Question 1

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

Accepted Answer

The way managers choose to finance the business can affect the rate of return to shareholders. If they choose to finance the business with debt, the interest payments on that debt will reduce the profits of the company, which can lower the rate of return to shareholders. On the other hand, if they choose to finance the business with equity, the cost of capital may be higher, which can also lower the rate of return to shareholders. Therefore, the financing decision can affect the rate of return to shareholders.

Question 2

Benkart Corporation has sales of $5,000,000,net income of $800,000,total assets of $2,000,000,and 100,000 shares of common stock outstanding.If Benkart's P/E ratio is 12,what is the company's current stock price?
A) $60 per share
B) $96 per share
C) $240 per share
D) $360 per share

Accepted Answer

P/E ratio = Market price per share / Earnings per share
Rearranging the formula, Market price per share = P/E ratio * Earnings per share
Earnings per share = Net income / Number of common shares outstanding
Earnings per share = $800,000 / 100,000 = $8 per share
Market price per share = 12 * $8 = $96 per share (Option B)

Question 3

When comparing inventory turnover ratios,other things being equal,
A) a lower inventory turnover is preferred in order to keep inventory costs low.
B) a higher inventory turnover is preferred to improve liquidity.
C) higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet.
D) highe rinventory turnover results from an increase in the selling price of the product.

Accepted Answer

A higher inventory turnover is preferred to improve liquidity because it indicates that the company is selling its inventory quickly and efficiently, which frees up capital for other business activities. A lower inventory turnover may suggest that inventory is not selling as quickly, potentially indicating poor sales or pricing strategies. Option A is incorrect because a lower inventory turnover may suggest that inventory is not selling as quickly, potentially leading to higher inventory costs. Option C is incorrect because old or obsolete inventory would decrease inventory turnover, not increase it. Option D is incorrect because an increase in the selling price of a product would not necessarily result in higher inventory turnover.

Question 4

For a retailer with inventory to sell,the acid-test ratio will be
A) less than the current ratio, thus providing a more stringent measure of liquidity.
B) greater than the current ratio, thus providing a more stringent measure of liquidity.
C) greater than the current ratio, thus providing a less stringent measure of liquidity.
D) unimportant because it doesn't include inventory.

Accepted Answer

The acid-test ratio, also known as the quick ratio, is a more stringent measure of liquidity because it excludes inventory, which may not be easily converted to cash. Therefore, for a retailer with inventory to sell, the acid-test ratio will be less than the current ratio, which includes inventory in its calculation.

Question 5

Company A has a higher day's sales outstanding ratio than Company B.Therefore,
A) Company A sells more on credit than Company B
B) Company A has a higher percentage of cash to credit sales than Company B
C) Company A must be collecting its accounts receivable faster than Company B, on average
D) Other things being equal, Company B has a cash flow advantage over Company A

Accepted Answer

The answer of Company A has a higher day's sales...

Question 6

Jones,Inc.has a current ratio equal to 1.40.Which of the following transactions will increase the company's current ratio?
A) The company collects $500,000 of its accounts receivable
B) The company sells $1 million of inventory on credit
C) The company pays back $50,000 of its long-term debt
D) The company writes a $30,000 check to pay off some existing accounts payable

Accepted Answer

The answer of Jones,Inc.has a current ratio equal to 1.40.Which...

Question 7

Asset efficiency ratios for Fischer,Inc.are given in the table below.Based on this information,Fischer,Inc.'s fixed asset turnover ratio is likely to be ________. 
A) equal to 3.50
B) less than 3.50
C) greater than 3.50
D) negative

Accepted Answer

The fixed asset turnover ratio measures a company's ability to generate sales from its fixed assets. It is calculated by dividing sales by fixed assets.

From the table, we can see that Fischer, Inc.'s total asset turnover ratio is 1.75, which means that the company generates $1.75 in sales for every dollar of assets it owns.

The fixed asset turnover ratio is typically lower than the total asset turnover ratio, because fixed assets tend to be less liquid and generate revenue over a longer period of time. Therefore, if the total asset turnover ratio is 1.75, the fixed asset turnover ratio is likely to be less than 1.75, indicating that Fischer, Inc. generates less than $1.75 in sales for every dollar invested in fixed assets.

This eliminates options A, C, and D. Therefore, the correct answer is B) less than 3.50.

Question 8

Operating return on assets captures the effect of taxes and financing costs,and hence provides the broadest possible measure of profitability.

Accepted Answer

Operating return on assets focuses on the operating income generated from the assets, excluding the effects of taxes and financing costs, to measure the efficiency of asset use in the core business operations.

Question 9

The computation of return on equity,or ROE,does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year.

Accepted Answer

Retained earnings are included in the calculation of common equity when computing Return on Equity (ROE) because ROE measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested, which includes retained earnings as part of the shareholders' equity.

Question 10

Nelson Industries has a higher debt ratio than Butler,Inc.,and Nelson also has a higher times interest earned ratio than Butler.If Nelson and Butler both have the same amount of total assets,then
A) Nelson must have higher operating income than Butler.
B) if both companies have the same operating income, Butler must be paying a higher interest rate on its long-term debt than Nelson is paying.
C) Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler has.
D) if both companies have the same operating income, a mistake was made in the calculations because the company with a higher debt ratio must have a lower times interest earned ratio.

Accepted Answer

The higher debt ratio of Nelson indicates that it may have more long-term debt than Butler, which results in a higher times interest earned ratio. However, if both companies have the same total assets, it also means that Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler. This is because these non-interest bearing liabilities do not affect the debt ratio or times interest earned ratio, but they do affect the total assets. Therefore, option C is the best choice.

Question 11

Smith Corporation has earned a return on capital invested of 10% for the past two years,but an investment analyst reviewing the company has stated the company is not creating shareholder value.This may be due to the fact that
A) the risk free rate of interest is 3%
B) the corporation's inventory turnover is high
C) investors' required rate of return is 8%
D) investors' required rate of return is 12%

Accepted Answer

If the investors' required rate of return is 12% and Smith Corporation is only earning a return on capital invested of 10%, then the company is not meeting the expectations of its investors and is not creating shareholder value.

Question 12

Company A and Company B have the same gross profit margin and the same total asset turnover,but company A has a higher return on equity.This may result from
A) Company B has more common stock .
B) Company A has a lower debt ratio.
C) Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
D) Company A has lower cost of goods sold, resulting in a higher net profit margin.

Accepted Answer

The answer of Company A and Company B have the...

Question 13

Williams Inc.has a current ratio equal to 3,a quick ratio equal to 1.8,and total current assets of $6 million.William's inventory balance is
A) $2,000,000.
B) $2,400,000.
C) $4,000,000.
D) $4,800,000.

Accepted Answer

Current Ratio = Current Assets / Current Liabilities

3 = 6,000,000 / Current Liabilities

Current Liabilities = 2,000,000

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

1.8 = (6,000,000 - Inventory) / 2,000,000

Inventory = $2,400,000

Question 14

In an ideal world,which of the following would be used to evaluate firm performance?
A) book value of assets
B) corporate retained earnings from the day of incorporation
C) accounting assets and profits
D) market value of assets

Accepted Answer

The market value of assets is the best choice to evaluate firm performance because it reflects the current value of the assets and takes into account the expectations and perceptions of the market. The other options (book value of assets, corporate retained earnings from the day of incorporation, and accounting assets and profits) do not reflect the current market value and may not accurately reflect the future potential of the firm.

Question 15

All of the following measure liquidity except:
A) current ratio.
B) inventory turnover.
C) acid-test ratio.
D) operating return on assets.

Accepted Answer

Operating return on assets measures how efficiently a company is using its assets to generate profits, and is not an indicator of liquidity. A, B, and C are all measures of liquidity - current ratio measures a company’s ability to pay off short-term debts, inventory turnover measures how quickly a company is selling its inventory, and acid-test ratio measures a company’s ability to meet short-term obligations using only its most liquid assets.

Question 16

Baker Corp.is required by a debt agreement to maintain a current ratio of at least 2.5,and Baker's current ratio now is 3.Baker wants to purchase additional inventory for its upcoming Christmas season,and will pay for the inventory with short-term debt.How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million?
A) $0.50 million
B) $1.67 million
C) $4.50 million
D) $6.00 million

Accepted Answer

To calculate the maximum amount of short-term debt that Baker can take on without violating the current ratio requirement, we need to use the following formula:

Maximum Short-Term Debt = (Current Assets - Current Liabilities) x (required current ratio - 1)

In this case, we know that Baker's current ratio is 3, and the required current ratio is 2.5. We also know that their total current assets are $15 million.

Using this information, we can calculate the maximum amount of short-term debt that Baker can take on:

Maximum Short-Term Debt = ($15 million - (Current Liabilities)) x (2.5 - 1)
Max Short-Term Debt = ($15 million/2.5) - $15 million
Max Short-Term Debt = $6 million - $15 million
Max Short-Term Debt = -$9 million

This means that if Baker were to use short-term debt to purchase additional inventory, their current liabilities (and therefore their current ratio) would decrease by more than $9 million, which would cause them to violate the debt agreement.

To find the maximum amount of inventory that Baker can purchase with current assets only, we can use the following formula:

Maximum Inventory = Current Assets - Current Liabilities

We know that Baker's current ratio is 3, which means that their current liabilities must be no more than 1/3 of their current assets. Therefore:

Current Liabilities = Current Assets/3
Current Liabilities = $15 million/3
Current Liabilities = $5 million

Using this information, we can calculate the maximum amount of inventory that Baker can purchase:

Maximum Inventory = $15 million - $5 million
Maximum Inventory = $10 million

Therefore, the maximum amount of inventory that Baker can purchase without violating their debt agreement is $10 million. However, since they only want to use short-term debt to finance the purchase, the maximum amount they can purchase is the same as the maximum short-term debt they can take on without violating the debt agreement:

Maximum Inventory = Maximum Short-Term Debt
Maximum Inventory = $1.67 million

Therefore, the answer is choice B: $1.67 million.

Question 17

Which of the following transactions will increase a corporation's operating return on assets?
A) sell stock and use the money to pay off some long-term debt
B) sell 10-year bonds and use the money to pay off current liabilities
C) negotiate a new contract that lowers raw material costs by 10%
D) increase sales by 10%

Accepted Answer

The answer of Which of the following transactions will increase...

Question 18

The goal of most financial managers is to reduce the amount of long-term debt to zero,thus maximizing shareholder wealth.

Accepted Answer

The goal of most financial managers is to maximize the value of the company, which may or may not involve reducing long-term debt to zero. The specific financial goals of a company depend on its financial strategy and objectives.

Question 19

An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?
A) Company B has much higher operating income than Company A
B) Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt
C) Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B
D) Company B has more total assets than Company A

Accepted Answer

C) Company B having a higher operating return on assets but Company A having a higher return on equity could explain the analyst's position. This suggests that Company A is using its debt more effectively to generate returns for equity holders, making its higher debt level less concerning.

Question 20

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?
A) Markets are inefficient and fail to recognize the benefits of leverage
B) The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased
C) Shareholders are not interested in return on equity
D) the high levels of debt increased the riskiness of HighLev relative to its competitors

Accepted Answer

The high levels of debt increase the riskiness of the company, and investors may perceive this increased risk as a negative factor, leading to a decrease in the company's stock price relative to its industry counterparts.

Quiz 4: Evaluating a Firms Financial Performance

How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has,not whether or not they paid for the assets with debt or equity.

Benkart Corporation has sales of $5,000,000,net income of $800,000,total assets of $2,000,000,and 100,000 shares of common stock outstanding.If Benkart's P/E ratio is 12,what is the company's current stock price?

When comparing inventory turnover ratios,other things being equal,

For a retailer with inventory to sell,the acid-test ratio will be

Company A has a higher day's sales outstanding ratio than Company B.Therefore,

Jones,Inc.has a current ratio equal to 1.40.Which of the following transactions will increase the company's current ratio?

Asset efficiency ratios for Fischer,Inc.are given in the table below.Based on this information,Fischer,Inc.'s fixed asset turnover ratio is likely to be ________.

Operating return on assets captures the effect of taxes and financing costs,and hence provides the broadest possible measure of profitability.

The computation of return on equity,or ROE,does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year.

Nelson Industries has a higher debt ratio than Butler,Inc.,and Nelson also has a higher times interest earned ratio than Butler.If Nelson and Butler both have the same amount of total assets,then

Smith Corporation has earned a return on capital invested of 10% for the past two years,but an investment analyst reviewing the company has stated the company is not creating shareholder value.This may be due to the fact that

Company A and Company B have the same gross profit margin and the same total asset turnover,but company A has a higher return on equity.This may result from

Williams Inc.has a current ratio equal to 3,a quick ratio equal to 1.8,and total current assets of $6 million.William's inventory balance is

In an ideal world,which of the following would be used to evaluate firm performance?

All of the following measure liquidity except:

Which of the following transactions will increase a corporation's operating return on assets?

The goal of most financial managers is to reduce the amount of long-term debt to zero,thus maximizing shareholder wealth.

An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?