9/18/2020 Chapter 2 Study Practice: 20211_FINANCIAL MGMT_5873
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Submitted Sep 17 at 4:57pm
Chapter 2
Pracce
This chapter assessment consists of a random sample of twenty five (25) true/false, multiple choice
theory, and multiple choice problem questions. You may use resources (i.e., textbook, notes, etc.) for this
quiz. Full credit will be given if the assignment is completed, however, you must complete the entire
assignment to receive full credit.
You will be presented with all questions at once.
Multiple attempts are allowed for practice.
Take the Quiz Again
1 / 1 pts
Question 1
Alumbat Corporation has $800,000 in debt outstanding, and pays an interest rate of 10
percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax
rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not
9/18/2020 Chapter 2 Study Practice: 20211_FINANCIAL MGMT_5873
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maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and
bankruptcy will result. Alumbat’s current times interest earned ratio is:
3.6 times.
4.0 times.
3.4 times.
5.0 times.
Correct. Alumbat’s current TIE is 5 times. The net income is $192,000;
that is, $3,200,000 multiplied by 6 percent. The earnings before tax is
$192,000 divided by 60 percent, which equals $320,000. The earnings
before interest and tax is $320,000 plus 10 percent of $800,000, which
equals $400,000. Therefore, the times interest earned ratio of the firm
is $400,000 divided by the interest charges of $80,000, which equals 5
times. See 2-3: Financial Statement (Ratio) Analysis
2.4 times.
1 / 1 pts
Question 2
Which of the following ratios indicate how much investors are willing to pay for a firm’s
stock for each dollar of reported profits?
Price/earnings ratio
Correct. The price/earnings ratio shows how much investors are
willing to pay for a firm’s stock for each dollar of reported profits. See
2-3: Financial Statement (Ratio) Analysis
Net profit margin
Market-to-book ratio
9/18/2020 Chapter 2 Study Practice: 20211_FINANCIAL MGMT_5873
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Return on equity
Earnings per share
1 / 1 pts
Question 3
Which of the following mathematical expressions calculates the debt ratio?
Debt ratio = Interest charges ÷ Total liabilities
Debt ratio = Total liabilities ÷ Total assets
Correct. The formula to calculate debt ratio is total liabilities divided by
total assets. See 2-3: Financial Statement (Ratio) Analysis
Debt ratio = Sales ÷ Total liabilities
Debt ratio = Long-term liabilities ÷ Current liabilities
Debt ratio = Net operating income ÷ Total debt
0 / 1 pts
Question 4
Incorrect
Incorrect
A firm’s total equity is $10 million and total liabilities is $5 million. During the year, its
sales equaled to $75 million. Based on the given information, the total assets turnover
ratio of the firm is:
13 times.
10.5 times.
15 times.
9/18/2020 Chapter 2 Study Practice: 20211_FINANCIAL MGMT_5873
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5 times.
7.5 times.
Incorrect. The total assets turnover ratio measures the dollar amount
of sales generated by each dollar invested in of the firm’s assets. See
2-3: Financial Statement (Ratio) Analysis
1 / 1 pts
Question 5
Which of the following ratios measures how effectively a firm is managing its assets?
Profit margin ratio
Price earnings ratio
Inventory turnover ratio
Correct. The inventory turnover ratio is an asset management ratio
that provides an indication of how well a firm is managing its inventory.
See 2-3: Financial Statement (Ratio) Analysis
Times interest earned ratio
Quick ratio
1 / 1 pts
Question 6
Which of the following mathematical expressions computes the net worth of a firm?
Net worth = Current assets minus current liabilities
9/18/2020 Chapter 2 Study Practice: 20211_FINANCIAL MGMT_5873
Net worth = Total assets minus current liabilities
Net worth = Total liabilities minus current liabilities
Net worth = Total assets minus total liabilities
Correct. The firm’s stockholders’ equity, or net worth, equals total
assets minus total liabilities. See 2-2: Financial Statements
Net worth = Total liabilities minus current assets
1 / 1 pts
Question 7
Which of the following financial statements summarizes the revenue generated and the
expenses incurred by a firm during the accounting period?
Statement of cash flows
