. An increase in financial leverage generally results in a higher return on equity (ROE).
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.
3. It is possible for a company to grow faster than its sustainable growth rate.
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 Software developers
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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