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19. The
degree of operating leverage measures the sensitivity of operating income to
changes in the level of output.
20. Higher levels of fixed costs result in lower
levels of operating leverage.
21. The break-even quantity is inversely related
to the level of a firm’s variable costs.
22. Financial analysis using ratios is not useful
in the firm’s financial planning process.
23. A high price-to-book value ratio would tend to
indicate that investors are more optimistic about the market value of firm’s
asset, and its managers’ abilities.
24. The price/earnings ratio shows how much
investors are willing to pay for each dollar of the firm’s current earnings per
share.
25. The market value ratios indicate the financial
markets’ assessment of the value of a firm’s securities.
26. Potential creditors of a firm might analyze
financial statements to gauge the firm’s ability to make timely payments of
interest and principal.
27. Ratios standardize balance sheet and income
statement numbers, thus minimizing the effect of firm size.
28. A cross-sectional analysis would be used to
evaluate a firm’s performance over time.
29. A firm’s efficiency in utilizing resources at
its disposal in generating sales would be measured by profitability ratios.
30. Because debt obligations are paid with cash,
the firm’s cash flows ultimately determine solvency.
31. Liquidity ratios indicate the firm’s ability
to generate returns on its sales, assets, and equity.
32. Liquidity ratios indicate the ability to meet
short-term obligations to creditors as they mature or come due.
33. Net working capital is current assets plus
current liabilities.
34. The current ratio is computed by dividing the
sum of cash, marketable securities, and accounts receivable by the current
liabilities.
35. The operating profit margin is calculated as
the firms earnings before interest and taxes divided by net sales.
36. The net profit margin is calculated as the
firms earnings before interest and taxes divided by net sales.