Chapter 14
● Firm A acquires firm B when firm B has a book value of assets
○ 55-35 = 120 million but they paid 175 million so the answer is 55 mil
● One of the biggest impediments to a global capital market has been…
○ Answer: the lack of common accounting standards
○ What stops the capital market from being the same across the globe
● Benjamin graham thought that the benefits from detailed analysis of a
firm’s financial statements has ___ over his long professional life
○ decreased
● If the interest rate on debt is higher than the ROA, then by using debt a
firm’s ROE will…
○ Decrease
◆ If debt is higher than assets – it costs more to borrow from a bank
● Which of the following is NOT one of the three key financial statements
available to investors in publicly traded firms?
○ Income statements
○ Balance sheet
○ Statement of operating earnings
○ Statement of cash flows
○ Answer: statement of operating earnings
● Common size balance sheets are prepared by dividing all quantities by…
○ Total assets
● Operating ROA is calculated as ___, while ROE is calculated as…
○ EBIT/total assets; net profit/equity
● Which of the following ratios is used to calculate the times-interest-
earned ratio?
○ EBIT/interest expense
● Which of the following is NOT a liquidity ratio?
○ Inventory turnover ratio
● Operating ROA can be found as the product of…
○ Return on sales x total asset turnover
● A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio
is…
○ 2.38/0.20 = 11.90
○ Answer: 11.90
● You find that a firm that uses debt has a compound leverage factor less
than 1. This tells you that the firm’s use of…
○ Financial leverage is negatively contributing to ROE
◆ Debt = financial leverage
● Which of the following statements is true concerning economic value
added?
○ A growing number of firms tie managers’ compensation to EVA
◆ To what degree did the firm grow by adding economic value?
● The level of real income of a firm can be distorted by the reporting of
depreciation and interest expense. During period of low inflation, the level
of reported depreciation tends to ___ income, and the level of interest
expense reported tends to ___ income
○ Understate; overstate
● If a firm’s ratio of stockholders’ equity/total assets is lower than the
industry average and its ratio of long-term debt/stockholders’ equity is
also lower than the industry average, this would suggest that the firm
○ Has more current liabilities than the industry average
● A high price-to-book ratio may indicate which one of the following?
○ Investors may believe that this firm will earn a rate of return greater
than the market capitalization rate
◆ People are willing to pay more than what the book indicates
◆ Cus they think the firm will overachieve
● A firm has an ROE equal to the industry average, but its price-to-book
ratio is below the industry average. You know that the firm’s…
○ Answer: earnings yield is above the industry average
● All of the following ratios are related to efficiency except…
○ Total asset turnover
◆ Talk about how efficient
○ Fixed-asset turnover
◆ How well you are using ur fixed assets
○ Average collection period
◆ How long the collection period determines efficiency
○ Cash ratio
◆ Does not speak to the firm’s efficiency
○ Answer : cash ratio
● Which of the following would result in a cash inflow under the heading -
“Cash flow from investing” in the statement of cash flows?
○ Sale of production machinery
● When assessing the sustainability of a firm’s cash flows, analysts will
prefer to see cash growth generated from which of the following sources?
○ Cash flow from operating activities
● Another term for EVA is…
○ Residual income
● Which of the following transactions will result in a decrease in cash flow
from operations?
○ Increase in accounts receivable
● Which of the following transactions will result in a decrease in cash flow
from investments?
○ Acquisition of another business
◆ Because you’re paying money out
● Which of the following will result in an increase in cash to the firm?
○ An increase in accounts payable
◆ Slowing down payables will increase cash