Answer to Finance Multiple Choice
As the debt ratio increases:
Fewer assets are debt financed.
More assets are debt financed.
The ratio of debt to equity increases.
The ratio of debt to equity decreases.
a. 1 and 3.
b. 1 and 4.
c. 2 and 3.
d. 2 and 4.
As times interest earned increases:
a. Bondholders' position deteriorates.
b. Net income decreases.
c. Interest payments become more assured.
d. Taxes decrease.
The return on equity:
a. Is the ratio of sales to equity.
b. Measures what the firm earns on assets.
c. Is the ratio of net income to total equity.
d. Measures what the firm earns on sales.
4. Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable?
a. A high P/E and a low price/sales ratio.
b. A high P/E and a high price/sales ratio.
c. A low P/E and a low price/sales ratio.
d. A low P/E and a high price/sales ratio.
5. If the ratio of price to book exceeds 1.0:
a. The stock is overvalued.
b. The firm's assets are understated.
c. The price of the stock is greater than the accounting value of the firm.
d. The accounting value of the firm is greater than the market value of the firm.
The odd lot theory suggests that:
a. Cheap stocks sell in fewer odd lots.
b. The small investor is often wrong.
c. Small investors do not buy high priced stocks.
d. Professional investors under perform individuals with modest amounts to invest.
If a moving average of the Dow Jones industrial average crosses the Dow Jones industrial average:
a. The direction of security prices has changed.
b. Stock prices will stabilize.
c. Stock prices will go through a period of fluctuation.
d. The investor should take profits.
8. Which of the following has no impact on cash flow?
a. The firm's equity.
b. Depreciation expense.
c. Taxes paid.
d. Net income.
Cash flow differs from earnings because:
a. Cash flow includes depreciation expense.
b. Earnings can be negative.
c. Taxes only affect earnings.
d. Interest expense only affects cash flow.
The current ratio is unaffected by:
a. Using cash to retire an account payable.
b. The collection of an account receivable.
c. Selling inventory for a profit.
d. Selling bonds and using the funds to finance inventory.
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Solution provided by:
Jiong Tu, PhD (IP)
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