1. As defined in this text, return on assets involves a comparison of total assets with
a. Net income.
b. Net income adjusted for dividends.
c. Net income adjusted for income taxes.
d. Net income adjusted for interest expense.

2. A high asset turnover indicates that a company
a. Buys and sells its long-term assets more frequently than most companies, so that it tends to operate with state-of-the-art equipment.
b. Generates a large amount of profit compared to its total assets.
c. Generates a large amount of sales compared to its total assets.
d. Uses fixed costs to increase net income as sales increase.

3. The substitution of fixed costs for variable costs affects which of the following most directly?
a. Stockholders€™ equity
b. Financial leverage
c. Gross profit margin
d. Operating leverage

4. A company with good investment opportunities normally can increase its stockholders€™ wealth by
a. Increasing the portion of net income paid out in dividends
b. Investing in new assets.
c. Reducing the amount invested in new assets.
d. Reducing its rate of return on new assets.

5. Company A has a higher proportion of fixed to variable costs than Company B. Both have a positive net income. The sales revenues of both companies increased by 10%. You would expect
a. Company A€™s expenses to increase more rapidly than Company B€™s.
b. Company A€™s expenses to decrease while Company B€™s increase.
c. Company A€™s net income to decrease while Company B€™s increases.
d. Company A€™s net income to increase more rapidly than Company B€™s.

6. Company A and Company B are similar in size and in many other respects. The companies reported the following net cash flow from (used for) investing activities in their 2005 annual reports.

From this information, you would expect
a. Company A to be growing more rapidly than Company B.
b. Company B to be growing more rapidly than Company A.
c. Company B to have better investment alternatives than Company A.
d. Company A to pay higher dividends than Company B.

7. Relative to Company A, Company B is more capital-intensive, has a higher debt to asset ratio, and pays out a smaller portion of its net income as dividends. Company A€™s asset growth rate has been larger than Company B€™s. From this information, it is likely that
a. Company A is riskier than Company B.
b. Company B is riskier than Company A.
c. Company A has a higher market value than Company B.
d. Company B has a higher market value than Company A.

8. Which of the following net cash flow patterns is typical of a company with high growth potential and strong financial performance?

9. Which of the following is evidence of effective use of assets?
a. Earning higher amounts of profit for each dollar of sales
b. Selling long-term assets promptly when sales drop
c. Increasing sales more rapidly than the dollar amount of additional investment
d. Planning for assets that have high fixed cost and low variable cost, in order to make use of operating leverage

10. Under generally accepted accounting principles in the United States, most assets are valued on the balance sheet at
a. Cost.
b. Cost, or a lower value if they are impaired.
c. Cost, or a higher value if evidence of increase is verifiable.
d. Fair marketvalue.

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(In millions) Company A Company B 2005 5 2004 $(460) 200 $(350) 35 2003 $(265) (80) 5 6 a. b. C. d. Cash Flow from Operating Activities Outflow Outflow Inflow Inflow Cash Flow from Investing Activities Outflow Inflow Inflow Outflow