Financial Statement Analysis
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1. Economic theory teaches that difference in market returns must relate to differences in which of the following?
a. Book value
b. Perceived risk
c. Price-earnings ratio
d. Bankruptcy risk
2. Market equity beta measures the covariability of a firm's returns with the returns of which of the following?
a. All industry competitors in the market
b. Risk free securities
c. All securities in the market
d. All firm of comparable market value
3. The fictional Molitor Company currently has a current ration of 1.1. The company decides to borrow $1,000, 000 from the fictional City National Bank for a period six months. What will Molitor's current ratio be after the borrowing?
a. Greater than 1.1
b. 1.1
c. Less than 1.1
d. Unable to determine without more information
4. One common problem with current ratio is that it is susceptible to "window dressing." If, before the end of the accounting period, the fictional streetwise company has a current ratio of 1.5 and management wishes to boost its current ratio, what might it decide to do?
a. Pay off accounts payable prior to year end.
b. Purchase more inventory on account
c. Purchase short-term investments with cash.
d. Purchase more inventory with cash.
5. The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?
a. Sales
b. Earnings
c. Positive cash flows
d. Income from continuing operations
6. Which of the following ratio is not measure of long-term solvency risk?
a. Debt/Equity
b. Interest coverage
c. Operating cash flows to current liabilities
d. Liabilities to assets
7. Univariate bankruptcy prediction models help indentify related to bankruptcy, but about which of the following items don't they provide information?
a. Specific ratios that are important
b. The amount of Type ! and Type II errors
c. Which specific company will go bankrupt
d. The relative importance of individual financial statement ratios
8. Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk. Which of the following is not one of the factors?
a. Investment factors
b. Financing factors
c. Operating factors
d. Credit factors
9. Which of the following is not one of the three explanatory variables that determines a firms market beta?
a. Degree of investing leverage
b. Degree of operating leverage
c. Degree of financial leverage
d. Variability of sales
10. You calculate the following from the fictional Midas Company's financial statements:
Day in Receivables = 43
Days in Payables = 38
Days in inventory = ?
How many days of working capital financing does Midas need to obtain from other sources?
a. 112 days
b. 36 days
c. 56 days
d. 26 days
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