Assignment 1

MCQ’s

1. Battery Plus, Inc. has total assets of $642,000. There are 60,000 shares of stock
outstanding with a market value of $19 a share. The firm has a profit margin of
6.4 percent and a total asset turnover of 1.36. What is the price-earnings ratio?
a. 15.10
b. 20.40
c. 23.91
d. 27.56
e. 30.20

2. Fidel's Forestry has a return on assets of 7.5 percent, a total asset turnover rate
of 1.6, and a debt-equity ratio of 1.2. What is the return on equity?
a. 12.00 percent
b. 16.40 percent
c. 16.50 percent
d. 26.40 percent
e. 26.50 percent

3. Which one of the following represents additional compensation provided to

bondholders to offset the possibility that the bond issuer might not pay the interest
and/or principal payments as expected?
a. interest rate risk premium
b. inflation premium
c. liquidity premium
d. taxability premium
e. default risk premium

4. The key activities of the financial manager include all of the following EXCEPT
(a) making financing decisions.
(b) financial analysis and planning.
(c) managing financial accounting.
(d) making investment decisions.
5. The wealth of the owners of a corporation is represented by
(a) profits.
(b) earnings per share.
(c) share price.
(d) cash flow.
6. _________ is where the firm’s ratio values are compared to those of a key competitor or
group of competitors, primarily to identify areas for improvement.
(a) Time-series analysis
(b) Benchmarking
(c) Combined analysis
(d) None of the above.

7. In the DuPont system, the return on equity is equal to

(a) (net profit margin)  (total asset turnover).
(b) (stockholders’ equity)  (financial leverage multiplier).
(c) (return on total assets)  (financial leverage multiplier).
(d) (return on total assets)  (total asset turnover).

8. Which one of the following actions will decrease the current ratio, all else
constant? Assume the current ratio is greater than 1.0.
a. purchasing inventory on credit
b. paying an account payable
c. collecting payment from a customer
d. selling inventory at a profit in a charge sale
e. selling inventory at cost in a cash sale

9. The _________ is a measure of liquidity which excludes _________, generally the least
liquid asset.
(a) current ratio; accounts receivable
(b) quick ratio; accounts receivable
(c) current ratio; inventory
(d) quick ratio; inventory

10. A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
(a) improve its collection practices, thereby increasing cash and increasing its current and
quick ratios.
(b) improve its collection practices and pay accounts payable, thereby decreasing current
liabilities and increasing the current and quick ratios.
(c) decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios.
(d) increase inventory, thereby increasing current assets and the current and quick ratios.

11. If the inventory turnover is divided into 360, it becomes a measure of

(a) sales efficiency.
(b) the average age of the inventory.
(c) sales turnover.
(d) the average collection period.
 12. Which one of the following statements is correct, all else constant?
(a) Increasing the inventory level will increase the inventory turnover rate.
(b) Increasing the inventory level will increase the days' sales in inventory.
(c) Increasing the receivables turnover rate will increase the days' sales in
receivables.
(d) Increasing sales will lower the total asset turnover.
(e) Increasing sales will increase the capital intensity ratio.

13. A firm has a times interest earned ratio of 2. This means that the firm has twice as
much:
(a) net income as it does interest expense.
(b) interest expense as it does net income.
(c) earnings before interest and taxes as it does interest expense.
(d) interest expense as it does earnings before interest and taxes.
(e) operating cash flow as it does interest expense.

14. A corporation had a year end 2004 retained earnings balance of $220,000. The firm
reported net profits after taxes of $50,000 in 2005 and paid dividends in 2005 of
$30,000. The firm’s retained earnings balance at year end 2005 was _________.
(a) $240,000
(b) $250,000
(c) $270,000
(d) $300,000

15. If a firm's ROA and ROE are equal, it can be concluded that the firm is
(a) losing money.
(b) liquid enough to pay some extra dividends.
(c) financed by all equity.
(d) financed by a high proportion of debt.