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

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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?

$500,000,000 (C) Signup and view all the answers

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

$1,200 million (D) Signup and view all the answers

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

Economic Value Added (EVA) (A) Signup and view all the answers

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

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

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

It can increase or decrease the working capital requirement based on the seasonality of the sector (B) 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?

2:1 (D) 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?

$30 (D) Signup and view all the answers

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

Delayed accounts receivable collections (B) Signup and view all the answers

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

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

What does ROIC before tax stand for?

Return on Investment Capital before tax (A) Signup and view all the answers

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

Earnings Before Interest and Taxes (A) Signup and view all the answers

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

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

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

ROICBT and ROEBT both decrease (B) Signup and view all the answers

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

Firm F (C) Signup and view all the answers

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

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

What is the implication of a negative ROE before tax?

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

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

Invested Capital (C) Signup and view all the answers

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

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

What happens to the leverage effect when EBIT decreases?

It becomes negative (D) Signup and view all the answers

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

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