4. Comparability between enterprises is more difficult to obtain than comparability within a single enterprise. True False 5. Generally, the first concern of a financial analyst is a firm's liquidity. True False 6. The acid test ratio is regarded primarily as a measure of a company's long term liquidity situation. True False

4. Comparability between enterprises is more difficult to obtain than comparability within a single enterprise. True False 5. Generally, the first concern of a financial analyst is a firm's liquidity. True False 6. The acid test ratio is regarded primarily as a measure of a company's long term liquidity situation. True False

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 9QE

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Similar questions

Which of the following statements is false?(a) The quickest way to determine whether a firm has too much debt is to calculate the debt-to-equity ratio.(b) The best guideline to determine the firm's liquidity is to calculate the current ratio.(c) From the investor's point of view, the rate of return on common equity is a good indicator of whether the firm is generating an acceptable return to the investor.( d) We can determine the operating margin by expressing net income as a percentage of total sales.
A6) Finance Which one of the following statements is not correct? a) Market timing theory argues that companies issue equity when their P/E ratio is exceptionally high b) According to static trade-off theory agency costs of equity increase when CEO’s ownership of the firm is low c) Firm has no target capital structure if it follows the pecking order theory d) Home-made leverage is possible when no market imperfections exist
Which of the following is NOT a conclusion drawn from M&M's Propositions 1 and 2? a. Shareholder's required return rises with leverage. b. The WACC does not change as capital structure change. c. Firm value is determined by the left hand of the balance sheet the firm's assets, and the cash flow generated by them. d. The WACC is determined by the riskiness of the company's business (assets). e. A firm can change its market value by splitting its cash flows into different streams.
9. Which of the following statements is CORRECT? a. A firm's business risk is determined solely by the financial characteristics of its industry. b. The factors that affect a firm's business risk include industry characteristics and economic conditions, both of which are generally beyond the firm's control. c. One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the risk of bankruptcy. d. A firm's financial risk can be minimized by diversification. e. The amount of debt in its capital structure determines a company's EBIT and business risk. f. All of the above answers are correct. g. None of the above answers is correct.
The use of financial leverage by the firm has a potential impact on which of the following? (1) The risk associated with the firm's operations. (2) The risk experienced by the stockholders (3) The variability of operating income (4) The variability of net income (5) The probability of going bankrupt Group of answer choices: 1, 2, 3 1, 3, 5 3, 4, 5 2, 3, 4 2, 4, 5
What types of firms would we expect to observe higher direct agency costs of equity, such as consuming excessive perquisites by management ? Question 7 options: a) Firms with high free cash flows b) Firms with fewer growth opportunities c) Firms with weak governance structures d) All of the above options are correct e) None of the options are correct
How many statements below are correct about the Modigliani-Miller theorem? i. The theorem is not an exact description of reality. ii. The theorem provides a benchmark to understand how the capital structure could affect WACC. iii. The theorem implies that firms have benefited from financing with debt due to a higher required rate of return on debt compared with equity. iv. The value of the firm is not affected by its capital structure under any assumptions.
1). Two companies operate in the same industry and tend to follow practically identical patterns of performance. Which statement describes the relationship between the returns of the two companies? (a). They show perfect negative correlation. (b). They show imperfect correlation. (c). They are uncorrelated. (d). They show perfect positive correlation. 2). What is meant by the term ‘junk bond’? (a). It is a financial security issued by retail chains selling inexpensive items. (b). It is a financial instrument with predominantly debt characteristics but offering high rate and high risk, and sometimes offering an equity kicker. (c). It is a worthless bond. (d). It is a financial instrument with predominantly equity characteristics but offering high dividends and high risk, and sometimes offering a linked debt kicker. 3). Which of the following best describes what determines the cost of debt capital? (a). The cost to the firm of income less taxable profits (b). The expected…
9. In an EBIT / EPS analysis, the risk behavior measured by the coefficient of variation makes it possible to verify that:a) The financing risk increases with increasing leverage.b) Financial risk is not directly dependent on leverage.c) Profitable companies borrow more frequently than unprofitable companies.d) UPA may be increased although the risk may decrease.
(1) Why is it so important to be aware of extraordinaryitems when analyzing a company’s finances? (2) Whyis the quick ratio frequently a better indicator than thecurrent ratio of a firm’s ability to pay its bills?
A comparable firm (ie, same industry and similar operations as our firm) has an equity bela of 1.3 and a debt-in-value ratio of 0.2. The debt of the comparable firm is risk-free. Based on the comparable firm, whal is an appropriate asset heta for our firm? Give your answer to the closest 0.01
Which of the following statements is most correct?(a) Generally, firms with high profit margins have high asset turnover ratios.(b) Having a high current ratio and a high quick ratio is always a good indication a firm is managing its liquidity position well.(c) Knowing that return on assets {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.(d) One way to improve the current ratio is to use cash to pay off currentliabilities.