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

A) True
B) False

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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%

F) D) and E)
G) A) and D)

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is the firm's current ratio?


A) 0.97
B) 1.08
C) 1.20
D) 1.33
E) 1.47

F) A) and B)
G) B) and E)

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Companies HD and LD are both profitable, and they have the same total assets However, Company HD has the higher debt ratio.Which of the following statements is CORRECT?


A) Company HD has a lower total assets turnover than Company LD.
B) Company HD has a lower equity multiplier than Company LD.
C) Company HD has a higher fixed assets turnover than Company B.
D) Company HD has a higher ROE than Company LD.
E) Company HD has a lower operating income (EBIT) than Company LD.

F) None of the above
G) B) and C)

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current ratio and inventory turnover ratios both help us measure the firm's liquidity.The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

A) True
B) False

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firm wants to strengthen its financial position.Which of the following actions would increase its quick ratio?


A) Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
B) Issue new common stock and use the proceeds to increase inventories.
C) Speed up the collection of receivables and use the cash generated to increase inventories.
D) Use some of its cash to purchase additional inventories.
E) Issue new common stock and use the proceeds to acquire additional fixed assets.

F) All of the above
G) B) and E)

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basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

A) True
B) False

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Which of the following statements is CORRECT?


A) Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."
B) Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
C) Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing."
D) Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
E) "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.

F) A) and B)
G) A) and C)

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observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average.Which of the following statements is CORRECT?


A) Its total assets turnover must be above the industry average.
B) Its return on assets must equal the industry average.
C) Its TIE ratio must be below the industry average.
D) Its total assets turnover must be below the industry average.
E) Its total assets turnover must equal the industry average.

F) C) and D)
G) A) and B)

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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%

F) A) and C)
G) A) and D)

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new firm is developing its business plan.It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)


A) 47.33%
B) 49.82%
C) 52.45%
D) 55.21%
E) 58.11%

F) A) and B)
G) B) and C)

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Companies HD and LD have the same tax rate, sales, 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 has a lower equity multiplier.
B) Company HD has more net income.
C) Company HD pays more in taxes.
D) Company HD has a lower ROE.
E) Company HD has a lower times interest earned (TIE) ratio.

F) None of the above
G) A) and B)

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year Rosenberg Corp.had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%.Now suppose the new CFO convinces the president to increase the debt ratio to 48%.Sales and total assets will not be affected, but interest expenses would increase.However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.By how much would the change in the capital structure improve the ROE?


A) 4.36%
B) 4.57%
C) 4.80%
D) 5.04%
E) 5.30%

F) A) and D)
G) A) and C)

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Companies E and P each reported the same earnings per share (EPS) , but Company E's stock trades at a higher price.Which of the following statements is CORRECT?


A) Company E probably has fewer growth opportunities.
B) Company E is probably judged by investors to be riskier.
C) Company E must have a higher market-to-book ratio.
D) Company E must pay a lower dividend.
E) Company E trades at a higher P/E ratio.

F) A) and E)
G) C) and E)

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Which of the following statements is CORRECT?


A) The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
B) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
C) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
D) An increase in the DSO, other things held constant, could be expected to increase the ROE.
E) An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.

F) B) and E)
G) A) and E)

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


A) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B) Use cash to repurchase some of the company's own stock.
C) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E) Use cash to increase inventory holdings.

F) A) and E)
G) A) and D)

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Considered alone, which of the following would increase a company's current ratio?


A) An increase in net fixed assets.
B) An increase in accrued liabilities.
C) An increase in notes payable.
D) An increase in accounts receivable.
E) An increase in accounts payable.

F) None of the above
G) A) and B)

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year Altman Corp.had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%.The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500.Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio.By how much would the reduction in assets improve the ROE?


A) 4.69%
B) 4.93%
C) 5.19%
D) 5.45%
E) 5.73%

F) C) and D)
G) None of the above

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is the firm's market-to-book ratio?


A) 0.56
B) 0.66
C) 0.78
D) 0.92
E) 1.08

F) B) and D)
G) B) and E)

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is the firm's ROA?


A) 2.70%
B) 2.97%
C) 3.26%
D) 3.59%
E) 3.95%

F) D) and E)
G) A) and C)

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