A+ Answers

1) A firm with a Current Ratio of 2.0 is twice as profitable as a firm with a Current Ratio of 1.0. True or False

2.All other factors being equal, a company that uses debt financing will have a higher return on equity (ROE) ratio than one that does not True or False

3.In general, firms want their Times Interest Earned ratio to be as low as possible True or False

4. A company whose Total Asset Turnover ratio is 1.0 is using its assets more efficiently than one whose ratio is 2.0 True or False

5. A firm which has a relatively large amount of cash, accounts receivable, and inventory on its books and a relatively small amount of current liabilities would be considered liquid profitable risky nuts

6. If a firm's current ratio is less than 1.0, it indicates that

The firm had negative net income for the year

The firm will be unable to pay its short term loans which come due this year

Current Assets are less than Current Liabilities

The firm is insolvent

A firm which has a relatively large amount of cash, accounts receivable, and inventory on its books and a relatively small amount of current liabilities would be considered:

liquid

profitable

risky

nuts

Refer to the following income statement for the Classic Cappuccino Corporation (CCC) to answer the question that follows:

Total Revenue                                                                       $50,000

Operating Expenses                                                               25,000

Depreciation                                                                          1,000

Operating Profit                                                                    24,000

Interest Expense                                                                    1,000

Before-Tax Profit                                                                  23,000

Taxes                                                                                     6,900

After-Tax Profit                                                                    $16,100

CCC’s Net Profit Margin is:

16.1%

23.0%

32.2%

$161,000

8. If a firm's PE ratio was 22, you would know that

Profits over Earnings = 22

The firm will probably not have any trouble meeting its debt obligations this year

The firm's stock price is expected to increase 22%

Investors are willing to pay 22 times the firm's EPS for a share of the firm's stock. 



9.Which of the following ratios would a potential creditor be most interested in?

Times Interest Earned

Economic Value Added (EVA)

Return on Equity (ROE)

 Net Profit Margin

10. The Du Pont equation allows you to gain additional insight into a firm’s

Liquidity

Sources of ROE

Sales potential

Sources of income