CSM Financial Analysis & Decision Making 2 — Questions and Answers
Question 1: A company's quick ratio is 0.8. What does this indicate?
- The company has strong long-term solvency
- The company may struggle to meet short-term obligations without selling inventory (Correct answer)
- The company is highly profitable
- The company has excessive cash reserves
Correct answer: The company may struggle to meet short-term obligations without selling inventory
A quick ratio below 1.0 means current liabilities exceed liquid assets (excluding inventory), signaling potential short-term liquidity risk.
Question 2: Which capital budgeting technique accounts for the time value of money AND provides a dollar-value measure of added shareholder wealth?
- Payback Period
- Accounting Rate of Return
- Net Present Value (Correct answer)
- Internal Rate of Return
Correct answer: Net Present Value
NPV discounts future cash flows to present value and directly measures the dollar amount of value created, making it the preferred capital budgeting method.
Question 3: A firm has EBIT of $500,000, interest expense of $100,000, and taxes of $120,000. What is net income?
- $280,000 (Correct answer)
- $380,000
- $400,000
- $500,000
Correct answer: $280,000
Net income = EBIT − Interest − Taxes = $500,000 − $100,000 − $120,000 = $280,000.
Question 4: In sensitivity analysis, what is a 'tornado chart' used for?
- Displaying seasonal revenue trends
- Ranking input variables by their impact on the output (Correct answer)
- Mapping competitive positioning
- Forecasting future cash flows
Correct answer: Ranking input variables by their impact on the output
A tornado chart ranks variables from most to least influential on an outcome, helping managers focus on the assumptions that matter most.
Question 5: Which ratio best measures how efficiently a company collects its receivables?
- Inventory Turnover
- Debt-to-Equity Ratio
- Days Sales Outstanding (DSO) (Correct answer)
- Gross Margin
Correct answer: Days Sales Outstanding (DSO)
DSO measures the average number of days it takes to collect payment after a sale, directly reflecting receivables collection efficiency.
Question 6: A company issues $1,000,000 in bonds at a coupon rate of 6% when market interest rates are 8%. The bonds will sell at:
- Par value ($1,000,000)
- A premium above par
- A discount below par (Correct answer)
- Zero value until maturity
Correct answer: A discount below par
When market rates exceed the coupon rate, investors demand a lower price (discount) to achieve the higher market yield.
Question 7: What does a high asset turnover ratio indicate about a company?
- High financial leverage
- Efficient use of assets to generate revenue (Correct answer)
- Poor inventory management
- High profit margins
Correct answer: Efficient use of assets to generate revenue
Asset turnover (Revenue ÷ Total Assets) measures how effectively a firm uses its assets to generate sales; a higher ratio indicates greater efficiency.
CSM Financial Analysis & Decision Making 2
A company's quick ratio is 0.8.
What does this indicate?