Test Bank For Investments Analysis and Behavior 2nd Edition Mark Hirschey

Test Bank for Investments: Analysis and Behavior,
2nd Edition: Mark Hirschey
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Test Bank for Investments: Analysis and Behavior, 2nd Edition: Mark Hirschey
10
1. Stock market speculation is the process of buying and holding for dividend income and long-term
capital appreciation the shares of companies with inherently attractive economic prospects.
True False
2. Basic earnings per share is the amount of net income divided by the number of shares
outstanding after consideration for the possible conversion of stock options.
True False
3. Investors seek to profit by sharing in the normal and predictable good fortune of companies.
True False
4. When profit margins are low, the company is operating at a low level of efficiency, competitive
pressure is modest, or both.
True False
5. Return on assets is defined as net income divided by the book value of tangible assets minus
total liabilities
True False
6. Book value per share is the sum of paid in capital and retained earnings, minus any amount paid
for share repurchases.
True False
7. ROE will fall with a rise in total asset turnover.
True False
8. Rich profit margins do not necessarily guarantee a high rate of return on stockholders' equity.
True False
9. During economic booms, leverage can dramatically decrease the firm's profit rate. During
recessions and other economic contractions, leverage can just as dramatically increase realized
rates of return,
True False
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10. For a typical year during the post-World War II period, the average ROE tends to fall in a range
between 12% and 14%.
True False
11. Market capitalization is synonymous with share price.
True False
12. Microsoft is an example of a company that has enjoyed enviable ROE because of high profit
margins.
True False
13. Large companies with market capitalizations above $5 billion are generally considered less risky
than mid-cap stocks.
True False
14. When a P/E ratio of 20:1 is paid, the earnings yield is 5%.
True False
15. The price-book ratio shows the relationship between a stock's current price and total (tangible
plus intangible) assets per share.
True False
16. Over the long-term, dividend income represents three-fourths of the total return earned on
common stocks.
True False
17. P/E and P/B ratios for the DJIA rose to historic highs during the late 1990s, and dividend yield
plummeted to historic lows.
True False
18. Financial liquidity ratios are useful to determine the amount of financial leverage a firm is using.
True False
19. Accounting restatements are not important because they do not change the basic business
operations of the firm.
True False
20. Stockholders own a public corporation.
True False
21. Holding all else equal, ROE will rise with an increase in:
A. total assets.
B. sales.
C. stockholders' equity.
D. none of these.
22. A "snapshot" of the company's financial well being at a specific point in time is given by the:
A. balance sheet.
B. income statement.
C. cash flow statement.
D. none of these.
A firm has the following figures in its annual report:
23. Compute the firm's return on equity.
A. 14.8%
B. 8.8%
C. 25.2%
D. 15.0%
24. Compute the firm's receivables turnover.
A. 8.0 times
B. 11.6 times
C. 1.9 times
D. 21.2 times
25. Holding all else equal, EBITDA will rise with an increase in:
A. assets.
B. profit margins.
C. interest expense.
D. depreciation.
26. Free cash flow rises with an increase in:
A. interest expenses.
B. amortization costs.
C. gross income.
D. capital expenditures.
27. Financial ratios that can be used to assess a company's ability to pay its bills are called:
A. profitability ratios.
B. leverage ratios.
C. operating efficiency ratios.
D. financial liquidity ratios.
28. Fully diluted earnings per share fall with a rise in:
A. the stock price.

B. basic earnings per share.
C. employee stock option exercises.
D. employee stock option expirations.
29. Stock market investment is the:
A. purchase or sale of securities on the expectation of capturing short-term trading profits from
share-price fluctuations tied to the temporary good fortune of a given company.
B. sharing in the unpredictable good fortune of companies.
C. buying and holding for dividend income and long-term capital appreciation the shares of
companies with inherently attractive economic prospects.
D. means by which one benefits from a short-term or fundamental change in the economic
prospects facing a company.
30. All else equal, a rise in Asset Turnover will result in a rise in:
A. depreciation.
B. leverage.
C. profit margin.
D. ROE.
31. ROE will rise with an increase in:
A. sales.
B. tangible assets.
C. book value per share.
D. net income.
32. A P/E ratio of 25 implies:
A. a dividend yield of 4%.

B. an earnings yield of 4%.
C. a ROE of 25%.
D. a ROA of 25%.
33. An attractive measure of the firm's success in managing operating and financial leverage is the
rate of:
A. return on assets.
B. return on equity.
C. return on sales.
D. earnings per share growth.
34. One of the problems with accrual accounting is that revenue can be reported without any
increase in:
A. debt.
B. cash.
C. sales.
D. accounts receivable.
35. ROE is the product of profit margin times leverage times:
A. total asset turnover.

B. sales.
C. total assets.
D. stock holders' equity.
36. Net income divided by the number of shares outstanding after consideration for the possible
conversion of stock options is called:
A. earnings per share.

C. fully diluted earnings per share.
D. none of these.
37. Corporate restructuring charges can have the effect of boosting:
A. profit margins.
B. net income.
C. return on equity.
D. stockholders' equity.
38. Select the true statement from among the following:
A. Following a 2:1 stock split, the market capitalization of the firm doubles.
B. Following a 2:1 stock split, the market capitalization of the firm falls by one-half.
C. Stock splits enhance the economic returns of a company.
D. The earnings per share number at any point in time is somewhat arbitrary.
39. For a typical year during the post-World War II period, the average ROE tends to fall in a range
between:
A. 4% and 6%.
B. 8% and 10%.
C. 12% and 14%.
D. 20% and 25%.
40. Capital appreciation potential tends to be greater for firms with high:
A. earnings growth.
B. price-earnings ratios.
C. market cap.
D. total assets.
41. Investor risk tends to rise with an increase in:

B. earnings yield.
C. price-earnings ratios.
D. profit margins.
42. The cost of duplicating productive capability using current technology is called:
A. historical cost.
B. replacement cost.
C. current cost.
D. opportunity cost.
43. Compute the firm's net profit margin.
A. 23.3%
B. 27.5%
C. 16.1%
D. 14.8%
44. Compute the firm's current ratio.
A. 3.07
B. 0.17
C. 3.57
D. 1.90
45. Financial ratios that can be used to assess how well management is using a company's assets to
generate sales and profits are called:
B. leverage ratios.
46. Companies may try to hide a basic deterioration in economic performance through:
A. stock market speculation.

B. dividend increases.
C. accounting restatements.
D. valuation indicators.
47. A higher degree of financial leverage in a firm implies:
A. a more valuable firm.

B. a less valuable firm.
C. a lower risk firm.
D. none of the above.
48. In 2005, Chevron's Net Operating Profit After Taxes was $13.65 billion. The firm is capitalized
with $10.22 billion in debt and $137.45 billion in equity. If the cost of capital is 9%, compute
Chevron's economic value added (EVA):
A. $3.43 billion
B. $2.77 billion
C. $1.28 billion
D. $0.36 billion
49. Savvy investors consider the ongoing restating of accounting statements as a sign of:
A. fraud.
B. competent management.
C. deterioration in economic performance.
D. auditor oversight.
50. Free cash flow has become an especially important measure of economic profitability because:
A. accrual accounting information is precise and cannot be manipulated.

B. it is perceived as being more difficult to manipulate than traditional accounting information.
C. net profit excludes depreciation.
D. it is less dependent on economic profits.
51. What are intangible assets and why are they important to investors?
52. What are typical ranges for the DJIA's P/E and P/B ratios during the post-WWII era?
53. Why should investors use caution when using book-value growth as an indicator of growth in the
value of a firm?
54. The 2004 Income Statement and Balance Sheet information for Coca-Cola is shown below.
Compute the following ratios for Coke:
Net Profit Margin, Return on Equity, Return on Assets,
Total Asset Turnover, Leverage Ratio, Receivables Turnover,
Inventory Turnover, Debt to Equity, Debt to Total Capital,
Current Ratio, Quick Ratio, Interest Coverage
55. Using Johnson Control's financial statements, compute its net profit margin, ROE, Asset
Turnover, and Leverage Ratio using net cash flow from operations information for 2004. Using
the DuPont formula, what is the source of Johnson Control's ROE?
56. Consider the following partial balance sheet for Delta Airlines. Compute Delta's current ratio and
quick ratio. Comment on Delta's liquidity.
10 Key
1. Stock market speculation is the process of buying and holding for dividend income and long-
term capital appreciation the shares of companies with inherently attractive economic
prospects.
FALSE
Hirschey - Chapter 10 #1
2. Basic earnings per share is the amount of net income divided by the number of shares
outstanding after consideration for the possible conversion of stock options.
FALSE
3. Investors seek to profit by sharing in the normal and predictable good fortune of companies.
TRUE
4. When profit margins are low, the company is operating at a low level of efficiency, competitive
pressure is modest, or both.
FALSE
5. Return on assets is defined as net income divided by the book value of tangible assets minus
total liabilities
FALSE
6. Book value per share is the sum of paid in capital and retained earnings, minus any amount
paid for share repurchases.
TRUE
7. ROE will fall with a rise in total asset turnover.
FALSE
8. Rich profit margins do not necessarily guarantee a high rate of return on stockholders' equity.
TRUE
9. During economic booms, leverage can dramatically decrease the firm's profit rate. During
recessions and other economic contractions, leverage can just as dramatically increase
realized rates of return,
FALSE
10. For a typical year during the post-World War II period, the average ROE tends to fall in a
range between 12% and 14%.
TRUE
11. Market capitalization is synonymous with share price.
FALSE
12. Microsoft is an example of a company that has enjoyed enviable ROE because of high profit
margins.
TRUE
13. Large companies with market capitalizations above $5 billion are generally considered less
risky than mid-cap stocks.
TRUE
14. When a P/E ratio of 20:1 is paid, the earnings yield is 5%.
TRUE
earnings yield = 1= 1/20 = 5%

15. The price-book ratio shows the relationship between a stock's current price and total (tangible
plus intangible) assets per share.
FALSE
16. Over the long-term, dividend income represents three-fourths of the total return earned on
common stocks.
FALSE
17. P/E and P/B ratios for the DJIA rose to historic highs during the late 1990s, and dividend yield
plummeted to historic lows.
TRUE
18. Financial liquidity ratios are useful to determine the amount of financial leverage a firm is
using.
FALSE
19. Accounting restatements are not important because they do not change the basic business
operations of the firm.
FALSE
20. Stockholders own a public corporation.
TRUE
21. Holding all else equal, ROE will rise with an increase in:
A. total assets.
B. sales.
C. stockholders' equity.
D. none of these.
22. A "snapshot" of the company's financial well being at a specific point in time is given by the:
A. balance sheet.
B. income statement.
C. cash flow statement.
D. none of these.
A firm has the following figures in its annual report:
Hirschey - Chapter 10
23. Compute the firm's return on equity.
A. 14.8%
B. 8.8%
C. 25.2%
D. 15.0%
ROE = NI / Equity = 197/1,330 = 0.148
24. Compute the firm's receivables turnover.
A. 8.0 times
B. 11.6 times
C. 1.9 times
D. 21.2 times
receivables turnover = Sales / Receivables = 1,220 / 105 = 11.62

25. Holding all else equal, EBITDA will rise with an increase in:
A. assets.
B. profit margins.
C. interest expense.
D. depreciation.
26. Free cash flow rises with an increase in:
A. interest expenses.
B. amortization costs.
C. gross income.
D. capital expenditures.
27. Financial ratios that can be used to assess a company's ability to pay its bills are called:
B. leverage ratios.
28. Fully diluted earnings per share fall with a rise in:
A. the stock price.

C. employee stock option exercises.
D. employee stock option expirations.
29. Stock market investment is the:
A. purchase or sale of securities on the expectation of capturing short-term trading profits from
share-price fluctuations tied to the temporary good fortune of a given company.
B. sharing in the unpredictable good fortune of companies.
C. buying and holding for dividend income and long-term capital appreciation the shares of
companies with inherently attractive economic prospects.
D. means by which one benefits from a short-term or fundamental change in the economic
prospects facing a company.
30. All else equal, a rise in Asset Turnover will result in a rise in:
A. depreciation.
B. leverage.
C. profit margin.
D. ROE.
31. ROE will rise with an increase in:
A. sales.
B. tangible assets.
C. book value per share.
D. net income.
32. A P/E ratio of 25 implies:
A. a dividend yield of 4%.

B. an earnings yield of 4%.
C. a ROE of 25%.
D. a ROA of 25%.
earnings yield = 1= 1/25 = 4%

33. An attractive measure of the firm's success in managing operating and financial leverage is
the rate of:
A. return on assets.
B. return on equity.
C. return on sales.
D. earnings per share growth.
34. One of the problems with accrual accounting is that revenue can be reported without any
increase in:
A. debt.
B. cash.
C. sales.
D. accounts receivable.
35. ROE is the product of profit margin times leverage times:

B. sales.
C. total assets.
D. stock holders' equity.
36. Net income divided by the number of shares outstanding after consideration for the possible
conversion of stock options is called:
A. earnings per share.

C. fully diluted earnings per share.
D. none of these.
37. Corporate restructuring charges can have the effect of boosting:
A. profit margins.
B. net income.
C. return on equity.
D. stockholders' equity.
38. Select the true statement from among the following:
A. Following a 2:1 stock split, the market capitalization of the firm doubles.
B. Following a 2:1 stock split, the market capitalization of the firm falls by one-half.
C. Stock splits enhance the economic returns of a company.
D. The earnings per share number at any point in time is somewhat arbitrary.
39. For a typical year during the post-World War II period, the average ROE tends to fall in a
range between:
A. 4% and 6%.
B. 8% and 10%.
C. 12% and 14%.
D. 20% and 25%.
40. Capital appreciation potential tends to be greater for firms with high:
A. earnings growth.
B. price-earnings ratios.
C. market cap.
D. total assets.
41. Investor risk tends to rise with an increase in:

B. earnings yield.
C. price-earnings ratios.
D. profit margins.
42. The cost of duplicating productive capability using current technology is called:
A. historical cost.
B. replacement cost.
C. current cost.
D. opportunity cost.
43. Compute the firm's net profit margin.
A. 23.3%
B. 27.5%
C. 16.1%
D. 14.8%
net profit margin = NI / Sales = 197 / 1,220 = 0.1615
44. Compute the firm's current ratio.
A. 3.07
B. 0.17
C. 3.57
D. 1.90
current ratio = CA / CL = 375 /122 = 3.074
45. Financial ratios that can be used to assess how well management is using a company's assets
to generate sales and profits are called:
B. leverage ratios.
46. Companies may try to hide a basic deterioration in economic performance through:
A. stock market speculation.

B. dividend increases.
C. accounting restatements.
D. valuation indicators.
47. A higher degree of financial leverage in a firm implies:
A. a more valuable firm.

B. a less valuable firm.
C. a lower risk firm.
D. none of the above.
48. In 2005, Chevron's Net Operating Profit After Taxes was $13.65 billion. The firm is capitalized
with $10.22 billion in debt and $137.45 billion in equity. If the cost of capital is 9%, compute
Chevron's economic value added (EVA):
A. $3.43 billion
B. $2.77 billion
C. $1.28 billion
D. $0.36 billion
EVA = $13.65 ($10.22 + $137.45) 0.09 = $0.36 billion
49. Savvy investors consider the ongoing restating of accounting statements as a sign of:
A. fraud.
B. competent management.
C. deterioration in economic performance.
D. auditor oversight.
50. Free cash flow has become an especially important measure of economic profitability
because:
A. accrual accounting information is precise and cannot be manipulated.

B. it is perceived as being more difficult to manipulate than traditional accounting information.
C. net profit excludes depreciation.
D. it is less dependent on economic profits.
51. What are intangible assets and why are they important to investors?
Intangible assets are valuable holdings that have no physical form. Examples of intangible
assets include brand names, advertising expenses, research and development expenses,
patents, and managerial ability. Such assets do not show up on balance sheets or in cash flow
and income statements, but undeniably add value to a firm. As a result, accounting balance
sheet information and income and cash-flow statements offer only a distorted view of true
economic performance for many companies. Investors can profit by identifying unrecognized
intangible assets that will increase firm value in the future. An investor who buys stock in a
company with unrecognized intangible assets has a good chance of earning above-market
returns once other investors recognize the value of these assets.
52. What are typical ranges for the DJIA's P/E and P/B ratios during the post-WWII era?
In the normal course of events, the DJIA's P/E has usually fallen between 10:1 and 20:1
during the post-WWII era. The DJIA has closed the year with its P/E at or below the 10:1 mark
in only a handful of instances during the past 50 years. Similarly, the DJIA rarely closes the
year with its P/E at or above the 20:1 mark. P/B ratios are commonly found in a range near
1.5:1 to 2:1. Rarely has the year-end P/B ratio for the DJIA fallen below 1:1 or risen above 3:1.

53. Why should investors use caution when using book-value growth as an indicator of growth in
the value of a firm?
Book-value growth can come from multiple and sometimes even illegitimate sources that do
not reflect growth in the intrinsic value of a firm. Book-value growth generated internally stems
from a rapid buildup in retained earnings and represents growth in the value of a firm.
However, investors must be cautious when book-value growth merely stems from accounting
adjustments or other external factors. For example, rapid book-value growth sometimes simply
reflects the effects the effects of mergers or other corporate acquisitions. The fairly recent
implosions of Enron Corp. and Arthur Anderson have reminded investors of the dangers
inherent to those who rely on hard to interpret figures as measures of firm value.

54. The 2004 Income Statement and Balance Sheet information for Coca-Cola is shown below.
Compute the following ratios for Coke:
Net Profit Margin, Return on Equity, Return on Assets,
Total Asset Turnover, Leverage Ratio, Receivables Turnover,
Inventory Turnover, Debt to Equity, Debt to Total Capital,
Current Ratio, Quick Ratio, Interest Coverage
Net Profit Margin = 4,847 / 21,962 = 22.1%
Return on Equity = 4,847 / 15,935 = 30.4%
Return on Assets = 4,847 / 31,327 = 15.5%
Total Asset Turnover = 21,962 / 31,327 = 0.70
Leverage Ratio = 31,327 / 15,935 = 1.97
Receivables Turnover = 21,962 / 2,171 = 10.1
Inventory Turnover = 7,638 / 1,420 = 5.38
Debt to Equity = 1,158 / 15,935 = 0.07
Debt to Total Capital = 1,158 / 31,327 = 0.04
Current Ratio = 12,094 / 10,971 = 1.10
Quick Ratio = (6,707+61+2,171) / 10,971 = 0.81
Interest Coverage = 6,418 / 196 = 32.7

55. Using Johnson Control's financial statements, compute its net profit margin, ROE, Asset
Turnover, and Leverage Ratio using net cash flow from operations information for 2004. Using
the DuPont formula, what is the source of Johnson Control's ROE?
56. Consider the following partial balance sheet for Delta Airlines. Compute Delta's current ratio
and quick ratio. Comment on Delta's liquidity.
Test Bank for Investments: Analysis and Behavior, 2nd Edition: Mark Hirschey
10 Summary
Category # of Questions
Hirschey - Chapter 10 57
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Test Bank for Investments: Analysis and Behavior,

2nd Edition: Mark Hirschey

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7. ROE will fall with a rise in total asset turnover.

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11. Market capitalization is synonymous with share price.

20. Stockholders own a public corporation.

A firm has the following figures in its annual report:

23. Compute the firm's return on equity.

24. Compute the firm's receivables turnover.

26. Free cash flow rises with an increase in:

A. the stock price.

29. Stock market investment is the:

31. ROE will rise with an increase in:

32. A P/E ratio of 25 implies:

A. a dividend yield of 4%.

A. total asset turnover.

A. earnings per share.

37. Corporate restructuring charges can have the effect of boosting:

38. Select the true statement from among the following:

41. Investor risk tends to rise with an increase in:

A. total asset turnover.

43. Compute the firm's net profit margin.

44. Compute the firm's current ratio.

A. stock market speculation.

47. A higher degree of financial leverage in a firm implies:

A. a more valuable firm.

A. accrual accounting information is precise and cannot be manipulated.

7. ROE will fall with a rise in total asset turnover.

11. Market capitalization is synonymous with share price.

earnings yield = 1= 1/20 = 5%

Hirschey - Chapter 10 #14

20. Stockholders own a public corporation.

A firm has the following figures in its annual report:

23. Compute the firm's return on equity.

ROE = NI / Equity = 197/1,330 = 0.148

Hirschey - Chapter 10 #23

24. Compute the firm's receivables turnover.

receivables turnover = Sales / Receivables = 1,220 / 105 = 11.62

Hirschey - Chapter 10 #24

26. Free cash flow rises with an increase in:

A. the stock price.

31. ROE will rise with an increase in:

32. A P/E ratio of 25 implies:

A. a dividend yield of 4%.

earnings yield = 1= 1/25 = 4%

Hirschey - Chapter 10 #32

35. ROE is the product of profit margin times leverage times:

A. total asset turnover.

A. earnings per share.

38. Select the true statement from among the following:

41. Investor risk tends to rise with an increase in:

A. total asset turnover.

43. Compute the firm's net profit margin.

net profit margin = NI / Sales = 197 / 1,220 = 0.1615

Hirschey - Chapter 10 #43

44. Compute the firm's current ratio.

current ratio = CA / CL = 375 /122 = 3.074

Hirschey - Chapter 10 #44

A. stock market speculation.

47. A higher degree of financial leverage in a firm implies:

A. a more valuable firm.

EVA = $13.65 ($10.22 + $137.45) 0.09 = $0.36 billion