX and the burdens of meeting detailed regulations are pushing some corporations to return to private (versus public) ownership.
Some observers also believe that these added regulatory demands have hurt the international competitiveness of U.S. financial markets.
We stress that transparency in the United States and other developed economies is usually pretty good. Nevertheless, it pays to be careful and critical even in these
countries. Take extra care in developing economies, where accounting standards are often lax.

award:

124.0.80 points
Look at and compare the financial ratios across industries. The retail industry has a much higher turnover of receivables (a shorter collection period) than other industries, while
software companies have high inventory turnover (low days in inventory). What do you think accounts for these differences?

24 of 25
The major portion of retail sales is paid for when the customer purchases the goods. Because credit sales are comparatively uncommon, accounts receivable are a smaller
percentage of sales than they are in other industries. This shows up as a low collection period or, equivalently, as high turnover of receivables.
Computer software companies do not have to maintain a large inventory of finished product awaiting sale. Often, they can deliver some product electronically as it is ready. In
addition, software development does not require large inventories of inputs that need to be assembled into a final product. Therefore, inventories compared to cost of goods
sold will be lower than is the case in other industries, and this is reflected in high inventory turnover ratios.

25 of 25