Although a full liquidity analysis requires the use of a cash budget
1. Although a full liquidity analysis requires the use of a cash budget, the current and quick
ratios provide fast and easy-to-use measures of a firm’s liquidity position.
2. High current and quick ratios always indicate that a firm is managing its liquidity position
3. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used
to assess how effectively a firm is managing its assets.
4. Companies HD and LD have the same sales, tax rate, interest rate on their debt, 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 pays less in taxes.
b. Company HD has a lower equity multiplier.
c. Company HD has a higher ROA.
d. Company HD has a higher times interest earned (TIE) ratio.
e. Company HD has more net income.
5. Which of the following statements is CORRECT?
a. If a firm has the highest price/earnings ratio of any firm in its industry, then, other things
held constant, this suggests that the board of directors should fire the president.
b. If a firm has the highest market/book ratio of any firm in its industry, then, other things held
constant, this suggests that the board of directors should fire the president.
c. Other things held constant, the higher a firm’s expected future growth rate, the lower its P/E
ratio is likely to be.
d. The higher the market/book ratio, then, other things held constant, the higher one would
expect to find the Market Value Added (MVA).
e. If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors
expect this situation to continue, then its market/book ratio and MVA are both likely
to be below average.
6. Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions
would increase the company’s current ratio?
a. Borrow using short-term notes payable and use the cash to increase inventories.
b. Use cash to reduce accruals.
c. Use cash to reduce accounts payable.
d. Use cash to reduce short-term notes payable.
e. Use cash to reduce long-term bonds outstanding.
7. 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?
8. Last 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
9. Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75.
Its sales were $195,000 and its net income was $10,549. The CFO believes that the company
could have operated more efficiently, lowered its costs, and increased its net income by
$5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased
its net income in this amount, by how much would the ROE have changed?
10. Bonner Corp.’s sales last year were $415,000, and its year-end total assets were $355,000.
The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner’s
new CFO believes the firm has excess assets that can be sold so as to bring the TATO
down to the industry average without affecting sales. By how much must the assets be
reduced to bring the TATO to the industry average, holding sales constant?