1) A firm’s capital structure refers to the firm’s:

1) A firm’s capital structure refers to the firm’s: A) combination of cash and cash equivalents. B) combination of accounts appearing on the left side of its balance sheet. C) mixture of various types of production equipment. D) proportions of financing from current and long-term debt and equity. E) investment selections for its excess cash reserves.

1)

2) Short-term finance deals with: A) acquiring and selling fixed assets. B) the timing of cash flows. C) financing long-term projects. D) issuing additional shares of common stock. E) capital budgeting.

2)

3) As seen on an income statement: A) depreciation is shown as an expense but does not affect the tax expense. B) interest is deducted from income and increases the total taxes incurred. C) the tax rate is applied to the earnings before interest and taxes when the firm has

both depreciation and interest expenses. D) interest expense is added to earnings before interest and taxes to compute pretax

income. E) depreciation reduces both the pretax income and the net income.

3)

4) According to the Generally Accepted Accounting Principles, costs are: A) matched with revenues. B) expensed as management desires. C) recorded as incurred. D) matched with production levels. E) recorded when paid.

4)

5) Under generally accepted accounting principles (GAAP), a firm’s assets are reported at: A) liquidation value less accumulated depreciation. B) market value less accumulated depreciation. C) historical cost less accumulated depreciation. D) market value. E) liquidation value.

5)

1

6) According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

A) a contract is signed to perform a service or deliver a good. B) managers decide to recognize it. C) payment is requested. D) income taxes are paid on the revenue earned. E) the transaction is complete and the goods or services are delivered.

6)

7) Projected future financial statements are called: A) plug statements. B) comparative statements. C) aggregated statements. D) pro forma statements. E) reconciled statements.

7)

8) Which statement expresses all accounts as a percentage of total assets? A) common-size balance sheet B) statement of cash flows C) common-size income statement D) pro forma income statement E) pro forma balance sheet

8)

9) Ratios that measure a firm’s financial leverage are known as ________ ratios. A) profitability B) asset management C) long-term solvency D) market value E) short-term solvency

9)

10) The debt-equity ratio is measured as: A) total debt divided by total equity. B) long-term debt divided by total equity. C) total assets minus total debt, divided by total equity. D) total equity divided by long-term debt. E) total equity divided by total debt.

10)

11) The measure of net income returned from every dollar invested in total assets is the: A) return on equity. B) return on assets. C) asset turnover. D) profit margin. E) earnings before interest and taxes.

11)

2

12) The market-to-book ratio is measured as the: A) market price per share divided by the net income per share. B) market price per share divided by the dividends per share. C) market value per share divided by the book value per share. D) net income per share divided by the market price per share. E) market price per share divided by the par value per share.

12)

13) An increase in which one of the following accounts increases a firm’s current ratio without affecting its quick ratio?

A) fixed assets B) inventory C) accounts payable D) cash E) accounts receivable

13)

14) A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______.

A) .40; .75 B) .50; .75 C) .45; 1.75 D) .50; 1.00 E) .40; 1.75

14)

15) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:

A) has no net working capital. B) is using its assets as efficiently as possible. C) also has a current ratio of 15. D) has no debt of any kind. E) has an equity multiplier of 2.

15)

16) Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred’s:

A) sells at a lower price per share than one share of Turner’s. B) represents a larger percentage of firm ownership than does one share of Turner’s

stock. C) has a higher market price than one share of stock in Turner’s. D) earns a greater profit per share than does one share of Turner’s stock. E) has a higher market price per dollar of earnings than does one share of Turner’s.

16)

3

17) The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:

A) the average ratios of the firm’s international peer group. B) those of the largest conglomerate that has operations in the same industry as the

firm. C) the average ratios of all firms within the same country over a period of time. D) the firm’s ratios from prior time periods and to the ratios of firms with similar

operations. E) those of other firms located in the same geographic area that are similarly sized.

17)

18) Enterprise value is based on the: A) book value of debt plus the market value of equity. B) market value of equity plus the book value of total debt minus cash. C) market value of interest bearing debt plus the market value of equity minus cash. D) book values of debt and assets, other than cash. E) book values of debt and equity less cash.

18)

19) The equity multiplier measures: A) management efficiency. B) financial leverage. C) returns to stockholders. D) asset use efficiency. E) operating efficiency.

19)

20) The return on equity can be calculated as: A) Profit margin × ROA × Total asset turnover. B) Profit margin × ROA. C) ROA × Debt-equity ratio. D) ROA × Equity multiplier. E) ROA × (Net income / Total assets).

20)