Management's use of resources can best be evaluated by focusing on measures of:
D. Book Value
Answer: B. Activity
Leverage ratios show how deeply the company is in debt. Overall the leverage or solvency ratios indicate the relative size of the claims of long-term creditors, compared to the claims or property rights of owners. Hence the leverage ratios indicate the method of ...
The solution answers and explains a multiple choice question on financial ratios.
Multiple Choice Questions MBA Finance
1. Which of the following might be attributed to efficient inventory management?
a. High inventory turnover ratio.
b. Low incidence of production schedule disruptions.
c. High total assets turnover.
d. Statements a and c are correct.
e. All of the statements above are correct.
2. Which of the following statements is most correct?
a. The cash balances of most firms consist of transactions, compensating, and precautionary balances. The total desired cash balance can be determined by calculating the amount needed for each purpose and then summing them together.
b. The easier a firm's access to borrowed funds, the higher its precautionary balances will be in order to protect against sudden increases in interest rates.
c. For some firms holding highly liquid marketable securities is a substitute for holding cash, because the marketable securities accomplish the same objective as cash.
d. All companies hold the same amount of funds for a transaction balance.
e. None of the statements above is correct.
3. Variations in accounting methods among firms can invalidate financial comparisons between firms.
4. Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law.
5. The maturity matching or "self-liqidating" approach involves the financing of permanent net operating working capital with combinations of long-term capital and short-term capital depending on the level of interest rates. When short-term rates are high, short-term assets will be financed with long-term debt to reduce cost and risk.
6. Which of the following statement is most correct?
a. A cash management system which minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float.
b. A cash management system which maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float.
c. The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than theft losses saved, then the lockbox should be installed.
d. Other things held constant, a firm will need an identical line of credit if it can arrange to pay its bills by the 5th of each month than if its bills come due uniformly during the month.
e. The statement above are all false.
7. Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
a. The transactions will have no effect on the current ratios.
b. The current ratios of both firms will be increased.
c. The current ratios of both firms will be decreased.
d. Only Pepsi Corporation's current ratio will be increased.
e. Only Coke Company's current ratio will be increased.
8. Which of the following statements is most correct?
a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt financing.
b. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's stock price.
c. The capital structure that minimizes the firm's cost of capital is also the capital structure that maximizes the firm's earnings per share.
d. If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital.
e. Statements a and b are correct.
9. If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule, then why do firms take such actions?
a. It normally stimulates sales.
b. To meet competitive pressures.
c. To increase the firm's deferral period for payables.
d. Statements a and b are correct.
e. All of the statements above are correct.
10. Which of the following statements is most correct?
a. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
b. The smaller the synergistic benefits of a particular merger, the greater the incentive to bargain in negotiations, and the higher the probability that the merger will be completed.
c. Since mergers are frequently financed by debt more than equity, financial economies which imply a lower cost of debt or greater debt capacity are rarely a relevant rationale for mergers.
d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification such as more stable earnings. However, since shareholders are free to diversify their own holdings at lower cost, such a rationale is generally not a valid motive for publicly held firms.
e. All of the answers above are correct.