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Test Bank for Principles of Managerial Finance, Arab World Edition

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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 1 preview imageExamName___________________________________TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.1)Finance can be defined as the science and art of managing money.1)2)Financial services are concerned with the duties of the financial manager.2)3)Financial managers actively manage the financial affairs of many types of business-financial andnon-financial, private and public, for-profit and not-for-profit.3)4)A partnership is a business owned by two or more people and operated for profit.4)5)More businesses are organized as corporations than any other legal form. However, soleproprietorships are overwhelmingly dominant with respect to business receipts and net profits.5)6)The board of directors is responsible for managing day-to-day operations and carrying out thepolicies established by the chief executive officer.6)7)The sole proprietor has unlimited liability; his or her total investment in the business, but not his orher personal assets, can be taken to satisfy creditors.7)8)In limited partnerships, only one partner may assume limited liability. All other partners have tohave unlimited liability.8)9)The president or chief executive officer is elected by the firm's stockholders and has ultimateauthority to guide corporate affairs and make general policy.9)10)A financial analyst is responsible for maintaining and controlling the firm's daily cash balances.Frequently manages the firm's short-term investments and coordinates short-term borrowing andbanking relationships.10)11)The capital expenditures analyst/manager is responsible for the evaluation and recommendation ofproposed asset investments and may be involved in the financial aspects of implementation ofapproved investments.11)12)The financial analyst administers the firm's credit policy by analyzing or managing the evaluationof credit applications, extending credit, and monitoring and collecting accounts receivable.12)13)In large companies, the project finance manager is responsible for coordinating the assets andliabilities of the employees' pension fund.13)1
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 2 preview image
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 3 preview imageMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.14)Finance can be defined as14)A)the system of debits and credits.B)the art of merchandising products and services.C)the science of the production, distribution, and consumption of wealth.D)the art and science of managing money.15)________is concerned with the duties of the financial manager in the business firm.15)A)Managerial FinanceB)Financial ManagerC)Financial ServicesD)None of the above16)The part of finance concerned with design and delivery of advice and financial products toindividuals, business, and government is called16)A)Financial Services.B)Financial Manager.C)Managerial Finance.D)none of the above.17)Managerial finance17)A)involves the design and delivery of advice and financial products.B)devotes the majority of its attention to the collection and presentation of financial data.C)involves tasks such as budgeting, financial forecasting, cash management, and fundsprocurement.D)recognizes funds on an accrual basis.18)Financial service18)A)is concerned with the duties of the financial manager.B)handles accounting activities related to data processing.C)involves the design and delivery of advice and financial products.D)provides guidelines for the efficient operation of the business.19)Career opportunities in financial services include all of the following EXCEPT19)A)personal financial planning.B)capital expenditures management.C)investments.D)real estate and insurance.20)Which of the following is a career opportunity in managerial finance?20)A)Capital Expenditures Management.B)Personal Financial Planning.C)Real Estate and Insurance.D)Investment.21)The dominant form of organization with respect to receipts and net profits is the21)A)partnership.B)S-corporation.C)corporation.D)sole proprietorship.22)Which of the following has the legal powers of an individual?22)A)A corporation.B)A limited partnership.C)A partnership.D)A sole proprietorship.23)Which of the following has stockholders who elect a board of directors?23)A)Partnerships.B)Sole proprietorships.C)Limited partnership.D)Corporation.2
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 4 preview image24)The true owner(s) of the corporation is (are) the________.24)A)stockholdersB)creditorsC)board of directorsD)chief executive officer25)The________has/have the ultimate responsibility in guiding corporate affairs and carrying outpolicies.25)A)creditorsB)stockholdersC)board of directorsD)chief executive officer26)The responsibility for managing day-to-day operations and carrying out corporate policiesbelongs to the________.26)A)chief executive officerB)board of directorsC)stockholdersD)creditors27)In a corporation, the members of the board of directors are elected by the27)A)creditors.B)chief executive officer.C)stockholders.D)employees.28)More businesses are organized as ________ than any other legal form.28)A)partnerships.B)sole proprietorships.C)corporations.D)S-corporations.29)All of the following are key strengths of a corporation EXCEPT29)A)readily transferable ownership.B)access to capital markets.C)limited liability.D)low organization costs.30)Which of the following legal forms of organization is characterized by limited liability?30)A)Partnership.B)Corporation.C)Professional partnership.D)Sole proprietorship.31)The________is responsible for evaluating and recommending proposed asset investments.31)A)Capital Expenditures AnalystB)Financial AnalystC)Pension Fund ManagerD)Credit Analyst32)The ________ primarily prepares the firm's financial plans and budgets.32)A)Cash managersB)Project finance managerC)Financial analystD)Capital expenditures managersTRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.33)The size and importance of the managerial finance function depend on the size of the firm.33)34)The firm's controller (or chief accountant) typically handles the accounting activities, such as taxmanagement, corporate accounting, and cost and financial accounting.34)35)The corporate treasurer typically handles the both cost accounting and financial accounting.35)36)The corporate treasurer is the officer responsible for the firm's accounting activities, such ascorporate accounting, tax management, financial accounting, and cost accounting.36)3
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 5 preview image37)The corporate controller is the officer responsible for the firm's financial activities such as financialplanning and fund raising, making capital expenditure decisions, and managing cash, credit, thepension fund, and foreign exchange.37)38)The corporate treasurer's focus tends to be more external, while the controller's focus is moreinternal.38)39)Marginal cost-benefit analysis states that financial decisions should be made and actions takenonly when added benefits exceed added costs.39)40)The accrual method recognizes revenue at the point of sale and recognizes expenses whenincurred.40)41)Using certain standardized and generally accepted principles, the accountant prepares financialstatements that recognize revenue at the point of sale and expenses when incurred.41)42)The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.42)43)The financial manager prepares financial statements that recognize revenue at the point of sale andexpenses when incurred.43)44)The accountant evaluates financial statements, develops additional data, and makes decisionsbased on his or her assessment of the associated returns and risks.44)45)The financial manager must look beyond financial statements to obtain insight into developing orexisting problems since the accrual accounting data do not fully describe the circumstances of afirm.45)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.46)The controller is commonly responsible for46)A)managing credit activities.B)managing cash.C)financial accounting.D)financial planning.47)The treasurer is commonly responsible for47)A)taxes.B)data processing.C)cost accounting.D)making capital expenditure decisions.48)The officer responsible for the firm's accounting activities, such as corporate accounting, taxmanagement, financial accounting, and cost accounting is the48)A)treasurer.B)controller.C)foreign exchange manager.D)none of the above.49)The officer responsible for the firm's financial activities such as financial planning and fund raising,making capital expenditure decisions, and managing cash, credit, the pension fund, and foreignexchange is49)A)controller.B)foreign exchange manager.C)treasurer.D)none of the above.4
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 6 preview image50)The accountant's primary function is50)A)making decisions based on financial data.B)planning cash flows.C)evaluating the financial statements.D)the collection and presentation of financial data.51)The accountant recognizes revenues and expenses on51)A)a revenue basis.B)a cash basis.C)an expense basis.D)an accrual basis.52)Economic theories that the financial manager must be able to utilize for efficient businessoperations, include52)A)supply-and-demand analysis.B)price theory.C)profit-maximizing strategies.D)marginal analysis.E)all of the above.53)The primary economic principle used in managerial finance is53)A)the liquidity trap.B)supply and demand.C)the crowding out effect.D)marginal analysis.54)Marginal analysis states that financial decisions should be made and actions taken only when54)A)added benefits are greater than zero.B)demand equals supply.C)added benefits exceed added costs.D)benefits equal costs.55)The financial manager recognizes revenues and expenses utilizing55)A)the standardized, generally accepted, accounting principles.B)the accrual method.C)the revenue method.D)the actual inflows and outflows of cash.56)The financial manager is interested in the cash inflows and outflows of the firm, rather than theaccounting data, in order to ensure56)A)profitability.B)solvency.C)the ability to pay dividends.D)the ability to acquire new assets.57)The accountant may be responsible for any of the following EXCEPT57)A)analyzing the mix of current to fixed assets.B)preparing the monthly income statement.C)ensuring accounts payable are paid on time.D)processing purchase orders and invoices.58)Johnson, Inc. has just ended the calendar year making a sale in the amount of US$10,000 ofmerchandise purchased during the year at a total cost of US$7,000. Although the firm paid in fullfor the merchandise during the year, it has yet to collect at year end from the customer. The netprofit and cash flow from this sale for the year are58)A)US$7,000 and-US$3,000, respectively.B)US$3,000 and US$7,000, respectively.C)US$3,000 and US$10,000, respectively.D)US$3,000 and-US$7,000, respectively.5
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 7 preview image59)A firm has just ended its calendar year making a sale in the amount of US$150,000 of merchandisepurchased during the year at a total cost of US$112,500. Although the firm paid in full for themerchandise during the year, it has yet to collect at year end from the customer. The net profit andcash flow from this sale for the year are59)A)US$0 and US$150,000, respectively.B)US$37,500 and-US$112,500, respectively.C)US$37,500 and-US$150,000, respectively.D)US$150,000 and US$112,500, respectively.60)The primary emphasis of the financial manager is the use of60)A)cash flow.B)profit incentives.C)accrued earnings.D)organization charts.61)By concentrating on cash flows within the firm the financial manager should be able to61)A)avoid insolvency.B)control expenses.C)speak authoritatively to stockholders.D)prepare tax returns.62)A firm has just ended its calendar year making a sale in the amount of US$200,000 of merchandisepurchased during the year at a total cost of US$150,500. Although the firm paid in full for themerchandise during the year, it has yet to collect at year end from the customer. The possibleproblem this firm may face is62)A)low profitability.B)inability to receive credit.C)high leverage.D)lack of cash flow.TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.63)When considering each financial decision alternative or possible action in terms of its impact on theshare price of the firm's stock, financial managers should accept only those actions that areexpected to increase the firm's profitability.63)64)Financial analysis and planning is concerned with analyzing the mix of assets and liabilities.64)65)Financing decisions deal with the left-hand side of the firm's balance sheet and involve the mostappropriate mix of current and fixed assets.65)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.66)The key role of the financial manager is66)A)the presentation of financial statements.B)the collection of financial data.C)the preparation of data for future evaluation.D)decision making.67)The key activities of the financial manager include all of the following EXCEPT67)A)making financing decisions.B)making investment decisions.C)managing financial accounting.D)financial analysis and planning.6
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 8 preview image68)Included in the primary activities of the financial manager are68)A)analyzing and planning cash flows.B)making investment decisions.C)making financing decisions.D)financial analysis and planning.E)all of the above.69)The financial manager may be responsible for any of the following EXCEPT69)A)analyzing the effects of more debt on the firm's capital structure.B)monitoring of quarterly tax payments.C)determining whether to accept or reject a capital asset acquisition.D)analyzing budget and performance reports.70)Making investment decisions includes all of the following EXCEPT70)A)notes payable.B)accounts receivable.C)fixed assets.D)inventory.71)Making financing decisions includes all of the following EXCEPT71)A)analyzing quarterly budget and performance reports.B)deciding which individual long-term sources are best at a given point in time.C)determining the appropriate mix of short-term and long-term financing.D)deciding which individual short-term sources are best at a given point in time.72)The financial manager may be responsible for any of the following EXCEPT72)A)determining whether to accept or reject a capital asset acquisition.B)analyzing quarterly budget and performance reports.C)analyzing the effects of more debt on the firm's capital structure.D)keeping track of quarterly tax payments.73)Financial analysis and planning involve all of the following EXCEPT73)A)evaluating the need for increased or reduced productive capacity.B)controlling the data processing activities.C)transforming data into a form that can be used to monitor the firm's financial position.D)determining the additional financing needs.74)The financial manager's investment decisions determine74)A)both the mix and the type of short-term and long-term financing.B)both the mix and the type of assets found on the firm's balance sheet.C)both the mix and the type of assets and liabilities found on the firm's balance sheet.D)both the mix and the type of liabilities found on the firm's balance sheet.75)In planning and managing the requirements of the firm, the financial manager is concerned with75)A)the type of financing utilized, but not the mix and type of assets.B)the acquisition of fixed assets, allowing someone else to plan the level of current assetsrequired.C)the mix and type of assets, the type of financing utilized, and analysis in order to monitor thefinancial condition.D)the mix and type of assets, but not the type of financing utilized.7
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 9 preview image76)The financial manager's financing decisions determine76)A)both the mix and the type of assets and liabilities found on the firm's balance sheet.B)the proportion of the firm's earnings to be paid as dividend.C)both the mix and the type of assets found on the firm's balance sheet.D)the most appropriate mix of short-term and long-term financing.TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.77)To achieve the goal of profit maximization for each alternative being considered, the financialmanager would select the one that is expected to result in the highest monetary return.77)78)The wealth of corporate owners is measured by the share price of the stock.78)79)A high earnings per share (EPS) does not necessarily translate into a high stock price.79)80)The profit maximization goal ignores the timing of returns, does not directly consider cash flows,and ignores risk.80)81)When considering each financial decision alternative or possible action in terms of its impact on theshare price of the firm's stock, financial managers should accept only those actions that areexpected to maximize shareholder value.81)82)Dividend payments change directly with changes in earnings per share.82)83)Risk and the magnitude and timing of cash flows are the key determinants of share price, whichrepresents the wealth of the owners in the firm.83)84)High cash flow is generally associated with a higher share price whereas higher risk tends to resultin a lower share price.84)85)An increase in firm risk tends to result in a higher share price since the stockholder must becompensated for the greater risk.85)86)Stockholders expect to earn higher rates of return on investments of lower risk and lower rates ofreturn on investments of higher risk.86)87)The goal of ethics is to motivate business and market participants to adhere to both the letter andthe spirit of laws and regulations in all aspects of business and professional practice.87)88)Agents of corporate owners are themselves owners of the firm and have been elected by all thecorporate owners to represent them in decision-making and management of the firm.88)89)Institutional investors are professional investors who work on behalf of national governments toensure fairness in the financial markets.89)90)The likelihood that managers may place personal goals ahead of corporate goals is called theagency problem.90)8
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 10 preview image91)The agency problem occurs when the firm selects an ineffective marketing advertising and PR firmto represent them.91)92)Market forces and incurring agency costs such as bonding and insurance help to prevent orminimize agency problems.92)93)Recent studies on executive compensation have failed to find a strong relationship between CEOcompensation and share price.93)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.94)The primary goal of the financial manager is94)A)minimizing return.B)maximizing wealth.C)minimizing risk.D)maximizing profit.95)Corporate owner's receive realizable return through95)A)earnings per share and cash dividends.B)increase in share price and earnings per share.C)profit and earnings per share.D)increase in share price and cash dividends.96)The wealth of the owners of a corporation is represented by96)A)share value.B)cash flow.C)profits.D)earnings per share.97)Wealth maximization as the goal of the firm implies enhancing the wealth of97)A)the firm's stockholders.B)the firm's employees.C)the Board of Directors.D)the federal government.98)The amount earned during the accounting period on each outstanding share of common stock iscalled98)A)net income.B)net profits after taxes.C)earnings per share.D)common stock dividend.99)The goal of profit maximization would result in priority for99)A)earnings per share.B)risk of the investment.C)timing of the returns.D)cash flows available to stockholders.100)Profit maximization as a goal is not ideal because it does NOT directly consider100)A)risk and EPS.B)risk and cash flow.C)cash flow and stock price.D)EPS and stock price.9
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 11 preview image101)A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costsUS$35,000 and is expected to provide earnings over a three-year period as described below.AssetYear 1Year 2Year 31$21,000$15,000$6,00029,00015,00021,00033,00020,00019,00046,00012,00012,000Based on the profit maximization goal, the financial manager would choose101)A)Asset 1.B)Asset 2.C)Asset 3.D)Asset 4.102)A financial manager must choose between three alternative investments. Each asset is expected toprovide earnings over a three-year period as described below. Based on the wealth maximizationgoal, the financial manager wouldYearAsset 1Asset 2Asset 31$21,000$ 9,000$15,000215,00015,00015,00039,00021,00015,000$45,000$45,000$45,000102)A)choose Asset 1.B)choose Asset 2.C)choose Asset 3.D)be indifferent between Asset 1 and Asset 2.103)Profit maximization as the goal of the firm is NOT ideal because103)A)profit maximization does not consider risk.B)profits are only accounting measures.C)cash flows are more representative of financial strength.D)profits today are less desirable than profits earned in future years.104)Profit maximization fails because it ignores all EXCEPT104)A)the timing of returns.B)earnings per share.C)risk.D)cash flows available to stockholders.105)The key variables in the owner wealth maximization process are105)A)cash flows and risk.B)earnings per share and risk.C)earnings per share and share price.D)profits and risk.106)Cash flow and risk are the key determinants in share price. Increased cash flow results in________,other things remaining the same.106)A)a higher share priceB)an undetermined share priceC)a lower share priceD)an unchanged share price107)Cash flow and risk are the key determinants in share price. Increased risk, other things remainingthe same, results in107)A)an undetermined share price.B)a lower share price.C)an unchanged share price.D)a higher share price.10
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 12 preview image108)Financial managers evaluating decision alternatives or potential actions must consider108)A)both risk and return.B)only return.C)risk, return, and the impact on share price.D)only risk.109)Higher cash flow and greater risk109)A)have no effect on share price.B)have the same effect on share price.C)adversely affect share price.D)have an inverse effect on share price.110)As the risk of a stock investment increases, investors'110)A)required rate of return will decrease.B)required rate of return will increase.C)return will increase.D)return will decrease.111)An ethics program is expected to have a________impact on the firm's share price.111)A)no impactB)negativeC)positiveD)undetermined112)A recent ethics survey indicated the opinion that maintaining high ethical standards112)A)was difficult to enforce.B)had no effect on a firm's competitive position.C)strengthened a firm's competitive position.D)weakened a firm's competitive position, particularly in foreign markets.113)________ are the standards of conduct or moral judgment that apply to persons engaged incommerce.113)A)Environmental concerns.B)Short-term and long-term financial goals of managementC)The legal organization of ownershipD)Business ethics114)All of the following are measures that can be used as a guide for establishing a corporate ethicspolicy, EXCEPT114)A)making sure violations are penalized, while at the same time not subjecting the employee topublicity.B)an effective internal control system.C)an effective internal audit system.D)making reference checks before hiring new employees.115)Corporate ethics policies typically apply to________in dealing with________.115)A)employee actions; customers, vendors, and regulatorsB)management actions; all corporate constituentsC)employee actions; all corporate constituentsD)employee actions; customers and creditors11
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 13 preview image116)The implementation of a pro-active ethics program is expected to result in116)A)a positive corporate image and increased respect, but is not expected to affect share price.B)a positive corporate image and increased respect, but is not expected to affect cash flows.C)an increased share price resulting from a decrease in risk, but is not expected to affect cashflows.D)a positive corporate image and increased respect, a reduction in risk, and enhanced cash flowresulting in an increase in share price.117)The board of directors is typically responsible for117)A)developing strategic goals and plans.B)hiring and firing.C)both A and B.D)neither A nor B.118)If a company's managers are NOT owners of the company, then they are118)A)brokers.B)agents.C)dealers.D)outsiders.119)The conflict between the goals of a firm's owners and the goals of its non-owner managers is119)A)of little importance in most large U.S. firms.B)serious only when profits decline.C)incompatibility.D)the agency problem.120)The agency problem may result from a manager's concerns about any of the following EXCEPT120)A)corporate goals.B)company-provided perquisites.C)job security.D)personal wealth.121)Among solutions to the agency problem in publicly-held corporations are all of the followingEXCEPT121)A)performance shares.B)cash bonuses tied to goal achievement.C)bonuses based on short-term results.D)stock options.122)Agency costs include all of the following EXCEPT122)A)opportunity costs.B)cost of goods sold.C)monitoring expenditures.D)bonding and structuring expenses.123)Agency costs include all of the following EXCEPT123)A)the cost of monitoring management behavior.B)performance incentives paid to managers.C)purchasing insurance against management misconduct.D)management reports to stockholders.124)One way often used to insure that management decisions are in the best interest of the stockholdersis to124)A)remove management's perquisites.B)tie management compensation to the performance of the company's common stock price.C)tie management compensation to the level of earnings per share.D)threaten to fire managers who are seen as not performing adequately.12
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 14 preview image125)Emerging trends resulting from the agency problem are all of the following EXCEPT125)A)large private corporations.B)restructuring through leveraged buyouts.C)prohibiting managers from maintaining an ownership interest.D)management by active investors.TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.126)A financial institution is an intermediary that channels the savings of individuals, businesses, andgovernments into loans or investments.126)127)Primary and secondary markets are markets for short-term and long-term securities, respectively.127)128)Financial markets are intermediaries that channel the savings of individuals, businesses andgovernment into loans or investments.128)129)Money markets involve the trading of securities with maturities of one year or less while capitalmarket involve the buying and selling of securities with maturities of more than one year.129)130)A public offering is the sale of a new security issueNtypically debt or preferred stockNdirectly to aninvestor or group of investors.130)131)A primary market is a financial market in which pre-owned securities are traded.131)132)The money market is a financial relationship created by a number of institutions and arrangementsthat allows suppliers and demanders of long-term funds to make transactions.132)133)An efficient market is a market that allocates funds to their most productive use as a result ofcompetition among wealth-maximizing investors.133)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.134)Which of the following is NOT a financial institution?134)A)A commercial bank.B)A pension fund.C)An insurance company.D)A local government.135)The key participants in financial transactions are individuals, businesses, and governments.Individuals are net________of funds, and businesses are net________of funds.135)A)suppliers; demandersB)users; providersC)demanders; suppliersD)purchasers; sellers136)Most businesses raise money by selling their securities in a136)A)stock exchange.B)public offering.C)direct placement.D)private placement.137)The two key financial markets are137)A)primary market and secondary market.B)primary market and money market.C)capital market and secondary market.D)money market and capital market.13
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 15 preview image138)The________is created by a financial relationship between suppliers and demanders of short-termfunds.138)A)money marketB)financial marketC)capital marketD)stock market139)By definition, the money market involves the buying and selling of139)A)funds that mature in more than one year.B)stocks and bonds.C)short-term funds.D)flows of funds.140)Firms that require funds from external sources can obtain them from140)A)financial markets.B)private placement.C)financial institutions.D)all of the above.141)Most money market transactions are made in141)A)stocks and bonds.B)common stock.C)marketable securities.D)preferred stock.142)A competitive market that allocates funds to their most productive use is called a(n)142)A)efficient market.B)liquid market.C)middleman's market.D)investor's market.143)The________is created by a number of institutions and arrangements that allow the suppliers anddemanders of long-term funds to make transactions.143)A)financial marketB)credit marketC)money marketD)capital market14
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 16 preview imageAnswer KeyTestname: UNTITLED11)TRUE2)FALSE3)TRUE4)TRUE5)FALSE6)FALSE7)FALSE8)FALSE9)FALSE10)FALSE11)TRUE12)FALSE13)FALSE14)D15)A16)A17)C18)C19)B20)A21)C22)A23)D24)A25)C26)A27)C28)B29)D30)B31)A32)C33)TRUE34)TRUE35)FALSE36)FALSE37)FALSE38)TRUE39)TRUE40)TRUE41)TRUE42)TRUE43)FALSE44)FALSE45)TRUE46)C47)D48)B49)C50)D15
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 17 preview imageAnswer KeyTestname: UNTITLED151)D52)E53)D54)C55)D56)B57)A58)D59)B60)A61)A62)D63)FALSE64)FALSE65)FALSE66)D67)C68)E69)B70)A71)A72)D73)B74)B75)C76)D77)TRUE78)TRUE79)TRUE80)TRUE81)TRUE82)FALSE83)TRUE84)TRUE85)FALSE86)FALSE87)TRUE88)FALSE89)FALSE90)TRUE91)FALSE92)TRUE93)TRUE94)B95)D96)A97)A98)C99)A100)B16
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 18 preview imageAnswer KeyTestname: UNTITLED1101)B102)A103)A104)B105)A106)A107)B108)C109)D110)B111)C112)C113)D114)A115)C116)D117)C118)B119)D120)A121)C122)B123)D124)B125)C126)TRUE127)FALSE128)FALSE129)TRUE130)FALSE131)FALSE132)FALSE133)TRUE134)D135)A136)B137)D138)A139)C140)D141)C142)A143)D17
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 19 preview imageExamName___________________________________TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.1)Accounting standards vary around the world, and that makes comparing the financial results offirms located in different countries quite challenging.1)2)GAAP refers to the generally accepted accounting principles used by all international publiccompanies for the reporting of financial results.2)3)Many countries have adopted a system of accounting principles known as international financialreporting standards (IFRS).3)4)Financial statements are accounting reports issued by a firm periodically (usually quarterly andannually) that present past information and a snapshot of the firm's financial position.4)5)The Securities and Exchange Commission (SEC) is the federal regulatory body in the United Statesthat requires publicly listed companies to provide their stockholders with an annual stockholders'report. Similar listing authorities exist around the world.5)6)The income statement is a financial summary of the firm's operating results during a specifiedperiod while the balance sheet is a summary statement of the firm's financial position at a givenpoint in time.6)7)Common stock dividends paid to stockholders are equal to the earnings available for commonstockholders divided by the number of shares of common stock outstanding.7)8)Earnings per share represents amount earned during the period on each outstanding share ofcommon stock.8)9)Earnings per share results from dividing earnings available for common stockholders by thenumber of shares of common stock authorized.9)10)Paid-in capital in excess of par refers to the amount of proceeds in excess of the par value receivedfrom the original sale of common stock.10)11)Paid-in capital in excess of par represents the firm's book value received from the original sale ofcommon stock.11)12)Net fixed assets represent the difference between gross fixed assets and the total expense recordedfor the depreciation over then entire lives of the firm's fixed assets.12)13)Retained earnings represent the cumulative total of all earnings retained and reinvested in the firmsince its inception.13)14)The balance sheet is a statement which balances the firm's assets (what it owns) against itsfinancing (debt or equity).14)1
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 20 preview image15)The amount paid in by the original purchasers of common stock is shown by two entries in thefirm's balance sheetNcommon stock and paid-in capital in excess of par on common stock.15)16)The original price per share received by the firm on a single issue of common stock is equal to thesum of the common stock and paid-in capital in excess of par accounts divided by the number ofshares outstanding.16)17)The statement of cash flows reconciles the net income earned during a given year, and any cashdividends paid, with the change in retained earnings between the start and end of that year.17)18)The statement of cash flows provides insight into the firm's assets and liabilities and reconcilesthem with changes in its cash and marketable securities during the period of concern.18)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.19)The rule-setting body that has established independent standards for financial reporting, adoptedby many countries around the world in recent years, is19)A)IASB.B)GAAP.C)Federal Reserve System.D)SEC.20)Accounting practices and procedures used to prepare financial statements are called20)A)SEC.B)IFRS.C)FASB.D)IRB.21)The stockholder's annual report must include21)A)a statement of stockholders' equity.B)an income statement.C)a statement of cash flows.D)a balance sheet.E)all of the above.22)The________provides a financial summary of the firm's operating results during a specifiedperiod.22)A)statement of cash flowsB)income statementC)statement of retained earningsD)balance sheet23)Total assets less net fixed assets equals23)A)liabilities and equity.B)depreciation.C)gross assets.D)current assets.24)Gross profits are defined as24)A)operating profits minus depreciation.B)sales revenue minus cost of goods sold.C)sales revenue minus operating expenses.D)operating profits minus cost of goods sold.25)Operating profits are defined as25)A)gross profits minus operating expenses.B)earnings before depreciation and taxes.C)sales revenue minus depreciation expense.D)sales revenue minus cost of goods sold.2
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 21 preview image26)Net profits after taxes are defined as26)A)sales revenue minus cost of goods sold.B)gross profits minus operating expenses.C)EBIT minus interest.D)operating profits minus interest expense and taxes.27)Operating profits are defined as27)A)earnings before interest and taxes.B)earnings before depreciation and taxes.C)earnings after tax.D)sales revenue minus cost of goods sold.28)Earnings available to common shareholders are defined as net profits28)A)after taxes minus preferred dividends.B)before taxes.C)after taxes minus common dividends.D)after taxes.29)All of the following are examples of current assets EXCEPT29)A)accounts receivable.B)accruals.C)inventory.D)cash.30)All of the following are examples of fixed assets EXCEPT30)A)equipment.B)automobiles.C)marketable securities.D)buildings.31)All of the following are examples of current liabilities EXCEPT31)A)accruals.B)notes payable.C)accounts payable.D)accounts receivable.32)The net value of fixed assets is also called its32)A)par value.B)market value.C)book value.D)price.33)The________represents a summary statement of the firm's financial position at a given point intime.33)A)balance sheetB)statement of cash flowsC)statement of retained earningsD)income statement34)The________summarizes the firm's funds flow over a given period of time34)A)statement of retained earningsB)balance sheetC)statement of cash flowsD)income statement35)The statement of cash flows may also be called the35)A)funds statement.B)statement of retained earnings.C)bank statement.D)sources and uses statement.36)Retained earnings on the balance sheet represents36)A)net profits after taxes minus preferred dividends.B)the cumulative total of earnings reinvested in the firm.C)net profits after taxes.D)cash.3
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 22 preview image37)The statement of retained earnings reports all of the following EXCEPT37)A)preferred stock dividends.B)interest.C)common stock dividends.D)net profits after taxes.38)A firm had the following accounts and financial data for 2013Sales Revenue$3,060Cost of goods sold$1,800Accounts Receivable500Preferred stock dividends18Interest expense126Tax rate40%Total oper. expenses600Number of shares of common1,000Accounts payable240stocks outstandingThe firm's earnings available to common shareholders for 2013 were________.38)A)US$516.60B)US$302.40C)US$195.40D)-US$224.2539)A firm had the following accounts and financial data for 2013:Sales Revenue$3,060Cost of goods sold$1,800Accounts receivable500Preferred stock dividends18Interest expense126Tax rate40%Total operating expenses600Number of common shares1,000Accounts payable240outstandingThe firm's earnings per share, rounded to the nearest cent, for 2013 was________.39)A)US$0.5125B)US$0.3204C)US$0.5335D)US$0.302440)A firm had the following accounts and financial data for 2013.Sales Revenue$3,060Cost of goods sold$1,800Accounts receivable500Preferred stock dividends18Interest expense126Tax rate40%Total operating expenses600Number of common shares1,000Accounts payable240outstandingThe firm's net profit after taxes for 2013 was ________.40)A)US$206.25B)US$320.40C)US$213.80D)-US$206.4041)On the balance sheet net fixed assets represent41)A)gross fixed assets at market value minus depreciation expense.B)gross fixed assets at cost minus accumulated depreciation.C)gross fixed assets at market value minus accumulated deprecation.D)gross fixed assets at cost minus depreciation expense.42)Paid-in-capital in excess of par represents the amount of proceeds42)A)at the current book value of common stock.B)in excess of the par value from the original sale of common stock.C)from the original sale of stock.D)at the current market value of common stock.4
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 23 preview image43)Firm ABC had operating profits of US$100,000, taxes of US$17,000, interest expense of US$34,000and preferred dividends of US$5,000. What was the firm's net profit after taxes?43)A)US$66,000B)US$83,000C)US$49,000D)US$44,00044)Khalil Corporation had pretax profits of US$1.2 million, an average tax rate of 34 percent, and itpaid preferred stock dividends of US$50,000. There were 100,000 shares outstanding and nointerest expense. What were Khalil Corporation's earnings per share?44)A)US$3.91B)US$4.52C)US$7.59D)US$7.4245)A corporation had year end 2012 and 2013 retained earnings balances of US$320,000 andUS$400,000, respectively. The firm reported net profits after taxes of US$100,000 in 2013. The firmpaid dividends in 2013 of________.45)A)US$20,000B)US$0C)US$80,000D)US$100,00046)A corporation had a year end 2012 retained earnings balance of US$220,000. The firm reported netprofits after taxes of US$50,000 in 2013 and paid dividends in 2013 of US$30,000. The firm'sretained earnings balance at year end 2013 was________.46)A)US$270,000B)US$300,000C)US$250,000D)US$240,00047)A firm had year end 2010 and 2011 retained earnings balance of US$670,000 and US$560,000,respectively. The firm reported net profits after taxes of US$100,000 in 2011. The firm paiddividends in 2011 of________.47)A)US$100,000B)US$10,000C)US$110,000D)US$210,000ESSAY. Write your answer in the space provided or on a separate sheet of paper.48)Ag Silver Mining, Inc. has US$500,000 of earnings before interest and taxes at the year end. Interest expenses forthe year were US$10,000. The firm expects to distribute US$100,000 in dividends. Calculate the earnings aftertaxes for the firm assuming a 40 percent tax on ordinary income.49)At the end of 2013, the Long Life Light Bulb Company announced it had produced a gross profit of US$1million. The company has also established that over the course of this year it has incurred US$345,000 inoperating expenses and US$125,000 in interest expenses. The company is subject to a 30% tax rate and hasdeclared US$57,000 total preferred stock dividends.(a)How much is the earnings available for common stockholders?(b)Compute the increased retained earnings for 2013 if the company were to declare a US$4.25 common stockdividend. The company has 15,000 shares of common stock outstanding.5
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 24 preview image50)Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the followingamounts in revenue and expense accounts.Sales revenueUS$ 85,000General and administrative expense7,500Interest expense3,500Depreciation expense5,000Preferred stock dividends500Selling expense4,000Cost of goods sold50,000Calculate(a)gross profits.(b)operating profits.(c)net profits before taxes.(d)net profits after taxes (assume a 40 percent tax rate).(e)cash flow from operations.(f)earnings available to common stockholders.(g)earnings per share.51)Casablanca Furniture's net profits before taxes for 2012 totaled US$354,000. The company's total retainedearnings were US$338,000 for 2011 year end and US$389,000 for 2012 year end. Casablanca is subject to a 26percent tax rate. How large was the cash dividend declared by Casablanca Furniture in 2012?52)On December 31, 2012, the Basim Corporation had US$485,000 as an ending balance for its retained earningsaccount. During 2013, the corporation declared a US$3.50/share dividend to its stockholders. The BasimCorporation has 35,000 shares of common stock outstanding. When the books were closed for 2013 year end,the corporation had a final retained earnings balance of US$565,000. What was the net profit earned by BasimCorporation during 2013?53)The Sunshine Company had a retained earnings balance of US$850,000 at the beginning of 2011. By the end of2011, the company's retained earnings balance was US$950,000. During 2011, the company earnedUS$245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholdersUS$45,000. Compute the common stock dividend per share in 2011 assuming 10,000 shares of common stockoutstanding.6
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 25 preview imageMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.Table 2.1Balance SheetACE (Amman Computer Enterprises)December 31, 2012CashUS$4,500Accounts PayableUS$10,000Accounts ReceivableNotes PayableInventoryAccruals1,000Total Current AssetsTotal Current LiabilitiesNet Fixed AssetsLong-Term DebtTotal AssetsStockholders' EquityTotal Liabilities & S.E.Information (2012 values)1. Sales totaled US$110,0002. The gross profit margin was 25 percent.3. Inventory turnover was 3.0.4. There are 360 days in the year.5. The average collection period was 65 days.6. The current ratio was 2.40.7. The total asset turnover was 1.13.8. The debt ratio was 53.8 percent.54)Inventory for ACE in 2012 was________. (See Table 2.1)54)A)US$27,500B)US$36,667C)US$ 9,167D)US$32,44855)Notes payable for ACE in 2012 was________. (See Table 2.1)55)A)US$ 10,609B)US$113,466C)US$ 52,372D)US$ 41,37256)Accounts receivable for ACE in 2012 was________. (See Table 2.1)56)A)US$18,333B)US$19,861C)US$14,056D)US$14,89557)Net fixed assets for ACE in 2012 were________. (See Table 2.1)57)A)US$69,341B)US$45,484C)US$54,511D)US$48,97558)Total assets for ACE in 2012 were________. (See Table 2.1)58)A)US$ 97,345B)US$124,300C)US$ 45,895D)US$ 58,60359)Long-term debt for ACE in 2012 was________. (See Table 2.1)59)A)US$30,763B)US$10,608C)US$52,372D)US$41,372TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.60)Time-series analysis is the evaluation of the firm's financial performance in comparison to otherfirm(s) at the same point in time.60)61)As a rule, the necessary inputs to an effective financial analysis include, at minimum, the incomestatement and the statement of cash flow.61)7
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 26 preview image62)The firm's creditors are primarily interested in the short-term liquidity of the company and itsability to make interest and principal payments.62)63)Cross-sectional ratio analysis involves comparing the firm's ratios to those of firms in otherindustries at the same point in time.63)64)Benchmarking is a type of cross-sectional analysis in which the firm's ratio values are compared tothose of firms in other industries, primarily to identify areas for improvement.64)65)Time-series analysis evaluates performance of firms at the same point in time using financialratios.65)66)Benchmarking is a type of time-series analysis in which the firm's ratio values are compared tothose of a key competitor or group of competitors, primarily to isolate areas of opportunity forimprovement.66)67)Ratio analysis merely directs the analyst to potential areas of concern; it does not provideconclusive evidence as to the existence of a problem.67)68)In a cross-sectional comparison of firms operating in several lines of business, the industry averageratios of any of the firm's product lines may be used to analyze the multiproduct firm's financialperformance.68)69)Due to inflationary effects, inventory costs and depreciation write-offs can differ from their truevalues, thereby distorting profits.69)70)In ratio analysis, the financial statements being used for comparison should be dated at the samepoint in time during the year. If not, the effect of seasonality may produce erroneous conclusionsand decisions.70)71)The use of the audited financial statements for ratio analysis may not be preferable because theremay be no reason to believe that the data contained in them reflect the firm's true financialcondition.71)72)Both present and prospective shareholders are interested in the firm's current and future level ofrisk and return. These two dimensions directly affect share price.72)73)The comparison of a particular ratio to the standard (industry average) is made in order to isolateany deviations from the norm. In the case of ratios for which higher values are preferred, as long asthe firm that is being analyzed has a value in excess of the industry average it can be viewedfavorably.73)74)The use of differing accounting treatmentsNespecially relative to inventory and depreciationNcandistort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis isused.74)75)Inflationary effects typically have a greater impact the larger the differences in the age of the assetsof the firms being compared. Without adjustment, inflation tends to cause older firms (with olderfixed assets) to appear more efficient and profitable than newer firms (with newer fixed assets).75)8
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 27 preview image76)Present and prospective shareholders and lenders pay close attention to the firm's degree ofindebtedness and ability to repay debt. Shareholders are concerned since the claims of creditorsmust be satisfied prior to the distribution of earnings to them. Lenders are concerned since themore indebted the firm, the higher the probability that the firm will be unable to satisfy the claimsof all its creditors.76)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.77)Ratios provide a________measure of a company's performance and condition.77)A)qualitativeB)definitiveC)grossD)relative78)________analysis involves the comparison of different firms' financial ratios at the same point intime.78)A)MarginalB)Time-seriesC)QuantitativeD)Cross-sectional79)________analysis involves comparison of current to past performance and the evaluation ofdeveloping trends.79)A)QuantitativeB)Time-seriesC)Cross-sectionalD)Marginal80)The primary concern of creditors when assessing the strength of a firm is the firm's80)A)share price.B)leverage.C)short-term liquidity.D)profitability.81)Present and prospective shareholders are mainly concerned with a firm's81)A)liquidity.B)leverage.C)risk and return.D)profitability.82)To analyze the firm's financial performance, the following types of ratio analyses EXCEPT________may be used.82)A)cross-section analysisB)marginal analysisC)time-series analysisD)combined analysis83)Time-series analysis is often used to83)A)reflect performance relative to some norm.B)standardize results.C)correct errors of judgment.D)assess developing trends.84)In ratio analysis, a comparison to a standard industry ratio is made to isolate________deviationsfrom the norm.84)A)anyB)positiveC)standardD)negative85)________evidence of the existence of a problem or outstanding management performance isprovided by ratio analysis.85)A)ConclusiveB)DefinitiveC)CompleteD)Inconclusive9
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 28 preview image86)The analyst should be careful when conducting ratio analysis to ensure that86)A)audited statements are used.B)the overall performance of the firm is not judged on a single ratio.C)the same accounting procedures were used.D)the dates of the financial statements being compared are the same.E)all of the above.87)The analyst should be careful when evaluating a ratio analysis that87)A)pre-audited statements are used.B)the dates of the financial statements being compared are the same time.C)neither A nor B.D)both A and B.88)________is where the firm's ratio values are compared to those of a key competitor or group ofcompetitors, primarily to identify areas for improvement.88)A)Combined analysisB)BenchmarkingC)Time-series analysisD)None of the above89)Cross-sectional ratio analysis is used to89)A)isolate the causes of problems.B)reflect the symptoms of a possible problem.C)provide conclusive evidence of the existence of a problem.D)correct expected problems in operations.90)Inflation can distort90)A)inventory costs.B)cost of goods sold.C)salaries and wages.D)interest write-offs.91)Without adjustment, inflation may tend to cause________firms to appear more efficient andprofitable than________firms, all else being the same.91)A)older; newerB)large; smallerC)newer; olderD)smaller; larger92)The following groups of ratios primarily measure risk.92)A)liquidity, activity, and profitabilityB)activity, debt, and profitabilityC)liquidity, activity, and common stockD)liquidity, activity, and debt93)The________ratios are primarily measures of return.93)A)debtB)activityC)liquidityD)profitabilityESSAY. Write your answer in the space provided or on a separate sheet of paper.94)Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectionaland time-series analysis.TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.95)The liquidity of a business firm refers to the solvency of the firm's overall financial position.95)96)The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as theycome due.96)10
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 29 preview image97)The current ratio provides a better measure of overall liquidity only when a firm's inventory cannoteasily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overallliquidity.97)98)The average age of inventory is viewed as the average length of time inventory is held by the firmor as the average number of days' sales in inventory.98)99)Total asset turnover commonly measures the liquidity of a firm's total assets.99)100)The average age of inventory can be calculated as inventory divided by 365.100)101)The average age of inventory can be calculated as inventory turnover divided by 365.101)102)The average age of inventory can be calculated as 365 divided by inventory turnover.102)103)The average payment period can be calculated as accounts payable divided by average sales perday.103)104)The average payment period can be calculated as accounts payable divided by average purchasesper day.104)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.105)The________of a business firm is measured by its ability to satisfy its short-term obligations asthey come due.105)A)activityB)debtC)liquidityD)profitability106)________ratios are a measure of the speed with which various accounts are converted into sales orcash.106)A)ProfitabilityB)ActivityC)LiquidityD)Debt107)The________is useful in evaluating credit and collection policies.107)A)average payment periodB)average collection periodC)current asset turnoverD)current ratio108)The________measures the activity, or liquidity, of a firm's inventory.108)A)inventory turnoverB)quick ratioC)average collection periodD)current ratio109)The two basic measures of liquidity are109)A)current ratio and total asset turnover.B)inventory turnover and current ratio.C)current ratio and quick ratio.D)gross profit margin and ROE.110)The________is a measure of liquidity which excludes________, generally the least liquid asset.110)A)current ratio; inventoryB)quick ratio; accounts receivableC)quick ratio; inventoryD)current ratio; accounts receivable11
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 30 preview image111)The________ratio may indicate the firm is experiencing stockouts and lost sales.111)A)quickB)average payment periodC)inventory turnoverD)average collection period112)The________ratio may indicate poor collections procedures or a lax credit policy.112)A)quickB)inventory turnoverC)average payment periodD)average collection period113)ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely beconsidered poor if its average collection period was113)A)57 days.B)47 days.C)30 days.D)36 days.114)________are especially interested in the average payment period, since it provides them with asense of the bill-paying patterns of the firm.114)A)Lenders and suppliersB)CustomersC)Borrowers and buyersD)Stockholders115)A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might115)A)improve its collection practices and pay accounts payable, thereby decreasing currentliabilities and increasing the current and quick ratios.B)decrease current liabilities by utilizing more long-term debt, thereby increasing the currentand quick ratios.C)increase inventory, thereby increasing current assets and the current and quick ratios.D)improve its collection practices, thereby increasing cash and increasing its current and quickratios.116)As a firm's cash flows become more predictable,116)A)the current ratio should expand.B)the return on equity should increase.C)current assets should decrease.D)current liabilities should decrease.117)If the inventory turnover is divided into 365, it becomes a measure of117)A)sales turnover.B)the average collection period.C)the average age of the inventory.D)sales efficiency.118)The________is useful in evaluating credit and collection policies.118)A)average collection periodB)current asset turnoverC)average payment periodD)current ratio119)The two categories of ratios that should be utilized to assess a firm's true liquidity are the119)A)current and quick ratios.B)liquidity and debt ratios.C)liquidity and activity ratios.D)liquidity and profitability ratios.120)A firm with a total asset turnover that is lower than industry standard but with a current ratiowhich meets industry standard must have excessive120)A)debt.B)inventory.C)accounts receivable.D)fixed assets.121)A firm with a total asset turnover lower than industry standard may have121)A)excessive cost of goods sold.B)insufficient sales.C)insufficient fixed assets.D)excessive debt.12
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Test Bank for Principles of Managerial Finance, Arab World Edition - Page 31 preview image122)If Nico Corporation has cost of goods sold of US$300,000 and inventory of US$30,000, then theinventory turnover is________and the average age of inventory is________.122)A)10; 36.5B)36.0; 10C)10; 36.0D)36.5; 10123)If Nico Corporation has annual purchases of US$300,000 and accounts payable of US$30,000, thenaverage purchases per day are________and the average payment period is________.123)A)821.9; 36.5B)36.0; 833.3C)833.3; 36.0D)36.5; 821.9TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.124)The magnification of risk and return introduced through the use of fixed-cost financing such asdebt and preferred stock is called financial leverage.124)125)The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.125)126)The higher the value of the times interest earned ratio, the higher the proportion of the firm'sinterest income compared to its contractual interest payments.126)127)In general, the more debt (other people's money) a firm uses in relation to its assets, the smaller itsfinancial leverage.127)128)The lower the fixed-payment coverage ratio, the lower is the firm's financial leverage.128)129)The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be itsrisk and return.129)130)Typically, higher coverage ratios are preferred, but too high a ratio may indicate under-utilizationof fixed-payment obligations, which may result in unnecessarily low risk and return.130)MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.131)The________ratio measures the proportion of total assets financed by the firm's creditors.131)A)total asset turnoverB)currentC)debtD)fixed asset turnover132)The________ratio measures the firm's ability to pay contractual interest payments.132)A)average payment periodB)fixed-payment coverageC)debtD)times interest earned133)The________ratio may indicate that the firm will not be able to meet interest obligations due onoutstanding debt.133)A)times interest earnedB)return on total assetsC)debtD)net profit margin134)The higher the value of________ratio, the better able the firm is to fulfill its interest obligations.134)A)debtB)average payment periodC)average collection periodD)times interest earned13
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