chapter 4 quiz

Question 1

In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with a face value of $1 million, market value of $.92 million, and a coupon rate of 8%. What is the firm’s times interest earned ratio? (Use value in dollars)
A. 3.75
B. 2.98
C. 2.80
D. 3.40

Answer 1

A. 3.75

Question 2

What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million? (Use the values in dollars)
A. 26.67%
B. 30.00%
C. 33.33%
D. 50.00%

Answer 2

B. 30.00%

Question 3

A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million. On average, how many days does it take the firm to pay its bills?
A. 63.47 days
B. 52.91 days
C. 48.19 days
D. 59.03 days

Answer 3

B. 52.91 days

Question 4

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?
A. 2.78 times
B. 4.17 times
C. 5.56 times
D. 8.33 times

Answer 4

C. 5.56 times

Question 5

What is the approximate total debt ratio for a firm with a total debt-equity ratio of.65?
A. 35%
B. 39%
C. 54%
D. 65%

Answer 5

A. 35%

Question 6

Calculate the average collection period for Dots Inc. if its accounts receivables were $550 at the beginning of a year in which the firm generated $3,000 of sales?
A. 60 days
B. 61 days
C. 67 days
D. 73 days

Answer 6

C. 67 days

Question 7

Which one of these changes indicates an improvement in a firm’s asset management efficiency?
A. an increase in the amount of assets per dollar of sales.
B. an increase in the inventory turnover rate.
C. a decrease in the receivables turnover rate.
D. an increase in the average days in inventory

Answer 7

B. an increase in the inventory turnover rate

Question 8

Which of these indicates that a firm is efficient?
A. a high average collection period.
B. a high day’s sales in inventories.
C. a low asset turnover.
D. a high inventory turnover

Answer 8

D. a high inventory turnover

Question 9

Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?
A. a leverage ratio of.0667
B. a P/E ratio of 14
C. a return on equity of 25%
D. a profit margin of 6.4%

Answer 9

D. a profit margin of 6.4%

Question 10

Which one of the following will cause a reduction in the net working capital turnover ratio all else held constant?
A. a decrease in sales.
B. an increase in average payables.
C. an increase in average inventory.
D. an increase in the average cash balance.

Answer 10

B. an increase in average payables

Question 11

Which one of the following changes will provide an increase (if only in the short-run) in a firm’s ROE?
A. a decrease in the profit margin.
B. an increase in the dividend-payout ratio.
C. an increase in equity.
D. an increase in tax rates

Answer 11

B. an increase in the dividend-payout ratio

Question 12

Which one of the following will increase a firm’s times interest earned ratio?
A. an increase in debt.
B. a decrease in cost of goods sold.
C. an increase in interest expense.
D. a decrease in net income.

Answer 12

C. an increase in interest expense

Question 13

Efficiency ratios:
A. include the quick ratio, asset turnover ratio, and return on equity.
B. are used to measure how well the company uses its assets.
C. are used to measure how liquid the company is.
D. measure the profits generated by a firm’s equity and assets

Answer 13

B. are used to measure how well the company uses its assets

Question 14

Assume BDS acquired its main supplier, ABC. As a result of the acquisition, BDS finds that its profit margin increased but its ROA remained constant. A decrease in which one of these ratios is most apt to be the reason why the ROA did not increase with the increase in the profit margin?
A. leverage ratio
B. market-to-book ratio
C. asset turnover
D. debt burden

Answer 14

C. asset turnover

Question 15

The inventory turnover ratio compares:
A. current assets to average inventory.
B. cost of goods sold to average inventory.
C. average receivables to average inventory.
D. average assets to average inventory

Answer 15

B. cost of goods sold to average inventory

Question 16

Which of the following actions could improve a firm’s current ratio if it is now less than 1.0?
A. converting marketable securities to cash.
B. paying accounts payable with cash.
C. buying inventory on credit.
D. selling inventory at cost.

Answer 16

B. paying accounts payable with cash

Question 17

Which one of these ratios is commonly referred to as the acid-test ratio?
A. times interest earned ratio.
B. quick ratio.
C. cash coverage ratio.
D. cash ratio.

Answer 17

B. quick ratio

Question 18

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?
A. current ratio will increase to 5.0.
B. net working capital will increase to $500,000.
C. current ratio will decrease.
D. net working capital will not change.

Answer 18

D. net working capital will not change

Question 19

Which of the following choices would be guaranteed to increase a firm’s ROE if the ROA is currently 10% and the leverage ratio equals 1?
A. decrease the leverage ratio.
B. increase the debt burden from its current level.
C. decrease assets turnover from the current level.
D. decrease the debt burden from its current level.

Answer 19

B. increase the debt burden from its current level

Question 20

What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:
A. remain constant.
B. increase from 1.46 to 2.33.
C. decrease from 1.74 to 1.67.
D. increase from 1.38 to 1.67.

Answer 20

A. remain constant

Question 21

The current ratio is a good proxy for a firm’s:
A. liquidity.
B. efficiency.
C. degree of leverage.
D. profitability

Answer 21

A. liquidity

Question 22

The use of debt in the firm’s capital structure will increase ROE if the firm:
A. has more debt than equity.
B. pays less in taxes than in interest.
C. earns a higher return than the rate paid on debt.
D. has a times interest earned ratio greater than 1.0

Answer 22

C. earns a higher return than the rate paid on debt

Question 23

An asset’s liquidity measures its:
A. potential for generating a profit.
B. cash requirements.
C. ease and cost of being converted to cash.
D. proportion of debt financing

Answer 23

C. ease and cost of being converted to cash

Question 24

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?
A. equity decreased by 10%.
B. equity decreased by 50%.
C. equity increased by 10%.
D. equity increased by 50%.

Answer 24

C. equity increased by 10%

Question 25

Which one of these statements is correct?
A. market value added measures the difference between the total market value and the total book value of equity.
B. net income is also called economic value added.
C. EVA measures the net profit of a firm after deducting the cost of the assets used in the production process.
D. EVA considers the cost of long-term debt financing but excludes the cost of equity financing

Answer 25

D. EVA considers the cost of long-term debt financing but excludes the cost of equity financing

Question 26

A firm’s quick ratio of.49 suggests the firm:
A. has a low level of current liabilities.
B. has been overstating the value of its inventory.
C. faces a potentially serious liquidity crisis.
D. should reduce its holdings of cash and/or marketable securities.

Answer 26

C. faces a potentially serious liquidity crisis

Question 27

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
A. firms have different dividend payout ratios.
B. some firms use fully depreciated assets.
C. financial leverage varies among firms.
D. unprofitable firms will not have any tax liability.

Answer 27

C. financial leverages varies among firms

Question 28

Which of these assets is generally considered to be the most liquid?
A. buildings
B. land
C. finished goods inventory
D. accounts receivable

Answer 28

D. accounts receivable

Question 29

If a firm’s cash coverage ratio is greater than its times interest earned ratio, then the:
A. firm’s assets are not fully depreciated.
B. firm has no lease obligations.
C. firm has very little long-term debt.
D. firm has a high degree of liquidity.

Answer 29

D. firm has a high degree of liquidity

Question 30

A deficiency of the standard measures of liquidity is that the measures:
A. ignore a firm’s reserve borrowing capacity.
B. fail to include accounts receivable as an asset.
C. give inventories equal weighting in the quick ratio.
D. do not include the current portions of long-term debt.

Answer 30

A. ignore a firm’s reserve borrowing capacity