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

o True

o False

Reasoning: It may or may not increase ROE, depending upon the level of leverage and the interest cost of debt.

2. Leverage and liquidity generally rise or fall together.

o True

o False

3. It is possible for a company to grow faster than its sustainable growth rate.

o True

o False

4. Which of the following ratios uses sales in the denominator?

o Days in inventory

o Receivables turnover

o Cash ratio

o Average collection period

5. For a levered firm, EBIT is equivalent to:

o Net income

o Pro forma earnings

o Operating profit

o Net income before taxes

6. Common-size financial statements are constructed in order to:

o Adjust for inflation and risk

o Facilitate comparisons of different-sized companies

o To comply with SEC requirements

o All of the above

7. A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. Its days in inventory is:

o 36.5 days

o 24.3 days

o 73.0 days

o Not enough information

8. For which of the following generic businesses would you expect a combination of high asset turnover and low profit margins?

o Supermarkets

o Banks

o Software developers

o Airlines

9. 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.


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