BUS311 Chapter 3

A firm has sales of $750, total assets of $400, and a debt-equity ratio of 1.50. If the return on equity is 10 percent, what is the firm's net income? A) $16 B) $20 C) $32 D) $40 E) $75

A) $16

Asset utiliization ratios are intended to describe how efficiently a firm uses its assets to generate sales. A) True B) False

A) True

When analyzing a financial statement, it is difficult to determine which ratios are most important and what the appropriate range for each ratio should be. A) True B) False

A) True

If a firm uses cash to purchase inventory, its quick ratio will increase. A) True B) False

B) False

Market value ratios are measures of financial performance that can be computed for both private and public companies. A) True B) False

B) False

The Du Pont identity breaks ROE into three components, which are the profit margin, the current ratio, and the equity multiplier. A) True B) False

B) False

Golf, Inc., and Swing, Inc., are close competitors. Last year, both had the same amount of cost of goods sold, but Golf turned its inventory 5 times during the year while Swing turned its inventory every 65 days. Which one of the following statements is true if the objective of both firms is to keep average inventory as low as possible? A) Golf did a better job since its inventory turnover is lower. B) Swing did a better job since its days' sales in inventory is lower. C) Golf did a better job since its days' sales in inventory is lower. D) Swing did a better job since its inventory turnover is lower. E) Golf did a better job since its level of inventory is lower.

B) Swing did a better job since its days' sales in inventory is lower.

A firm is having difficulty controlling its operating expenses. Which one of the following ratio categories will most directly reflect this problem? A) liquidity B) profitability C) market value D) turnover E) long-term solvency

B) profitability

Delta, Inc., has a times interest earned ratio of 3.0. Based on this ratio, a creditor knows that Delta's EBIT must decline by more than _______ percent before Delta will be unable to cover its interest expense. A) 33 B) 40 C) 67 D) 75 E) 80

C) 67

A very short-term creditor, such as a supplier who grants credit for only 30 days, is likely to be most interested in a firm's: A) current ratio B) quick ratio C) cash coverage ratio D) cash ratio E) times interest earned ratio

D) cash ratioo

CatchaTan CO. had net sales of $750,000 over the past year. During that time, average receivables were $150,000. Assuming a 365-day year, what was the average collection period? A) 4 days B) 5 days C) 36 days D) 48 days E) 73 days

E) 73 days

The sustainable growth rate illustrates the relationship among which of the following areas? I. operating efficiency II. Asset utilization III. Dividend policy IV. Financial policy A) I, II, and IV only B) I, II, and III only C) II, III, and IV only D) I, III, and IV only E) I, II, III, and IV

E) I, II, III, and IV

Which of the following are incorporated into the calculation of the Du Pont identity? I. return on assets II. Equity multiplier III. Total asset turnover IV. Profit margin A) III and IV only B) I, II, and III C) I, III, and IV only D) II, III, and IV only E) I, II, III, and IV

E) I, II, III, and IV

A comparision of the financial statements of two firms in the same genral industry may be difficult if: I. the firm's financial statements are prepared using different fiscal year-ends. II. One or both firms have international operations. III. The size of the two firms' operations are different. A) I only B) II and III only C) I and III only D) I and II only E) I, II, and III

E) I, II, and III

Which of the following is (are) a measure of profitability? I. return on assets II. Return on equity III. Market-to-book ratio IV. Profit margin A) I only B) III only C) I and II only D) III and IV only E) I, II, and IV only

E) I, II, and IV only