Corporate Finance, 12e (Ross)
1) Which statement expresses all relative account values as a percentage of total assets?
A) Pro forma balance sheet
B) Common-size income statement
C) Statement of cash flows
D) Pro forma income statement
E) Common-size balance sheet
2) You would like to compare your firm’s cost structure to that of your competitors. However,
your competitors are much larger in size than your firm. Which one of these would best enable
you to compare costs across your industry?
A) Pro forma balance sheet
B) Common-size income statement
C) Statement of cash flows
D) Pro forma income statement
E) Common-size balance sheet
3) Which one of these terms is most synonymous with the term “income from operations”?
A) TTM
B) EBIT
C) LTM
D) EBITDA
E) EPS
4) Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are
known as:
A) asset management ratios.
B) long-term solvency measures.
C) liquidity measures.
D) profitability ratios.
E) market value ratios.
5) The current ratio is measured as:
A) current assets minus current liabilities.
B) current assets divided by current liabilities.
C) current liabilities minus inventory, divided by current assets.
D) cash on hand divided by current liabilities.
E) current liabilities divided by current assets.
6) The quick ratio is measured as:
A) current assets divided by current liabilities.
B) cash on hand plus current liabilities, divided by current assets.
C) current liabilities divided by current assets, plus inventory.
D) current assets minus inventory, divided by current liabilities.
E) current assets minus inventory minus current liabilities.
7) 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) market value
8) The debt-equity ratio is measured as:
A) total equity divided by long-term debt.
B) total equity divided by total debt.
C) total debt divided by total equity.
D) long-term debt divided by total equity.
E) total assets minus total debt, divided by total equity.
9) The equity multiplier is measured as total:
A) equity divided by total assets.
B) equity plus total debt.
C) assets minus total equity, divided by total assets.
D) assets plus total equity, divided by total debt.
E) assets divided by total equity.
10) Ratios that measure how efficiently a firm uses its assets to generate sales are known as
________ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) market value
11) The inventory turnover ratio is measured as:
A) sales divided by inventory.
B) inventory times total sales.
C) cost of goods sold divided by inventory.
D) inventory divided by cost of goods sold.
E) inventory divided by sales.
12) Days’ sales in inventory is measured as:
A) inventory turnover plus 365 days.
B) inventory turnover times 365 days.
C) inventory divided by cost of goods sold, times 365 days.
D) 365 days divided by the inventory.
E) 365 days divided by the inventory turnover.
13) The receivables turnover ratio is measured as:
A) sales plus accounts receivable.
B) sales divided by accounts receivable.
C) sales minus accounts receivable, divided by sales.
D) accounts receivable times sales.
E) accounts receivable divided by sales.
14) The total asset turnover ratio measures the amount of:
A) total assets needed for every $1 of sales.
B) sales generated by every $1 in total assets.
C) fixed assets required for every $1 of sales.
D) net income generated by every $1 in total assets.
E) net income that can be generated by every $1 of fixed assets.
15) Ratios that measure how efficiently a firm’s management uses its assets and equity to
generate bottom line net income are known as ________ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability
E) market value
16) The financial ratio measured as net income divided by sales is known as the firm’s:
A) profit margin.
B) return on assets.
C) return on equity.
D) asset turnover.
E) earnings before interest and taxes.
17) The measure of net income returned from every dollar invested in total assets is the:
A) profit margin.
B) return on assets.
C) return on equity.
D) asset turnover.
E) earnings before interest and taxes.
18) The financial ratio that measures the accounting profit per dollar of book equity is referred to
as the:
A) profit margin.
B) price-earnings ratio.
C) return on equity.
D) equity turnover.
E) market profit-to-book ratio.
19) The amount that investors are willing to pay for each dollar of annual earnings is reflected in
the:
A) return on assets.
B) return on equity.
C) debt-equity ratio.
D) price-earnings ratio.
E) DuPont identity.
20) The market-to-book ratio is measured as the:
A) market price per share divided by the par value per share.
B) net income per share divided by the market price per share.
C) market price per share divided by the net income per share.
D) market price per share divided by the dividends per share.
E) market value per share divided by the book value per share.
21) Which one of the following statements is correct concerning ratio analysis?
A) A single ratio is often computed differently by different individuals.
B) No ratio can address the problem of size differences among firms.
C) Only a very limited number of ratios can be used for analytical purposes.
D) Every ratio is an income statement entry divided by a balance sheet item.
E) Ratios cannot be used for comparison purposes over periods of time.
22) Which one of the following is a liquidity ratio?
A) Quick ratio
B) Cash coverage ratio
C) Total debt ratio
D) EV multiple
E) Times interest earned ratio
23) An increase in which one of the following accounts increases a firm’s current ratio without
affecting its quick ratio?
A) Accounts payable
B) Cash
C) Inventory
D) Accounts receivable
E) Fixed assets
24) 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
25) A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:
A) $1 in total equity.
B) $.53 in total assets.
C) $1 in current assets.
D) $.53 in total equity.
E) $1 in fixed assets.
26) The long-term debt ratio is probably of most interest to a firm’s:
A) credit customers.
B) employees.
C) suppliers.
D) mortgage holder.
E) stockholders.
27) A banker considering loaning money to a firm for ten years would most likely prefer the firm
have a debt ratio of ________, and a times interest earned ratio of ________.
A) .50; .75
B) .50; 1.00
C) .45; 1.75
D) .40; .75
E) .40; 1.75
28) From a cash flow position, which one of the following ratios best measures a firm’s ability to
pay the interest on its debts?
A) Times interest earned ratio
B) Cash coverage ratio
C) Cash ratio
D) Quick ratio
E) Interval measure
29) The higher the inventory turnover, the:
A) less time inventory items remain on the shelf.
B) higher the inventory as a percentage of total assets.
C) longer it takes a firm to sell its inventory.
D) greater the amount of inventory held by a firm.
E) greater the selection of goods available for sale.
30) Which one of the following statements is correct if a firm has a receivables turnover of 10?
A) It takes the firm 10 days to collect payment from its customers.
B) It takes the firm 36.5 days to sell its inventory and collect the payment from the sale.
C) It takes the firm an average of 36.5 days to sell its items.
D) The firm collects its credit sales in an average of 36.5 days.
E) The firm has ten times more in accounts receivable than it does in cash.
31) A capital intensity ratio of 1.03 means a firm has $1.03 in:
A) total debt for every $1 in equity.
B) equity for every $1 in total debt.
C) sales for every $1 in total assets.
D) total assets for every $1 in sales.
E) long-term assets for every $1 in short-term assets.
32) Puffy’s Pastries generates five cents of net income for every $1 in equity. Thus, Puffy’s has
________ of 5 percent.
A) a return on assets
B) a profit margin
C) a return on equity
D) an EV multiple
E) a price-earnings ratio
33) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent,
then the firm:
A) has no debt of any kind.
B) is using its assets as efficiently as possible.
C) pays all its earnings out in dividends.
D) also has a current ratio of 15.
E) has an equity multiplier of 2.
34) If stockholders want to know how much profit the firm is making on their entire investment
in that firm, the stockholders should refer to the:
A) profit margin.
B) return on assets.
C) return on equity.
D) equity multiplier.
E) earnings per share.
35) Assume BGL Enterprises increases its operating efficiency by lowering its costs while
holding its sales constant. As a result, given all else constant, the:
A) return on equity will increase.
B) return on assets will decrease.
C) profit margin will decline.
D) total debt ratio will decrease.
E) price-earnings ratio will increase.
36) Joe’s has old, fully depreciated equipment. Moe’s just purchased all new equipment which
will be depreciated over eight years. If Joe’s and Moe’s have the same sales, costs, tax rate, and
enterprise value, then:
A) Joe’s will have a lower profit margin.
B) Joe’s will have a lower return on equity.
C) Moe’s will have a higher net income.
D) Moe’s and Joe’s will have the same EV multiple.
E) Moe’s will have a lower EV multiple.
37) Last year, Alfred’s Automotive had a price-earnings ratio of 15 and earnings per share of
$1.20. This year, the price-earnings ratio is 18 and the earnings per share is $1.20. Based on this
information, it can be stated with certainty that:
A) the price per share decreased.
B) the earnings per share decreased.
C) investors are paying a lower price per share this year as compared to last year.
D) investors are receiving a higher rate of return this year.
E) the investors’ outlook for the firm has improved.
38) Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of 19.
Thus, you can state with certainty that one share of stock in Alfred’s:
A) has a higher market price than one share of stock in Turner’s.
B) has a higher market price per dollar of earnings than does one share of Turner’s.
C) sells at a lower price per share than one share of Turner’s.
D) represents a larger percentage of firm ownership than does one share of Turner’s stock.
E) earns a greater profit per share than does one share of Turner’s stock.
39) Which one of the following is most apt to cause a profitable, stable firm to have a higher
price-earnings ratio?
A) Slow industry outlook
B) Very low current earnings
C) Low market share
D) Low prospect of firm growth
E) Low investor opinion of firm
40) Vinnie’s Motors has a market-to-book ratio of 3.4. The book value per share is $34 and
earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a
$1 increase in the book value per share will:
A) decrease the price-earnings ratio.
B) decrease the EV multiple.
C) decrease the market price per share.
D) increase the price-earnings ratio.
E) increase the return on equity.
41) Which one of the following sets of ratios would generally be of the most interest to
stockholders?
A) Return on assets and profit margin
B) Quick ratio and times interest earned
C) Price-earnings ratio and debt-equity ratio
D) Return on equity and price-earnings ratio
E) Cash coverage ratio and equity multiplier
42) If a firm decreases its operating costs, all else constant, then the:
A) profit margin will decrease.
B) return on assets will decrease.
C) total asset turnover rate will increase.
D) cash coverage ratio will decrease.
E) price-earnings ratio will decrease.
43) A public firm’s market capitalization is equal to the:
A) total book value of assets less the book value of debt.
B) par value of common equity.
C) price per share multiplied by number of shares outstanding.
D) stock price per share multiplied by the number of shares authorized.
E) maximum value an acquirer would pay for the firm in an acquisition.
44) Enterprise value is based on the:
A) market value of interest-bearing debt plus the market value of equity minus cash.
B) book values of debt and assets, other than cash.
C) market value of equity plus the book value of total debt minus cash.
D) book value of debt plus the market value of equity.
E) book values of debt and equity less cash.
45) Which one of these values best represents the funds needed to acquire a firm and payoff all
of that firm’s debt?
A) Market value of total assets
B) Book value of equity
C) Return on assets
D) Market value of equity
E) Enterprise value
46) A firm with a high level of growth opportunities is most apt to have a:
A) high PE ratio and a high EV multiple.
B) high cash ratio and a low EV multiple.
C) high PE ratio and a low EV multiple.
D) low PE ratio and a high EV multiple.
E) low cash ratio and a low PE ratio.
47) The equity multiplier measures:
A) financial leverage.
B) returns to stockholders.
C) operating efficiency.
D) management efficiency.
E) asset use efficiency.
48) The return on equity can be calculated as:
A) ROA × Equity multiplier.
B) Profit margin × ROA.
C) Profit margin × ROA × Total asset turnover.
D) ROA × Net income/Total assets.
E) ROA × Debt-equity ratio.
49) The DuPont identity can be computed as:
A) Net income × Profit margin × (1 + Debt-equity ratio).
B) Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).
C) Net income × Total asset turnover × Equity multiplier.
D) Profit margin × Total asset turnover × Debt-equity ratio.
E) Return on equity × Profit margin × Total asset turnover.
50) Which one of these ratios measures the efficiency at which a firm employs its assets?
A) Profit margin
B) Return on equity
C) Equity multiplier
D) P/E ratio
E) Total asset turnover
51) It is easier to evaluate a firm using its financial statements when the firm:
A) is a conglomerate.
B) is global in nature.
C) uses the same accounting procedures as other firms in its industry.
D) has a different fiscal year than other firms in its industry.
E) tends to have one-time events such as asset sales and property acquisitions.
52) The most effective method of directly evaluating the financial performance of a firm is to
compare the financial ratios of the firm to:
A) the firm’s ratios from prior time periods and to the ratios of firms with similar operations.
B) the average ratios of all firms within the same country over a period of time.
C) those of other firms located in the same geographic area that are similarly sized.
D) the average ratios of the firm’s international peer group.
E) those of the largest conglomerate that has operations in the same industry as the firm.
53) The least problems encountered when comparing the financial statements of one firm with
those of another firm occur when the firms:
A) are in different lines of business.
B) have geographically diverse operations.
C) use different methods of depreciation.
D) are both classified as conglomerates.
E) have the same fiscal year-end.
54) In the financial planning model, the external financing needed (EFN) as shown on a pro
forma balance sheet is equal to the changes in assets:
A) plus the changes in liabilities minus the changes in equity.
B) minus the changes in both liabilities and equity.
C) minus the changes in liabilities only.
D) plus the changes in both liabilities and equity.
E) minus the change in retained earnings.
55) Which account is least apt to vary directly with sales?
A) Notes payable
B) Inventory
C) Cost of goods sold
D) Accounts payable
E) Accounts receivable
56) Projected future financial statements are called:
A) imaginative statements.
B) pro forma statements.
C) reconciled statements.
D) aggregated statements.
E) comparative statements.
57) The projected addition to retained earnings can be calculated as:
A) PM × Δ Sales.
B) PM × Δ Sales × (1 − Dividend payout ratio).
C) PM × Projected sales × (1 − Dividend payout ratio).
D) Projected sales × (1 − Dividend payout ratio).
E) PM × Projected sales.