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A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA?"

  1. 8.40%
  2. 10.90%
  3. 12.00%
  4. 13.30%
  5. 15.10%

Question 2           

Which of the following actions is consistent with social responsibility but is necessarily inconsistent with stockholder wealth maximization?

  1. "Investing in a smokestack ""scrubber"" to reduce the firm's air pollution as mandated by law."
  2. Voluntarily installing expensive machinery to treat effluent discharge which currently is being dumped into a river where it is ruining the drinking water of the community where the plant is located.
  3. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.
  4. Making a large corporate donation to the local community in order to fund a recreation complex that will be used by the community and the firm's employees.
  5. Each of the above actions is consistent with social responsibility and none are necessarily inconsistent with stockholder wealth maximization.

Question 3           

Which of the following statements is correct?

  1. "In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced."
  2. "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."
  3. "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."
  4. "During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline."
  5. Each of the above statements is false.

Question 4           

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) at a particular point in time?

  1. balance sheet
  2. income statement
  3. statement of retained earnings
  4. statement of cash flows
  5. proxy statement

Question 5           

"Compared to corporations, what is the primary disadvantage of partnerships as forms of business organizations?"

  1. The tax rates applied to partnership are higher than the tax rates applied to corporations.
  2. "Any dividends paid to the owners of a partnership business are taxed twice - once at the partnership level and once at the personal or individual level."
  3. Partnerships generally are much easier to form (start up) than corporations.
  4. Partnerships have unlimited lives whereas corporations do not.
  5. "The owners of a partnership - that is, the partners - have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability."

Question 6           

The average length of time required to convert a firm's receivables into cash is called the __________.

  1. cash conversion cycle
  2. inventory conversion period
  3. receivables collection period
  4. payables deferral period
  5. days sales outstanding

Question 7           

Which of the following groups probably would not be interested in the financial statement analysis of a firm?

  1. creditors
  2. management of the firm
  3. stockholders
  4. Internal Revenue Service
  5. All of the above would be interested in the financial statement analysis.

Question 8           

Which of the following statements is most correct?

  1. "An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales."
  2. "An increase in DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio."
  3. "An increase on the DSO, other things held constant, would generally lead to an increase in the ROE."
  4. "In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets."
  5. It is more important to adjust the Debt/Asset ratio than the inventory turnover ratio to account for seasonal fluctuations.

Question 9           

Net working capital is

  1. Current liabilities.
  2. Current assets.
  3. Current liabilities plus current assets.
  4. Current assets minus current liabilities.
  5. Current liabilities minus current assets.

Question 10         

Changes in balance sheet accounts are necessary for

  1. A typical ratio analysis.
  2. Pro forma balance sheet construction.
  3. Statement of cash flows construction.
  4. Profit and loss analysis.
  5. Pro forma income statement construction.


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