Chapter 2 and 3 Review
1. International Appliances has a current ratio of .5.
Which of the following actions
would improve this ratio?
a.
Use cash to pay off current liabilities
b.
Collect some of the current accounts receivable
c.
Use cash to pay off some long term debt
d.
Purchase additional inventory on credit
2.
Now assume International Appliances has a current ratio of 1.2, not .5.
Which of
the following actions would improve this ratio?
a.
Use cash to pay off current liabilities
b.
Collect some of the current accounts receivable
c.
Use cash to pay off some long term debt
d.
Purchase additional inventory on credit
e.
Use cash to pay for some fixed assets
3.
Which of the following is true?
a.
Having a high current ratio and a high quick ratio is always a good
indication that a firm is managing its liquidity position well.
b.
A decline in the inventory turnover ratio suggests that the firm’s liquidity
is improving
c.
If a firm’s times interest earned ratio is relatively high, then this is one
indication that the firm should be able to meet its debt obligations.
d.
Since ROA measures the firm’s effective utilization of assets (without
considering how those assets are financed), two firms with the same EBIT
must have the same ROA.
e.
If, through specific managerial actions, a firm has been able to increase its
ROA, then, because of the fixed mathematical relationship between ROA
and ROE, it must have increased its ROE.
4.
Which of the following is true?
a.
Suppose two firms with the same amount of assets pay the same interest
rate on their debt and earn the same rate of return on their assets and that
ROA is positive.
However, one firm has a higher debt ratio.
Under these
conditions, the firm with the higher debt ratio will also have a higher rate
of return on common equity.
b.
One of the problems of ratio analysis is that the relationships are subject to
manipulation.
For example, we know that if we use some cash to pay off
some current liabilities, the current ratio will always increase, especially if
the current ratio is weak initially, for example, below 1.0.
c.
Generally firms with high profit margins have high asset turnover ratios
and firms with low profit margins have low turnover ratios; this result is
exactly as predicted by the extended DuPont equation.
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Firms A and B have identical earnings and identical dividend payout
ratios.
If Firm A’s growth ratio is higher than firm B’s, then Firm A’s P/E
ratio must be greater than Firm B’s P/E ratio.
5.
Info Technics has an equity multiplier of 2.75.
The company’s assets are
financed with some combination of long term debt and common equity.
What is
the company’s debt ratio?
a.
25%
b.
36.36%
c.
52.48%
d.
63.64%
e.
75%
6.
A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate
of 40% and a profit margin of 6%.
What is the firm’s times interest earned ratio?
a.
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 Fall '08
 WHITE
 Corporate Finance, Ratio, Financial Ratio, s ROE

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