1 - JustAnswer
1. A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today. What would a financial analyst be most justified in concluding?
|a. |The firm's fixed assets turnover probably has improved. |
|b. |The firm's liquidity position probably has improved. |
|c. |The firm's stock price probably has increased. |
|d. |Each of the above is likely to have occurred. |
|e. |The analyst would be unable to draw any conclusions from this information. |
2. Which of the following actions will cause an increase in the quick ratio in the short run?
|a. |$1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the |
| |amount of profit of the sale, which is added to retained earnings. |
|b. |A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 |
| |percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.) |
|c. |Marketable securities are sold at cost. |
|d. |All of the above. |
|e. |Answers a and b above. |
3. Which of the following statements is correct?
|a. |In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced. |
|b. |If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way|
| |ratio is calculated, other things held constant. |
|c. |During a recession, it is reasonable to think that most companies inventory turnover ratios will change while their |
| |fixed asset turnover ratio will remain fairly constant. |
|d. |During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will |
| |probably decline. |
|e. |Each of the above statements is false. |
4. As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer?
|Current | | | |Debt |
|ratio | |TIE | |ratio |
|a. |0.5 0.5 0.33 |
|b. |1.0 1.0 0.50 |
|c. |1.5 1.5 0.50 |
|d. |2.0 1.0 0.67 |
|e. |2.5 0.5 0.71 |
5. Which of the following statements about ratio analysis is incorrect?
|a. |Classifying a large, well-diversified firm into a single industry often is difficult because many of the firm’s |
| |divisions are involved with different products from different industries. |
|b. |As a rule of thumb, it is safe to conclude that any firm with a current ratio greater than 1.0 should be able to meet |
| |its current obligations—that is, pay bills that come due in the current period. [Current ratio = (Current assets) / |
| |(Current liabilities)] |
|c. |Sometimes firms attempt to use “window dressing” techniques to make their financial statements look better than they |
| |actually are in the current period. |
|d. |Computing the values of the ratios is fairly simple; the toughest and most important part of ratio analysis is |
| |interpretation of the values derived from the computations. |
|e. |General conclusions about a firm should not be made by examining one or a few ratios—ratio analysis should be |
| |comprehensive. |
Not 100% sure about number 5
6. Yesterday, Bicksler Corporation purchased (and received) raw materials on credit from its supplier. All else equal, if Bicksler’s current ratio was 2.0 before the purchase, what effect did this transaction have on Bicksler’s current ratio?
|a. |Increased |
|b. |Decreased |
|c. |stayed the same |
|d. |There is not enough information to answer this question. |
|e. |None of the above is a correct answer. |
7. Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that
|a. |the value of current assets is equal to the value of inventory. |
|b. |the value of current assets is equal to the value of current liabilities. |
|c. |the value of current liabilities is equal to the value of inventory. |
|d. |All of the above. |
|e. |None of the above. |
8. Which of the following statements is most correct?
|a. |firms with relatively low debt ratios have higher expected returns when the business is good. |
|b. |firms with relatively low debt ratios are exposed to risk of loss when the business is poor. |
|c. |firms with relatively high debt ratios have higher expected returns when the business is bad. |
|d. |firms with relatively high debt ratios have higher expected returns when the business is good. |
|e. |none of the above. |
9. All other things constant, an increase in a firm’s profit margin would
|a. |increase the additional funds needed for financing a growth in operations. |
|b. |decrease the additional funds needed for financing a growth in operations. |
|c. |have no effect on the additional funds needed for financing a growth in operations. |
|d. |decrease its taxes. |
|e. |none of the above. |
10. Which of the following statements is correct?
|a. |If Company A has a higher debt ratio that Company B, then we can be sure that A will have a lower times-interest-earned |
| |ratio than B. |
|b. |Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and |
| |assets. However, Company A used more debt than Company B; that is, Company A has a higher debt ratio. Under these |
| |conditions, we would expect B's profit margin to be higher than A's. |
|c. |The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must |
| |exceed the company's ROA. |
|d. |Statements a, b, and c are all true. |
|e. |Statements a, b, and c are all false. |
11. Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
|a. |The transactions will have no effect on the current ratios. |
|b. |The current ratios of both firms will be increased. |
|c. |The current ratios of both firms will be decreased. |
|d. |Only Pepsi Corporation's current ratio will be increased. |
|e. |Only Coke Company's current ratio will be increased. |
12. The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax income of $15,000, and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock, prior to taking the company public. A similar firm which is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock.
|a. |$10.00 |
|b. |$7.50 |
|c. |$5.00 |
|d. |$2.50 |
|e. |$1.50 |
13. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%?
|a. |12 years |
|b. |15 years |
|c. |18 years (chapter 4assignment) |
|d. |20 years |
|e. |23 years |
| | |
| | |
14. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?
|a. |0.25% |
|b. |0.50% |
|c. |0.70% |
|d. |1.00% |
|e. |1.25% |
15. Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually. If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20?
|a. |$52,821.19 |
|b. |$57,900.83 |
|c. |$58,988.19 |
|d. |$62,527.47 |
|e. |$64,131.50 |
16. Assume you are to receive a 20-year annuity with annual payments of $50. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20. You will invest each payment in an account that pays 10 percent. What will be the value in your account at the end of Year 30?
|a. |$6,354.81 |
|b. |$7,427.83 |
|c. |$7,922.33 |
|d. |$8,591.00 |
|e. |$6,752.46 |
17. Which of the following statements is most correct?
|a. |If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate. |
|b. |If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. |
|c. |If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for |
| |the same price regardless of the bond's coupon rate. |
|d. |Answers b and c are both correct. |
|e. |None of the above answers are correct. |
18. Which of the following statements is most correct?
|a. |All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it will |
| |on the prices of short-term bonds. |
|b. |All else equal, and increase in interest rate will have a greater effect on higher-coupon bonds than it will have on |
| |lower-coupon bonds. |
|c. |An increase in interest rates will have a greater effect on a zero-coupon bond with 10 years maturity than it will have |
| |on a 9-year bond with a 10 percent annual coupon. |
|d. |All of the above are correct. |
|e. |Answers a and c are both correct. |
| | |
19. Which of the following statements is correct?
|a. |A 10-year bond would have more interest rate price risk than a 5-year bond, but all 10-year bonds have the same interest|
| |rate price risk. |
|b. |A 10-year bond would have more reinvestment rate risk than a 5-year bond, but all 10-year bonds have the same |
| |reinvestment rate risk. |
|c. |If their maturities were the same, a 5 percent coupon bond would have more interest rate price risk than a 10 percent |
| |coupon bond. |
|d. |If their maturities were the same, a 5 percent coupon bond would have less interest rate price risk than a 10 percent |
| |coupon bond. |
|e. |Zero-coupon bonds have more interest rate price risk than any other type bond, even perpetuities. |
20. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months. If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it?
|a. |$1,122.87 |
|b. |$1,003.42 |
|c. |$875.38 |
|d. |$950.75 |
|e. |$812.15 |
21. A share of preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is your simple (not effective) annual rate of return?
|a. |10% |
|b. |8% |
|c. |6% |
|d. |12% |
|e. |14% |
22. The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock?
|a. |$44.00 |
|b. |$38.50 |
|c. |$40.00 |
|d. |$45.69 |
|e. |$50.00 |
23. Which of the following statements is false?
|a. |The NPV will be positive if the IRR is less than the required rate of return. |
|b. |If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable|
| |by the IRR method. |
|c. |When IRR = k (the required rate of return), NPV = 0. |
|d. |The IRR can be positive even if the NPV is negative. |
|e. |The NPV method is not affected by the multiple IRR problem. |
24. Assume that you are comparing two mutually exclusive projects. Which of the following statements is most correct?
|a. |The NPV and IRR rules will always lead to the same decision unless one or both of the projects are "non-conventional" in|
| |the sense of having only one change of sign in the cash flow stream, i.e., one or more initial cash outflows (the |
| |investment) followed by a series of cash inflows. |
|b. |If a conflict exists between the NPV and the IRR, the conflict can always be eliminated by dropping the IRR and |
| |replacing it with the payback period. |
|c. |There will be a meaningful (as opposed to irrelevant) conflict only if the projects' NPV profiles cross, and even then, |
| |only if the required rate of return is to the left of (or lower than) the discount rate at which the crossover occurs. |
|d. |Statements a, b, and c are all true. |
|e. |None of the above is a correct statement. |
25. Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?
|a. |The NPV and IRR methods will select the same project if the required rate of return is greater than 10 percent; for |
| |example, 18 percent. |
|b. |The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 |
| |percent. |
|c. |To determine if a ranking conflict will occur between the two projects the required rate of return is needed as well as |
| |an additional piece of information. |
|d. |Project L should be selected at any required rate of return, because it has a higher IRR. |
|e. |Project S should be selected at any required rate of return, because it has a higher IRR. |
26. The internal rate of return of a capital investment
|a. |Changes when the required rate of return changes. |
|b. |Is equal to the annual net cash flows divided by one half of the project's cost when the cash flows are an annuity. |
|c. |Must exceed the required rate of return in order for the firm to accept the investment. |
|d. |Is similar to the yield to maturity bond. |
|e. |Answers c and d are both correct. |
27. Which of the following statements is correct?
|a. |In general, the NPVs of riskier cash flows should be found using relatively high discount rates. However, if a cash flow|
| |is negative, it should be evaluated using a low discount rate. |
|b. |If a project has only costs (no revenues) as would certain environmental projects, then the project is likely to have |
| |two regular IRRs. |
|c. |If the NPV and IRR methods give conflicting rankings for two mutually exclusive projects, the payback period should be |
| |used to choose the project that should be purchased. |
|d. |It is better to use the NPV method to evaluate independent projects, but for mutually exclusive projects, especially if |
| |projects vary greatly in size, the IRR method is better. |
|e. |None of the above is a correct statement. |
28. Two firms evaluated the same capital budgeting project to determine whether to purchase it. The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent, and she recommended that the project be purchased. The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that considers the time value of money. Given this information, which of the following statements is correct?
|a. |The net present value of the project must be positive for both firms. |
|b. |If the SSI's CFO computes the IRR for the project, he will find that it is less than 9 percent for his company. |
|c. |AWC's CFO must have used the traditional payback period method to evaluate the project. |
|d. |If the project is acceptable (unacceptable) to one firm, it must be acceptable (unacceptable) to both firms. As a |
| |result, one of the CFOs made a mistake when evaluating the project. |
|e. |SSI's must have a required rate of return that is greater than 9 percent. |
29. When Richard evaluated a capital budgeting project—a new machine needed to manufacture inventory—using his firm's required rate of return, he discovered that the project's net present value (NPV) is negative. Based on this information, which of the following must be correct?
|a. |The project's internal rate of return is also negative. |
|b. |The project's discounted payback period is greater than its economic life. |
|c. |As long as the new machine's initial investment outlay is fairly low, the firm should purchase if it is used to replace |
| |an older machine that is required to produce inventory. |
|d. |The project's traditional payback period must be greater than the maximum payback period that the firm has established. |
|e. |Two or more of these scenarios must be correct. |
30. Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics:
| |Cash Flows |
|Year |Project Q |Project R |
|0 |$(4,000) |$(4,000) |
|1 |0 |3,500 |
|2 |5,000 |1,100 |
| | | |
|IRR |11.8% |12.0% |
If the firm's required rate of return (k) is 10 percent, which project should be purchased?
|a. |Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return. |
|b. |Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return. |
|c. |Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV. |
|d. |Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV. |
|e. |None of the above is a correct answer. |
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