1. Increased leverage allows companies to control more assets and increase their ROE. What’s bad about leverage?
A. It reduces productivity, which can decrease overall
ROE.
B. Leverage-based profits are not cash-based and are
ignored by finance.
C. Leverage multiplies losses, too, as it increases a
company’s risk
D. There is nothing bad about leverage—using other people’s money is a good way to increase the value of the company.
2. What types of companies are more likely to have
high leverage?
A. Companies with high growth opportunities in new
industries
B. Companies in stable, predictable industries with
reliable cash flows
C. Technology companies
D. Companies with low profitability
3. In 2009, Warren Buffett invested $3 billion in Dow Chemical, via an issuance of preferred stock. Which of the following is
not an advantage of preferred
stock to the owner of the preferred stock?
A. In the case of bankruptcy, preferred stockholders
get paid before common stockholders.
B. Even when common stockholders get no
dividends, preferred stockholders may get
dividends.
C. Preferred stock is associated with ownership in the
company, unlike debt.
D. Preferred stock dividends must be in even-
numbered percentages (2 percent, 4 percent, etc.).
4. Which of the following is least likely to be listed as an asset on a balance sheet?
A. Gilead Sciences Inc.’s patent for the highly profit-
able hepatitis C treatment it developed in-house
B. Google’s corporate headquarters
C. Payments owed to Ford Motor Company by dealer-
ships for the purchase of cars
D. The $42 billion in Facebook’s bank accounts at
year-end 2017
5. Which of the following companies is most likely to have the highest inventory turnover?
A. Subway, a fast-food restaurant company
B. Books-A-Million, a bookstore chain
C. Whole Foods, a grocery store
D. British Airways, an airline
6. Which ratio is a distinguishing feature of retail companies?
A. High ROE
B. Low receivables collection period
C. High inventory turnover
D. High total debt/total assets
7. BHP Billiton is one of the world’s largest mining companies, and accounts receivable make up 21 percent
of its total assets (in 2016). Which of the following
companies is most likely to owe BHP Billiton money
as part of BHP Billiton’s accounts receivable?
A. Bank of America, a global bank
B. Mining Recruitment Agency, a recruiter for em-
ployees specialized in mining
C. Sysco, a food distributor
D. United States Steel Corporation, a steel manufacturer
8. Which of the following constituencies care most about a company’s current ratio?
A. Its stockholders
B. Its suppliers
C. Its competitors
D. Its customers
9. True or false: a high ROE is always a good thing.
A. True
B. False
10. Home Depot, a home improvement supply store, issued $2 billion in debt in late 2016. What is the main difference between debt and other liabilities,
like accounts payable?
A. Debt carries an explicit interest rate.
B. Debt represents ownership in the company.
C. Debt is a residual claim.
D. Debt is only owed to suppliers
