Chapter 3
Which one of the following statements is true concerning the price-earnings (PE) ratio?
A high PE ratio may indicate that a firm is expected to grow significantly.
Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.
Cash payment of an account payable
Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?
Cash ratio
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?
No new equity and a constant debt-equity ratio
All else constant, which one of the following will decrease if a firm increases its net income?
Price-earnings ratio
A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:
has positive net working capital.
A common-size balance sheet helps financial managers determine:
if changes are occurring in a firm's mix of assets
The equity multiplier is equal to:
one plus the debt-equity ratio.
Common-size financial statements present all balance sheet account values as a percentage of:
total assets
Which one of the following statements is correct?
Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.
The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets
I, II, III, and IV
The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity
I, II, and IV
Which of the following are determinants of a firm's sustainable rate of growth? I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity III. Amount of current assets per dollar of current liabilities IV. Percentage of net income distributed as dividends
I, II, and IV only
Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity
II and III only
Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio
III and IV only
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?
Internal growth rate
New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?
Price-sales ratio
Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?
SIC
Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?
Total asset turnover
The cash coverage ratio is used to evaluate the:
ability of a firm to pay the interest on its debt.
The ratios that are based on financial statement values and used for comparison purposes are called:
financial ratios.
High Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:
vary in direct relation to the net profit percentage
If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:
zero percent
Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?
Common-size income statement
Financial statement analysis:
provides useful information that can serve as a basis for forecasting future performance.
Blooming Gardens has an inventory turnover of 16. This means the firm:
sells its inventory an average of 16 times each year.
You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?
Cash coverage ratio = 2.6; debt-equity ratio = 0.3
Which one of the following transactions will increase the liquidity of a firm?
Credit sale of inventory at cost
Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?
Decrease in the capital intensity ratio
Which one of the following will increase the profit margin of a firm, all else constant?
Decrease in the tax rate
Donovan Brothers, Inc. would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?
Divided payout ratio
Which one of the following is a measure of long-term solvency?
Equity multiplier
The DuPont identity can be totally defined by which one of the following?
Equity multiplier and return on assets