Which of the following represent questions the financial manger would ask to
evaluate investment decisions? (Do not confuse the investment decision
with the financing decision)
Is the financing strategy prudent?
Reason:
This is a question related to the financing decision.
How profitable are investments relative to the cost of capital?
How should profitability be measured?
Does the firm have sufficient liquidity?
Reason:
This is a question related to the financing decision.
Correct Answer
How profitable are investments relative to the cost of capital?
How should profitability be measured?
Which of the following ratios are used to determine the liquidity of the firm?
Current ratio
Inventory turnover ratio
Quick ratio
Interest coverage ratio
Correct Answer
Current ratio
Quick ratio
Market capitalization is equal to
current assets divided by current liabilities.
market value of equity divided by book value of equity.
share price times number of shares outstanding.
the difference between the market value of the firm's shares and the amount
of money that shareholders have invested in the firm.
Correct Answer
share price times number of shares outstanding.
Economic value added is equal to
market capitalization minus book value of equity.
share price times number of shares outstanding.
market value of equity divided by book value of equity.
net income minus the cost of capital.
Correct Answer
net income minus the cost of capital.
XYZ had after tax operating income of $2,700,000. XYZ's total capitalization
was $30,000,000 and their cost of capital was 6%. XYZ's economic value
added amounted to:
$1,638,000
Reason:
EVA = after-tax operating income - (cost of capital x total capitalization) =
$2,700,000 x (.06 x $30,000,000) = $900,000
$900,000
$162,000
Reason:
EVA = after-tax operating income - (cost of capital x total capitalization) =
$2,700,000 x (.06 x $30,000,000) = $900,000
Correct Answer
$900,000
Which of the following represent questions the financial manger would ask to
evaluate financing decisions? (Do not confuse the financing decision with
the investment decision)
How should profitability be measured?
Reason:
This is a question related to the investment decision.
How profitable are investments relative to the cost of capital?
Reason:
This is a question related to the investment decision.
Is the financing strategy prudent?
Does the firm have sufficient liquidity?
Correct Answer
Is the financing strategy prudent?
Does the firm have sufficient liquidity?
Return on capital and return on assets are used instead of _____ to compare
managers whose assets differ in size.
market capitalization
market-to-book ratio
economic value added
market value added
Correct Answer
economic value added
Which of the following ratios are used to determine if the financial leverage
of the firm is prudent?
Interest coverage ratio
Quick ratio
Debt ratios
Inventory turnover ratio
Correct Answer
Interest coverage ratio
Debt ratios
XYZ Corporation had after-tax operating income of $100,000 and total assets
of $900,000. XYZ's return on assets is ____.
11.1%
Reason:
ROA = after-tax operating income/total assets = $100,000/$900,000=.111 or
11.1%
88.8%
Reason:
ROA = after-tax operating income/total assets = $100,000/$900,000=.111 or
11.1%
10.0%
Reason:
ROA = after-tax operating income/total assets = $100,000/$900,000=.111 or
11.1%
9.0%
Reason:
ROA = after-tax operating income/total assets = $100,000/$900,000=.111 or
11.1%
Correct Answer
11.1%
XYZ Corporation's shares are selling for $50 a share and the number of
shares currently outstanding is 1,000. XYZ's market capitalization is:
$50,000
$1,000
Reason:
Market capitalization = share price x number of outstanding shares = $50 x
1,000 = $50,000
$20
Reason:
Market capitalization = share price x number of outstanding shares = $50 x
1,000 = $50,000
$50
Reason:
Market capitalization = share price x number of outstanding shares = $50 x
1,000 = $50,000
Correct Answer
$50,000
XYZ Corporation had net income of $65,000 and equity of $260,000. XYZ's
return on equity is _____.
4%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
125%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
25%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
75%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
Correct Answer
25%
Economic value added is also referred to as
opportunity cost of capital.
residual income.
net income.
rate of return.
Correct Answer
residual income.
Which of the following formulas can be used to calculate economic value
added?
after-tax interest - net income + cost of capital in dollars
after-tax operating income - (cost of capital x total capitalization)
after-tax operating income - total capitalization
after-tax interest + net income - (cost of capital x total capitalization)
Correct Answer
after-tax operating income - (cost of capital x total capitalization)
after-tax interest + net income - (cost of capital x total capitalization)
Which of the following are helpful for measuring the firm's profits per dollar
of assets?
Return of debt
Return on assets
Return on capital
Return on equity
Correct Answer
Return on assets
Return on capital
Return on equity
Which of the following ratios measures after-tax operating income as a
fraction of the firm's total assets?
Market-to-Book
Return on Equity
Return on Capital
Return on Assets
Correct Answer
Return on Assets
Which of the following ratios measure the firm's efficiency with which it uses
its assets?
Asset turnover
Return on assets
Reason:
Return on assets is a measure of profitability.
Inventory turnover
Return on equity
Reason:
Return on equity is a measure of profitability.
Correct Answer
Asset turnover
Inventory turnover
Which of the following ratios measures net income as a percentage of
shareholders' equity?
Return on Capital
Return on Equity
Return on Assets
Market-to-Book
Correct Answer
Return on Equity
Economic value added is equal to
market capitalization minus book value of equity.
share price times number of shares outstanding.
net income minus the cost of capital.
market value of equity divided by book value of equity.
Correct Answer
net income minus the cost of capital.
XYZ had after tax operating income of $2,700,000. XYZ's total capitalization
was $30,000,000 and their cost of capital was 6%. XYZ's economic value
added amounted to:
$162,000
Reason:
EVA = after-tax operating income - (cost of capital x total capitalization) =
$2,700,000 x (.06 x $30,000,000) = $900,000
$900,000
$1,638,000
Reason:
EVA = after-tax operating income - (cost of capital x total capitalization) =
$2,700,000 x (.06 x $30,000,000) = $900,000
Correct Answer
$900,000
An asset turnover ratio of 2.10 states that
each dollar of assets produced $2.10 in sales
sales turned over 2.10 times during the year
assets turned over 2.10 times during the year
each dollar of sales provided $2.10 in assets
Correct Answer
each dollar of assets produced $2.10 in sales
Asset turnover, inventory turnover, and receivables turnover are all ratios
used to measure a firm's __________.
leverage
liquidity
efficiency
profitability
Correct Answer
efficiency
XYZ Corporation had net income of $65,000 and equity of $260,000. XYZ's
return on equity is _____.
25%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
75%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
125%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
4%
Reason:
ROE= net income/equity= $65,000/$260,000=.25 or 25%
Correct Answer
25%
Economic value added is defined as the
value added by each dollar the shareholders have invested.
total value of the company's equity.
profit after deducting all costs, including the cost of capital.
minimum acceptable rate of return on a capital investment.
Correct Answer
profit after deducting all costs, including the cost of capital.
ABC Corporation had sales of $125,000. Total assets at the beginning the
year were 53,000 and at the end of the year were $55,000. ABC's asset
turnover for the entire year was _____. (Use the average total assets to
solve)
2.31
Reason:
Sales/average total assets = $125,000/(($53,000+$55,000)/2)
.864
Reason:
Sales/average total assets = $125,000/(($53,000+$55,000)/2)
2.27
Reason:
Sales/average total assets = $125,000/(($53,000+$55,000)/2)
2.36
Reason:
Sales/average total assets = $125,000/(($53,000+$55,000)/2)
Correct Answer
2.31
Which of the following formulas can be used to calculate economic value
added?
after-tax operating income - (cost of capital x total capitalization)
after-tax operating income - total capitalization
after-tax interest + net income - (cost of capital x total capitalization)
after-tax interest - net income + cost of capital in dollars
Correct Answer
after-tax operating income - (cost of capital x total capitalization)
after-tax interest + net income - (cost of capital x total capitalization)
The profit margin is equal to
net income minus taxes divided by sales
sales divided by net income
net income divided by sales
sales divided by total assets
Correct Answer
net income divided by sales
Which of the following ratios shows how much sales are generated by each
dollar of total assets?
Average days sales in receivables ratio
Receivables turnover ratio
Return on assets ratio
Asset turnover ratio
Correct Answer
Asset turnover ratio
Most firms would prefer both high profit margin and high turnover; however,
this strategy typically leads to lower sales per dollar of assets. The Du Pont
formula can help companies
determine if they should pursue a high profit margin/low turnover strategy
Identify the constraints firms face
determine if they should pursue a high turnover/low profit margin strategy
determine if they should pursue different management hiring practices
Correct Answer
determine if they should pursue a high profit margin/low turnover strategy
Identify the constraints firms face
determine if they should pursue a high turnover/low profit margin strategy
The asset turnover ratio is equal to
sales divided by total assets
after-tax operating income divided by total assets
net income divided by total assets
total assets divided by sales
Correct Answer
sales divided by total assets
ABC Corporation had net income of $75,000 and sales of $1,000,000. ABC's
profit margin is _____.
6.98%
Reason:
Profit margin = net income / sales = $75,000 / $1,000,000 = .075 or 7.5%
7.5%
.075%
Reason:
Profit margin = net income / sales = $75,000 / $1,000,000 = .075 or 7.5%
13.33%
Reason:
Profit margin = net income / sales = $75,000 / $1,000,000 = .075 or 7.5%
Correct Answer
7.5%
According to the Du Pont System, return on assets is dependent upon which
of the following two factors?
Return on equity
Operating profit margin
Inventory turnover
Asset turnover
Correct Answer
Operating profit margin
Asset turnover
ABC Corporation has long-term debt of $100,000 and equity of $160,000.
ABC's long-term debt-equity ratio is _____.
62.5%
60%
Reason:
Long-term debt-equity ratio = long-term debt/equity = $100,000/$160,000 =
.625 or 62.5%
160%
Reason:
Long-term debt-equity ratio = long-term debt/equity = $100,000/$160,000 =
.625 or 62.5%
38.5%
Reason:
Long-term debt-equity ratio = long-term debt/equity = $100,000/$160,000 =
.625 or 62.5%
Correct Answer
62.5%
The long-term debt ratio is equal to
long-term debt divided by equity
Reason:
This shows the firm's long-term debt-equity ratio. The long-term debt ratio is
equal to long-term debt divided by long-term debt plus equity
long-term debt divided by long-term debt plus equity
long-term debt divided by long-term debt minus equity
equity divided by long-term debt
Correct Answer
long-term debt divided by long-term debt plus equity
Which part of the return on equity equation depends on the firm's production
and marketing skills, not the firm's financing mix?
Debt burden
Reason:
The firm's debt burden depends on the firm's financing mix. The firm's return
on assets depends on the firm's production and marketing skills.
Return on assets
Leverage ratio
Reason:
The firm's leverage ratio depends on the firm's financing mix. The firm's
return on assets depends on the firm's production and marketing skills.
Correct Answer
Return on assets
The long-term debt-equity ratio is equal to
long-term debt divided by equity
long-term debt divided by long-term debt minus equity
Reason:
long-term debt divided by equity
long-term debt divided by long-term debt plus equity
Reason:
This is the long-term debt ratio, not the long-term debt-equity ratio, which is
equal to long-term debt/equity
equity divided by long-term debt
Reason:
long-term debt divided by equity
Correct Answer
long-term debt divided by equity
When loaning money, creditors are interested in the borrower's financial
leverage as well as their
raw materials
marketing abilities
hiring practices
liquidity
Correct Answer
liquidity
ABC Corporation has current assets of $50,000, total assets of $150,000,
current liabilities of $35,000, total liabilities of $90,000, and shareholders'
equity of $25,000. What is ABC Corporation's net working capital worth?
$60,000
Reason:
Net working capital = current assets - current liabilities = $50,000 - $35,000
= $15,000
$35,000
Reason:
Net working capital = current assets - current liabilities = $50,000 - $35,000
= $15,000
$85,000
Reason:
Net working capital = current assets - current liabilities = $50,000 - $35,000
= $15,000
$15,000
Correct Answer
$15,000
Which parts of the return on equity equation depend on the firm's financing
mix (its debt-equity mix)?
Operating profit margin
Reason:
Operating profit margin is part of the firm's return on assets, which depends
on the firm's production and marketing skills and is unaffected by the firm's
financing mix.
Leverage ratio
Debt burden
Return on assets
Reason:
Return on assets depends on the firm's production and marketing skills and
is unaffected by the firm's financing mix.
Correct Answer
Leverage ratio
Debt burden
Liquid assets are those that can be quickly converted to _______.
cash
loans
bonds
inventories
Correct Answer
cash
When it comes to financial ratios and assessing company performance,
management usually look at which of the following?
How the company's financial ratios have changed over time
Comparing ratios with companies in the same line of business
Compare ratios with companies not in the same line of business
Correct Answer
How the company's financial ratios have changed over time
Comparing ratios with companies in the same line of business
Net working capital is equal to
liabilities minus assets
current liabilities minus current assets
current assets minus current liabilities
assets minus liabilities
Correct Answer
current assets minus current liabilities
When determining if a ratio is good or bad, managers look at industry norms
in order to
compare their measures with the measures of companies in a different line of
business
compare their measures with the measures of companies in the same line of
business.
compare changes in their own measures from year to year
Correct Answer
compare their measures with the measures of companies in the same line of
business.
