Finance for Executives: Cengage Learning, Sixth Edition, 2019, Page 164 Quiz
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Questions and Answers

What effect does borrowing have on a firm's business risk?

  • Borrowing reduces the firm's business risk
  • Borrowing stabilizes the firm's business risk
  • Borrowing magnifies the firm's business risk (correct)
  • Borrowing has no effect on the firm's business risk

Which firm's ROE shows wider variation in response to changes in EBIT?

  • Neither firm shows any variation
  • Both firms show the same variation
  • Firm D
  • Firm F (correct)

What is the Weighted Average Cost of Capital (WACC) for KELLER?

  • 2%
  • 4%
  • 10% (correct)
  • 8%

What is the net sales for KELLER in 2016?

<p>$500,000,000 (C)</p> Signup and view all the answers

What is the expected total invested capital for KIDDY WONDER WORLD in 2019?

<p>$1,200 million (D)</p> Signup and view all the answers

What does the value contribution in the context of VOLKSWAGEN correspond to?

<p>Economic Value Added (EVA) (A)</p> Signup and view all the answers

What is the main shortcoming of the current ratio as mentioned in the text?

<p>It does not consider the timing of cash flows (B)</p> Signup and view all the answers

What is the effect of the firm's economic sector on its working capital requirement?

<p>It can increase or decrease the working capital requirement based on the seasonality of the sector (B)</p> Signup and view all the answers

In the financial statement analysis, what is the ratio between long-term debt and equity for the company in one of the examples?

<p>2:1 (D)</p> Signup and view all the answers

What is the total amount of short-term debt in one of the examples mentioned in the financial statement analysis?

<p>$30 (D)</p> Signup and view all the answers

What is one reason mentioned for a company facing cash problems despite having a strong current ratio?

<p>Delayed accounts receivable collections (B)</p> Signup and view all the answers

What is the assumption about the operating profit in the financial leverage analysis?

<p>Management earns an operating profit of 10% on every dollar (D)</p> Signup and view all the answers

What does ROIC before tax stand for?

<p>Return on Investment Capital before tax (A)</p> Signup and view all the answers

What does the abbreviation 'EBIT' stand for in the context of the text?

<p>Earnings Before Interest and Taxes (A)</p> Signup and view all the answers

In the financial leverage analysis, what does a positive leverage effect indicate?

<p>The firm benefits from the use of debt financing (D)</p> Signup and view all the answers

What is the impact on profitability for firm F when EBIT decreases to $20 million?

<p>ROICBT and ROEBT both decrease (B)</p> Signup and view all the answers

For which firm did the leverage effect have a negative impact on ROE before tax?

<p>Firm F (C)</p> Signup and view all the answers

What is the formula for financial leverage in the context of this text?

<p>$\text{Invested Capital} / \text{Equity}$ (C)</p> Signup and view all the answers

What is the implication of a negative ROE before tax?

<p>The firm is not utilizing debt financing effectively (C)</p> Signup and view all the answers

What does 'IB' stand for in the financial leverage analysis?

<p>Invested Capital (C)</p> Signup and view all the answers

What do positive ROICBT and ROEBT indicate in the context of the text?

<p>Debt financing has a positive impact on profitability (D)</p> Signup and view all the answers

What happens to the leverage effect when EBIT decreases?

<p>It becomes negative (D)</p> Signup and view all the answers

What does 'Equity IB Debt' represent in the financial leverage analysis?

<p>Total invested capital minus total equity minus total debt (B)</p> Signup and view all the answers

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