Chapter 4 Evaluating a Firm's Financial Performance

43) Which of the following statements concerning Economic Value Added (EVA) is MOST correct?

A) the higher the cost of capital, the higher the EVA, other things being held constant

B) EVA can be negative even if operating profits are positive.

C) A company with positive net income will have positive EVA.

D) Higher operating return on assets will result in lower EVA for a company with a debt ratio over 50%.

44) The acid-test ratio of a firm would be unaffected by which of the following?

A) Accounts payable are reduced by obtaining a short-term loan.

B) Common stock is sold and the money is invested in marketable securities.

C) Inventories are sold for cash.

D) Inventories are sold on a short-term credit basis.

45) The acid-test ratio of a firm would be unaffected by which of the following?

A) Several short-term loans are consolidated and paid off using long-term debt.

B) Equipment is purchased, financed by a long-term debt issue.

C) Additional inventory is purchased for cash.

D) Large accounts receivable balances are collected.

46) The current ratio of a firm would be increased by which of the following?

A) Land held for investment is sold for cash.

B) Equipment is purchased, financed by a long-term debt issue.

C) Inventories are sold for cash.

D) Inventories are sold on a credit basis.

47) The current ratio of a firm would be decreased by which of the following?

A) Land held for investment is sold for cash.

B) Equipment is purchased, financed by a long-term debt issue.

C) Inventories are sold for cash.

D) Inventories are sold on a long-term credit basis.

48) The current ratio of a firm would equal its quick ratio whenever

A) the firm has no inventory.

B) the firm's inventory is equal to its other current assets.

C) the firm's inventory is equal to its current liabilities.

D) the firm's current ratio is equal to one.

49) Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection period is

A) 18.25 days.

B) 36.50 days.

C) 90 days.

D) 40.56 days.

Please refer to Table 4-1 for the following questions.

Table 4-1

Stewart Company

Balance Sheet

Assets:
Cash and marketable securities		$600,000
Accounts receivable		900,000
Inventories		1,500,000
Prepaid expenses		75,000
Total current assets		$3,075,000
Fixed assets	8,000,000
Less: accum. depr.	(2,075,000)
Net fixed assets		$5,925,000
Total assets		$9,000,000
Liabilities:
Accounts payable		$800,000
Notes payable	700,000
Accrued taxes		50,000
Total current liabilities		$1,550,000
Long-term debt		2,500,000
Owner's equity (1 million shares of common stock outstanding)		4,950,000
Total liabilities and owner's equity		$9,000,000
Net sales (all credit)		$10,000,000
Less: Cost of goods sold		(3,000,000)
Selling and administrative expense		(2,000,000)
Depreciation expense		(250,000)
Interest expense		(200,000)
Earnings before taxes		4,550,000
Income taxes		(1,820,000)
Net income		$2,730,000

50) Based on the information in Table 4-1, the current ratio is

A) 1.92.

B) 1.98.

C) 2.86.

D) 2.88.

51) Based on the information in Table 4-1, the acid-test ratio is

A) 1.71.

B) 1.67.

C) 1.02.

D) 0.98.

52) Based on the information in Table 4-1, the average collection period is

A) 36.50 days.

B) 32.85 days.

C) 46.34 days.

D) 29.85 days.