View the step-by-step solution to: Q uestion 1 Which of the following factors could explain why

assignment in attachment. all multiple choice questions.
week 3 quiz.docx

Q uestion 1
Which of the following factors could explain why Dellva Energy had a negative net cash flow
last year, even though the cash on its balance sheet increased?
Answer
The company sold a new issue of bonds.
The company made a large investment in new plant and equipment.
The company paid a large dividend.
The company had high amortization expenses.
The company repurchased 20% of its common stock.

Q uestion 2
Assume that Pappas Company commenced operations on January 1, 2010, and it was granted
permission to use the same depreciation calculations for shareholder reporting and income tax
purposes. The company planned to depreciate its fixed assets over 15 years, but in December
2010 management realized that the assets would last for only 10 years. The firm's accountants
plan to report the 2010 financial statements based on this new information. How would the new
depreciation assumption affect the companys financial statements?
Answer
The firms reported net fixed assets would increase.
The firms EBIT would increase.
The firm's reported 2010 earnings per share would increase.
The firm's cash position in 2010 and 2011 would increase.
The firms net liabilities would increase.

Q uestion 3
On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and
exactly that same amount was shown the following year. Assuming that no earnings
restatements were issued, which of the following statements is CORRECT?
Answer
If the company lost money in 2010, they must have paid dividends.
The company must have had zero net income in 2010.
The company must have paid out half of its earnings as dividends.
The company must have paid no dividends in 2010.
Dividends could have been paid in 2010, but they would have had to equal the earnings for
the year.

Q uestion 4
Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:
Assets:
Cash

2009
$

2008
200,000

$ 170,000

Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets

864,000
2,000,000
$ 3,064,000
6,000,000
$ 9,064,000

700,000
1,400,000
$2,270,000
5,600,000
$7,870,000

Liabilities and equity:
Accounts payable
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total common equity
Total liabilities and equity

$ 1,400,000
1,600,000
$ 3,000,000
2,400,000
3,000,000
664,000
$ 3,664,000
$ 9,064,000

$1,090,000
1,800,000
$2,890,000
2,400,000
2,000,000
580,000
$2,580,000
$7,870,000

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year
non-callable, long-term debt in 2008. As of the end of 2009, none of the principal on this debt
had been repaid. Assume that the companys sales in 2008 and 2009 were the same. Which of
the following statements must be CORRECT?
Answer
Wolken increased its short-term bank debt in 2009.
Wolken issued long-term debt in 2009.
Wolken issued new common stock in 2009.
Wolken repurchased some common stock in 2009.
Wolken had negative net income in 2009.

Q uestion 5
Aubey Aircraft recently announced that its net income increased sharply from the previous year,
yet its net cash flow from operations declined. Which of the following could explain this
performance?
Answer
The companys operating income declined.
The companys expenditures on fixed assets declined.
The companys cost of goods sold increased.
The companys depreciation and amortization expenses declined.
The companys interest expense increased.

Q uestion 6

Last year, Tucker Technologies had (1) a negative net cash flow from operations, (2) a negative
free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the
following factors could explain this situation?
Answer
The company had a sharp increase in its inventories.
The company had a sharp increase in its accrued liabilities.
The company sold a new issue of common stock.
The company made a large capital investment early in the year.
The company had a sharp increase in its depreciation and amortization expenses.

Q uestion 7
A security analyst obtained the following information from Prestopino Products financial
statements:
Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010
had declined to $320,000.
The company does not pay dividends.
The companys depreciation expense is its only non-cash expense; it has no amortization
charges.
The company has no non-cash revenues.
The companys net cash flow (NCF) for 2010 was $150,000.
On the basis of this information, which of the following statements is CORRECT?
Answer
Prestopino had negative net income in 2010.
Prestopinos depreciation expense in 2010 was less than $150,000.
Prestopino had positive net income in 2010, but its income was less than its 2009 income.
Prestopino's NCF in 2010 must be higher than its NCF in 2009.
Prestopinos cash on the balance sheet at the end of 2010 must be lower than the cash it had
on the balance sheet at the end of 2009.

Q uestion 8
Which of the following statements is CORRECT?
Answer
Since companies can deduct dividends paid but not interest paid, our tax system favors the
use of equity financing over debt financing, and this causes companies debt ratios to be
lower than they would be if interest and dividends were both deductible.
Interest paid to an individual is counted as income for tax purposes and taxed at the
individuals regular tax rate, which in 2008 could go up to 35%, but dividends received
were taxed at a maximum rate of 15%.
The maximum federal tax rate on corporate income in 2008 was 50%.
Corporations obtain capital for use in their operations by borrowing and by raising equity

capital, either by selling new common stock or by retaining earnings. The cost of debt
capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the
stock. Both of these costs are deductible from income when calculating income for tax
purposes.
The maximum federal tax rate on personal income in 2008 was 50%.

Q uestion 9
Which of the following items cannot be found on a firms balance sheet under current liabilities?
Answer
Accounts payable.
Short-term notes payable to the bank.
Accrued wages.
Cost of goods sold.
Accrued payroll taxes.

Q uestion 10
Which of the following statements is CORRECT?
Answer
In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
Dividends do not show up in the statement of cash flows because dividends are considered
to be a financing activity, not an operating activity.
In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
In the statement of cash flows, depreciation charges are reported as a use of cash.
In the statement of cash flows, a decrease in inventories is reported as a use
of cash.

Q uestion 11
Which of the following statements is CORRECT?
Answer
Since depreciation is a source of funds, the more depreciation a company has, the larger its
retained earnings will be, other things held constant.
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow
cash to make required payments.
Common equity includes common stock and retained earnings, less accumulated
depreciation.
The retained earnings account as shown on the balance sheet shows the amount of cash that
is available for paying dividends.
If a firm reports a loss on its income statement, then the retained earnings account as shown
on the balance sheet will be negative.

Q uestion 12
Other things held constant, which of the following actions would increase the amount of cash on
a companys balance sheet?
Answer
The company repurchases common stock.
The company pays a dividend.
The company issues new common stock.
The company gives customers more time to pay their bills.
The company purchases a new piece of equipment.

Q uestion 13
For managerial purposes, i.e., making decisions regarding the firm's operations, the standard
financial statements as prepared by accountants under Generally Accepted Accounting Principles
(GAAP) are often modified and used to create alternative data and metrics that provide a
somewhat different picture of a firm's operations. Related to these modifications, which of the
following statements is CORRECT?
Answer
The standard statements make adjustments to reflect the effects of inflation on asset values,
and these adjustments are normally carried into any adjustment that managers make to the
standard statements.
The standard statements focus on accounting income for the entire corporation, not cash
flows, and the two can be quite different during any given accounting period. However, for
valuation purposes we need to discount cash flows, not accounting income. Moreover,
since many firms have a number of separate divisions, and since division managers should
be compensated on their divisions performance, not that of the entire firm, information that
focuses on the divisions is needed. These factors have led to the development of
information that is focused on cash flows and the operations of individual units.
The standard statements provide useful information on the firms individual operating units,
but management needs more information on the firms overall operations than the standard
statements provide.
The standard statements focus on cash flows, but managers are less concerned with cash
flows than with accounting income as defined by GAAP.
The best feature of standard statements is that, if they are prepared under GAAP, the data
are always consistent from firm to firm. Thus, under GAAP, there is no room for
accountants to adjust the results to make earnings look better.

Q uestion 14
Which of the following statements is CORRECT?
Answer
The primary difference between EVA and accounting net income is that when net income is
calculated, a deduction is made to account for the cost of common equity, whereas EVA

represents net income before deducting the cost of the equity capital the firm uses.
MVA gives us an idea about how much value a firms management has added during the last
year.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1-T) (Investor-supplied op. capital) x (A-T cost of capital).
EVA gives us an idea about how much value a firms management has added over the firms
life.

Q uestion 15
Which of the following statements is CORRECT?
Answer
One way to increase EVA is to achieve the same level of operating income but with more
investor-supplied capital.
If a firm reports positive net income, its EVA must also be positive.
One drawback of EVA as a performance measure is that it mistakenly assumes that equity
capital is free.
One way to increase EVA is to generate the same level of operating income but with less
investor-supplied capital.
Actions that increase reported net income will always increase net cash flow.

Q uestion 16
Which of the following statements is CORRECT?
Answer
If one firm has a higher debt ratio than another, we can be certain that the firm with the
higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount
of debt a firm uses.
A firms use of debt will have no effect on its profit margin on sales.
If two firms differ only in their use of debti.e., they have identical assets, sales, operating
costs, interest rates on their debt, and tax ratesbut one firm has a higher debt ratio, the
firm that uses more debt will have a lower profit margin on sales.
The debt ratio as it is generally calculated makes an adjustment for the use of assets leased
under operating leases, so the debt ratios of firms that lease different percentages of their
assets are still comparable.
If two firms differ only in their use of debti.e., they have identical assets, sales, operating
costs, and tax ratesbut one firm has a higher debt ratio, the firm that uses more debt will
have a higher profit margin on sales.

Q uestion 17

Safecos current assets total to $20 million versus $10 million of current liabilities, while Riscos
current assets are $10 million versus $20 million of current liabilities. Both firms would like to
window dress their end-of-year financial statements, and to do so they tentatively plan to
borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash
accounts. Which of the statements below best describes the results of these transactions?
Answer
The transactions would raise Safecos financial strength as measured by its current ratio but
lower Riscos current ratio.
The transactions would lower Safecos financial strength as measured by its current ratio but
raise Riscos current ratio.
The transaction would have no effect on the firm financial strength as measured by their
current ratios.
The transaction would lower both firm financial strength as measured by their current
ratios.
The transaction would improve both firms financial strength as measured by their current
ratios.

Q uestion 18
Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S),
return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt
ratio. Which of the following statements is CORRECT?
Answer
Company HD has a lower total assets turnover than Company LD.
Company HD has a lower equity multiplier than Company LD.
Company HD has a higher fixed assets turnover than Company B.
Company HD has a higher ROE than Company LD.
Company HD has a lower operating income (EBIT) than Company LD.

Q uestion 19
A firm wants to strengthen its financial position. Which of the following actions
would increase its current ratio?
Answer
Reduce the companys days sales outstanding to the industry average and use the resulting
cash savings to purchase plant and equipment.
Use cash to repurchase some of the companys own stock.
Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more
than one year.
Issue new stock and then use some of the proceeds to purchase additional inventory and
hold the remainder as cash.
Use cash to increase inventory holdings.

Question 20

HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates,
and EBIT. However, HD uses more debt than LD. Which of the following statements is
CORRECT?
Answer
Without more information, we cannot tell if HD or LD would have a higher or lower net
income.
HD would have the lower equity multiplier for use in the Du Pont equation.
HD would have to pay more in income taxes.
HD would have the lower net income as shown on the income statement.
HD would have the higher net income as shown on the income statement.

Q uestion 21
Companies E and P each reported the same earnings per share (EPS), but Company Es stock
trades at a higher price. Which of the following statements is CORRECT?
Answer
Company E probably has fewer growth opportunities.
Company E is probably judged by investors to be riskier.
Company E must have a higher market-to-book ratio.
Company E must pay a lower dividend.
Company E trades at a higher P/E ratio.

Question 22
Taggart Technologies is considering issuing new common stock and using the proceeds to reduce
its outstanding debt. The stock issue would have no effect on total assets, the interest rate
Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company
goes ahead with the stock issue?
Answer
The ROA will decline.
Taxable income will decrease.
The tax bill will increase.
Net income will decrease.
The times interest earned ratio will decrease.

Question 23
Which of the following statements is CORRECT?
Answer
If a security analyst saw that a firms days sales outstanding (DSO) was higher than the
industry average and was also increasing and trending still higher, this would be interpreted
as a sign of strength.
If a firm increases its sales while holding its accounts receivable constant, then, other things
held constant, its days sales outstanding (DSO) will increase.
There is no relationship between the days sales outstanding (DSO) and the average

collection period (ACP). These ratios measure entirely different things.
A reduction in accounts receivable would have no effect on the current ratio, but it would
lead to an increase in the quick ratio.
If a firm increases its sales while holding its accounts receivable constant, then, other things
held constant, its days sales outstanding will decline.

Q uestion 24
A firm wants to strengthen its financial position. Which of the following actions
would increase its quick ratio?
Answer
Offer price reductions along with generous credit terms that would (1) enable the firm to
sell some of its excess inventory and (2)lead to an increase in accounts receivable.
Issue new common stock and use the proceeds to increase inventories.
Speed up the collection of receivables and use the cash generated to increase inventories.
Use some of its cash to purchase additional inventories.
Issue new common stock and use the proceeds to acquire additional fixed assets.

Q uestion 25
Which of the following statements is CORRECT?
Answer
If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the
same.
If Firms X and Y have the same net income, number of shares outstanding, and price per
share, then their P/E ratios must also be the same.
If Firms X and Y have the same earnings per share and market-to-book ratio, they must
have the same price earnings ratio.
If Firm Xs P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be
expected to grow at a faster rate.
If Firms X and Y have the same net income, number of shares outstanding, and price per
share, then their market-to-book ratios must also be the same.

Q uestion 26
Which of the following statements is CORRECT?
Answer
Suppose a firms total assets turnover ratio falls from 1.0 to 0.9, but at the same time its
profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.
Under these conditions, the ROE will increase.
Suppose a firms total assets turnover ratio falls from 1.0 to 0.9, but at the same time its
profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.

Without additional information, we cannot tell what will happen to the ROE.
The modified Du Pont equation provides information about how operations affect the ROE,
but the equation does not include the effects of debt on the ROE.
Other things held constant, an increase in the debt ratio will result in an increase in the profit
margin on sales.
Suppose a firms total assets turnover ratio falls from 1.0 to 0.9, but at the same time its
profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%.
Under these conditions, the ROE will decrease.

Q uestion 27
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager
(i.e., grading the manager), which of the following situations would be likely to cause the
manager to receive a better grade? In all cases, assume that other things are held constant.
Answer
The divisions basic earning power ratio is above the average of other firms in its industry.
The divisions total assets turnover ratio is below the average for other firms in its industry.
The divisions debt ratio is above the average for other firms in the industry.
The divisions inventory turnover is 6, whereas the average for its competitors is 8.
The divisions DSO (days sales outstanding) is 40, whereas the average for its competitors
is 30.

Q uestion 28
Amram Companys current ratio is 1.9. Considered alone, which of the following actions
would reducethe companys current ratio?
Answer
Borrow using short-term notes payable and use the proceeds to reduce accruals.
Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
Use cash to reduce accruals.
Use cash to reduce short-term notes payable.
Use cash to reduce accounts payable.

Q uestion 29
If a bank loan officer were considering a companys request for a loan, which of the following
statements would you consider to be CORRECT?
Answer
The lower the companys EBITDA coverage ratio, other things held constant, the lower the
interest rate the bank would charge the firm.
Other things held constant, the higher the debt ratio, the lower the interest rate the bank
would charge the firm.
Other things held constant, the lower the debt ratio, the lower the interest rate the bank
would charge the firm.

The lower the companys TIE ratio, other things held constant, the lower the interest rate the
bank would charge the firm.
Other things held constant, the lower the current ratio, the lower the interest rate the bank
would charge the firm.

Q uestion 30
Which of the following statements is CORRECT?
Answer
The use of debt financing will tend to lower the basic earning power ratio, other things held
constant.
A firm that employs financial leverage will have a higher equity multiplier than an
otherwise identical firm that has no debt in its capital structure.
If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in
the way they are financed, the firm with less debt will generally have the higher expected
ROE.
Holding bonds is better than holding stock for investors because income from bonds is
taxed on a more favorable basis than income from stock.
All else equal, increasing the debt ratio will increase the ROA.

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