This is a selection of True/False questions from a corporate finance course I took. The questions are designed to be tricky, so read them carefully. If you dont recognize certain terms, use this as a good opportunity to learn what they mean and how they can be used. I have found Investopedia.com to be a good reference for this. You might want to start with what ‘free cash flow’ is. In future articles we will try to explain some of the answers and how these ratios are important to your company and general investing.
1. (T/F) An increase in ‘accounts receivable days outstanding’ will reduce free cash flow to the firm (FCFF).
2. (T/F) Reducing debt balances will decrease free cash flow to Equity (FCFE), all else equal.
3. (T/F) An increase in dividends paid will reduce free cash flow to the firm, all else equal.
4. (T/F) An increase in ‘accounts payable days’ will reduce the length of the ‘cash cycle’.
5. (T/F) An increase in interest expense will reduce the Return on Invested Capital.
6. (T/F) Comparing two firms with identical operating performance and size, the company with the higher debt ratio will experience greater variability in its Return on Equity, all else equal.
7. (T/F) Holding other factor constant, if a company increases its accounts payable balances and uses the cash to repurchase its own stock, the Return on Invested Capital will improve.
8. (T/F) The Return on Assets is unaffected by a company’s financing choice of debt versus equity.
9. (T/F) If two companies have the same level of current assets and current liabilities, the Quick Ratio will identify the company with more inventory as having lower liquidity risk (greater liquidity).
10. (T/F) A problem with using net income as a performance measure is that it is likely to lead to over-investment.
Answers: (1. T, 2. T, 3. F, 4. T, 5. F, 6. T, 7. T, 8. F, 9. F, 10. T)