True / False Questions 6. Residual income is another term for economic value add
ID: 2775586 • Letter: T
Question
True / False Questions
6. Residual income is another term for economic value added.
True False
7. EVA is the net profit of the firm adjusted for the cost of capital.
True False
8. ROE is equal to ROA when the firm has no debt.
True False
Multiple Choice Questions
9. When a firm's long-term debt-equity ratio is .98, the firm:
A. has too much long-term debt in relation to leases.
B. has less long-term debt than equity.
C. is nearing insolvency.
D. has as much in long-term liabilities as in equity.
10. If a firm's total debt ratio is greater than .5, then:
A. its current liabilities are quite high.
B. its debt-equity ratio exceeds 1.0.
C. it has too few total assets.
D. it has more long-term debt than equity.
11. An asset's liquidity measures its:
A. potential for generating a profit.
B. cash requirements.
C. ease and cost of being converted to cash.
D. proportion of debt financing.
12. Which of the following actions could improve a firm's current ratio if it is now less than 1.0?
A. Converting marketable securities to cash
B. Paying accounts payable with cash
C. Buying inventory on credit
D. Selling inventory at cost
13. A firm's quick ratio of .49 suggests the firm:
A. has a low level of current liabilities.
B. has been overstating the value of its inventory.
C. faces a potentially serious liquidity crisis.
D. should reduce its holdings of cash and/or marketable securities.
14. The inventory turnover ratio compares:
A. current assets to average inventory.
B. cost of goods sold to average inventory.
C. average receivables to average inventory.
D. average assets to average inventory.
15. What is the residual income for a firm with $1 million in total capital, $300,000 in net income, and a 20% cost of capital?
A. $100,000
B. $140,000
C. $240,000
D. $500,000
16. What is the residual income for a firm with $1 million in total capital, $300,000 in net income, and a 20% cost of capital?
A. $100,000
B. $140,000
C. $240,000
D. $500,000
17. Which of these indicates that a firm is efficient?
A. A high average collection period
B. A high day's sales in inventories
C. A low asset turnover
D. A high inventory turnover
Explanation / Answer
6) False
However, both the methods are same so we can say they are just synonyms.
EVA = Net operating income – Capital x cost of capital
Residual Income = Net operating income – average capital x cost of capital
Both the methods uses similar inputs and calculates the same results. So they are both same.
7)False
EVA method does not use Net profit but it uses Net operating income after taxes and then subtracts capital cost to calculate EVA.
8) True
Total Assets = Total equity + total debt
When there is no debt, Total asset is equal to Total equity and denominator for both the measures become same. Therefore, they will produce the same result.
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