chapter 14.csv

Question 1

1) Which of the following assets is most liquid? A) cash equivalents B) receivables C) inventories D) plant and equipment

Answer 1

A

Question 2

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

Answer 2

A

Question 3

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

Answer 3

C

Question 4

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

Answer 4

A

Question 5

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

Answer 5

D

Question 6

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

Answer 6

B

Question 7

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

Answer 7

D

Question 8

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

Answer 8

A

Question 9

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

Answer 9

C

Question 10

13) Common-size balance sheets are prepared by dividing all quantities by ________. A) total assets B) total liabilities C) shareholders’ equity D) fixed assets

Answer 10

A

Question 11

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

Answer 11

C

Question 12

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

Answer 12

D

Question 13

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

Answer 13

C

Question 14

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

Answer 14

D

Question 15

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

Answer 15

A

Question 16

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

Answer 16

D

Question 17

20) Which of the following is NOT a liquidity ratio? A) Inventory turnover ratio B) Current ratio C) Quick ratio D) Cash ratio

Answer 17

A

Question 18

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

Answer 18

A

Question 19

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

Answer 19

B

Question 20

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

Answer 20

C

Question 21

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

Answer 21

B

Question 22

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

Answer 22

A

Question 23

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%

Answer 23

D

Question 24

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%

Answer 24

C

Question 25

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.

Answer 25

A

Question 26

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.

Answer 26

A

Question 27

50) A firm has a net profit/pretax profit ratio of 0.6, a leverage ratio of 1.5, a pretax profit/EBIT of 0.7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is ________. A) 7.56% B) 15.12% C) 20.16% D) 30.24%

Answer 27

B

Question 28

51) A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is ________. A) 15.12% B) 28.42% C) 37.24% D) 40.6%

Answer 28

B

Question 29

52) The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to ________ income, and the level of interest expense reported tends to ________ income. A) understate; overstate B) understate; understate C) overstate; understate D) overstate; overstate

Answer 29

A

Question 30

53) If a firm’s ratio of stockholders’ equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders’ equity is also lower than the industry average, this would suggest that the firm ________. A) has more current liabilities than the industry average B) has more leased assets than the industry average C) will be less profitable than the industry average D) has more current assets than the industry average

Answer 30

A

Question 31

54) A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: I. Lower ATO than the industry average II. Lower ROA than the industry average III. Lower ROE than the industry average A) I only B) I and II only C) II and III only D) I, II, and III

Answer 31

D

Question 32

55) A high price-to-book ratio may indicate which one of the following? A) The firm expanded its plant and equipment in the past few years. B) The firm is doing a poorer job controlling its inventory expense than other related firms. C) Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate. D) All of these options.

Answer 32

C

Question 33

56) A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm’s ________. A) earnings yield is above the industry average B) P/E ratio is above the industry average C) dividend payout ratio is too high D) interest burden must be below the industry average

Answer 33

A

Question 34

62) All of the following ratios are related to efficiency except ________. A) total asset turnover B) fixed-asset turnover C) average collection period D) cash ratio

Answer 34

D

Question 35

63) Which of the following would result in a cash inflow under the heading “Cash flow from investing” in the statement of cash flows? A) purchase of capital equipment B) payments to suppliers for inventory C) collections on receivables D) sale of production machinery

Answer 35

D

Question 36

64) When assessing the sustainability of a firm’s cash flows, analysts will prefer to see cash growth generated from which of the following sources? A) cash flow from investment activities B) cash flow from operating activities C) cash flow from financing D) cash flow from extraordinary events

Answer 36

B

Question 37

65) The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS? A) $8 million B) –$6 million C) $3 million D) –$4 million

Answer 37

B

Question 38

66) Another term for EVA is ________. A) net income B) operating income C) residual income D) market-based income

Answer 38

C

Question 39

67) Which of the following transactions will result in a decrease in cash flow from operations? A) increase in accounts receivable B) decrease in inventories C) increase in taxes payable D) decrease in bonds outstanding

Answer 39

A

Question 40

68) Which of the following transactions will result in a decrease in cash flow from investments? A) acquisition of another business B) capital gain from sale of a subsidiary C) decrease in net investments D) sale of equipment

Answer 40

A

Question 41

69) Which of the following will result in an increase in cash to the firm? A) dividends paid B) a delay in collecting on accounts receivable C) net new investments D) an increase in accounts payable

Answer 41

D

Question 42

71) A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations? A) $50 increase B) $100 increase C) $150 increase D) $250 increase

Answer 42

A

Question 43

72) A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing? A) $20 increase B) $80 increase C) $100 increase D) $200 increase

Answer 43

D

Question 44

73) A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments? A) $10 decrease B) $90 decrease C) $180 decrease D) $190 decrease

Answer 44

C

Question 45

74) The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities? A) increase of $225 B) increase of $130 C) decrease of $195 D) decrease of $110

Answer 45

A

Question 46

75) The term quality of earnings refers to ________. A) how well reported earnings conform to GAAP B) the realism and sustainability of reported earnings C) whether actual earnings matched expected earnings D) how well reported earnings fit a trend line of earnings growth

Answer 46

B

Question 47

76) The practice of “selling” large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed ________. A) channel stuffing B) clogging the network C) spamming the johns D) artificial sales

Answer 47

A

Question 48

77) What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets? A) asset turnover B) current ratio C) liquidity ratio D) quick ratio

Answer 48

A

Question 49

78) A firm’s leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.25, and its asset turnover is 1.1. What is the firm’s compound leverage factor? A) 0.243 B) 0.267 C) 0.826 D) 0.972

Answer 49

D

Question 50

79) The tax burden of the firm is 0.4, the interest burden is 0.65, the return on sales is 0.05, the asset turnover is 0.90, and the leverage ratio is 1.35. What is the ROE of the firm? A) 1.58% B) 5.68% C) 12.2% D) 13.33%

Answer 50

A

Question 51

80) The tax burden of the firm is 0.5, the interest burden is 0.55, the profit margin is 0.25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm? A) 1.88% B) 6.68% C) 12.15% D) 17.02%

Answer 51

D

Question 52

81) The major difference between IFRS and GAAP is that U.S. standards are ________ and IFRS standards are ________. A) strictly enforced; weakly enforced B) rules-based; principles-based C) evolutionary; devolutionary D) based on government standards; based on corporate practice

Answer 52

B

Question 53

82) The quick ratio is a measure of a firm’s ________. A) asset turnover B) market valuation C) liquidity D) interest burden

Answer 53

C

Question 54

83) The firm’s leverage ratio is 1.2, interest-burden ratio is 0.81, and profit margin is 0.24, and its asset turnover is 1.25. What is the firm’s ROA? A) 0.25 B) 0.3 C) 0.335 D) 0.372

Answer 54

B

Question 55

84) A firm has a compound leverage factor greater than 1; this indicates that ________. A) the firm has no interest payments B) the firm uses less debt as a percentage of financing C) the firm’s interest payments are equal to the firm’s pretax profits D) the firm’s debt has a positive contribution to the firm’s ROA

Answer 55

D

Question 56

85) If a firm’s borrowing rate exceeds its ROA, then ROE will ________. A) increase by an amount that depends on the equity/debt ratio. B) increase by an amount that depends on the debt/equity ratio. C) decline by an amount that depends on the equity/debt ratio. D) decline by an amount that depends on the debt/equity ratio.

Answer 56

D

Question 57

86) The impact of using LIFO over FIFO is to ________. A) bias ROE downward since investments are undervalued B) bias ROE downward since investments are overvalued C) bias ROE upward since investments are undervalued D) bias ROE upward since investments are overvalued

Answer 57

C

Question 58

87) According the Financial Accounting Standards Board’s Statement No. 157 on fair value accounting, Level 3 assets ________. A) must be reduced to book value B) must be compared to market valuations C) are hardest to value D) are easiest to value

Answer 58

C

Question 59

88) When choosing a benchmark, it is best to use ________. A) numerous firms in the same industry B) your number one competitor C) the aspirational firm you wish to emulate D) standards established by the FASB

Answer 59

A