Deck 4: Measuring Corporate Performance

Question 1

Receivable turnover ratio and asset turnover ratio are both efficiency ratios.

Answer 1

True

Question 2

Return on assets and return on equity are both profitability ratios.

Answer 2

True

Question 3

Market value added is the same as economic value added.

Answer 3

False

Question 4

Market value added is the difference between the market value of the firm's equity and its book value.

Question 5

The difference between the current and quick ratios is that inventory has been subtracted from current assets.

Question 6

The net working capital of a firm will decrease when accrued wages are paid with cash.

Question 7

Increasing leverage will always act to increase a firm's ROE.

Question 8

Net working capital is determined from the difference between current assets and current liabilities.

Question 9

The inventory turnover ratio times the average days in inventory equals 365.

Question 10

The income statement of a firm shows the value of its assets and liabilities over a specified period of time.

Question 11

Net working capital to total assets and current ratio are both liquidity ratios.

Question 12

The net working capital to total assets ratio is always a larger number than the current ratio.

Question 13

Other things equal,an increase in average accounts receivable will increase a firm's return on assets.

Question 14

The reduction in value over time of intangible assets is known as amortization.

Question 15

Residual income is another term for economic value added.

Question 16

Return on assets is always a larger number than the return on equity.

Question 17

The asset turnover ratio and inventory turnover ratio are both efficiency ratios.

Question 18

ROE is equal to ROA when the firm has no debt.

Question 19

EVA is the net profit of the firm adjusted for the cost of capital.

Question 20

The higher the times interest earned ratio,the higher the interest expense.

Question 21

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?

A) $17 million
B) $18 million
C) $19 million
D) $25 million

Question 22

An asset turnover ratio of 1.75 can be interpreted as:

A) $1.75 in sales are generated by every $1 of assets.
B) $1.75 in additional assets are generated by every $1 of sales.
C) $1.75 in assets are used to generate $1 of sales.
D) $1 in sales are used to generate $1.75 in assets.

Question 23

A firm's profit margin when ignoring the effects of financing is 20% with an EBIT of $1.5 million and sales of $5 million.How much did the firm pay in taxes?(Enter the answer in dollars)

A) $50,000
B) $300,000
C) $350,000
D) $500,000

Question 24

What is the book value per share for a firm with 2 million shares outstanding at a market price of $50,a market-to-book ratio of .75,and a dividend-payout ratio of 50%?

A) $33.33
B) $37.50
C) $62.50
D) $66.67

Question 25

A company has total assets of $1,000,current liabilities of $130,and total liabilities of $350.What is the long-term debt to asset ratio?

A) .19
B) .22
C) .36
D) .31

Question 26

How much will Gamma Inc.'s equity holders earn given a total asset turnover of .85,an operating profit margin of .15,and a debt-equity ratio of .25?

A) 9.56%
B) 15.94%
C) 16.96%
D) 38.25%

Question 27

The board of directors is dissatisfied with last year's ROE of 15%.If the 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?

A) .50%
B) 5%
C) 16.67%
D) 33.33%

Question 28

A firm's after-tax operating income was $1,000,000 in 2013.It started the year with a total capitalization of $8,000,000 and ended the year with a total capitalization of $9,000,000.The additional capital raised during 2013 started to affect the operating income in 2014.Which value best represents the return on capital for 2013?

A) 12.5%
B) 11.8%
C) 11.1%
D) 10.0%

Question 29

What are the annual sales for a firm with $400,000 in debt,a total debt ratio of .4,and an asset turnover of 3?

A) $333,333
B) $1,200,000
C) $1,800,000
D) $3,000,000

Question 30

XYZ Corp.has an operating profit margin of 7%,a debt burden of .8,and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18%?

A) 1.26
B) 1.61
C) 2.14
D) 4.02

Question 31

By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firm's operating profit margin is 5% on sales of $4 million?(Use the value in dollars)

A) $240,000
B) $333,333
C) $400,000
D) $516,167

Question 32

What is the ROA of a firm with $150,000 in average receivables,which represents 60 days sales,average assets of $750,000,and a profit margin of 9%?

A) 7.50%
B) 9.00%
C) 10.95%
D) 16.70%

Question 33

TSI Inc.has enough liquid assets to finance its operations for 67 days and cash,marketable securities,and receivables totaling $1,000.TSI's average daily expenditures from operations are:

A) $6.70.
B) $8.23.
C) $14.93.
D) $22.28.

Question 34

What is the residual income for a firm with $1 million in total capital,$300,000 in net income,and a 20% cost of capital?(Use the value in dollars)

A) $100,000
B) $140,000
C) $240,000
D) $500,000

Question 35

A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.

Question 36

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?

A) $10
B) $30
C) $90
D) $105

Question 37

A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing.If taxes are $200,000,how much is EBIT (Operating Income)?(Use the value in dollars)

A) $100,000
B) $300,000
C) $500,000
D) $800,000

Question 38

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

Question 39

Balsco's balance sheet shows total assets of $238,000 and total liabilities of $107,000.The firm has 55,000 shares of stock outstanding that sell for $11 a share.What is amount of market value added?

A) $389,000
B) $474,000
C) $1,073,000
D) $123,712

Question 40

Last year's asset turnover ratio was 2.0.Sales have increased by 25% and average total assets have increased by 10% since that time.What is the asset turnover ratio today?

A) 1.82
B) 2.05
C) 2.15
D) 2.27

Question 41

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.

Question 42

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.

Question 43

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

Question 44

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

Question 45

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

Question 46

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.

Question 47

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

Question 48

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%

Question 49

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%

Question 50

The current ratio is a good proxy for a firm's:

A) liquidity.
B) efficiency.
C) degree of leverage.
D) profitability.

Question 51

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%

Question 52

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.

Question 53

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.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

Which one of the following will cause a reduction in the NWC 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.

Question 61

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.

Question 62

Which one of the following statements is most likely correct for a firm with an average collection period of 90 days?

A) its average daily sales are low.
B) its average daily sales are high.
C) its current ratio will be high.
D) it is providing financing for approximately 25% of its annual sales.

Question 63

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.

Question 64

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.

Question 65

Which one of these firms has recently had a highest positive market value added in Canada in 2013?

A) Royal Bank of Canada
B) Suncor
C) Husky Energy
D) Air Canada

Question 66

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%.

Question 67

Lease obligations are included in certain leverage ratios because leases:

A) require the payment of interest.
B) represent long-term fixed obligations.
C) must be financed through a bank.
D) are perpetual obligations.

Question 68

A times interest earned ratio of 5 indicates the firm:

A) pays 5 times its earnings in interest expense.
B) earns significantly more than its interest obligations.
C) has interest expense equal to 5% of EBIT.
D) has a low tax liability.

Question 69

The use of financial leverage will be detrimental to a firm's ROE if the:

A) firm currently has no long-term debt.
B) firm's current ratio is greater than 1.
C) interest expense exceeds the tax liability.
D) interest rate on debt exceeds the firm's ROA.

Question 70

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.

Question 71

If a firm's total debt ratio is greater than .5,then:

A) its current liabilities are quite high.
B) its debt-equity ratio exceeds 1.0.
C) it has too few total assets.
D) it has more long-term debt than equity.

Question 72

High levels of liquidity are most apt to indicate:

A) low levels of net working capital.
B) low profit margins.
C) high levels of economic value added.
D) inefficient use of assets.

Question 73

Which of these assets is generally considered to be the most liquid?

A) buildings
B) land
C) finished goods inventory
D) accounts receivable

Question 74

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.

Question 75

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.

Question 76

A firm with no leases has a long-term debt-equity ratio of 50%.This means that the book value of equity:

A) equals the book value of long-term debt.
B) is less than the book value of long-term debt.
C) is greater than the book value of long-term debt.
D) is unknown in relation to the book value of long-term debt.

Question 77

A total debt ratio of .35:

A) indicates that the firm is financed with 35% long-term debt.
B) would exist if a firm had liabilities of $700 and assets of $2,000.
C) indicates that 35 cents of every dollar of capital is in the form of short-term debt.
D) indicates that 35 cents of every dollar of capital is in the form of long-term debt.

Question 78

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?

A) its cash balance is too low.
B) its cost of goods sold is too low.
C) its current liabilities are too low.
D) its average inventory is too high.

Question 79

When a firm's long-term debt-equity ratio is .98,the firm:

A) has too much long-term debt in relation to leases.
B) has less long-term debt than equity.
C) is nearing insolvency.
D) has as much in long-term liabilities as in equity.

Question 80

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.