Corporate Finance November 24, 2015

Quiz 1 First four questions carry 3 marks each and 5th qs carries 8 marks. Total marks are 20

1. The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relationship of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

a. True

b. False

2. Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

a. True

b. False

3. Last year Thatcher Industries had a current ratio of 1.2, a quick ratio of 0.8, and current liabilities of $500,000. Which of the following statements is most correct?

a. If the company obtained a short-term bank loan for $500,000 and used the proceeds to purchase inventory, its current ratio would fall.

b. Last year Thatcher industries had $200,000 in inventories.

c. Last year Thatcher industries had $416,667 in current assets.

d. All of the answers above are correct.

e. Answers a and b are correct.

4. Company A is financed with 90 percent debt, whereas Company B, which has the same amount of total assets, is financed entirely with equity. Both companies have a marginal tax rate of 35 percent. Which of the following statements is most correct?

a. If the two companies have the same basic earning power (BEP), Company B will have a higher return on assets.

b. If the two companies have the same return on assets, Company B will have a higher return on equity.

c. If the two companies have the same level of sales and basic earning power (BEP), Company B will have a lower profit margin.

d. All of the answers above are correct.

e None of the answers above is correct.

5. Taft Technologies has the following relationships:

Annual sales $1,200,000

Current liabilities $ 375,000

Days sales outstanding (DSO) (365-day year) 40

Inventory Turnover ratio 4.8

Current ratio 1.2

The company’s current assets consist of cash, inventories, and accounts receivable. How much cash does Taft have on its balance sheet?