True-False


1. Although a full liquidity analysis
requires the use of a cash budget, the current and quick


ratios provide fast and easy-to-use
measures of a firm’s liquidity position.


a. True


b. False


2. High current and quick ratios always
indicate that a firm is managing its liquidity position


well.


a. True


b. False


3. The inventory turnover ratio and days
sales outstanding (DSO) are two ratios that are used


to assess how effectively a firm is
managing its assets.


a. True


b. False


4. Companies HD and LD have the same sales,
tax rate, interest rate on their debt, total assets,


and basic earning power. Both companies
have positive net incomes. Company HD


has a higher debt ratio and, therefore, a
higher interest expense. Which of the following


statements is CORRECT?


a. Company HD pays less in taxes.


b. Company HD has a lower equity
multiplier.


c. Company HD has a higher ROA.


d. Company HD has a higher times interest
earned (TIE) ratio.


e. Company HD has more net income.



5. Which of the following statements is
CORRECT?


a. If a firm has the highest price/earnings
ratio of any firm in its industry, then, other things


held constant, this suggests that the board
of directors should fire the president.


b. If a firm has the highest market/book
ratio of any firm in its industry, then, other things held


constant, this suggests that the board of
directors should fire the president.


c. Other things held constant, the higher a
firm’s expected future growth rate, the lower its P/E


ratio is likely to be.


d. The higher the market/book ratio, then,
other things held constant, the higher one would


expect to find the Market Value Added
(MVA).


e. If a firm has a history of high Economic
Value Added (EVA) numbers each year, and if investors


expect this situation to continue, then its
market/book ratio and MVA are both likely


to be below average.


6. Walter Industries’ current ratio is 0.5.
Considered alone, which of the following actions


would increase the company’s current ratio?


a. Borrow using short-term notes payable
and use the cash to increase inventories.


b. Use cash to reduce accruals.


c. Use cash to reduce accounts payable.


d. Use cash to reduce short-term notes
payable.


e. Use cash to reduce long-term bonds
outstanding.



7. Nikko Corp.’s total common equity at the
end of last year was $305,000 and its net income


after taxes was $60,000. What was its ROE?


a. 16.87%


b. 17.75%


c. 18.69%


d. 19.67%


e. 20.66%


8. Last year Urbana Corp. had $197,500 of
assets, $307,500 of sales, $19,575 of net income,


and a debt-to-total-assets ratio of 37.5%.
The new CFO believes a new computer program


will enable it to reduce costs and thus
raise net income to $33,000. Assets, sales, and the


debt ratio would not be affected. By how
much would the cost reduction improve the


ROE?


a. 9.32%


b. 9.82%


c. 10.33%


d. 10.88%


e. 11.42%



9. Last year Mason Inc. had a total assets
turnover of 1.33 and an equity multiplier of 1.75.


Its sales were $195,000 and its net income
was $10,549. The CFO believes that the company


could have operated more efficiently,
lowered its costs, and increased its net income by


$5,250 without changing its sales, assets,
or capital structure. Had it cut costs and increased


its net income in this amount, by how much
would the ROE have changed?


a. 5.66%


b. 5.95%


c. 6.27%


d. 6.58%


e. 6.91%


10. Bonner Corp.’s sales last year were
$415,000, and its year-end total assets were $355,000.


The average firm in the industry has a
total assets turnover ratio (TATO) of 2.4. Bonner’s


new CFO believes the firm has excess assets
that can be sold so as to bring the TATO


down to the industry average without
affecting sales. By how much must the assets be


reduced to bring the TATO to the industry
average, holding sales constant?


a. $164,330


b. $172,979


c. $182,083


d. $191,188


e. $200,747