Financial Management | Chapter 3 | Part 1 | MBA MCQs | FM

Finacial Management MCQs

  

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1. Which of the following statements (in general) is correct?
   1.   The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
   2.   An increase in net profit margin with no change in sales or assets means a weaker ROI.
   3.   The higher the tax rate for a firm, the lower the interest coverage ratio
   4.   A low receivables turnover is desirable.
2. A company can improve (lower) its debt-to-total asset ratio by doing which of the following?
   1.   Sell common stock.
   2.   Shift long-term to short-term debt.
   3.   Borrow more.
   4.   Shift short-term to long-term debt.
3. Which group of ratios measure a firm's ability to meet short-term obligations?
   1.   Debt ratios.
   2.   Liquidity ratios.
   3.   Activity ratios.
   4.   Coverage ratios.
   5.   Profitability ratios.
4. Which of the following would not improve the current ratio?
   1.   Sell common stock to reduce current liabilities.
   2.   Sell fixed assets to reduce accounts payable.
   3.   Borrow short term to finance additional fixed assets.
   4.   Issue long-term debt to buy inventory.
5. Which of the following statements is most accurate?
   1.   Receivable- and inventory-based activity ratios also shed light on the "liquidity" of these current assets.
   2.   Receivable- and inventory-based activity ratios also shed light on the firm's use of financial leverage.
   3.   Coverage ratios also shed light on the "liquidity" of these current ratios.
   4.   Liquidity ratios also shed light on the firm's use of financial leverage
6. DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = __________
   1.   Total asset turnover × Gross profit margin × Equity multiplier
   2.   Net profit margin × Total asset turnover × Equity multiplier
   3.   Total asset turnover × Net profit margin
   4.   Total asset turnover × Gross profit margin × Debt ratio
7. Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-equity ratio?
   1.   .333
   2.   .2
   3.   .77
   4.   .667
8. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?
   1.   $480,000
   2.   $300,000
   3.   $3,750,000
   4.   $1,500,000
9. In conducting a common-size analysis every balance sheet item is divided by __________ and every income statement is divided by __________.
   1.   total assets; net sales or revenues
   2.   its corresponding base year balance sheet item; its corresponding base year income statement item
   3.   its corresponding base year income statement item; its corresponding base year balance sheet item
   4.   net sales or revenues; total assets.
10. Which group of ratios relate profits to sales and investment?
    1.   Profitability ratios.
    2.   Coverage ratios.
    3.   Activity ratios.
    4.   Liquidity ratios.
11. Which of the following statements is most correct regarding the current ratio for a firm that uses industry averages and a peer benchmark as their comparison
    1.   Firms should strive to maintain a current ratio that seems reasonable when compared to an industry average and a peer benchmark.
    2.   Firms should attempt to maintain a current ratio that is below 0.5.
    3.   Firms should strive to maintain a current ratio of at least 2.0.
    4.   Firms should always exceed both the industry average and the peer benchmark current ratio.
12. Which group of ratios relate the financial charges of a firm to its ability to service them
    1.   Liquidity ratios.
    2.   Profitability ratios.
    3.   Activity ratios.
    4.   Coverage ratios.
13. Which of the following statements is the least likely to be correct?
    1.   Financial ratios are relevant for making internal comparisons.
    2.   There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm.
    3.   A firm that has a high degree of business risk is less likely to want to incur financial risk.
    4.   It is important to make external comparisons or financial ratios.
14. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if __________.
    1.   the U.S. Congress increased the tax rate
    2.   cost of goods sold increased relative to sales
    3.   dividends were decreased
    4.   sales increased relative to expenses
15. Sales for 1991 (base year) were $800,000 and the year-end total asset turnover ratio was 1.6. With which of the following statements would you agree?
    1.   The total assets index analysis value, assuming $1.05 million of assets at the end of 2000, would be 210.
    2.   index analysis supplements the common-size analysis by comparing key industry ratios.
    3.   If total debt in 2000 was $420,000, the debt-to-equity ratio in 2000 would be 84%.
    4.   The gross profit margin and the net profit margin are examples of balance sheet ratios.
16. The authors place financial ratios into __________.
    1.   two broad categories: (1) balance sheet ratios; and (2) income statement ratios
    2.   three broad categories: (1) balance sheet ratios; (2) income statement ratios; and (3) income statement/balance sheet ratios
    3.   two broad categories: (1) balance sheet ratios; (2) income statement and income statement/balance sheet ratios
    4.   two broad categories: (1) balance sheet and income statement/balance sheet ratios; and (2) income statement ratios
17. Determine a firm's total asset turnover (TAT) if its net profit margin is 5 percent, assets are $8 million, and ROI is 8 percent.
    1.   2.05
    2.   2.50
    3.   4.00
    4.   1.60
18. Which group of ratios measure how effectively the firm is using its assets?
    1.   Liquidity ratios.
    2.   Activity ratios.
    3.   Profitability ratios.
    4.   Coverage ratios.
19. Benchmarking can be applied to ratio analysis. How is this different from comparing a firm's ratios to industry averages over time?
    1.   It creates a benchmark that compares your firm to the best world-class competitors rather than an entire industry.
    2.   In benchmarking you compare your firm's performance to a previous "benchmarked" period and not industry averages.
    3.   It creates a benchmark of numerous industries for comparison purposes rather than a single industry due to wild fluctuations within specific industries.
    4.   It creates a benchmark of numerous industries for comparison purposes rather than a single industry due to wild fluctuations within specific industries.
20. In conducting an index analysis every balance sheet item is divided by __________ and every income statement is divided by __________.
    1.   its corresponding base year income statement item; its corresponding base year balance sheet item
    2.   total assets; net sales or revenues
    3.   net sales or revenues; total assets.
    4.   its corresponding base year balance sheet item; its corresponding base year income statement item