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Essentials of Investments, 11e (Bodie)
1) Which of the following assets is most liquid?
A) cash equivalents
B) receivables
C) inventories
D) plant and equipment
2) Cost of goods sold refers to ________.
A) direct costs attributable to producing the product sold by the firm
B) salaries, advertising, and selling expenses
C) payments to the firm's creditors
D) payments to federal and local governments
3) Many observers believe that firms "manage" their income statements to ________.
A) minimize taxes over time
B) maximize expenditures
C) smooth their earnings over time
D) generate level sales
4) Depreciation expense is in what broad category of expenditures?
A) operating expenses
B) general and administrative expenses
C) debt interest expense
D) tax expenditures
5) Firm A acquires firm B when firm B has a book value of assets of $155 million and a book
value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase
would result in goodwill for firm A equal to ________.
A) $175 million
B) $155 million
C) $120 million
D) $55 million
6) One of the biggest impediments to a global capital market has been ________.
A) volatile exchange rates
B) the lack of common accounting standards
C) lower disclosure standards in the United States than abroad
D) the lack of transparent reporting standards across the EU
7) Benjamin Graham thought that the benefits from detailed analysis of a firm's financial
statements had ________ over his long professional life.
A) increased greatly
B) increased slightly
C) remained constant
D) decreased
8) If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will
________.
A) decrease
B) increase
C) not change
D) change but in an indeterminable manner
9) Which of the following is not one of the three key financial statements available to investors
in publicly traded firms?
A) income statement
B) balance sheet
C) statement of operating earnings
D) statement of cash flows
10) In 2017 Huge-Packing repurchased shares of common stock worth $5,241 million and made
dividend payments of $894 million. Other financing activities raised $196 million, and Huge-
Packing's total cash flow from financing was –$6,077 million. How much did the long-term debt
accounts of Huge-Packing change?
A) increased $138 million
B) decreased $138 million
C) increased $836 million
D) decreased $836 million
11) Cash Flow Data for Interceptors, Inc.
2015
2016
2017
2018
Cash
$
35
$
40
$
45
$
50
Cash from Operations
$
127
$
125
$
122
$
117
Net Capital Spending
$
140
$
130
$
140
$
145
Cash from Financing
$
18
$
15
$
23
What must cash flow from financing have been in 2018 for Interceptors, Inc.?
A) $5
B) $28
C) $30
D) $33
12) Cash Flow Data for Interceptors, Inc.
2015
2016
2017
2018
Cash
$
35
$
40
$
45
$
50
Cash from Operations
$
127
$
125
$
122
$
117
Net Capital Spending
$
140
$
130
$
140
$
145
Cash from Financing
$
18
$
15
$
23
Based on the cash flow data in the table for Interceptors Inc., which of the following statements
is (are) correct?
I. This firm appears to be a good investment because of its steady growth in cash.
II. This firm has been able to generate growing cash flows only by borrowing or selling equity
to offset declining operating cash flows.
III. Financing activities have been increasingly important for this firm's operations, at least in the
short run.
A) I only
B) II and III only
C) II only
D) I and II only
13) Common-size balance sheets are prepared by dividing all quantities by ________.
A) total assets
B) total liabilities
C) shareholders' equity
D) fixed assets
14) Operating ROA is calculated as ________, while ROE is calculated as ________.
A) EBIT/total assets; net profit/total assets
B) net profit/total assets; EBIT/total assets
C) EBIT/total assets; net profit/equity
D) net profit/EBIT; sales/total assets
15) A firm increases its financial leverage when its ROA is greater than the cost of debt.
Everything else equal, this change will probably increase the firm's:
I. Beta
II. Earnings variability over the business cycle
III. ROE
IV. Stock price
A) I and II only
B) III and IV only
C) I, III, and IV only
D) I, II, and III only
16) The highest possible value for the interest-burden ratio is ________, and this occurs when
the firm ________.
A) 0; uses as much debt as possible
B) 1; uses debt to the point where ROA = interest cost of debt
C) 1; uses no interest-bearing debt
D) –1; pays down its existing debts
17) Which one of the following ratios is used to calculate the times-interest-earned ratio?
A) Net profit/Interest expense
B) Pretax profit/EBIT
C) EBIT/Sales
D) EBIT/Interest expense
18) The process of decomposing ROE into a series of component ratios is called ________.
A) DuPont analysis
B) technical analysis
C) comparative analysis
D) liquidity analysis
19) Which of the following is not a ratio used in the DuPont analysis?
A) Interest burden
B) Profit margin
C) Asset turnover
D) Earnings yield ratio
20) Which of the following is NOT a liquidity ratio?
A) Inventory turnover ratio
B) Current ratio
C) Quick ratio
D) Cash ratio
21) Operating ROA can be found as the product of ________.
A) return on sales × ATO
B) tax burden × interest burden
C) interest burden × leverage ratio
D) ROE × dividend payout ratio
22) A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is ________.
A) 8.4
B) 11.9
C) 17.62
D) 47.6
23) If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is
the same as the operating ROA, then operating ROA will be ________.
A) greater than zero, but it is impossible to determine how operating ROA will compare to ROE
B) equal to ROE
C) greater than ROE
D) less than ROE
24) You find that a firm that uses debt has a compound leverage factor less than 1. This tells you
that ________.
A) the firm's use of financial leverage is positively contributing to ROE
B) the firm's use of financial leverage is negatively contributing to ROE
C) the firm's use of operating leverage is positively contributing to ROE
D) the firm's use of operating leverage is negatively contributing to ROE
25) A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is ________.
A) 2.88
B) 2
C) 1.75
D) 0.69
26) A firm has an ROA of 8% and a debt/equity ratio of 0.5; its ROE is ________.
A) 4%
B) 6%
C) 8%
D) 12%
27) A firm has a tax burden of 0.7, a leverage ratio of 1.3, an interest burden of 0.8, and a return-
on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's
ROE?
A) 12.4%
B) 14.5%
C) 16.6%
D) 17.8%
28) Economic value added (EVA) is
A) the difference between the return on assets and the opportunity cost of capital times the
capital base.
B) ROA × ROE.
C) a measure of the firm's abnormal return.
D) largest for high-growth firms.
29) Which of the following statements is true concerning economic value added?
A) A growing number of firms tie managers' compensation to EVA.
B) A profitable firm will always have a positive EVA.
C) EVA recognizes that the cost of capital is not a real cost.
D) If a firm has positive present value of growth opportunities, it will have positive EVA.
16
30) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current
ratio for 2017 indicates that Flathead's liquidity has ________ since 2016.
A) risen
B) fallen
C) stayed the same
D) The answer cannot be determined from the information given.
18
31) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory
turnover ratio is ________. (Please keep in mind that when a ratio involves both income
statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the
year must be averaged.)
A) 11.6
B) 10.2
C) 9.5
D) 7.7
32) The financial statements of Flathead Lake Manufacturing Company are shown below.
Income Statement 2017
Sales
$
9,300,000
Cost of Goods Sold
5,750,000
Depreciation Expense
550,000
Gross Profit
$
3,000,000
Selling and Administrative Expenses
2,200,000
EBIT
$
800,000
Interest Expense
200,000
Income before Tax
$
600,000
Taxes
375,000
Net Income
$
225,000
Flathead Lake Manufacturing
Comparative Balance Sheets
2017
2016
Cash
$
50,000
$
40,000
Accounts Receivable
570,000
600,000
Inventory
530,000
460,000
Total Current Assets
$
1,150,000
$
1,100,000
Fixed Assets
2,050,000
1,400,000
Total Assets
$
3,200,000
$
2,500,000
Accounts Payable
$
320,000
$
300,000
Bank Loans
480,000
400,000
Total Current Liabilities
$
800,000
$
700,000
Long-term Bonds
1,500,000
1,000,000
Total Liabilities
$
2,300,000
$
1,700,000
Common Stock (200,000 shares)
200,000
200,000
Retainded Earnings
700,000
600,000
Total Equity
$
900,000
$
800,000
Total Liabilities and Equity
$
3,200,000
$
2,500,000
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debt-to-
equity ratio for 2017 is ________.
