Finance 300 UTK
T/F: An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date.
False
T/F: Financial ratios are useful for evaluating performance but should not be used for making financial projections.
False
T/F: How managers choose to finance the business affects the company's risk, and as a result, the rate of return stockholders receive on their investments.
True
T/F: If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover.
True
T/F: Ratios are used to standardize financial information, thereby making it easier to interpret.
True
T/F: Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management
True
T/F: Seasonality causes comparability problems in ratio analysis. A common solution is to use an average account balance as opposed to an ending account balance.
True
T/F: The accounting book value of an asset represents the historical cost of the asset rather than its current market value or replacement cost.
True
How do you determine the times interest earned ratio?
= Income before interest and taxes / interest expense
Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium. Question content area bottom Part 1 True False
true
Question content area top Part 1 The required rate of return for an asset is equal to the risk−free rate plus a risk premium. Question content area bottom Part 1 True False
true
T/F: A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods.
true
t/f: The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.
TRUE
WRJ has a debt ratio of .4, current liabilities of $18,000, and total assets of $120,000. What is the level of WRJ's total liabilities? A. $63,934 B. $58,000 C. $48,000 D. $22,000
$120,000 * .4 = C. $48,000
Question content area top Part 1 Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection period is Question content area bottom Part 1 A. 36.50 days. B. 90 days. C. 18.25 days. D. 40.56 days.
$900,000/10 = $90,000 ($90,000/$900,000) * 365 = 36.5 days
How do you determine the operating profit margin?
(Operating Profit/ Sales) * 100 (Operating Profit is the earnings before taxes and interest expense)
How do you determine the average collection period?
= (Days * "Total liabilities and owner's equity") / Credit sales (365 * x)/y
What is the "five question approach?"
1. How liquid is the firm? 2. Is management generating adequate operating profits on the firm's assets? 3. How is the firm financing its assets? 4. Are the owners recieving an adequate return on their investment? 5. Is the management team creating shareholder value?
Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver Systems' return on equity?
14.0%
Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short−term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million? Question content area bottom Part 1 A. $4.50 million B. $1.67 million C. $0.50 million D. $6.00 million
15+x / 5+x = 2.5 15+x = 12.5+2.5x 2.5 = 1.5x x = 2.5/1.5x = 1.67M
How do you determine the Acid test quick ratio?
= (Current assets - inventory) / Current liabilities
T/F: Accounting rules specify that assets on the balance sheet must be reported at current market value, because this is the valuation most useful to potential investors.
False
T/F: Fixed assets are assets whose balances will remain the same throughout the year.
False
T/F: When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis.
False
Question content area top Part 1 Most stocks have betas between Question content area bottom Part 1 A. 0.60 and 1.60. B. 1.00 and 2.00. C. −1.00 and 1.00. D. 0.00 and 1.00.
A. 0.60 and 1.60.
If you hold a portfolio made up of the following stocks: Investment Value Beta Stock X $4,000 1.5 Stock Y $5,000 1.0 Stock Z $1,000 .5 What is the beta of the portfolio? Question content area bottom Part 1 A. 1.15 B. 1.33 C. 1.24 D. 1.00
A. 1.15
A corporation's operating profit margin is equal to A. EBIT divided by sales. B. EBIT divided by net income. C. sales divided by EBIT. D. net income divided by sales.
A. EBIT divided by sales.
How do you determine the return on equity?
Net Income / (RE + common stock)
You must add one of two investments to an already well− diversified portfolio. Security A Security B Expected Return = 14% Expected Return = 14% Standard Deviation of Standard Deviation of Returns = 15.8% Returns = 19.7% Beta = 1.8 Beta = 1.5 If you are a risk−averse investor, which one is the better choice? Question content area bottom Part 1 A. Security B B. Either security would be acceptable. C. Security A D. Cannot be determined with information given
A. Security B
Two companies have identical assets and operating activities. Which of the follow statements is true? A. The company with more debt will have lower net income due to interest expense. B. Both companies have the same net income. C. The company with more debt will have lower operating income due to interest expense. D. The company with more debt will have higher operating income due to leverage.
A. The company with more debt will have lower net income due to interest expense.
You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income? Commission Probability of Occurrence $15,000 0.10 $35,000 0.20 $48,000 0.40 $67,000 0.16 $80,000 0.14 Question content area bottom Part 1 A. The salary of $50,000 is greater than the expected commission of $49,620. B. The salary of $50,000 is greater than the expected commission of $48,400. C. The salary of $50,000 is less than the expected commission of $50,050. D. The salary of $50,000 is less than the expected commission of $52,720.
A. The salary of $50,000 is greater than the expected commission of $49,620.
Which of the following accounts belongs in the liability section of a balance sheet? A. accounts payable B. accumulated depreciation C. preferred stock D. interest expense
A. accounts payable
Question content area top Part 1 If we are able to fully diversify, what is the appropriate measure of risk to use? Question content area bottom Part 1 A. beta B. risk−free rate of return C. standard deviation D. expected return
A. beta
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment? Question content area bottom Part 1 A. common stock of small firms B. U.S. Treasury bills C. common stock of large firms D. long−term government bonds
A. common stock of small firms
Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period? A. income statement B. statement of cash flows C. sources and uses of funds statement D. balance sheet
A. income statement
The increase in owners' equity for a given period is equal to A. net income minus dividends. B. gross profit minus distributions to shareholders. C. positive net cash flow minus dividends. D. sales minus dividends.
A. net income minus dividends.
Company A has a higher days sales outstanding ratio than Company B. Therefore, A. other things being equal, Company B has a cash flow advantage over Company A. B. Company A has a higher percentage of cash to credit sales than Company B. C. Company A sells more on credit than Company B. D. Company A must be collecting its accounts receivable faster than Company B, on average.
A. other things being equal, Company B has a cash flow advantage over Company A.
The capital asset pricing model Question content area bottom Part 1 A. provides a risk−return trade−off in which risk is measured in terms of beta. B. provides a risk−return trade−off in which risk is measured in terms of the market volatility. C. depicts the total risk of a security. D. measures risk as the coefficient of variation between security and market rates of return.
A. provides a risk−return trade−off in which risk is measured in terms of beta.
Gross profit is equal to A. sales − cost of goods sold. B. profits plus depreciation. C. earnings before taxes minus taxes payable. D. revenues − expenses.
A. sales − cost of goods sold.
A stock's beta is a measure of its Question content area bottom Part 1 A. systematic risk. B. company−unique risk. C. diversifiable risk. D. unsystematic risk.
A. systematic risk.
Financial analysis A. uses historical financial statements to measure a company's performance and in making financial projections of future performance. B. is accounting record−keeping using generally accepted accounting principles. C. relies on generally accepted accounting principles to make comparisons between companies valid. D. uses historical financial statements and is thus useful only to assess past performance.
A. uses historical financial statements to measure a company's performance and in making financial projections of future performance.
Siskiyou Corp. has cash of $75,000; short−term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital? A. $390,000 B. $700,000 C. $210,000 D. $175,000
A. $390,000 current asset = 75,000 + 275,000 + 350,000 = 700000 current liability = 100,000 + 135,000 + 75,000 =310000 net working capital = 700000 -310000 = $390,000
Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.3, the risk−free rate of return is 3%, and the market risk premium is 8%. The required return on Robotics stock is Question content area bottom Part 1 A. 13.4%. B. 17.6%. C. 16.5%. D. 21.1%.
A. 13.4%.
High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of the following statements is correct? Question content area bottom Part 1 A. High's average collection period is less than Low's. B. Low Company has (on average) a lower accounts receivable balance than does High. C. Low's average collection period is less than High's. D. High has a higher accounts receivable balance on average than does Low Company.
A. High's average collection period is less than Low's.
Question content area top Part 1 WPM, Inc. has current assets of $8,000,000, current liabilities of $4,000,000, inventory of $1,320,000, and sales of $12,000,000. What is the acid test ratio? Question content area bottom Part 1 A. 0.1 B. 1.67 C. 2.0 D. 0.22
Acid test ratio = (Current assets - Inventories) / Current liabilities = ($8,000,000 - $1,320,000) / $4,000,000 = 1.67
How do you determine the average collection period?
Average collection period= (365* account receivable)/total credit sale
Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from Question content area bottom Part 1 A. Company A has lower cost of goods sold, resulting in a higher net profit margin. B. Company A has lower selling and administrative expenses, resulting in a higher net profit margin. C. Company A has a lower debt ratio. D. Company B has more common stock.
B. Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Therefore, A. Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment. B. Corporation A's retained earnings will increase due to the tax deductibility of interest expense. C. Corporation A's gross profit will decrease. D. Corporation A's operating income will decrease due to higher interest expense.
B. Corporation A's retained earnings will increase due to the tax deductibility of interest expense.
Which of the following statements is MOST correct concerning diversification and risk? Question content area bottom Part 1 A. Asset allocation is important for pension funds but not for individual investors. B. Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category. C. Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated. D. Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B. Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
Question content area top Part 1 Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio? Investment Expected Rate of Return σ A 18% 20% B 20% 20% C 20% 22% Question content area bottom Part 1 A. Investment A B. Investment B C. Investment C D. Cannot be determined without information regarding the risk−free rate of return.
B. Investment B
The current ratio of a firm would be increased by which of the following? Question content area bottom Part 1 A. Inventories are sold for cash. B. Land held for investment is sold for cash. C. Inventories are sold on a credit basis. D. Equipment is purchased, financed by a long−term debt issue.
B. Land held for investment is sold for cash.
Which of the following statements is MOST correct concerning diversification and risk? Question content area bottom Part 1 A. Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. B. Risk−averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. C. Proper diversification generally results in the elimination of risk. D. Risk−averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
B. Risk−averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
The acid−test ratio of a firm would be unaffected by which of the following? Question content area bottom Part 1 A. Equipment is purchased, financed by a long−term debt issue. B. Several short−term loans are consolidated and paid off using long−term debt. C. Large accounts receivable balances are collected. D. Additional inventory is purchased for cash.
B. Several short−term loans are consolidated and paid off using long−term debt.
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment? Question content area bottom Part 1 A. long−term government bonds B. U.S. Treasury bills C. common stock of large firms D. common stock of small firms
B. U.S. Treasury bills
When comparing inventory turnover ratios, other things being equal, A. higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet. B. a higher inventory turnover is preferred to improve liquidity. C. higher inventory turnover results from an increase in the selling price of the product. D. a lower inventory turnover is preferred in order to keep inventory costs low.
B. a higher inventory turnover is preferred to improve liquidity.
When comparing inventory turnover ratios, other things being equal, Question content area bottom Part 1 A. higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet. B. a higher inventory turnover is preferred to improve liquidity. C. higher inventory turnover results from an increase in the selling price of the product. D. a lower inventory turnover is preferred in order to keep inventory costs low.
B. a higher inventory turnover is preferred to improve liquidity.
During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000. The result of this growth will be Question content area bottom Part 1 A. a higher operating profit margin and higher net income. B. a lower operating profit margin and higher net income. C. a lower operating profit margin and lower net income. D. a higher P/E ratio.
B. a lower operating profit margin and higher net income.
Of the following, which differs in meaning from the other three? Question content area bottom Part 1 A. undiversifiable risk B. asset−unique risk C. systematic risk D. market risk
B. asset−unique risk
Common−sized income statements A. compare companies with the same level of net income. B. assist in the comparison of companies of different sizes. C. show each income statement account as a percentage of total assets. D. compare companies with the same level of total sales.
B. assist in the comparison of companies of different sizes.
Which of the following measures the average relationship between a stock's returns and the market's returns? Question content area bottom Part 1 A. geometric regression B. beta coefficient C. coefficient of validation D. standard deviation
B. beta coefficient
A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of A. cash flow from investing and cash flow from operations. B. cash flow from financing and cash flow from investing. C. cash flow from financing and cash flow from operations. D. cash flow from investing and cash flow from financing.
B. cash flow from financing and cash flow from investing.
Of the following different types of securities, which is typically considered most risky? Question content area bottom Part 1 A. common stocks of large companies B. common stocks of small companies C. long−term government bonds D. long−term corporate bonds
B. common stocks of small companies
T/F: The two principal sources of financing for corporations are A. debt and accounts payable. B. debt and equity. C. common equity and preferred equity. D. cash and common equity.
B. debt and equity.
Which of the following does NOT provide an indication of liquidity? Question content area bottom Part 1 A. quick ratio B. debt ratio C. inventory turnover D. average collection period
B. debt ratio
Based on the security market line, Robo−Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo−Tech has a standard deviation of returns of 18%. Therefore, Question content area bottom Part 1 A. the beta for Friendly must be greater than the beta for Robo−Tech because Friendly is the better buy for a risk−averse investor. B. for a well−diversified investor, Friendly is less risky than Robo−Tech. C. all rational investors will prefer Friendly over Robo−Tech. D. Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo−Tech.
B. for a well−diversified investor, Friendly is less risky than Robo−Tech.
A firm's financing costs include A. depreciation expense. B. interest expense C. costs of goods sold. D. both A and B.
B. interest expense
In an ideal world, which of the following would be used to evaluate firm performance? A. book value of assets B. market value of assets C. accounting assets and profits D. corporate retained earnings from the day of incorporation
B. market value of assets
Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management? Question content area bottom Part 1 A. operating efficiency quotient B. operating return on assets C. times interest earned D. net profit margin
B. operating return on assets
If the beta for stock A equals zero, then Question content area bottom Part 1 A. stock A's required return is greater than the required return on the market portfolio. B. stock A's required return is equal to the risk−free rate of return. C. stock A's required return is equal to the required return on the market portfolio. D. stock A has a guaranteed return.
B. stock A's required return is equal to the risk−free rate of return.
Which of the following is the slope of the security market line? Question content area bottom Part 1 A. beta B. the market risk premium C. one D. It varies, and it is steeper for riskier securities.
B. the market risk premium
Which of the following ratios would be the poorest indicator of how rapidly the firm's credit accounts are being collected? Question content area bottom Part 1 A. cash conversion cycle B. times interest earned C. accounts receivable turnover ratio D. average collection period
B. times interest earned
Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines? Question content area bottom Part 1 A. systematic risk B. unsystematic risk C. market risk D. non−diversifiable risk
B. unsystematic risk
Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long−term assets of $800,000. How much is the firm's Total Liabilities & Equity? A. $2,500,000 B. $2,000,000 C. $1,800,000 D. $1,300,000
B. $2,000,000 As per Basic Accounting equation, Total Assets = Total Liabilities & Equities while, Total Assets = Total Current Assets + Long Term Assets Total Assets = $1200,000 + $800,000 Total Assets = $2,000,000
California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing's net income? A. $377,000 B. $390,000 C. $350,000 D. $288,000
B. $390,000
Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will produce? Question content area bottom Part 1 A. $1,540 B. $4,040 C. $12140 D. $7,640
B. $4,040
Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; long−term assets of $800,000; and long−term debt of $600,000. How much is the firm's total equity? A. $2,000,000 B. $900,000 C. $800,000 D. $1,200,000
B. $900,000 Total equity = (Current assets + long term assets) - (current liabilities + long term debt)= ($1,200,000 + $800,000) - ($500,000 + $600,000)= $2,000,000 - $1,100,000= $900,000
Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio? Question content area bottom Part 1 A. 14.8% B. 12.9% C. 15.6% D. 18.3%
B. 12.9%
Wildings, Inc. common stock has a beta of 1.2. If the expected risk free return is 4% and the expected market risk premium is 9%, what is the expected return on Wildings' stock? Question content area bottom Part 1 A. 12.0% B. 14.8% C. 10.0% D. 13.8
B. 14.8%
You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk? I. Risk resulting from possibility of a stock market crash. II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product. IV. Risk resulting from interest rates decreasing. Question content area bottom Part 1 A. I only B. II, III C. I and IV D. I, II, III, IV
B. II, III
T/F: How managers choose to finance the business does not affect the rate of return to shareholders because the rate of return is based on how the company uses the assets it has, not whether or not they paid for the assets with debt or equity.
False
T/F: Intangible assets such as copyrights and goodwill are not included on the balance sheet because they are impossible to value objectively.
False
T/F: Lower asset turnover ratios are generally indicative of more efficient asset management.
False
T/F: Net income is the best measure to use for evaluating a firm's profits on assets because it includes the effect of financing as well as the effect of operations.
False
T/F: The astute financial manager will seek to attain the highest current ratio possible.
False
T/F: The balance sheet equation is Total Assets = Total Revenues − Total Liabilities.
False
An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position? A. Company B has much higher operating income than Company A. B. Company B has more total assets than Company A. C. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B. D. Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
C. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
T/F: The income statement describes the financial position of a firm on a given date.
False
Question content area top Part 1 Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose Question content area bottom Part 1 A. Investment B because a lower return means lower risk. B. Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B. C. Investment A if A and B are of equal risk. D. Investment A because of the higher expected return.
C. Investment A if A and B are of equal risk.
Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true? Question content area bottom Part 1 A. Lake Tours' investors are not being adequately compensated for relevant risk. B. Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc. C. Lake Tours is more likely to have negative returns than Rogue Rec. D. Rogue Rec is likely to experience returns larger than those of Lake Tours.
C. Lake Tours is more likely to have negative returns than Rogue Rec.
Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a higher times interest earned ratio than Butler. If Nelson and Butler both have the same amount of total assets, then Question content area bottom Part 1 A. if both companies have the same operating income, a mistake was made in the calculations because the company with a higher debt ratio must have a lower times interest earned ratio. B. if both companies have the same operating income, Butler must be paying a higher interest rate on its long−term debt than Nelson is paying. C. Nelson may have more non−interest bearing liabilities, such as accounts payable, than Butler has. D. Nelson must have higher operating income than Butler.
C. Nelson may have more non−interest bearing liabilities, such as accounts payable, than Butler has.
The basic format of an income statement is A. Sales − Liabilities = Profits. B. Assets − Liabilities = Profits. C. Sales − Expenses = Profits. D. Income − Expenses = EBIT.
C. Sales − Expenses = Profits.
Question content area top Part 1 Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio? Question content area bottom Part 1 A. The company collects $500,000 of its accounts receivable. B. The company writes a $30,000 check to pay off some existing long-term debt. C. The company sells $1 million of inventory on credit with a cost of goods sold of $0.5 million. D. The company pays back $50,000 of its long-term debt.
C. The company sells $1 million of inventory on credit with a cost of goods sold of $0.5 million.
What information does a firm's income statement provide to the viewing public? A. a report of investments made and their cost for a specific period of time B. an itemization of all of a firm's assets and liabilities for a defined period of time C. a report of revenues and expenses for a defined period of time D. a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time
C. a report of revenues and expenses for a defined period of time
All of the following statements about balance sheets are true EXCEPT A. assets are reported at historical cost. B. a balance sheet reports a company's financial position at a specific point in time. C. balance sheets show average asset balances over a one−year period. D. Assets − Liabilities = Shareholders' Equity.
C. balance sheets show average asset balances over a one−year period.
Which of the following accounts belongs on the asset side of a balance sheet? A. accruals B. accounts payable C. inventory D. depreciation expense
C. inventory
For a retailer with inventory to sell, the acid−test ratio will be Question content area bottom Part 1 A. greater than the current ratio, thus providing a more stringent measure of liquidity. B. unimportant because it doesn't include inventory. C. less than the current ratio, thus providing a more stringent measure of liquidity. D. greater than the current ratio, thus providing a less stringent measure of liquidity.
C. less than the current ratio, thus providing a more stringent measure of liquidity.
A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? A. profitability B. leverage C. liquidity D. efficiency
C. liquidity
A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? Question content area bottom Part 1 A. leverage B. efficiency C. liquidity D. profitability
C. liquidity
All of the following measure liquidity EXCEPT A. current ratio. B. inventory turnover. C. operating return on assets. D. acid−test ratio.
C. operating return on assets.
Examples of uses of cash include A. selling machinery. B. borrowing an additional amount using a secured loan. C. paying cash dividends to stockholders. D. all of the above.
C. paying cash dividends to stockholders.
Common−sized balance sheets A. show data for companies with approximately the same amount of assets. B. show data for companies in the same industry. C. show each balance sheet account as a percentage of total assets. D. show each balance sheet account as a percentage of total sales.
C. show each balance sheet account as a percentage of total assets.
Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short−term line of credit? A. return on equity B. the operating profit margin C. the acid test ratio D. the fixed asset turnover
C. the acid test ratio
The current ratio of a firm would equal its quick ratio whenever Question content area bottom Part 1 A. the firm's inventory is equal to its current liabilities. B. the firm's current ratio is equal to one. C. the firm has no inventory. D. the firm's inventory is equal to its other current assets.
C. the firm has no inventory.
T/F: The profit and loss (income) statement is compiled on a cash basis.
False
An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that A. the firm is selling a product mix that includes more high margin items. B. the firm is managing its inventory inefficiently. C. the firm's products are in inventory for fewer days before they are sold than is average for the industry. D. the firm has higher sales than the industry average.
C. the firm's products are in inventory for fewer days before they are sold than is average for the industry.
Financial analysis A. uses historical financial statements and is thus useful only to assess past performance. B. relies on generally accepted accounting principles to make comparisons between companies valid. C. uses historical financial statements to measure a company's performance and in making financial projections of future performance. D. is accounting record−keeping using generally accepted accounting principles.
C. uses historical financial statements to measure a company's performance and in making financial projections of future performance.
Universal Financial, Inc. has total current assets of $1,200,000; long−term debt of $600,000; total current liabilities of $500,000; and long−term assets of $800,000. How much is the firm's net working capital? A. $900,000 B. $1,000,000 C. $700,000 D. $600,000
C. $700,000 Net working capital=Total current assets-Total current liabilities=1,200,000-500,000=700,000 Net working capital=$700,000
The risk−free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is Question content area bottom Part 1 A. 34%. B. 36%. C. 22%. D. 26%.
C. 22%.
Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that A. the risk−free rate of interest is 3%. B. investors' required rate of return is 8%. C. investors' required rate of return is 12%. D. the corporation's inventory turnover is high.
C. investors' required rate of return is 12%.
Which of the following types of risk is diversifiable? Question content area bottom Part 1 A. market risk B. betagenic, or ecocentric risk C. unsystematic, or company−unique risk D. systematic risk
C. unsystematic, or company−unique risk
How do you determine the inventory turnover ratio?
COGS / average inventory
Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of $6 million. Williams' inventory balance is Question content area bottom Part 1 A. $4,800,000. B. $4,000,000. C. $2,000,000. D. $2,400,000.
Current Assets / Current Liabilities = Current Ratio Current Liabilities = Current Assets / Current Ratio = $6,000,000 / 3 = $2,000,000 Quick Ratio = [Current Assets - Inventory] / Current Liabilities 1.8 = [$6,000,000 - Inventory] / $2,000,000 Inventory = $6,000,000 - [1.8 x $2,000,000] = $6,000,000 - $3,600,000 = $2,400,000
How do you determine current ratio?
Current assets/ current liabilites
Question content area top Part 1 RBW Corp. has cash of $48,000; short−term notes payable of $35,000, accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000. What is RBW's current ratio? Question content area bottom Part 1 A. 2.71 B. 1.57 C. 0.64 D. 1.42
Current assets=Cash+AR+Inventory =(48000+100,000+200,000)=$348000 Current liabilities=Short term notes payable+AP+Accruals =(35000+120,000+90000)=$245000 Current ratio=Current assets/Current liabilities =$348000/$245000 =1.42(Approx).
The Walker Corporation has current assets of $15,000, inventories of $7,000, and a current ratio of 2.5. What is the Walker Corporation's quick or acid test ratio? (Choose the best answer.) A. 1.33 B. 2.14 C. 0.74 D. 0.86
Current liabilities = $ 6,000. Acid quick ratio = (Current assets - inventory) / Current liabilities Acid quick ratio = ($ 15,000 - $ 7,000) / $ 6,000 (From (1) Current liabilities = $ 6,000, From question, Inventory = $ 7,000). Acid quick ratio = ($ 8,000) / $ 6,000 Acid quick ratio = 1.33
Question content area top Part 1 The acid−test ratio of a firm would be unaffected by which of the following? Question content area bottom Part 1 A. Inventories are sold on a short−term credit basis. B. Inventories are sold for cash. C. Common stock is sold and the money is invested in marketable securities. D. Accounts payable are reduced by obtaining a short−term loan.
D. Accounts payable are reduced by obtaining a short−term loan.
The current ratio of a firm would be decreased by which of the following? Question content area bottom Part 1 A. Inventories are sold for cash. B. Land held for investment is sold for cash. C. Equipment is purchased, financed by a long−term debt issue. D. Inventories are sold on a long−term credit basis.
D. Inventories are sold on a long−term credit basis.
Which of the following is/are true? Question content area bottom Part 1 A. The greater the total risk of an asset, the greater the expected return. B. Two points on the Characteristic Line are the T−bill and the market portfolio. C. All securities have a beta between 0 and 1. D. Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
D. Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
Which of the following statements concerning net income is MOST correct? A. Negative net income reduces a company's cash balance. B. Net income represents sales minus operating expenses at a specific point in time. C. Net income represents cash available to pay dividends. D. Net income represents income that may be reinvested in the firm or distributed to its owners.
D. Net income represents income that may be reinvested in the firm or distributed to its owners.
An income statement may be represented as follows: A. Sales − Liabilities = Profits. B. Sales − Expenses = Retained Earnings. C. Revenues − Liabilities = Net Income. D. Sales − Expenses = Profits.
D. Sales − Expenses = Profits.
HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible? Question content area bottom Part 1 A. The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased. B. Markets are inefficient and fail to recognize the benefits of leverage. C. Shareholders are not interested in return on equity. D. The high levels of debt increased the riskiness of HighLev relative to its competitors.
D. The high levels of debt increased the riskiness of HighLev relative to its competitors.
A typical measure for the risk−free rate of return is the Question content area bottom Part 1 A. short−term AAA−rated bond rate. B. money−market rate. C. prime lending rate. D. U.S. Treasury bill rate.
D. U.S. Treasury bill rate.
What information does a firm's balance sheet provide to the viewing public? A. a report of revenues and expenses for a defined period of time B. a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time C. a report of investments made and their cost for a specific period of time D. an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date
D. an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date
Net working capital is equal to A. current assets minus total liabilities. B. total assets minus total liabilities. C. total operating capital minus net income. D. current assets minus current liabilities.
D. current assets minus current liabilities.
XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely that A. XYZ's earnings per share are twice the earnings per share of EFG. B. investors believe that for the same level of earnings growth, XYZ is a higher risk company. C. investors believe XYZ stock is overvalued. D. investors expect XYZ's earnings to grow faster than EFG's earnings.
D. investors expect XYZ's earnings to grow faster than EFG's earnings.
Common−sized balance sheets A. show each balance sheet account as a percentage of total sales. B. show data for companies with approximately the same amount of assets. C. show data for companies in the same industry. D. show each balance sheet account as a percentage of total assets.
D. show each balance sheet account as a percentage of total assets.
The category of securities with the highest historical risk premium is Question content area bottom Part 1 A. large company stocks. B. small company corporate bonds. C. government bonds. D. small company stocks.
D. small company stocks.
What financial statement explains the changes that took place in the firm's cash balance over a period? A. reconciliation of free cash flow B. balance sheet C. income statement D. statement of cash flow
D. statement of cash flow
Beta is a statistical measure of Question content area bottom Part 1 A. unsystematic risk. B. total risk. C. the standard deviation. D. the relationship between an investment's returns and the market return.
D. the relationship between an investment's returns and the market return.
The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore, A. the corporation's gross profit margin is less than 20%. B. the corporation's gross profit margin is equal to 20% because gross profit is not affected by operating expenses or financing costs. C. the corporation's net profit margin is greater than 20%. D. the corporation's gross profit margin is greater than 20%.
D. the corporation's gross profit margin is greater than 20%.
California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is California Retailing's EBIT? A. $850,000 B. $1,300,000 C. $875,000 D. $900,000
D. $900,000
Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price? A. $240 per share B. $360 per share C. $60 per share D. $96 per share
D. $96 per share Earnings per share, EPS is $800,000 divided by 100,000 shares, or $8.000/share. If the price-to-earnings ratio is 12, the stock must be selling at 12 * $8.00 = 96.
Green Company stock has a beta of 2 and a required return of 23%, while Gold Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company. The expected return on the market portfolio according to the CAPM is Question content area bottom Part 1 A. 12%. B. 10%. C. 9%. D. 14%.
D. 14%.
Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk−free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is Question content area bottom Part 1 A. 17.6%. B. 16.5%. C. 21.1%. D. 15.0%.
D. 15.0%.
Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce? Question content area bottom Part 1 A. 33.3% B. 16.1% C. 9.5% D. 15.4%
D. 15.4%
Question content area top Part 1 Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio? Question content area bottom Part 1 A. 15.67% B. 13.25% C. 14.97% D. 15.78%
D. 15.78%
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________. Question content area bottom Part 1 A. security market line; standard deviation B. standard deviation; beta C. beta; slope of the characteristic line D. beta; standard deviation
D. beta; standard deviation
Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets of $70,000. What is Acme's level of current liabilities? A. $8,400 B. $9,400 C. $10,600 D. $12,348
Debt ratio = Total Debt/Total Asset 0.42 = Total Debt/70000 Total Debt = 70000*0.42 Total Debt = 29400 Total Debt = noncurrect liabilites + current liabilities current liabilities = 29400-20000 current liabilities = $ 9400
How do you determine the Operating Return on Assets (OROA)?
Earnings before interest and taxes (EBIT) / Average Total Assets
Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price? Question content area bottom Part 1 A. $360 per share B. $60 per share C. $240 per share D. $96 per share
Earnings per share = $ 800000 / 100000 = $ 8 / share Price per share / Earnings per share = 12 Price per share / $ 8 = 12 Price per share = 12 x $ 8 = $ 96 / share Therefore Benkart's Stock price = $ 96 / share
T/F: A balance sheet reflects the current market value of a firm's assets and liabilities.
False
T/F: A company with negative net income will also have negative operating cash flow.
False
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's gross profit is equal to A. $1,070,000. B. $1,500,000. C. $770,000. D. $1,100,000.
Gross Profit = Sales- COGS B. $1,500,000. (3,000,000-1,500,000)
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to A. 50.00%. B. 25.67%. C. 35.67%. D. 36.67%.
Net profit margin = Net Income / Sales *100 = 770000 / 3000000 *100 = 25.67% Net income = Sales - (COGS + Depreciation + Administrative + Interest expenses + Marketing expenses + Taxes)
How do you determine the fixed asset turnover ratio?
Net sales / net fixed assets
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to A. $770,000. B. $1,100,000. C. $1,070,000. D. $1,500,000.
Opearting income = Sales - COGS - Depreciation expense - Administrative expenses - Marketing expenses B. $1,100,000 (3,000,000 - 1,500,000 - 170,000 - 150,000 - 80,000)
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000; Rogue's operating profit margin is equal to A. 35.67%. B. 50.00%. C. 36.67%. D. 25.67%.
Operating Income = Sales - Costs of Goods Sold - Depreciation Expenses - Administrative expenses - Marketing Expenses Operating Income = $3,000,000 - $1500,000 - $170,000 - $150,000 - $80,000 Operating Income = $1100,000 - Operating Profit margin = (Operating Income/Sales)*100 Operating Profit margin = ($1,100,000/$3000,000)*100 Operating Profit margin = 36.67% So, Rogue's OPERATING PROFIT MARGIN is equal to 36.67%
How do you determine the P/E ratio?
P/E = stock price per share / earnings per shareEPS = net income / # shares
How do you determine the P/E ratio given the company's stock price per share (x)?
P/E Ratio: = Market price per share/Earnings per share (Think of net income / (Net sales- Total liabilities and owners equity)
How do you determine Return on Common Equity (ROE)?
ROE = (Net Income/ Common Equity) * 100
John Box Inc. has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT). John Box's times−interest−earned ratio is 4.2. What is John Box's net income? Question content area bottom Part 1 A. $57,000 B. $126,000 C. $96,000 D. $57,600
Solution: 4.2*$30,000 = $126,000 ($126,000-$30,000) / (1-0.4) = $57,600
How do you determine the total asset turnover ratio?
Total Net Sales/ Total Assets
Use the following information to calculate the company's accounting net income for the year. Credit Sales $800,000 Cash Sales $500,000 Operating Expenses on Credit $200,000 Cash Operating Expenses $700,000 Accounts Receivable (Beg. of Year) $50,000 Accounts Receivable (End of Year) $80,000 Accounts Payable (Beg. of Year) $50,000 Accounts Payable (End of Year) $100,000 Corporate Tax Rate 40% A. $125,000 B. $240,000 C. $300,000 D. $120,000
Total Sales = 800,000 + 500,000 = $1,300,000 Total expenses = 200,000 + 700,000 = $900,000 Net Income = (1,300,000 - 900,000) * (1 - 0.4) = $240,000.......... Thus, Option B
How do you determine the total amount of common stock dividend for 2010?
Total amount of Yen's common stock dividend = Opening retained earnings(2009) + Net income earned during the year(2010) - closing retained earnings (2010)
TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio? Question content area bottom Part 1 A. 66.7% B. 55.4% C. 43.7% D. 31.2%
Total assets = 995000 Total equity = 560000 Current liabilties = 310000 Total assets = Total equity + Current liabilities + Debt 995000=560000+310000+X Total debt = 125000 Debt ratio = Total Liabilties / Total Assets = (310000+125000) /995000 = 43.7%
T/F: A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity.
True
T/F: A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods.
True
T/F: A high debt ratio can be favorable because higher leverage may result in a higher return on equity.
True
T/F: According to accrual accounting, revenues are recognized when earned and expenses are recognized when incurred.
True
T/F: An income statement reports the firm's revenues and expenses for a specific period of time such as one year.
True
T/F: A firm's income statement reports the results from operating the business for a period of time, while the firm's balance sheet provides a snapshot of the firm's financial position at a specific point in time.
True
T/F: Common−sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of afirm's financial performance across time and with competitors.
True
T/F: DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage (debt).
True
T/F: Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners.
True
T/F: Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.
True
T/F: Financial ratios are used by managers inside the company and by lenders, credit−rating agencies, and investors outside of the company.
True
T/F: Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.
True
T/F: If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.
True
T/F: Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price.
True
T/F: Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing.
True
T/F: Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value.
True
T/F: The balance sheet reflects the accounting equation: Assets = Liabilities + Owners' Equity.
True
T/F: The statement of cash flow explains the changes that took place in the firm's cash balance over the period of interest.
True
T/F: Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting numbers, but accounting numbers are used because they are more readily available.
True
Determining the best way to raise money to fund a firm's long-term investments is called
capital structure decision
How do you determine debt ratio?
debt ratio =Total debt/Total assets =(Total current liabilities+Long term debt)/Total assets
A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky. Question content area bottom Part 1 True False
false
Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value. Question content area bottom Part 1 True False
false
An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%. Question content area bottom Part 1 True False
false
As the required rate of return of an investment decreases, the market price of the investment decreases. Question content area bottom Part 1 True False
false
Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk. Question content area bottom Part 1 True False
false
Cash flows is the most relevant variable to measure the returns on debt instruments, while GAAP net income is the most relevant variable to measure the returns on common stock. Question content area bottom Part 1 True False
false
Due to strict stock market controls, the most a stock's value can drop in one trading day is 5%. Question content area bottom Part 1 True False
false
It is commonly accepted that the industry average for a ratio is the ideal goal for a financial manager to achieve.
false
Portfolio performance is determined mainly by stock selection and market timing, with less emphasis on asset allocation. Question content area bottom Part 1 True False
false
Proper diversification generally results in the elimination of risk. Question content area bottom Part 1 True False
false
Question content area top Part 1 Asset allocation is not recommended by financial planners because mixing different types of assets, such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions. Question content area bottom Part 1 True False
false
T/F: Common-size balance sheets are balance sheets of companies with almost identical total assets (within 2% of each other).
false
T/F: Investors will be indifferent between two investments if both investments have the same expected return.
false
T/F: When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis.
false
The market rewards the patient investor, for the period between 1926 and 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years. Question content area bottom Part 1 True False
false
How do you determine the accounts receivable turnover?
net credit sales / average accounts receivable
Which of the following has the most significant influence on return on equity?
operating income
Which of the following accounts belongs in the equity section of a balance sheet? Question content area bottom Part 1 A. cash B. long−term debt C. retained earnings D. dividends
retained earnings
SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000. What is SNL's times−interest−earned ratio? Question content area bottom Part 1 A. 8.1 B. 11.4 C. 1.3 D. 45.8
times interest earned ratio=EBIT/Interest payable EBIT=$825,000-$620,000=$205,000 so Times interest earned ratio=EBIT/Interest payable=$205,000/$18,000=11.389
A security with a beta of one has a required rate of return equal to the overall market rate of return. Question content area bottom Part 1 True False
true
A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace. Question content area bottom Part 1 True False
true
A stock with a beta of 1.4 has 40% more variability in returns than the average stock. Question content area bottom Part 1 True False
true
According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's risk premium. Question content area bottom Part 1 True False
true
An all−stock portfolio is more risky than a portfolio consisting of all bonds. Question content area bottom Part 1 True False
true
Beta is a measurement of the relationship between a security's returns and the general market's returns. Question content area bottom Part 1 True False
true
Beta represents the average movement of a company's stock returns in response to a movement in the market's returns. Question content area bottom Part 1 True False
true
Diversifying among different kinds of assets is called asset allocation. Question content area bottom Part 1 True False
true
Question content area top Part 1 In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investor's attitude toward risk. Question content area bottom Part 1 True False
true
T/F: Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.
true
T/F: Financial ratios are used by managers inside the company and by lenders, credit−rating agencies, and investors outside of the company.
true
T/F: Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.
true
T/F: One weakness of the times interest earned ratio is that it includes only the annual interest expense as a finance expense and ignores other financing items such as lease payments that must be paid.
true
T/F: Ratios are used to standardize financial information, thereby making it easier to interpret.
true
T/F: Shareholder wealth maximization means maximizing the price of the existing common stock.
true
T/F: The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period.
true
T/F: Variation in the rate of return of an investment is a measure of the riskiness of that investment.
true
The T−bill return is used in the CAPM model as the risk−free rate. Question content area bottom Part 1 True False
true
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated. Question content area bottom Part 1 True False
true
The beta of a T−bill is zero. Question content area bottom Part 1 True False
true
The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away. Question content area bottom Part 1 True False
true
The slope of the characteristic line of a security is that security's beta. Question content area bottom Part 1 True False
true
The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate. Question content area bottom Part 1 True False
true
Total risk equals systematic risk plus unsystematic risk. Question content area bottom Part 1 True False
true
Variation in the rate of return of an investment is a measure of the riskiness of that investment. Question content area bottom Part 1 True False
true
