1. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

a. Use cash to increase inventory holdings.

b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

c. Use cash to repurchase some of the company's own stock.

d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

e. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

2. Which of the following statements is CORRECT?

a. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.

b. A reduction in inventories held would have no effect on the current ratio.

c. An increase in inventories would have no effect on the current ratio.

d. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

e. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

3. Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

a. Company A trades at a higher P/E ratio.

b. Company A probably has fewer growth opportunities.

c. Company A is probably judged by investors to be riskier.

d. Company A must have a higher market-to-book ratio.

e. Company A must pay a lower dividend.

4. 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.

5. Which of the following statements is CORRECT?

a. "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.

b. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."

c. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

d. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing."

e. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Answer rating: 100% (QA)

1 e Issue new stock and then use some of the proceeds to purc... View the full answer