FIN 310 ch 4

By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firm's operating profit margin is 5% on sales of $4 million?*

$333,333*

XYZ Corp. has an operating profit margin of 7%, a debt burden of .8, and has financed two-thirds of its assets through equity. What asset turnover ratio is necessary to achieve an ROE of 18%?*

2.14*

What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million?*

33.33%*

A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million. On average, how many days does it take the firm to pay its bills?*

52.91 days*

When will ROE equal ROC?

Whenever the firm has no interest payments on debt

Which one of these costs accounts for the difference between accounting income and economic value added?

cost of captial

A firm's quick ratio of .49 suggests the firm:

faces a potentially serious liquidity crisis

Which one of the following would likely be most detrimental to a firm's current ratio if that ratio is currently 2?

purchasing inventory on credit

A healthy current ratio and an unhealthy quick ratio may be caused by excess inventory.

true

EVA is the net profit of the firm adjusted for the cost of capital.

true

Market value added is the difference between the market value of the firm's equity and its book value.

true

Net working capital is determined from the difference between current assets and current liabilities.

true

Net working capital to total assets and current ratio are both liquidity ratios.

true

ROE is equal to ROA when the firm has no debt.

true

Receivable turnover ratio and asset turnover ratio are both efficiency ratios.

true

Residual income is another term for economic value added.

true

The asset turnover ratio and inventory turnover ratio are both efficiency ratios.

true

The difference between the current and quick ratios is that inventory has been subtracted from current assets.

true

An asset turnover ratio of 1.75 can be interpreted as:

$1.75 in sales are generated by every $1 of assets

What is the residual income for a firm with $1 million in total capital, $300,000 in net income, and a 20% cost of capital?*

$100,000*

TSI Inc. has enough liquid assets to finance its operations for 67 days and cash, marketable securities, and receivables totaling $1,000. TSI's average daily expenditures from operations are:*

$14.93*

A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends. By how much will shareholders' equity increase on the balance sheet?

$17 million

What are the annual sales for a firm with $400,000 in debt, a total debt ratio of .4, and an asset turnover of 3?*

$3,000,000*

Balsco's balance sheet shows total assets of $238,000 and total liabilities of $107,000. The firm has 55,000 shares of stock outstanding that sell for $11 a share. What is amount of market value added?*

$474,000*

A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing. If taxes are $200,000, how much is EBIT?*

$500,000*

A firm's profit margin when ignoring the effects of financing is 20% with an EBIT of $1.5 million and sales of $5 million. How much did the firm pay in taxes?*

$500,000*

What is the book value per share for a firm with 2 million shares outstanding at a price of $50, a market-to-book ratio of .75, and a dividend-payout ratio of 50%?*

$66.67*

What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of $3,000,000, and a market-to-book ratio of 3?*

$90*

A company has total assets of $1,000, current liabilities of $130, and total liabilities of $350. What is the long-term debt ratio?*

.25*

What is the ROA of a firm with $150,000 in average receivables, which represents 60 days sales, average assets of $750,000, and a profit margin of 9%?*

10.95%*

A firm's after-tax operating income was $1,000,000 in 2013. It started the year with a total capitalization of $8,000,000 and ended the year with a total capitalization of $9,000,000. The additional capital raised during 2013 started to affect the operating income in 2014. Which value best represents the return on capital for 2013?*

12.6%*

How much will Gamma Inc.'s equityholders earn given a total asset turnover of .85, an operating profit margin of .15, and a debt-equity ratio of .25?*

15.94%*

Last year's asset turnover ratio was 2.0. Sales have increased by 25% and average total assets have increased by 10% since that time. What is the current asset turnover ratio?*

2.27*

In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with a face value of $1million, market value of $.92 million, and a coupon rate of 8%. What is the firm's times interest earned ratio?*

3.75*

The board of directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover ratio remain unchanged at 8% and 1.25, respectively, by how much must the leverage ratio (i.e., assets/equity) increase to achieve 20% ROE?*

33.333%*

What is the approximate total debt ratio for a firm with a total debt-equity ratio of .65? *

39%*

What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?*

5.56 times *

Calculate the average collection period for Dots Inc. if its accounts receivables were $550 at the beginning of a year in which the firm generated $3,000 of sales?

67 days*

The only measure of firm performance that accounts for cost of capital is:

EVA

Which one of the following may be the best measure of company performance?

EVA

Which of the following is the least effective measure of operating performance?

ROE

Which one of the following will increase a firm's times interest earned ratio?

a decrease in cost of goods sold

Which of these indicates that a firm is efficient?

a high inventory turnover

Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?*

a profit margin of 6.4%*

A retail store with zero net working capital has:

a quick ratio that is less than 1

Which of these assets is generally considered to be the most liquid?

accounts receivable

Which one of the following will cause a reduction in the NWC turnover ratio all else held constant?

an increase in average payable

Which one of the following changes will provide an increase (if only in the short-run) in a firm's ROE?

an increase in the dividend-payout ratio

Which one of these changes indicates an improvement in a firm's asset management efficiency?

an increase in the inventory turnover rate

Efficiency ratios:

are used to measure how well the company uses its assets

Assume BDS acquired its main supplier, ABC. As a result of the acquisition, BDS finds that its profit margin increased but its ROA remained constant. A decrease in which one of these ratios is most apt to be the reason why the ROA did not increase with the increase in the profit margin?

asset turnover

Which one of these firms has recently had a negative market value added?

bank of america

Which of the following actions could improve a firm's current ratio if it is now less than 1.0?

buying inventory on credit

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

can still have a positive net income

The inventory turnover ratio compares:

cost of goods sold to average inventory

If a firm has a debt-equity ratio of .45, long-term debt of $500, and equity of $2,000, then: *

current liabilities must be $400*

If the cash coverage ratio exceeds the times interest earned ratio, then the firm has:

depreciable assets

An increase in which one of the following will have no effect on the cash coverage ratio?

depreciation

The use of debt in the firm's capital structure will increase ROE if the firm:

earns a higher return than the rate paid on debt

A times interest earned ratio of 5 indicates the firm:

earns significantly more than its interest expense

An asset's liquidity measures its:

ease and cost of being converted to cash

A firm with no leases has a long-term debt ratio of 50%. This means that the book value of equity:

equals the book value of long-term debt

Last year's return on equity was 30%. This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings. The firm has no preferred stock. What caused the decrease?*

equity increased by 50%*

Increasing leverage will always act to increase a firm's ROE.

false

Market value added is the same as economic value added

false

Other things equal, an increase in average accounts receivable will increase a firm's return on assets.

false

Return on assets is always a larger number than the return on equity.

false

The higher the times interest earned ratio, the higher the interest expense.

false

The income statement of a firm shows the value of its assets and liabilities over a specified period of time.

false

The net working capital of a firm will decrease when accrued wages are paid with cash

false

The net working capital to total assets ratio is always a larger number than the current ratio.

false

What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?

financial leverage varies among firms

If a firm's cash coverage ratio is greater than its times interest earned ratio, then the:

firm's assets are not fully depreciated

When a firm's long-term debt-equity ratio is .98, the firm:

has less long-term debt than equity

A deficiency of the standard measures of liquidity is that the measures:

ignore a firms reserve borrowing capacity

Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10% and the leverage ratio equals 1?

increase the debt burden from its current level

High levels of liquidity are most apt to indicate:

inefficient use of assets

The use of financial leverage will be detrimental to a firm's ROE if the:

interest rate on debt exceeds the firm's ROA

If a company has a healthy current ratio but a significantly lower quick ratio, then you can assume that:

inventory represents a large portion of the firm's current assets

When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a lower inventory turnover. What might you assume about Tri-C?

its average inventory is too high

If a firm's total debt ratio is greater than .5, then

its debt- equity ratio exceeds 1.0

Which one of the following statements is most likely correct for a firm with an average collection period of 90 days?

its providing financing for approximately 25% of its annual sales

The current ratio is a good proxy for a firm's:

liquidity

Which one of these statements is correct?

market value added measures the difference between the total market value and the total book value of equity

After-tax operating income for a leveraged firm is defined as:

net income + after-tax interest

A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?

net working capital will not change

Which one of these ratios is commonly referred to as the acid-test ratio?

quick ratio

What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must*

remain constant*

Lease obligations are included in certain leverage ratios because leases:

represent long-term fixed obligations

How would you interpret an inventory turnover ratio of 10.7?

the firm has sufficient inventories to maintain sales for 34.1 days

If ROC is less than a firm's cost of capital, which of the following must be true?

the firms EVA is negative

If a company uses cash to pay off some of its accounts payables, what effect will this have on its liquidity ratios, given that the ratios exceeded 1 before the payoff?

the quick ratio and current ratio will both increase

nstead of increasing its long-term debt by borrowing money from a bank to purchase new stereo equipment, Jay's Jams Inc. decides to lease the equipment on a long-term basis. How will the long-term debt ratio differ if the lease option is selected over the bank-debt option?

the ratio will be the same regardless of the financing method selected

The inventory turnover ratio times the average days in inventory equals 365

true

The reduction in value over time of intangible assets is known as amortization.

true

administrative acts and decisions recorded in writing is one of the six characteristics of the ideal bureaucracy

true

A total debt ratio of .35:

would exist if a firm had liabilities of $700 and assets of $2,000