Finance for Non-Finance Managers Financial Ratios 4

Question 1

Which of these scenarios would improve a company's debt-to-assets ratio?

Accepted Answer

Repaying a bank loan using retained earnings

Answer

Repaying debt with retained earnings reduces total liabilities while total assets may decrease proportionally less, lowering the debt-to-assets ratio.

Question 2

A company's receivables days outstanding (DSO) increases from 30 to 55 days. A manager should be concerned because:

Accepted Answer

Cash is being collected more slowly, tying up working capital

Answer

Rising DSO means customers are taking longer to pay, which delays cash inflows and can create working capital pressure.

Question 3

The DuPont analysis decomposes ROE into three components. Which set correctly represents these components?

Accepted Answer

Net profit margin, asset turnover, equity multiplier

Answer

DuPont analysis breaks ROE into net profit margin (profitability) × asset turnover (efficiency) × equity multiplier (leverage), revealing the drivers of shareholder returns.

Question 4

A company has an interest coverage ratio of 1.2. This is a warning sign because:

Accepted Answer

The company barely earns enough to cover its interest payments, leaving little buffer

Answer

An interest coverage ratio just above 1.0 means operating earnings barely exceed interest obligations, signaling financial stress and limited capacity to absorb downturns.

Question 5

Which ratio would a bank most likely focus on when deciding whether to extend additional credit to a business?

Accepted Answer

Debt service coverage ratio

Answer

The debt service coverage ratio (DSCR) measures whether operating income is sufficient to cover all debt payments, which is the key question lenders ask.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Financial Ratios 4