Multiple Choice (80%)
1. Which of the following is not a category of financial statement ratios? a. Financial leverage.
2. An individual interested in making a judgment about the profitability of a company should: a. review the trend of working capital for several years.
b. calculate the company's ROI for the most recent year.
c. review the trend of the company's ROI for several years. d. compare the company's ROI for the most recent year with the industry average ROI for the most recent year.
3. A potential creditor's judgment about granting credit would be most influenced by the potential customer's: a. current ratio at the end of the prior fiscal year.
b. most recent acid-test ratio.
c. trend of acid-test ratio over the past three years.
d. practice with respect to taking cash discounts offered by current suppliers.
4. The inventory turnover calculation:
a. is wrong unless cost of goods sold is used in the numerator. b. is wrong unless sales is used in the numerator.
c. is an alternative way of expressing the number of days' sales in inventory. d. requires knowledge of the inventory cost flow assumption being used.
5. If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be: a. less than 10.
b. between 10 and 25.
c. between 25 and 40.
d. over 40.
6. When a firm has financial leverage:
a. ROI will be greater than ROE.
b. ROI will usually be less than it would be without leverage. c. risk is greater than if there isn't any leverage.
d. the firm will always have a higher ROE than it would without leverage. 7. If the P/E ratio of a company's common stock were 12, and its earnings were $2.50 per common share: a. the market value of the common stock would be $20.83 per share. b. the market value of the common stock would be $25.00 per share. c. an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $2.40 per share. d. an increase in earnings of $0.20 per share, with no change in the multiple, would result in a market price increase of $1.67 per share. 8. When a corporation has both common stock and preferred stock outstanding: a. dividends on preferred stock are paid only if the company has current earnings. b. dividends on preferred stock must be paid before dividends on common stock can be paid. c. preferred stockholders receive the same dividend per share as common stockholders. d. dividends on preferred stock are paid only if dividends are to be paid on the common stock.
9. If a firm's debt ratio were 25%, its debt/equity ratio would be: a. 25%.
10. A leverage buyout refers to:
a. one firm issues stock to take over another firm.
b. one firm trades its stock for the stock of another firm. c. a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders. d. one firm pays cash for the shares of a takeover firm's shares.
11. Book value per share of common stock of a manufacturing company: a. is not a very useful measure most of the time.
b. is calculated by dividing market value per share by earnings per share. c. reflects the fair market value of the company's stock.
d. is the same as the total balance sheet asset value per share of common stock.
12. Financial leverage:
a. arises because most borrowed funds have a fixed interest rate. b. arises because most borrowed funds have a variable interest rate. c. usually has no bearing on the risk associated with a company. d. is a concept that does not apply to individuals.
13. Which of the following is(are) an example of a measure of leverage? a. Debt yield.
b. Debt payout ratio.
c. Preferred dividend coverage ratio.
d. Debt/equity ratio.
e. All of these.
14. Activities included in a generally accepted definition of...
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