Chapter 04 Test Bank – Static Key
1.
The income statement of a firm shows the value of its assets and liabilities over a specified period of time.
2.
The higher the times interest earned ratio, the higher the interest expense.
3.
The net working capital of a firm will decrease when unpaid bills from suppliers are later paid with cash.
4.
Net working capital is determined from the difference between current assets and current liabilities.
5.
Net working capital to total assets and current ratio are both liquidity ratios.
6.
The net working capital to total assets ratio is always a larger number than the current ratio.
7.
The asset turnover ratio and inventory turnover ratio are both efficiency ratios.
8.
The inventory turnover ratio times the average days in inventory equals 365.
9.
Return on assets and return on equity are both profitability ratios.
10.
Return on assets is always a larger number than the return on equity.
11.
The reduction in value over time of intangible assets is known as amortization.
12.
Receivable turnover ratio and asset turnover ratio are both efficiency ratios.
13.
Market value added is the difference between the market value of the firm’s equity and its book value.
14.
Market value added is the same as economic value added.
15.
The difference between the current and quick ratios is that inventory has been subtracted from current assets.
16.
A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.
17.
Other things equal, an increase in average accounts receivable will increase a firm’s return on assets.
18.
Residual income is another term for economic value added.
19.
EVA is the net profit of the firm adjusted for the cost of capital.
20.
ROE is equal to ROC when the firm has no debt.
21.
Increasing leverage will always act to increase a firm’s ROE.
22.
Which of the following is the least effective measure of operating performance?
23.
Lease obligations are included in certain leverage ratios because leases:
24.
A firm with no leases has a long-term debt ratio of 50%. This means that the book value of equity:
25.
When a firm’s long-term debt-equity ratio is .98, the firm:
26.
If a firm’s debt ratio is greater than 0.5, then:
27.
A times interest earned ratio of 5 indicates the firm:
28.
If a firm’s cash coverage ratio is greater than its times interest earned ratio, then the:
29.
An asset’s liquidity measures its:
30.
Which of the following actions could improve a firm’s current ratio if it is now less than 1.0?
31.
If a firm’s quick ratio is equal to its current ratio:
32.
A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses cash to
pay off $50,000 in accounts payable?
33.
How would you interpret an inventory turnover ratio of 10.7?
34.
What are the annual sales for a firm with $400,000 in debt, a total debt ratio of 0.4, and an asset turnover of 3?
35.
Which one of the following will cause a reduction in the NWC turnover ratio all else held constant?
36.
The inventory turnover ratio compares:
37.
When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a lower
inventory turnover. What might you assume about Tri–C?
38.
Which one of the following statements is most likely correct for a firm with an average collection period of 90 days?
39.
An all-equity firm reports a net profit margin of 10% on sales of $3 million. If the tax rate is 40%, what is the pretax profit
0.10 = (1 − 0.4) × Pretax income / $3,000,000 → Pretax income = $500,000
40.
Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?
0.16 = Operating profit margin × 2.50
41.
What is the ROA of a firm with $150,000 in receivables, which represents 60 days sales, assets of $750,000, and an
operating profit margin of 9%?
42.
Last year’s return on equity was 30%. This year the ROE has decreased to 20% even though the firm’s earnings equaled last
year’s earnings. The firm has no preferred stock. What caused the decrease?
43.
Which one of these costs accounts for the difference between accounting income and economic value added?
44.
After-tax operating income for a leveraged firm is defined as:
45.
Which one of these changes indicates an improvement in a firm’s asset management efficiency?
46.
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–to-book ratio of 3?
47.
Which one of the following may be the best measure of company performance since it accounts for the opportunity cost of
capital?
48.
Which one of these statements is correct?
49.
The board of directors is dissatisfied with last year’s ROE of 15%. If the operating profit margin and asset turnover ratio
remain unchanged at 8% and 1.25, respectively, by how much must the leverage ratio (i.e., assets/equity) increase to achieve
20% ROE?
50.
What must happen to asset turnover to leave ROE unchanged from its original 16% level if the operating profit margin is
reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:
51.
The use of debt in the firm’s capital structure will increase ROE if the firm:
52.
To calculate which of these measures do you need to know the cost of capital?
53.
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?
54.
If a firm starts the year with receivables of $80,000 and produces sales for the year of $300,000, what is its average
collection period?
55.
A firm’s after-tax operating income was $1,000,000 in 2016. It started the year with total capital of $8,000,000 and raised an
additional $1 million of capital during the year. The additional capital raised during 2016 only started to affect the operating
income in 2017. Which value best represents the return on capital for 2016?
56.
If ROC is less than a firm’s cost of capital, which of the following must be true?
57.
When will ROE equal ROC?
58.
If the ratio of total liabilities to total assets is 0.5, long-term liabilities are $3,000, and equity is $5,000, then::