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