Chapter 3 - BUS 361 Sample Test


1. Debt management ratios:

a. measure the amount of debt the firm uses.
b. measure how effectively a firm is managing its assets.
c. show the relationship of a firm’s cash and other current assets to its current liabilities.
d. show the combined effects of all areas of the firm on operating results.

2. Days sales outstanding:

a. measures how much in sales a firm generates relative to its inventory
b. measures how much in net income a firm generates relative to its total assets
c. measures how quickly a firm converts credit sales into cash
 

3. Which of the following are key qualitative factors that should be considered when evaluating a company?

a. to what extent is company performance tied to a key customer, a key product, or a single supplier
b. what percentage of the company’s business is generated overseas
c. what is the company competition and legal and regulatory environments
d. what are the company’s future prospects
e. all of the above are important qualitative factors

4. The Wilson Corporation has the following relationships: Sales/Total assets = 6; Return on assets (ROA) = 10%; Return on equity (ROE)  21%. What is Wilson’s profit margin?

a. 2.39%
b. 3.50%
c. 1.67%
d. 2.96%
e. 1.55%
 

5. Which of the following is most correct:

a. A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.
b. The use of debt in a company’s capital structure results in tax benefits to the investors who purchase the company’s bonds.
c. All else equal, a firm with a higher debt ratio will have a lower basic earning power ratio.
d. All of the statements above are correct.
e. Statements a and c are correct.
 

6. Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities and inventory has a positive balance.)

a. fixed assets are sold for cash
b. cash is used to purchase inventories
c. accounts receivable are collected
d. long-term debt is issued to pay off a short-term loan
 

7. P/E ratios are reflections of:

a. the firm’s growth prospects
b. the firm’s risk
c. both a and b
d. neither a nor b
 

8. All else being equal, which of the following will increase a company’s current ratio?

a. an increase in accounts receivable
b. an increase in accounts payable
c. an increase in net fixed assets
d. a and b are correct
e. all of the above statements are correct
 

9. Market value ratios:

a. measure the amount of debt the firm uses.
b. measure how effectively a firm is managing its assets.
c. show the relationship of a firm’s cash and other current assets to its current liabilities.
d. show the combined effects of all areas of the firm on operating results.
e. give an indication of what investors think of the firm’s performance and future prospects.
 

10. Wetsdale Financial Company and Commerce Financial Company have the same total assets, the same total assets turnover, and the same return on equity. However, Wetsdale has a higher return on assets than Commerce. Which of the following can explain these ratios?

a. Wetsdale has a higher profit margin and a higher debt ratio than Commerce.
b. Wetsdale has a lower profit margin and a lower debt ratio than Commerce.
c. Wetsdale has a higher profit margin and a lower debt ratio than Commerce.
d. Wetsdale has lower net income but more common equity than Commerce.
 

11. Moss Motors has $272 million in assets, and its tax rate is 40%. The company’s basic earning power (BEP) ratio is 41%, and its return on assets (ROA) is 11%. What is Moss’ times-interest-earned (TIE) ratio?

a. 2.03
b. 0.49
c. 0.81
d. 1.81
e. 0.38
 

12. The examination of ratios over time is called:

a. cash flow estimation
b. trend analysis
c. capital expenditure
d. flotation cost
 

13. UKNO, Inc. uses only debt and common equity funds to finance its assets. This past year the firm's return on total assets was 13%. The firm financed 42% percent of its assets using debt.  What was the firm's return on common equity?

a. 30.95%
b. 22.41%
c. 27.16%
d. 33.96%
e. 20.11%
 

14. A modified Du Pont chart shows how return on equity is affected by:

a. profit margin on sales
b. total assets turnover
c. leverage
d. all of the above
e. none of the above

15. Which of the following is most correct?

a. A large current ratio (relative to competitors) is “good” from the standpoint of liquidity, and would likely increase profitability.
b. A large current ratio (relative to competitors) is “good” from the standpoint of liquidity, but could damage profitability.
c. A small current ratio (relative to competitors) is “good” from the standpoint of liquidity, but could damage profitability.