FIN575 – QUIZ – 5 – SOLUTION – GRADED 28/30

1. ( TCO D) Purchases divided by accounts payable provides information about: (Points : 3)

capital structure.

management of working capital.

gross profit margin.

profitability.

 

 

Question 2.2. (TCO D) Which of the following situations is most likely to explain an accounts receivable turnover that is lower than the industry norm?  (Points : 3)

The company makes less credit sales than industry.

The company gives customers less time to pay than its competitors.

The company has been selling inferior products to competitors.

The company is systematically over-estimating bad debts.

 

 

Question 3.3. (TCO D) The net operating profit margin is 19% for WidgetCo and 21% for Tool. Which of the following statements is the most plausible explanation of the difference in observed net operating profit margins?  (Points : 3)

WidgetCo’s has lower financial leverage.

WidgetCo uses LIFO and Tools uses FIFO.

WidgetCo’s has a lower tax rate.

WidgetCo’s net operating asset turnover.

 

 

Question 4.4. (TCO D) Err Company has a major lawsuit against them for unsafe products. It recognizes a huge liability in 2004 of $300M. The effect of this liability is to decrease stockholders’ equity by 50%. In 2005, the effect of recognizing this liability, all else equal, is: (Points : 3)

Return on net operating assets will increase dramatically.

Return on net operating assets will decrease dramatically.

Return on equity will increase dramatically.

Return on equity will decrease dramatically.

 

 

Question 5.5. (TCO D) WidgetCo and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. WidgetCo has a much lower net operating asset turnover than Tool. Which of the following statements best explains the difference in observed net operating asset turnovers? (Points : 3)

WidgetCo’s has lower financial leverage.

WidgetCo uses FIFO and Tools uses LIFO.

WidgetCo has a lower tax rate.

WidgetCo has significant operating leases and Tool has no leases.

 

 

Question 6.6. (TCO D) Cost of goods sold divided by inventory provides information about: (Points : 3)

profitability.

capital structure.

management of working capital.

gross profit margin.

 

 

Question 7.7. (TCO D) The management of Finner Company believes that “the statement of cash flows is not a very useful statement” and does not include it with the company’s financial statements. As a result the auditor’s opinion should be: (Points : 3)

qualified.

unqualified.

adverse.

disclaimed.

 

 

Question 8.8. (TCO D) Below is selected information from Tricorp.

Year 1    Year 2

Net Operating Assets/Common Equity  1.37        1.53

Net Operating Profit Margin       19%        21%

Income Tax Rate              47%        28%

Revenues/Net Operating Assets              0.81        0.61

EBIT/Revenues 38%        32%

 

Return on Common Equity for Year 1 is: (Points : 3)

19.0%.

19.6%.

21.08%.

26.03%.

 

 

Question 9.9. (TCO D) Which of the following statements about the relationship between RNOA and ROCE is correct?  (Points : 3)

ROCE is always greater than RNOA.

ROCE is greater than RNOA if RNOA is greater than after-tax cost of dividends.

ROCE is greater than RNOA if RNOA is greater than cost of debt.

ROCE is greater than RNOA if RNOA is greater than after-tax cost of debt.

 

 

Question 10. (TCO D) Which of the following statements about the equity growth rate is correct?

I. The higher the ROCE, the higher equity growth rate, all other things equal.

II. The higher the dividend payout, the higher the equity growth rate.

III. The equity growth rate is unaffected by the cost of debt.

IV. The equity growth rate indicates the expected growth in stock price each period.

(Points : 3)

I, II, III, and IV

I, II, and III

I and III

I only

 

 

 
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