FIN 355 quiz 3

If a firms ROE is equal to 9.0% and its ROA is equal to 6.0% its equity multiplier must be 1.5 a. True b. False

a. True .09=.06*1.5

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. a. True b. False

b. False

One problem with ratio analysis is that the relationships can be manipulated. For example, we know that if our current ratio os less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. a. True b. False

b. False

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin. a. True b. False

b. False

Which of the following statements is CORRECT? a. If firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal b. If firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same c. If firms X and Y have the same EPS and market-to-book ratio, they must have the same P/E ratio d. If firms X's P/E ratio exceeds that of firm Y, then Y is likely to be less risky and/or be expected to grow faster e. If firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must be the same

b. If firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. a. True b. False

a. True

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? a. Offer price reductions along with generous credit terms that would 1.) enable the firm to sell some of its excess inventory and 2.) lead to an increase in A/R b. Issue new common stock and use the proceeds to increase inventories c. Speed up collection of A/R and use the cash to increase inventories d. Use some of its cash to purchase additional inventories e. Issue new common stock and use the proceeds to acquire additional fixed assets.

a. Offer price reductions along with generous credit terms that would 1.) enable the firm to sell some of its excess inventory and 2.) lead to an increase in A/R

Companies HD and LD are both profitable, and they have the same total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). Both firms finance using only debt and common equity. However company HD has the higher total debt to capital ratio. Which of the following statements is CORRECT? a. Company HD has a lower total assets turnover than LD. b. Company HD has a lower equity multiplier than LD. c. Company HD has a higher fixed assets turnover than LD. d. Company HD has a higher ROE than LD. e. Company HD has a lower operating income (EBIT) than LD.

d. Company HD has a higher ROE than LD.