Question 1

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?
A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors

Accepted Answer

Investment factors, financing factors, and operating factors are all considered in bankruptcy prediction research as they directly impact a firm's long-term solvency risk. Credit factors, on the other hand, are typically used in credit analysis to evaluate a borrower's ability to repay a loan, rather than predicting bankruptcy.

Question 2

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?
A) Sales
B) Earnings
C) Positive cash flows
D) Income from continuing operations

Accepted Answer

B

Question 3

Doran Corp.has a current ratio of6.Under which of the following scenarios might this indicate a problem?
A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Doran Corp. operates is experiencing a recession

Accepted Answer

A current ratio of 6 indicates that the company has a significant amount of current assets to cover its current liabilities. However, if inventories are increasing and the industry is experiencing a recession, it may be difficult for the company to sell those inventories and generate cash to pay its current liabilities. This could potentially lead to liquidity problems and a decrease in the current ratio in the future.

Question 4

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's quick ratio changed by what percentage from 2009 to 2010?
A) 30%
B) 107%
C) 25%
D) 82%

Accepted Answer

2010 Quick ratio = 1,757,854 / 1,648,753 = 1.07
2009 Quick ratio = 1,282,432 / 1,566,237 = .82
(1.07 - .82)/ .82 = .30

Question 5

Market equity beta measures the covariability of a firm's returns with the return's of
A) all industry competitors in the market.
B) risk free securities.
C) all securities in the market.
D) all firms of comparable market value.

Accepted Answer

Market equity beta measures the covariability of a firm's returns with the returns of all securities in the market. Therefore, option C is the best choice. Option A is not accurate as the covariance is not limited to industry competitors only. Option B is incorrect as risk-free securities have no covariance with the market. Option D is not accurate as the covariability is not limited to firms of comparable market value only.

Question 6

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be
A) 54.36 days
B) 75.36 days
C) 102.94 days
D) 5.27 days

Accepted Answer

Days A/R + Days Inv.- Days A/P = Days Other Financing
43.20 + 59.25 - 48.09 = 54.36

Question 7

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?
A) failing to make a required interest payment on time
B) paying an accounts payable after the billing date
C) restructuring debt
D) defaulting on a principal payment on debt

Accepted Answer

Defaulting on a principal payment on debt is the most troubling state of financial distress for an investor or creditor because it signals a serious inability to repay a significant amount of debt. Failing to make a required interest payment on time, paying an accounts payable after the billing date, and even restructuring debt can potentially be managed and resolved without severe consequences, but defaulting on principal payment is a major red flag indicating long-term financial instability.

Question 8

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was
A) 43.20 days
B) 40.50 days
C) 45.25 days
D) 8.50 days

Accepted Answer

$4,885,340 / [(490,816 + 665,828)× .5 ] = 8.45 A/R Turnover
365 / 8.45 = 43.20 days

Question 9

Which of the following is not one of the three explanatory variables that determines a firm's market beta?
A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.

Accepted Answer

The three explanatory variables that determine a firm's market beta are the degree of operating leverage, the degree of financial leverage, and the variability of sales. The degree of investing leverage is not one of the determinants of a firm's market beta.

Question 10

The Johnson company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?
A) greater than 1.45
B) 1.45
C) less than 1.45
D) unable to determine without more information

Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Selling merchandise on credit increases accounts receivable, which is a current asset, without affecting current liabilities. Therefore, the current ratio will increase.

Question 11

Here are several ratios calculated from Midas Company's financial statements: Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?
A) 39 days
B) 36 days
C) 56 days
D) 26 days

Accepted Answer

The answer of Here are several ratios calculated from Midas...

Question 12

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to
A) pay off accounts payable prior to year end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.

Accepted Answer

Paying off accounts payable prior to year-end would improve Saxon Company's current ratio by decreasing its current liabilities, without affecting its current assets. Purchasing more inventory on account (B) or with cash (D) would increase current assets, but also increase current liabilities, leaving the current ratio unchanged. Purchasing short-term investments with cash (C) would also increase current assets but not affect current liabilities, resulting in an increase in the current ratio. However, this strategy may not be sustainable or profitable in the long run, as it would decrease the company's cash holdings and potentially provide lower returns than other investments. Paying off accounts payable prior to year-end (A) is likely the most practical and effective option for boosting the current ratio, as it reduces the company's debt and may also improve its creditworthiness with suppliers and creditors.

Question 13

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was
A) .70
B) 1.39
C) 1.00
D) .72

Accepted Answer

$1,156,084 / [($1,648,753 + 1,566,237)× .5] = .72

Question 14

Which of the following ratios is not a measure of long-term solvency risk?
A) Debt /Equity Ratio
B) Interest Coverage Ratio
C) Operating Cash Flows to Current Liabilities Ratio
D) Liabilities to Assets Ratio

Accepted Answer

The Operating Cash Flows to Current Liabilities Ratio is a measure of short-term liquidity rather than long-term solvency risk. The other ratios listed all relate to the company's ability to meet its long-term financial obligations.

Question 15

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's current ratio in 2010 was
A) 1.07
B) 1.45
C) 1
D) .69

Accepted Answer

$2,388,964 / 1,648,753 = 1.45

Question 16

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about
A) specific ratios that are important.
B) the amount of Type I and Type II errors.
C) which specific company will go bankrupt.
D) the relative importance of individual financial statement ratios.

Accepted Answer

The answer of Univariate bankruptcy prediction models help identify factors...

Question 17

Economic theory teaches that differences in market returns must relate to differences in
A) book value
B) perceived risk
C) price-earnings ratio
D) bankruptcy risk

Accepted Answer

Economic theory teaches that differences in market returns must relate to differences in perceived risk. This means that investors require higher returns on assets that are perceived to be riskier, to compensate for the higher level of risk. Differences in book value, price-earnings ratio, and bankruptcy risk may also impact market returns, but they are not the primary factors driving differences in returns.

Question 18

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is
A) 7.53 days
B) 48.09 days
C) 45.51 days
D) 50 days

Accepted Answer

Purchases = $2,542,353 + 338,599 - 487,505 = 2,393,447
Average A/P = (296,307 + 334,247)× .5 = 315,277
A/P Turnover = 7.59
Days = 365 / 7.59 = 48.09 days

Question 19

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:

-Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is
A) 7.46
B) 11.83
C) 6.16
D) 5.62

Accepted Answer

$2,542,353 / [(338,599 + 487,505)× .5] = 6.16

Question 20

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?
A) Firms credit history
B) financial position of the firms creditors
C) firms cash flow
D) a and c

Accepted Answer

When a customer wants to obtain bank financing, the bank will inquire about the firm's credit history to assess their past behavior in repaying debts. They will also inquire about the firm's cash flow because they want to evaluate whether the firm has enough money to pay back the loan. The financial position of the firm's creditors is not directly relevant to the bank's decision to grant a loan, so choice B is not correct. Therefore, the best choice is D, which includes options A and C.

Quiz 5: Risk Analysis

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

Doran Corp.has a current ratio of6.Under which of the following scenarios might this indicate a problem?

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's quick ratio changed by what percentage from 2009 to 2010?

Market equity beta measures the covariability of a firm's returns with the return's of

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was

Which of the following is not one of the three explanatory variables that determines a firm's market beta?

The Johnson company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?

Here are several ratios calculated from Midas Company's financial statements: Days in Receivables = 45 Days in Payables = 36 Days in Inventory = 30 How many days of working capital financing does Midas need to obtain from other sources?

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was

Which of the following ratios is not a measure of long-term solvency risk?

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's current ratio in 2010 was

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about

Economic theory teaches that differences in market returns must relate to differences in

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is

Mobile Company Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions: -Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?