McGraw hill ch 3 questions

Question 1

Common-size financial statements present all balance sheet account values as a percentage of:

Answer 1

assets

Question 2

The DuPont identity can be accurately defined as:

Answer 2

equity multiplier x return on assets

Question 3

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

Answer 3

No new debt but additional external equity equal to the increase in retained earnings

Question 4

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

Answer 4

cash coverage ratio

Question 5

the cats ratio is used to evaluate the

Answer 5

liquidity of a firm

Question 6

It is important to review not just the current ratio, but also the quick ratio and cash ratio because:

Answer 6

the cash ratio must always provide a greater statistic than the current ratio and quick ratio.

Question 7

Builder’s Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm’s sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Answer 7

common size income statement

Question 8

Which one of these transactions will increase the liquidity of a firm?

Answer 8

credit sale of inventory at cost

Question 9

the equity multiplier is equal to

Answer 9

one plus the debt equity ratio

Question 10

Which one of the following will increase the profit margin of a firm, all else held constant?

Answer 10

decrease in the tax rate

Question 12

Which ratio was primarily designed to monitor firms with negative earnings?

Answer 12

price sales ratio