Chapter 5

Which of the following is NOT one of the three explanatory variable that determine a firm's market beta? A. Degree of investing leverage B. Degree of operating leverage C. Degree of financial leverage D. Variability of sales

A Degree of investing leverage

Refer to the Marker's 2012 Financial Statements on the Study Guide. Marker's Liabilities to Assets Ratio for 2012 is: A. 105.1% B. 63.1% C. 78.3% D. 100%

B. 63.1% $1,847,712 / $2,928,965 = 63.1%

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years? A. Sales B. Earnings C. Positive cash flows D. Income from continuing operations

B. Earnings

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in investing? (ability to generate cash/Need to use cash) A. Profitability of goods and services sold/Working capital requirements B. Sales of existing plant assets/Plant capacity requirements C. Borrowing capacity/Debt service requirements D. Profitability of goods and services sold/Debt service requirements

B. Sales of existing plant assets/Plant capacity requirements

Economic theory teaches that differences in market returns must relate to differences in: A. book value B. perceived risk C. price-earnings ratio D. bankruptcy risk

B. perceived risk

All of the following are common domestic risks faced by companies EXCEPT: A. recessions B. technology C. inflation D. demographic shifts

B. technology

Refer to the Marker's 2012 Financial Statements on the Study Guide. Marker's 2012 Interest Coverage ratio is: A. 7.66 B. 1 C. 11.35 D. 4.35

C. 11.35

Refer to the information for Mobile Company. Mobile's 2010 Inventory Turnover ratio is: A. 7.46 B. 11.83 C. 6.16 D. 5.62

C. 6.16 $2,542,353 / [(338,599+487,505) * .5] = 6.16

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in financing? (ability to generate cash/need to use cash) A. Profitability of goods and services sold/Working capital requirements B. Sales of existing plant assets/Plant capacity requirements C. Borrowing capacity/Debt service requirements D. Profitability of goods and services sold/Debt service requirements

C. Borrowing capacity/Debt service requirements

Which of the following ratios is NOT a measure of long-term solvency risk? A. Debt/Equity Ratio B. Interest Coverage Ratio C. Operating Cash Flows to Current Liabilities Ratio D. Liabilities to Assets Ratio

C. Operating Cash Flows to Current Liabilities Ratio

Changes in foreign exchange rates can affect a firm in all of the following ways EXCEPT: A. The prices a firm pays to acquire raw materials from suppliers abroad. B. The amount of cash a firm receives when it collects an account receivable, a loan receivable, or another receivable denominated in a currency other than its own. C. The value of domestic liabilities with fixed interest rates D. The prices a firm charges for products sold to customers abroad.

C. The value of domestic liabilities with fixed interest rates.

Market equity beta measures the covariability of a firm's returns with the returns of: A. all industry competitors in the market. B. risk free securities. C. all securities in the market. D. all firms of comparable market value

C. all securities in the market

Which of the following can companies use as collateral for a loan? A. prepaid insurance B. prepaid rent C. property, plant, and equipment D. retained earnings

C. property, plant, and equipment

Refer to the information for Mobile Company. Mobile's quick ratio changed by what percentage from 2009 to 2010? A. 30% B. 107% C. 25% D. 82%

A. 30% 2010 Quick ratio = 1,757,854 / 1,648,753 = 1.07 2009 Quick ratio = 1,282,432 / 1,566,237 = .82 (1.07-.82)/.82 = .30

Refer to the Marker's 2012 Financial Statements on the Study Guide. Marker's 2012 Long-term Debt to Long-Term Capital ratio is: A. 31.4% B. 29.4% C. 34% D. 25.4%

A. 31.4% (45,0000+ 450,000) / (1,081,253 + 450,000 + 45,000) = 31.4%

Here are several ratios calculated from Midas Company's Financial Statements: Days in Receivables = 45 Days in Payables = 36 Days in Inventory = 30 How many days of working capital financing does Midas need to obtain from other sources? A. 39 Days B. 36 Days C. 56 Days D. 26 Days

A. 39 Days

Refer to the information for Mobile Company. Mobile's days receivables outstanding at the end of 2010 was: A. 43.20 days B. 40.50 days C. 45.25 days D. 8.50 days

A. 43.20 Days $4,885,340 / [(490,816+665,828) * .5] = 8.45 A/R Turnover 365/8.45 = 43.20 days

Refer to the information for Mobile Company. Days of other financing required by Mobile at the end of 2010 would be: A. 54.36 days B. 75.36 days C. 102.94 days D. 5.27 days

A. 54.36 days Days A/R + Days Inv. - Days A/P = Days other Financing 43.2 + 59.25 - 48.09 = 54.36

The Johnson Company has a current ratio of 1.45. The company has just sold $600,000 worth of merchandise on credit. What will the current ratio be after the sales on credit. A. greater than 1.45 B. 1.45 C. less than 1.45 D. unable to determine without more information

A. greater than 1.45

All of the following are common industry risks faced by companies EXCEPT: A. litigation B. technology C. regulation D. competition

A. litigation

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to: A. pay off accounts payable prior to year-end. B. purchase more inventory on account. C. purchase short-term investments with cash. D. purchase more inventory with cash

A. pay off accounts payable prior to year-end.

Which of the following properly links the factors affecting a firms ability to generate cash with its need to use cash in operations Ability to generate Cash Need to use cash A. profitiability of goods and services sold Working capital requ B. Sales of existing plant assets Plant capacity requi C. Borrowing capacity Debt service req D. Profitability of goods and services sold Debt service req

A. profitability of goods and services sold/Working capital requirements

___________________________ concerns a firm's ability to make interest and principal payments on borrowings as they become due.

Credit risk

Refer to the information for Mobile Company. Mobiles Operating Cash Flow to Current Liabilities ratio in 2010 was: A. .7 B. 1.39 C. 1 D. .72

D. .72 $1,156,084/[($1,648,753+ 1,566,237) * .5] = .72

Refer to the Marker's 2012 Financial Statements on the Study Guide. Marker's 2012 Long-term Debt to Shareholders' Equity ratio is: A. 31.4% B. 29.4% C. 34 % D. 45.8%

D. 45.8% (45,000 + 450,000) / 1,081,253 = 45.8%

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk, which of the following is NOT one of the factors? A. Investment factors B. Financing factors C. Operating Factors D. Credit Factors

D. Credit Factors

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan? A. Firms credit history B. financial position of the firms creditors C. firms cash flow D. a and c

D. a and c

Which of the following states of financial distress would be considered the most troubling for an investor or creditor? A. failing to make a required interest payment on time B. paying an accounts payable after the billing C. restructuring debt D. defaulting on a principal payment on debt

D. defaulting on a principal payment on debt

All of the following typically drive firm-specific risks EXCEPT: A. the nature of the business B. competition C. supplier relationships D. demographic shifts

D. demographic shifts

All of the following are common international risks faced by companies EXCEPT: A. asset expropriation B. exchange rate changes C. political unrest D. dependence on one or a few suppliers

D. dependence on one or a few suppliers

Doran Corp. has a current ratio of 6. Under which of the following scenarios might this indicate a problem? A. inventories are increasing due to the introduction of a new product. B. the company is holding cash in expectation of making a large investment in equipment C. receivables are increasing due to increasing sales D. inventories are increasing and the industry in which Doran Corp. operates is experiencing a recession

D. inventories are increasing and the industry in which Doran Corp operates is experiencing a recession.

The quick acid test ratio contains all of the following EXCEPT: A. cash B. accounts receivable C. Marketable securities D. prepaid assets

D. prepaid assets

Changes in interest rates can typically affect firms in all of the following ways EXCEPT: A. The value of investments in bonds or other investment securities with fixed interest rates. B. The value of liabilities with fixed interest rates C. The returns a firm generates from pension fund investments D. the cash-equivalent value of assets invested abroad.

D. the cash-equivalent value of assets invested abroad

Univariate bankruptcy prediction models help identify factors related to bankruptcy, but they do NOT provide information about: A. specific ratios that are important B. the amount of Type I and Type II errors. C. which specific company will go bankrupt. D. the relative importance of individual financial statement ratios

D. the relative importance of individual financial statement ratios

Common shareholders benefit with increasing proportions of debt in the capital structure as long as the firm maintains an excess of ______________________________ over the after-tax cost of debt

ROA

When a company wants to calculate the current ratio they would divide the current assets by the ________________________________________

current liabilities

Working capital is defined as ______________________________ minus ____________________________

currents assets, current liabilities

The source of risk related to interest rate changes and demographic changes is _________________________

domestic

When the excess of ROA over the after-tax cost of borrowing declines, additional ______________________________________ begins to reduce the return to common shareholders.

financial leverage

The source of risk related management competence, strategic direction and lawsuits is ________________________

firm specific

The source of risk related to technology, regulation and availability of raw materials is __________________________________

industry

The ______________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense

interest coverage

The source of risk related to political unrest and exchange rate changes are ____________________________

international

In general, the shorter the number of days of needed financing, the ___________________________________ is the cash flow from operations to average current liabilities.

larger

The current ration is one of the measures of the _______________________ of the firm.

liquidity

Short-term ________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.

liquidity risk

When calculating the quick ratio, an analyst would include in the numerator cash, _____________________________, and receivables.

marketable securities

Large current ratios indicate the availability of cash and near cash assets to repay _______________________________ coming due within the next year.

obligations

The analysis of short-term liquidity risk requires an understanding of the __________________________ of a firm.

operating cycle

The operating cycle must NOT only generate cash to supply __________________________________________ needs, it must generate sufficient cash to service debt.

operating working capital

Financially healthy firms frequently close any cash flow gaps in their operating cycles with _______________________________________________

short-term borrowing

Long-term ____________________________ represents the longer-term ability of the firm to generate cash internally or from external sources to satisfy plant capacity and debt repayment needs.

solvency risk

When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called __________________________________________

window dressing

Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ___________________________

working capital

By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of ________________________________ the firm requires.

working capital financing

Please refer to the financial statements for Mobile Company on the Study Guide. Refer to the information for Mobile Company. Mobile's current ratio in 2010 was: A. 1.07 B. 1.45 C. 1 D. .69

B. 1.45 $2,388,964 / $1,648,753 = 1.45

Refer to the Marker's 2012 Financial Statements on the Study Guide. Marker's 2012 Long-term Debt to Long-Term Capital ratio is: A. 100% B. 170.9% C. 63.1% D. 129.3%

B. 170.9% $1,847,712 / $1,081,253 = 170.9%

Refer to the information for Mobile Company. Mobile's days accounts payable outstanding at the end of 2010 is: A. 7.53 days B. 48.09 days C. 45.51 days D. 50 days

B. 48.09 days Purchases = $2,542,353 + 338,599 - 487,505 = 2,393,447 Average A/P = (296,307 + 334,247) * .5 = 315,277 A/P Turnover = 7.59 Days 365/7.59 = 48.09 days

Below are various states of financial distress: 1. defaulting on a principal payment on debt 2. restructuring debt 3. liquidating a firm 4. filing for bankruptcy 5. failing to make a required interest payment on time What is the order of increasing gravity that analysts typically consider when assessing credit risk and bankruptcy risk according to a continuum of financial distress? A. 5,1,2,3,4 B. 5,2,1,4,3 C. 1,5,1,4,3 D. 1,5,2,3,4

B. 5,2,1,4,3

One problem with debt ratios is that they provide no information about the ability of the firm to generate ___________________________________ to service debt.

cash flow from operations

An analyst can view the revenues to cash ratio as a(n) ____________________

cash turnover ratio

The beta coefficient measures the _________________________________ of a firm's returns with those of all shares traded in the market (in excess of the risk-free interest rate).

covariability