48. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: A. has no debt of any kind.
B. is using its assets as efficiently as possible. C. has no net working capital. D. also has a current ratio of 10. E. has an equity multiplier of 2.
Difficulty level: Medium
Topic: PROFITABILITY RATIOS Type: DEFINITIONS
49. If shareholders want to know how much profit a firm is making on their entire investment in
the firm, the shareholders should look at the: A. profit margin. B. return on assets. C. return on equity. D. equity multiplier. E. earnings per share.
Difficulty level: Medium Topic: PROFITABILITY RATIOS Type: DEFINITIONS
50. BGL Enterprises increases its operating efficiency such that costs decrease while sales remain
constant. As a result, given all else constant, the: A. return on equity will increase. B. return on assets will decrease. C. profit margin will decline.
D. equity multiplier will decrease. E. price-earnings ratio will increase.
Difficulty level: Medium Topic: PROFITABILITY RATIOS Type: DEFINITIONS
51. The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:
A. Joe's will have a lower profit margin. B. Joe's will have a lower return on equity. C. Moe's will have a higher net income. D. Moe's will have a lower profit margin. E. Moe's will have a higher return on assets.
Difficulty level: Medium
Topic: PROFITABILITY RATIOS Type: DEFINITIONS
52. Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings
ratio is 18. Based on this information, it can be stated with certainty that: A. the price per share increased. B. the earnings per share decreased.
C. investors are paying a higher price for each share of stock purchased. D. investors are receiving a higher rate of return this year.
E. either the price per share, the earnings per share, or both changed.
Difficulty level: Medium Topic: MARKET VALUE RATIOS Type: DEFINITIONS
53. 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. has a higher market price than one share of stock in Turner's.
B. has a higher market price per dollar of earnings than does one share of Turner's. C. sells at a lower price per share than one share of Turner's.
D. represents a larger percentage of firm ownership than does one share of Turner's stock. E. earns a greater profit per share than does one share of Turner's stock.
Difficulty level: Medium Topic: MARKET VALUE RATIO Type: DEFINITIONS
54. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio? I. slow industry outlook
II. high prospect of firm growth III. very low current earnings
IV. investors with a low opinion of the firm A. I and II only B. II and III only C. II and IV only D. I and III only E. III and IV only
Difficulty level: Medium
Topic: MARKET VALUE RATIOS Type: DEFINITIONS
55. Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding
market-to-book constant, a $1 increase in the book value per share will:
A. cause the accountants to increase the equity of the firm by an additional $2. B. increase the market price per share by $1. C. increase the market price per share by $12. D. tend to cause the market price per share to rise. E. only affect book values but not market values.
Difficulty level: Medium Topic: MARKET VALUE RATIOS Type: DEFINITIONS
56. Which one of the following sets of ratios applies most directly to shareholders?
A. return on assets and profit margin B. quick ratio and times interest earned C. price-earnings ratio and debt-equity ratio D. market-to-book ratio and price-earnings ratio E. cash coverage ratio and times equity multiplier
Difficulty level: Medium Topic: MARKET VALUE RATIOS Type: DEFINITIONS
57. The three parts of the Du Pont identity can be generally described as: I. operating efficiency, asset use efficiency and firm profitability. II. financial leverage, operating efficiency and asset use efficiency. III. the equity multiplier, the profit margin and the total asset turnover. IV. the debt-equity ratio, the capital intensity ratio and the profit margin. A. I and II only B. II and III only C. I and IV only D. I and III only E. III and IV only
Difficulty level: Medium Topic: DU PONT IDENTITY Type: DEFINITIONS
58. If a firm decreases its operating costs, all else constant, then:
A. the profit margin increases while the equity multiplier decreases. B. the return on assets increases while the return on equity decreases.
C. the total asset turnover rate decreases while the profit margin increases. D. both the profit margin and the equity multiplier increase. E. both the return on assets and the return on equity increase.
Difficulty level: Medium
Topic: DU PONT IDENTITY Type: DEFINITIONS
59. Which one of the following statements is correct?
A. Book values should always be given precedence over market values.
B. Financial statements are frequently the basis used for performance evaluations. C. Historical information has no value when predicting the future.
D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.
Difficulty level: Medium
Topic: EVALUATING FINANCIAL STATEMENTS Type: DEFINITIONS
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