1. Which statement is TRUE?
A. The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's financial leverage.
B. Return on equity is the percentage increase in stock prices.
C. The accounting-based stock valuation formula calculates the value of a stock as the book value plus the present value of future expected dividends discounted at the cost of equity.
D. Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.
2. Which statement is TRUE?
A. Once the projected financial statements are prepared, there is no need for sensitivity analysis to examine the assumptions used in the preparation.
B. Prospective analysis should be performed after historical financial statements have been adjusted.
C. Prospective analysis should only be based on the firm’s historical financial statements.
D. Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.
3. Which statement is TRUE?
A. As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.
B. If the company has available cash, they should always pay their bills immediately, even if suppliers give them time to pay before charging penalties.
C. It is possible for a profitable company to go out of business because of severe short-term liquidity problems.
D. Free cash flow in a given year is a better indicator of profitability than earnings.