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Question 21 Which of the following statements is CORRECT?Answer If Firms X and Y have the same P/E ratios, then their marke...

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Question 21

  1.   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 X’s 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.                                                                                                                                              

2 points  

Question 22

  1.   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 firm’s use of debt will have no effect on its profit margin on sales.

 

 

If two firms differ only in their use of debt—i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates—but 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 debt—i.e., they have identical assets, sales, operating costs, and tax rates—but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.                                                                                                                         

2 points  

Question 23

  1.   Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.  This action had no effect on the company’s total assets or operating income.  Which of the following effects would occur as a result of this action?Answer

 

 

The company’s current ratio increased.

 

 

The company’s times interest earned ratio decreased.

 

 

The company’s basic earning power ratio increased.

 

 

The company’s equity multiplier increased.

 

 

The company’s debt ratio increased.                                                                                                                                                   

2 points  

Question 24

  1.   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.                                                                                                        

2 points  

Question 25

  1.   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?Answer

 

 

Company HD pays less in taxes.

 

 

Company HD has a lower equity multiplier.

 

 

Company HD has a higher ROA.

 

 

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

 

 

Company HD has more net income.                                                                                                                                                        

2 points  

Question 26

  1.   Which of the following statements is CORRECT?Answer

 

 

A reduction in inventories held would have no effect on the current ratio.

 

 

An increase in inventories would have no effect on the current ratio.

 

 

If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

 

 

A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

 

 

If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.

2 points  

Question 27

  1.   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.    

2 points  

Question 28

  1.   Which of the following statements is CORRECT?Answer

 

 

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.

 

 

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.

 

 

Other things held constant, the higher a firm’s expected future growth rate, the lower its P/E ratio is likely to be.

 

 

The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).

 

 

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.

2 points  

Question 29

  1.   Considered alone, which of the following would increase a company’s current ratio?Answer

 

 

An increase in net fixed assets.

 

 

An increase in accrued liabilities.

 

 

An increase in notes payable.

 

 

An increase in accounts receivable.

 

 

An increase in accounts payable.    

2 points  

Question 30

  1.   A firm wants to strengthen its financial position.  Which of the following actions would increase its current ratio?Answer

 

 

Reduce the company’s 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 company’s 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.

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