Deck 4: Measuring Corporate Performance

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

Market value added is the same as economic value added.

Question 13

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

Question 14

Residual income is another term for economic value added.

Question 15

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

Question 16

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

Question 17

The net working capital of a firm will decrease when unpaid bills from suppliers are later paid with cash.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 25

How would you interpret an inventory turnover ratio of 10.7?

A) It takes 50 days on average to collect receivables.
B) Inventory is converted into sales every 50 days.
C) The firm has sufficient inventories to maintain sales for 34.1 days.
D) Assets are converted into sales every 50 days.

Question 26

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 27

A firm with no leases has a long-term debt 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 28

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 relatively low.
B) Its cost of goods sold is relatively low.
C) Its current liabilities are relatively low.
D) Its average inventory is relatively high.

Question 29

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 30

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) An operating profit margin of 6.4%

Question 31

Which of the following is the least effective measure of operating performance?

A) ROC
B) ROA
C) ROE
D) All of the options are equally ineffective measures of operating performance.

Question 32

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?

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

Question 33

If a firm's debt ratio is greater than 0.5,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 34

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

Question 35

The inventory turnover ratio compares:

A) current assets to inventory.
B) cost of goods sold to inventory.
C) average receivables to inventory.
D) average assets to inventory.

Question 36

If a firm's quick ratio is equal to its current ratio:

A) It has a low level of current liabilities.
B) It has no inventory.
C) It faces a potentially serious liquidity crisis.
D) It is in a loss-making position.

Question 37

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

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

Question 38

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 39

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 40

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 41

What is the debt ratio for a firm with a debt-equity ratio of 0.5?

A) 35%
B) 33.3%
C) 54%
D) 66.7%

Question 42

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 43

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 44

When will ROE equal ROC?

A) Whenever the firm has equal debt and equity financing
B) Whenever the firm has no debt
C) Whenever the value of the firm's assets exceeds the value of its equity
D) ROE will never equal ROC

Question 45

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%?

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

Question 46

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?

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

Question 47

If the ratio of total liabilities to total assets is 0.5,long-term liabilities are $3,000,and equity is $5,000,then::

A) you know that current liabilities must be $ 2,000.
B) you know that current assets must be $400.
C) you know that retained earnings must be $800.
D) you know that preferred stock must be $400.

Question 48

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?

A) 0.50%
B) 5%
C) 16.67%
D) 33.33%

Question 49

After-tax operating income for a leveraged firm is defined as:

A) net income + after-tax interest.
B) EBIT × (1 − tax rate).
C) net income + depreciation.
D) profit margin × sales.

Question 50

If ROC is less than a firm's cost of capital,which of the following must be true?

A) The firm's EVA is positive.
B) The firm's EVA is negative.
C) The firm's ROE is equal to zero.
D) The firm's ROE is negative.

Question 51

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 52

Which one of these costs accounts for the difference between accounting income and economic value added?

A) Depreciation
B) Cost of capital
C) Taxes
D) Dividends

Question 53

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:

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 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?

A) 3.75 days.
B) 97.3 days.
C) 52 days.
D) 77.9 days

Question 55

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 56

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 57

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 58

Which one of the following may be the best measure of company performance since it accounts for the opportunity cost of capital?

A) EVA
B) Net income
C) Increase in sales
D) Current ratio

Question 59

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 60

To calculate which of these measures do you need to know the cost of capital?

A) ROC.
B) ROA.
C) ROE.
D) EVA.

Question 61

An increase in which one of the following will have no effect on the cash coverage ratio?

A) Depreciation
B) Interest
C) Sales
D) Cost of goods sold

Question 62

A firm's operating profit margin is 20% with an EBIT of $1.5 million and sales of $5 million.If it has no debt,how much did the firm pay in taxes?

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

Question 63

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.

Question 64

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 65

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?

A) 26.67%
B) 30.00%
C) 33.33%
D) 50.00%

Question 66

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

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

Question 67

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? Assume that the reduction in assets has no effect on sales or profit margin

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

Question 68

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 69

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 from the current level
D) Decrease the debt burden from its current level

Question 70

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 71

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 72

A retail store with zero net working capital has:

A) no cash or marketable securities.
B) insufficient inventory.
C) no current debt.
D) a quick ratio that is less than 1.

Question 73

If a company has a healthy current ratio but a significantly lower quick ratio,then you can assume that:

A) the cost of goods sold represents more than half of sales.
B) current liabilities exceed current assets.
C) the firm sells only on a cash basis.
D) inventory represents a large portion of the firm's current assets.

Question 74

Which one of the following would be most detrimental to a firm's current ratio if that ratio is currently 2?

A) Collecting payment on an accounts receivable
B) Selling marketable securities at cost
C) Paying off accounts payable with cash
D) Purchasing inventory on credit

Question 75

What is the book value per share for a firm with 2 million shares outstanding at a price of $50,a market-to-book ratio of 0.75,and a dividend-payout ratio of 50%?

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

Question 76

What is the residual income for a firm that is entirely equity-financed with $1 million in capital,$300,000 in net income,and a 20% cost of capital?

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

Question 77

Which one of the following changes will provide an increase in a firm's ROE?

A) A decrease in the profit margin
B) An increase in the interest rate
C) An increase in equity
D) A decrease in the tax rate

Question 78

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 79

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 80

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