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1. Which of the following assets is most liquid?
A. Cash equivalents
B. Receivables
C. Inventories
D. Plant and equipment
Answer: A. Cash equivalents
2. Cost of goods sold refers to ___________.
A. direct costs attributable to producing the product sold by the firm
B. salaries, advertising, and selling expenses
C. payments to the firm's creditors
D. payments to federal and local governments
Answer: A. direct costs attributable to producing the product sold by the firm
3. Many observers believe that firms "manage" their income statements to _______.
A. minimize taxes over time
B. maximize expenditures
C. smooth their earnings over time
D. generate level sales
Answer: C. smooth their earnings over time
4. Depreciation expense is in what broad category of expenditures?
A. Operating expenses
B. General and administrative expenses
C. Debt interest expense
D. Tax expenditures
Answer: A. Operating expenses
5. Firm A acquires firm B when firm B has a book value of assets of $155 million and a book
value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This
purchase would result in goodwill for firm A equal to _____.
A. $175 million
B. $155 million
C. $120 million
D. $55 million
Answer: D. $55 million
Book value of B = $155 - $35 = $120
Firm A pays $175; Goodwill = $175 - $120 = $55
6. One of the biggest impediments to a global capital market has been _________.
A. volatile exchange rates
B. the lack of common accounting standards
C. lower disclosure standards in the United States than abroad
D. the lack of transparent reporting standards across the EU
Answer: B. the lack of common accounting standards
7. Benjamin Graham thought that the benefits from detailed analysis of a firm's financial
statements had _________ over his long professional life.
A. increased greatly
B. increased slightly
C. remained constant
D. decreased

Answer: D. decreased
8. If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.
A. decrease
B. increase
C. not change
D. change but in an indeterminable manner
Answer: A. decrease
9. Which of the following is not one of the three key financial statements available to
investors in publicly traded firms?
A. Income statement
B. Balance sheet
C. Statement of operating earnings
D. Statement of cash flows
Answer: C. Statement of operating earnings
10. In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and
made dividend payments of $894 million. Other financing activities raised $196 million, and
Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the
long-term debt accounts of Hewlett-Packard change?
A. Increased $138 million
B. Decreased $138 million
C. Increased $836 million
D. Decreased $836 million
Answer: B. Decreased $138 million
HP cash flow from financing: -$5,241 - $894 + $196 + x = -$6,077; x = -$138
11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?
A. $5
B. $28
C. $30
D. $33
Answer: D. $33
Cash flow from financing = $50 - $45 - $117 + $145 = $33
12.

Based on the cash flow data in the table for Interceptors Inc., which of the following
statements is (are) correct?
I. This firm appears to be a good investment because of its steady growth in cash.

II. This firm has been able to generate growing cash flows only by borrowing or selling equity
to offset declining operating cash flows.
III. Financing activities have been increasingly important for this firm's operations, at least in
the short run.
A. I only
B. II and III only
C. II only
D. I and II only
Answer: B. II and III only
13. Common-size balance sheets are prepared by dividing all quantities by ____________.
A. total assets
B. total liabilities
C. shareholders' equity
D. fixed assets
Answer: A. total assets
14. Operating ROA is calculated as __________, while ROE is calculated as _________.
A. EBIT/Total assets; Net profit/Total assets
B. Net profit/Total assets; EBIT/Total assets
C. EBIT/Total assets; Net profit/Equity
D. Net profit/EBIT; Sales/Total assets
Answer: C. EBIT/Total assets; Net profit/Equity
15. A firm increases its financial leverage when its ROA is greater than the cost of debt.
Everything else equal, this change will probably increase the firm's:
I. Beta
II. Earnings variability over the business cycle
III. ROE
IV. Stock price
A. I and II only
B. III and IV only
C. I, III, and IV only
D. I, II, and III only
Answer: D. I, II, and III only
16. The highest possible value for the interest-burden ratio is ______, and this occurs when
the firm _________.
A. 0; uses as much debt as possible
B. 1; uses debt to the point where ROA = interest cost of debt
C. 1; uses no interest-bearing debt
D. -1; pays down its existing debts
Answer: C. 1; uses no interest-bearing debt
17. Which one of the following ratios is used to calculate the times-interest-earned ratio?
A. Net profit/Interest expense
B. Pretax profit/EBIT
C. EBIT/Sales
D. EBIT/Interest expense
Answer: D. EBIT/Interest expense

18. The process of decomposing ROE into a series of component ratios is called
______________.
A. DuPont analysis
B. technical analysis
C. comparative analysis
D. liquidity analysis
Answer: A. DuPont analysis
19. Which of the following is not a ratio used in the DuPont analysis?
A. Interest burden
B. Profit margin
C. Asset turnover
D. Earnings yield ratio
Answer: D. Earnings yield ratio
20. By 2008, over 100 countries had adopted financial reporting standards that are in
conformance with ________.
A. GAAP
B. IFRS
C. FASB
D. GASB
Answer: B. IFRS
21. Operating ROA can be found as the product of ______.
A. Return on sales × ATO
B. Tax burden × Interest burden
C. Interest burden × Leverage ratio
D. ROE × Dividend payout ratio
Answer: A. Return on sales × ATO
22. A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.
A. 8.4
B. 11.9
C. 17.62
D. 47.6
Answer: B. 11.9
P/E = 2.38/.20 = 11.9
23. If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt
is the same as the operating ROA, then operating ROA will be _________.
A. greater than zero, but it is impossible to determine how operating ROA will compare to
ROE
B. equal to ROE
C. greater than ROE
D. less than ROE
Answer: C. greater than ROE
24. You find that a firm that uses debt has a compound leverage factor less than 1. This tells
you that ________.
A. the firm's use of financial leverage is positively contributing to ROE
B. the firm's use of financial leverage is negatively contributing to ROE
C. the firm's use of operating leverage is positively contributing to ROE

D. the firm's use of operating leverage is negatively contributing to ROE
Answer: B. the firm's use of financial leverage is negatively contributing to ROE
25. A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is
_________.
A. 2.88
B. 2
C. 1.75
D. .69
Answer: A. 2.88
P/B = 24(.12) = 2.88
26. A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.
A. 4%
B. 6%
C. 8%
D. 12%
Answer: C. 8%
ROE = ROA × Leverage = .08(1.5) = .12
27. A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a returnon-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's
ROE?
A. 12.4%
B. 14.5%
C. 16.6%
D. 17.8%
Answer: C. 16.6%
ROE = (.7)(1.3)(.8)(.10)(2.28) = 16.6%
28. Economic value added (EVA) is:
A. the difference between the return on assets and the opportunity cost of capital times the
capital base
B. ROA × ROE
C. a measure of the firm's abnormal return
D. largest for high-growth firms
Answer: A. the difference between the return on assets and the opportunity cost of capital
times the capital base
29. Which of the following statements is true concerning economic value added?
A. A growing number of firms tie managers' compensation to EVA.
B. A profitable firm will always have a positive EVA.
C. EVA recognizes that the cost of capital is not a real cost.
D. If a firm has positive present value of growth opportunities, it will have positive EVA.
Answer: A. A growing number of firms tie managers' compensation to EVA.
30. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's
current ratio for 2012 indicates that Flathead's liquidity has __________ since 2011.
A. risen
B. fallen
C. stayed the same
D. The answer cannot be determined from the information given.
Answer: B. fallen
CR2011 = $1,100,000/$700,000 = 1.571; CR2012 = $1,150,000/$800,000 = 1.438
31. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's
inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. 11.6
B. 10.2
C. 9.5
D. 7.7
Answer: A. 11.6

32. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's debtto-equity ratio for 2012 is _________.
A. 2.13
B. 2.44
C. 2.56
D. 2.89
Answer: C. 2.56
Debt-to-equity ratio = 2,3000,000/900,000 = 2.56
33. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's cash
flow from operating activities for 2012 was _______.
A. $810,000
B. $775,000
C. $755,000
D. $735,000
Answer: C. $755,000

34. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The industry
average ACP is 32 days. How is Flathead doing in its collections relative to the industry?
(Please keep in mind that when a ratio involves both income statement and balance sheet
numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)
A. Flathead's receivables are outstanding about 9 fewer days than the industry average.
B. Flathead's receivables are outstanding about 15 fewer days than the industry average.
C. Flathead's receivables are outstanding about 12 more days than the industry average.
D. Flathead's receivables are outstanding about 6 more days than the industry average.
Answer: A. Flathead's receivables are outstanding about 9 fewer days than the industry
average.
Average AR = ($600,000 + 570,000)/2 = $585,000
ACP - Average AR/Sales × 365 = $585,000/$9,300,000 × 365 = 22.9597
35. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total
asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. 3.56
B. 3.26
C. 3.14
D. 3.02
Answer: B. 3.26

36. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. In 2012 Flathead
generated ______ of EBIT for every dollar of sales.
A. $.075
B. $.086
C. $.092
D. $.099
Answer: B. $.086

37. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return
on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. 6.5%
B. 26.5%
C. 33.4%
D. 38%
Answer: B. 26.5%

38. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's P/E
ratio for 2012 is _________.
A. 3.39
B. 3.6
C. 13.33
D. 10.67
Answer: C. 13.33
P/E = 15/(225,000/200,000) = 13.33
39. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's
compound leverage ratio is __________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. 1.5
B. 2
C. 2.5
D. 3
Answer: C. 2.5
Compound leverage ratio = (Pretax profit/EBIT) × (Assets/Equity) Assets/Equity

40. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's current
ratio for 2012 is _________.
A. 1.3
B. 1.5
C. 1.69
D. 2.83
Answer: D. 2.83

41. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's quick
ratio for 2012 is _________.
A. 1.3
B. 1.5
C. 1.69
D. 2.83
Answer: B. 1.5
QR = (Cash + AR)/CL = ($90,000 + 810,000)/$600,000 = 1.5
42. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's leverage
ratio for 2012 is _________.
A. 1.3
B. 1.5
C. 1.69
D. 2.83
Answer: A. 1.3
Leverage ratio = Assets/Equity = $4,300,000/($500,000 + 2,800,000) = 1.3
43. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's timesinterest-earned ratio for 2012 is _________.
A. 2.8
B. 6
C. 9
D. 11.11
Answer: B. 6
TIE = 300,000/50,000 = 6
44. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixedasset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves
both income statement and balance sheet numbers, the balance sheet numbers for the
beginning and end of the year must be averaged.)
A. 2.8
B. 6
C. 9
D. 11.11
Answer: A. 2.8

45. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset
turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. 1.3
B. 1.5
C. 1.69
D. 2.83
Answer: C. 1.69

46. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's returnon-sales ratio for 2012 is _________.
A. .0409
B. .0429
C. .0475
D. .0753
Answer: B. .0429

47. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's returnon-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both
income statement and balance sheet numbers, the balance sheet numbers for the beginning
and end of the year must be averaged.)
A. .0409
B. .0429
C. .0462
D. .0923
Answer: C. .0462

48. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's P/E ratio
for 2012 is _________.
A. 2.8
B. 3.6
C. 6
D. 11.11
Answer: B. 3.6
P/E = 27/(150,000/20,000) = 3.6
49. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.
Refer to the financial statements of Burnaby Mountain Trading Company. The firm's marketto-book value for 2012 is _________.
A. .1708
B. .1529
C. .1462
D. .1636
Answer: D. .1636

50. A firm has a net profit/pretax profit ratio of .6, a leverage ratio of 1.5, a pretax profit/EBIT
of .7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its
ROE is _________.
A. 7.56%

B. 15.12%
C. 20.16%
D. 30.24%
Answer: B. 15.12%
ROE = .6(.7)(.06)(4)(1.5) = .1512
51. A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the
interest rate on its debt is 7%. Its ROE is _________.
A. 15.12%
B. 28.42%
C. 37.24%
D. 40.6%
Answer: B. 28.42%
52. The level of real income of a firm can be distorted by the reporting of depreciation and
interest expense. During periods of low inflation, the level of reported depreciation tends to
__________ income, and the level of interest expense reported tends to __________ income.
A. understate; overstate
B. understate; understate
C. overstate; understate
D. overstate; overstate
Answer: A. understate; overstate
53. If a firm's ratio of stockholders' equity/total assets is lower than the industry average and
its ratio of long-term debt/stockholders' equity is also lower than the industry average, this
would suggest that the firm _________.
A. has more current liabilities than the industry average
B. has more leased assets than the industry average
C. will be less profitable than the industry average
D. has more current assets than the industry average
Answer: A. has more current liabilities than the industry average
54. A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover
than the industry averages. You should not be surprised to find that this firm has:
I. Lower ATO than the industry average
II. Lower ROA than the industry average
III. Lower ROE than the industry average
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: D. I, II, and III
55. A high price-to-book ratio may indicate which one of the following?
A. The firm expanded its plant and equipment in the past few years.
B. The firm is doing a poorer job controlling its inventory expense than other related firms.
C. Investors may believe that this firm has opportunities for earning a rate of return in excess
of the market capitalization rate.
D. All of these options.

Answer: C. Investors may believe that this firm has opportunities for earning a rate of return
in excess of the market capitalization rate.
56. A firm has an ROE equal to the industry average, but its price-to-book ratio is below the
industry average. You know that the firm's _________.
A. earnings yield is above the industry average
B. P/E ratio is above the industry average
C. dividend payout ratio is too high
D. interest burden must be below the industry average
Answer: A. earnings yield is above the industry average
57. Use the following cash flow data of Haven Hardware for the year ended December 31,
2012.

What is the net cash provided by operating activities of Haven Hardware?
A. -$30,000
B. $220,000
C. $320,000
D. $780,000
Answer: B. $220,000

58. Use the following cash flow data of Haven Hardware for the year ended December 31,
2012.

What is the net cash provided by or used in investing activities of Haven Hardware?
A. -$12,000
B. -$62,000
C. $12,000
D. $164,000
Answer: A. -$12,000

59. Use the following cash flow data of Haven Hardware for the year ended December 31,
2012.

What is the net cash provided by or used in financing activities of Haven Hardware?
A. -$10,000
B. -$120,000
C. $10,000
D. $120,000
Answer: B. -$120,000

60. Use the following cash flow data of Haven Hardware for the year ended December 31,
2012.

What is the net increase or decrease in cash for Haven Hardware for 2012?
A. -$94,000
B. -$88,000
C. $88,000
D. $188,000
Answer: C. $88,000

61. Use the following cash flow data of Haven Hardware for the year ended December 31,
2012.

What is the cash at the end of 2012 for Haven Hardware?
A. $6,000
B. $94,000
C. $736,000
D. $188,000
Answer: D. $188,000

62. All of the following ratios are related to efficiency except _______.
A. total asset turnover
B. fixed-asset turnover
C. average collection period
D. cash ratio
Answer: D. cash ratio
63. Which of the following would result in a cash inflow under the heading "Cash flow from
investing" in the statement of cash flows?
A. Purchase of capital equipment
B. Payments to suppliers for inventory
C. Collections on receivables
D. Sale of production machinery
Answer: D. Sale of production machinery
64. When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash
growth generated from which of the following sources?
A. Cash flow from investment activities
B. Cash flow from operating activities
C. Cash flow from financing
D. Cash flow from extraordinary events
Answer: B. Cash flow from operating activities
65. The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of
15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the
economic value added (EVA) for ABS?
A. $8 million
B. -$6 million
C. $3 million
D. -$4 million
Answer: B. -$6 million
EVA = (ROA - k)(capital) = (.09 - .15)$100 million = -$6 million
66. Another term for EVA is ______.

A. net income
B. operating income
C. residual income
D. market-based income
Answer: C. residual income
67. Which of the following transactions will result in a decrease in cash flow from operations?
A. Increase in accounts receivable
B. Decrease in inventories
C. Decrease in taxes payable
D. Decrease in bonds outstanding
Answer: A. Increase in accounts receivable
68. Which of the following transactions will result in a decrease in cash flow from
investments?
A. Acquisition of another business
B. Capital gain from sale of a subsidiary
C. Decrease in net investments
D. Sale of equipment
Answer: A. Acquisition of another business
69. Which of the following will result in an increase in cash to the firm?
A. Dividends paid
B. A delay in collecting on accounts receivable
C. Net new investments
D. An increase in accounts payable
Answer: D. An increase in accounts payable
70. The table below shows some data for Key Biscuit Company:

What must have caused the firm's ROE to drop?
A. The firm began using more debt as a percentage of financing.
B. The firm began using less debt as a percentage of financing.
C. The compound leverage ratio was less than 1.
D. The operating ROA was declining.
Answer: C. The compound leverage ratio was less than 1.
Compound leverage ratio = (Interest burden)( Leverage ratio) < 1 each year and falling
71. A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit
purchases. An investment is made via the purchase of a new facility, and equity is issued in
the amount of $300 to pay for the purchase. What is the change in net cash provided by
operations?
A. $50 increase
B. $100 increase
C. $150 increase
D. $250 increase
Answer: A. $50 increase
Cash from operations = 150 - 100 = 50 increase

72. A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit
purchases. An investment is made via the purchase of a new facility, and equity is issued in
the amount of $200 to pay for the purchase. What is the change in net cash provided by
financing?
A. $20 increase
B. $80 increase
C. $100 increase
D. $200 increase
Answer: D. $200 increase
Cash from financing = Cash raised by equity financing = $200
73. A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit
purchases. An investment is made via the purchase of a new facility, and equity is issued in
the amount of $180 to pay for the purchase. What is the change in net cash provided by
investments?
A. $10 decrease
B. $90 decrease
C. $180 decrease
D. $190 decrease
Answer: C. $180 decrease
Cash flow from investments = Cash spent on investment = $(180)
74. The net income of the company is $120. Accounts payable increase by $20, depreciation
is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the
total change in cash for the firm for all activities?
A. Increase of $225
B. Increase of $130
C. Decrease of $195
D. Decrease of $110
Answer: A. Increase of $225
Free cash flow = 120 + 15 + 20 - 40 + 110 = 225
75. The term quality of earnings refers to ________.
A. how well reported earnings conform to GAAP
B. the realism and sustainability of reported earnings
C. whether actual earnings matched expected earnings
D. how well reported earnings fit a trend line of earnings growth
Answer: B. the realism and sustainability of reported earnings
76. The practice of "selling" large quantities of goods to customers in order to get quarterly
sales up while allowing these customers to return the goods next quarter is termed
_____________.
A. channel stuffing
B. clogging the network
C. spamming the johns
D. artificial sales
Answer: A. channel stuffing
77. What ratio will definitely increase when a firm increases its annual sales with no
corresponding increase in assets?
A. Asset turnover

B. Current ratio
C. Liquidity ratio
D. Quick ratio
Answer: A. Asset turnover
78. A firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its
asset turnover is 1.1. What is the firm's compound leverage factor?
A. .243
B. .267
C. .826
D. .972
Answer: D. .972
Compound leverage factor = 1.20 × .81 = .972
79. The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the
asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?
A. 1.58%
B. 5.68%
C. 12.2%
D. 13.33%
Answer: A. 1.58%
ROE = .4 × .65 × .05 × .90 × 1.35 = .0158
80. The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the
asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?
A. 1.88%
B. 6.68%
C. 12.15%
D. 17.02%
Answer: D. 17.02%
ROE = .5 × .55 × .25 × 1.5 × 1.65 = .1702
81. The major difference between IFRS and GAAP is that U.S. standards are ___________
and IFRS standards are _________.
A. strictly enforced; weakly enforced
B. rules-based; principles-based
C. evolutionary; devolutionary
D. based on government standards; based on corporate practice
Answer: B. rules-based; principles-based
82. The quick ratio is a measure of a firm's __________.
A. asset turnover
B. market valuation
C. liquidity
D. interest burden
Answer: C. liquidity
83. The firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and
its asset turnover is 1.25. What is the firm's ROA?
A. .25
B. .3
C. .335

D. .372
Answer: B. .3
ROA = Margin × Asset turnover = .24 × 1.25 = .3
84. A firm has a compound leverage factor greater than 1; this indicates that ______.
A. the firm has no interest payments
B. the firm uses less debt as a percentage of financing
C. the firm's interest payments are equal to the firm's pretax profits
D. the firm's debt has a positive contribution to the firm's ROA
Answer: D. the firm's debt has a positive contribution to the firm's ROA

Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422

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