Deck 4: Measuring Corporate Performance

Question 1

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

Answer 1

True

Question 2

Market value added is the same as economic value added.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

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 accrued wages are paid with cash.

Question 18

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

Question 19

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

Question 20

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

Question 21

The sum of the payout ratio and the plowback ratio will always equal 1.0.

Question 22

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?

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

Question 23

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) Leverage ratio must increase by .5.
B) Leverage ratio must increase by 5.
C) Leverage ratio must increase by 16.67%.
D) Leverage ratio must increase by 33.3%.

Question 24

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

A) will have a net loss.
B) will have no income-tax liability.
C) needs to lower its interest expense.
D) can still have a positive net income.

Question 25

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 tax liability.

Question 26

What is the ROE for a firm with 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) -33.33%
B) 30.00%
C) 33.33%
D) 50.00%

Question 27

Which of the following may be the best measure of company performance?

A) EVA
B) Net income
C) ROA
D) ROE

Question 28

Last year's return on equity was 30%.This year the ROE has decreased to 20%,while the same amount of earnings was generated this year.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 29

The only measure of firm performance that accounts for cost of capital is:

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

Question 30

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 greater than 1.0.

Question 31

Which of the following changes will provide an increase (if only in the short-run)in a firm's ROE?

A) An increase in total assets
B) An increase in the dividend payout ratio
C) An increase in equity
D) An increase in tax rates

Question 32

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 33

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 34

Which of the following is most likely to result in a higher P/E ratio for a firm,other things equal?

A) Lower growth rate in dividends
B) Reduction in the stock's required rate of return
C) Lower dividend yield
D) Lower stock price

Question 35

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 .75,and a dividend payout ratio of 50%?

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

Question 36

When will ROE = ROC?

A) If the firm has equal debt and equity financing
B) If the firm has no interest payments on debt
C) If the value of the firm's assets exceed the value of its equity
D) ROE will never equal ROC

Question 37

Which of the following is correct?

A) Market value added measures the difference between the market value of the firm's equity and its book value.
B) Residual income is also called economic value added.
C) EVA measures the net profit of a firm or division after deducting the cost of the capital employed.
D) All of these.

Question 38

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/book ratio of 3.0?

A) $8.57
B) $30.00
C) $90.00
D) $105.00

Question 39

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

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

Question 40

A firm's after-tax operating income was $1,000,000 in 2010.It started the year with a total capitalization of $8,000,000 and ended 2010 with a total capitalization of $9,000,000.If the capital raised in 2010 did not contribute significantly to 2010's operating income,which of the following best represents the firm's return on capital in 2010?

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

Question 41

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 42

When a firm's debt-equity ratio is 1.0,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 43

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 44

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 1.0?

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 45

What is the approximate total debt ratio for a firm with a total debt to equity ratio of .65?

A) 35%
B) 39%
C) 54%
D) 65%

Question 46

Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

A) Convert marketable securities to cash.
B) Pay accounts payable with cash.
C) Buy inventory on credit.
D) Sell inventory at cost.

Question 47

If a firm's cash coverage ratio is greater than its times interest earned ratio,then:

A) the firm's assets are not fully depreciated.
B) the firm has no lease obligations.
C) the firm has very little long-term debt.
D) the firm has a high degree of liquidity.

Question 48

A times interest earned ratio of 5.0 indicates that 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 low tax liability.

Question 49

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

A) firm has no long-term debt.
B) firm's profit margin does not exceed its asset turnover.
C) interest expense exceeds the tax liability.
D) interest rate on debt exceeds the firm's ROA.

Question 50

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 51

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 52

Which of the following is not likely to cause a reduction in the NWC turnover ratio?

A) Sales have decreased.
B) Average payables have increased.
C) Average inventory has been higher.
D) The firm's cash balance is greater.

Question 53

Which 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 54

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 a measure of efficiency, just like debt.

Question 55

What are the annual sales for a firm with $400,000 in debt,a total debt ratio of .4,and an asset turnover of 3.0?

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

Question 56

Which of the following is correct for a firm with a debt-equity ratio of .45 if long-term debt equals 500 and equity equals 2,000? The firm has:

A) current liabilities that are valued at 400.
B) current assets that are valued at 400.
C) retained earnings that are valued at 900.
D) preferred stock of 400.

Question 57

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 58

How much will Gamma Inc.'s equityholders earn given the following information: total asset turnover is 0.85,profit margin is 0.15,and debt-equity ratio is 0.25?

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

Question 59

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 60

A firm's quick ratio of .89 suggests that 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 61

A deficiency of 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

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 current asset turnover ratio?

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

Question 63

If a company uses cash to pay off some of its accounts payables,what effect will this have on its liquidity ratios,given that the ratios exceeded 1.0 before the payoff?

A) The quick ratio and current ratio will both increase.
B) The quick ratio and current ratio will both decrease.
C) The quick ratio will increase but the current ratio will remain unchanged.
D) The current ratio will increase but the quick ratio will remain unchanged.

Question 64

A company with bond debt of 80,lease obligations of 20,total assets of 1,000,and total liabilities of 350 has a:

A) total debt ratio of approximately .10.
B) total debt ratio of approximately .23.
C) long-term debt ratio of approximately .15.
D) debt-to-equity ratio of approximately .15.

Question 65

A cash coverage ratio of less than one indicates:

A) the firm does not have enough cash to make its interest payments.
B) the firm does have enough cash to make its interest payments, but not its lease obligations.
C) the firm has too little depreciation expense.
D) earnings need to fall by only a small amount before interest obligations cannot be covered.

Question 66

Which of the following would likely be most detrimental to a firm's current ratio if that ratio is currently 2.0?

A) Buy raw materials on credit.
B) Sell marketable securities at cost.
C) Pay off accounts payable with cash.
D) Pay off a portion of long-term debt with cash.

Question 67

An asset turnover ratio of 1.75 can be interpreted as:

A) $1.75 in sales are generated for every $1.00 of assets.
B) $1.75 in additional assets are generated for every $1.00 of sales.
C) $1.75 in assets are used to generate $1.00 of sales.
D) $1.00 in sales are used to generate $1.75 in assets.

Question 68

__________ are those expected to be turned into cash in the near future,while __________ are those expected to be fulfilled in the near future,and the difference between the two is __________.

A) Current assets; current liabilities; shareholders' equity.
B) Current assets; current liabilities; net working capital.
C) Fixed assets; current liabilities; net working capital.
D) Liquid assets; liquid liabilities; shareholders' equity.

Question 69

XYZ Corp.has improved its average collection period from 55 to 40 days.Which one of XYZ's other ratios may appear worse as a result of the improved receivables collection?

A) Inventory turnover
B) Quick ratio
C) Net profit margin
D) Return on equity

Question 70

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 71

Which 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 72

Average daily expenses are $50.8 million.Average accounts payable are $3,743.5 million.The average number of days that it takes the company to pay its bills (the average payment delay)is therefore:

A) 63.7 days.
B) 73.7 days.
C) 83.7 days.
D) 93.7 days.

Question 73

A firm with zero net working capital has:

A) no cash or marketable securities.
B) insufficient inventories.
C) excessive current liabilities.
D) a quick ratio of less than 1.0.

Question 74

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 75

Given that a company has a healthy current ratio but a significantly lower quick ratio,which of the following may not be true?

A) The company may have an inventory problem.
B) The numerator of the quick ratio includes cash, marketable securities, and receivables.
C) The quick ratio is always smaller than the current ratio.
D) The company is rich in cash and receivables.

Question 76

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

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

Question 77

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) help answer questions of firm stability.

Question 78

An example of liquid assets would be:

A) buildings.
B) company cars.
C) finished goods.
D) fixed assets.

Question 79

What is the inventory turnover ratio for ABC Corp.if cost of goods sold equals $5,000,current ratio equals 3.0,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 80

Instead of increasing its long-term debt by borrowing money to purchase new stereo equipment,Jay's Jams Inc.decides to lease the equipment.How does this affect its long-term debt ratio?

A) It will decrease.
B) It will increase.
C) It will remain unchanged.
D) The effects are unknown without the amount of the lease obligation.