QUESTIONS :

 

An increase in financial leverage generally results in a higher return on equity (ROE).

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True

 

False

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A company’s return on assets should be greater than its return on equity.

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True

 

False

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An optimal current ratio should be greater than 1.0.

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True

 

False

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GoodTimes, Inc. has asset turnover of 0.5 times, a net profit margin of 10% and average total assets of $100, what is its net income (assuming no unusual items)?

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$50

 

$500

 

$5

 

The answer cannot be determined with the information provided

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Common-size financial statements are constructed in order to:

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Adjust for inflation and risk

 

Facilitate comparisons of different-sized companies

 

To comply with SEC requirements

 

All of the above

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A company builds a new plant and finances its construction by issuing stock. Which ratio is least likely to be affected, all else being equal?

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Current ratio

 

Debt to equity ratio

 

Debt to asset ratio

 

Net fixed assets to total assets

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A company has net working capital of $0, current liabilities of $25 and total assets equal to $100. What is its current ratio?

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0.0

 

1.0

 

0.5

 

4.0

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Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer question 9.

Sales in 2003 were $10,000. Therefore, the compounded average growth rate is:

 

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8.6%

 

6.7%

 

6.3%

 

Not enough information available

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The cash cycle measures the days required to produce finished goods or delivered services.

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True

 

False

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In general, an increase in a liability is a source of funds.

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True

False

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Chap7

3. The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.

Compute the following.

a. Average monthly rate of return for each stock

b. Standard deviation of returns for each stock

c. Covariance between the rates of return

d. The correlation coefficient between the rates of return

What level of correlation did you expect? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?

7. The following are monthly percentage price changes for four market indexes.

Compute the following.

a. Average monthly rate of return for each index

b. Standard deviation for each index

c. Covariance between the rates of return for the following indexes: DJIA–S&P 500 S&P 500–Russell 2000 S&P 500–Nikkei Russell 2000–Nikkei

d. The correlation coefficients for the same four combinations

e. Using the answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Discuss the two portfolios.

8. The standard deviation of Shamrock Corp. stock is 19 percent. The standard deviation of Cara Co. stock is 14 percent. The covariance between these two stocks is 100. What is the correlation between Shamrock and Cara stock?