Exam #1 SmartBook Questions
A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.
10 cents
U.S.corporations pay a tax rate of ______ percent.
21
The short run is ______.
An imprecise period of time
The short run is a period when there are ______ costs.
Both fixed and variable
Future value is the ______ value of an investment at some time in the future.
Cash
Non-cash items do not affect:
Cash flow
True or false: Current assets plus current liabilities equals net working capital
FALSE; CA-CL
True or false: With the passage of the Tax Cuts and Jobs Act of 2017, corporate tax rates went up.
FALSE; Taxes were reduced to a flat 21% rate
Long-term solvency ratios measure what aspect of the firm's financial position?
Its financial leverage
The last item (or "bottom line") on the income statement is typically the _________.
Net income
One of the most important uses of financial statement information within the firm is:
Performance evaluation
________ financial statements enable one to compare firms that differ in size.
Standardized
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
TRUE
In the long-run, costs may be considered as ________.
All variable
If a company has inventory, the quick ratio will always be ______ the current ratio.
Less than
The retention ratio equals one ______ the dividend payout ratio
Minus
A firm may use a price-sales ratio when it has had ______ earnings over the past year.
Negative
How is the average income tax rate computed?
Total tax bill/Total taxable income
Which one of the following best explains why financial managers use a common-size balance sheet?
To track changes in a firm's capital structure
A common-size balance sheet expresses accounts as a percentage of ______.
Total assets
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
Uneven because they don't occur at equal intervals
Financial leverage refers to a firm's _________.
Use of debt in its capital structure
A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.
26
The most common way to repay a loan is to pay ____.
A single fixed payment every period
A balance sheet reflects a firm's:
Accounting value on a specific date
Net earnings refers to income earned ______.
After interest and taxes
The price-earnings (PE) ratio is a ____ ratio.
Market value
How is the market-to-book ratio measured?
Market value per share/Book value per share
Which of the following could not be evaluated as annuities or annuities due?
- Tips to a waiter - Monthly electric bills
Common-size statements are best used for comparing:
- Firms of different sizes - Competitors - Year-to-year for your firm
Time value of money tables are not as common as they once were because:
- It is easier to use inexpensive financial calculators instead - They are available for only a relatively small number of interest rates.
Which of the following are real-world examples of annuities?
- Leases - Pensions - Mortgages
Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.
- May increase or decrease - May not change
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will ______.
Increase
Long-term solvency ratios are also known as:
Financial leverage ratios
With _______ interest, the interest is not reinvested
Simple
The market value of an item is:
The cash value you'd get if you sold it
Earnings management is a controversial practice in which corporations ________ or ___________ their earnings to "smooth out" dips and surges and keep investors calm.
Overstate; understate
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
Present; future
Which of the following is the correct representation of the cash coverage ratio?
(EBIT+depreciation)/Interest expense
Which of the following are traditional financial ratio categories?
- Turnover ratios - Profitability ratios - Financial leverage ratios
According to GAAP, when is revenue recognized on an income statement?
- When the value of an exchange of goods or services is known or reliably determined - When the earnings process is virtually completed
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
Discounted cash flow (DCF)
The ______ payout ratio equals cash dividends divided by net income.
Dividend
When a firm smooths earnings to please investors, it is called ________.
Earnings management
True or false: Future value refers to the amount of money an investment is worth today.
FALSE; Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate
True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.
FALSE; Higher levels of inventory result in less liquidity
True or false: The times interest earned ratio is EBIT minus interest.
FALSE; It's *divided* by interest
The ______ tax rate is the tax rate paid on the next dollar of income.
Marginal
The price at which willing buyers and sellers would trade is called ______ value.
Market
Whenever ___________ information is available, it should be used instead of accounting data.
Market
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+ r)
Which of the following is (are) true of financial ratios?
- They are developed from a firm's financial information. - They are used for comparison purposes.
In the Excel setup of a loan amortization problem, which of the following occurs?
- To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. - The payment is found with = PMT(rate, nper, -pv, fv).
A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.
Created
The current ratio computes the relationship between ______.
Current assets and current liabilities
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm increased. The firm has ______ its liquidity over the past year.
Decreased
The more debt a firm has, the greater its:
Degree of financial leverage
Which of the following is an example of a non-cash item on an income statement?
Depreciation
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the _______ of the period.
End
True or false: If the interest rate is greater than zero, the value of an annuity due is always less than an ordinary annuity.
FALSE; If the interest rate is greater than zero, the value of an annuity due is always greater than an ordinary annuity.
True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.
FALSE; It uses the annuity present value the present value factor, and the discount rate
True or false: Receivables turnover is cost of goods sold divided by accounts receivable.
FALSE; It's sales divided by accounts receivable
True or false: Financial ratios are computed using balance sheet information.
FALSE; They can use information from all financial statements
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
FALSE; With inventory, quick ratio will always be less than current ratio
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)t
Given an internal growth rate of 3 percent, a firm can _____.
Grow by 3 percent or less without any additional external financing
An increase in a firm's total asset turnover will ______ the sustainable growth rate.
Increase
When finding the present or future value of an annuity using a financial calculator, the ______ ______ should be entered as a percentage.
Interest rate
Which one of the following does not affect ROE according to the DuPont identity?
Investor sentiment
Which of the following is true about the sustainable growth rate?
It is the maximum rate of growth a firm can maintain without increasing its financial leverage.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase.
If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:
Less than 1
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
Liquidity
Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.
Longer; greater
Which one of the following is the correct equation for computing return on assets (ROA)?
Net income/Total assets
Which of the following is the correct equation for return on equity?
Net income/Total equity
The DuPont identity shows that ______ ______ ______ times total asset turnover times equity multiple equals ROE
Net profit margin
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
Non-cash expenses
The current value of a future cash flow discounted at the appropriate rate is called the _____ value.
Present
The present value is the current value of the ______ cash flows discounted at the appropriate discount rate
Present
If a company has had negative earnings for several periods they might choose to use a __________.
Price-sales ratio
The price-earnings ratio is ______ per share divided by ______ per share
Price; earnings
Return on equity (ROE) is a measure of _____.
Profitability
Liquidity has two dimensions which are the ability to:
Quickly convert assets into cash without significant loss in value
With typical interest-only loans, the entire principal is:
Repaid at some point in the future
In a common-size income statement, each item is expressed as a percentage of total ______
Sales
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
The times interest earned ratio is a measure of long-term ______
Solvency
True or false: The cash ratio is found by dividing cash by current liabilities.
TRUE
True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.
TRUE
Which of the following best explains why financial managers use a common-size income statement?
The common-size income statement can show which costs are rising or falling as a percentage of sales.
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Which of the following items are used to compute the current ratio?
- Accounts payable - Cash
Which of the following would help a company take action to improve its ratios?
- Comparing to its own historical ratios - Comparing to major competitors - Comparing to aspirant companies - Comparing to peer companies
Assets can be categorized as:
- Current and fixed assets - Tangible and intangible assets
A company's ______ tax rate is its tax bill divided by its total taxable income, and its ______ tax rate is the tax rate it pays on the next dollar of income.
Average; marginal
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
Because the $100 is an outflow from you which should be negative.
The idea behind ______ is that interest is earned on interest.
Compounding
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory