A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the
industry benchmark. To achieve this goal, costs were cut in production through an investment in
efficient equipment, and the company achieved a higher profit margin. If this continues, you are certai...
D076 Finance By ME (Module Quizzes)
A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the
industry benchmark. To achieve this goal, costs were cut in production through an investment in
efficient equipment, and the company achieved a higher profit margin. If this continues, you are certain
that the firm will achieve its goal in two years. What is this an example of?
You are comparing the company's ratio to the goal and checking how the company is progressing
toward the goal.
For what purpose are market ratios used?
a) To measure how well a company uses its assets to generate sales or cash
b) To consider how a firm is financed
c) To evaluate the current share price of a public firm's stock
d) To assess a firm's ability to meet short-term obligations without raising external capital - ✔✔c) To
evaluate the current share price of a public firm's stock
Market ratios are used to evaluate whether the current share of a public firm's stock is correctly priced.
You are considering starting a new business to sell Widgets in your hometown. You can import the
Widgets at a low cost, and you hope to be able to sell them for significantly more. Which ratio can help
you calculate how much profit you will earn from the sale of each Widget? (Assume you are only
considering the cost of the Widget, not any other operating costs.)
,a) Operating margin
b) Accounts receivable turnover
c) Gross margin
d) Fixed asset turnover - ✔✔c) Gross margin
Gross margin tells you the percent of sales that become gross profit. The rest of the money earned from
sales is used for the production of goods.
What allows an investor to determine which financial activities are contributing to changes in the return
on equity?
a) Flexibility
b) Trend analysis
c) Cross-sectional analysis
d) DuPont framework - ✔✔d) DuPont framework
Decomposing the DuPont framework enables analysis of fundamental performance to determine which
financial activities are contributing to changes in the return on equity.
Knowing that you are taking this finance class, a friend asks you about two investment opportunities he
is considering. He wants to know which of the firms is using its assets more efficiently to generate sales.
Which set of information could help you determine this?
a) Firm A has an asset turnover of 4, and Firm B has an asset turnover of 2.5.
b) Firm A has a leverage ratio of 3, and Firm B has a leverage ratio of 1.5.
c) Firm A has a gross margin of 40%, and Firm B has a gross margin of 35%.
, d) Both firms have a return on assets of 5%, but Firm B has a higher profit margin. - ✔✔a) Firm A has an
asset turnover of 4, and Firm B has an asset turnover of 2.5.
Asset turnover is an indicator of how well a firm uses its assets to generate sales. Since Firm A generates
$4 of sales for every $1 of assets, it is using its assets more efficiently.
W&H Company wants to create a cash budget to better manage its cash flows. The financial manager
knows that the firm's labor costs and materials costs are too high for the level of sales each month. The
firm also needs to keep better track of its cash flows to assess its need for additional financing through
short-term loans.
W&H Inc.'s labor costs each month are an example of which item in a cash budget?
a) Minimum cash need
b) Cash disbursement
c) Cash receipt
d) Net cash for the month - ✔✔b) Cash disbursement
This is a cash disbursement for the firm because it represents cash going out during the month to pay
employees.
W&H Company wants to create a cash budget to better manage its cash flows. The financial manager
knows that the firm's labor costs and materials costs are too high for the level of sales each month. The
firm also needs to keep better track of its cash flows to assess its need for additional financing through
short-term loans.
After W&H Inc. has developed a cash budget, what should the company do in the following months?
a) It should invest any profits in new capital.
b) It should begin tracking its cash inflows and outflows.
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