Question

1.what can we conclude when a firm has a lower CFO/operating imcome ratio compared to its similar peers

a. the firm likely generates a lower leverl of cash by paying too much interest in cash to its loan providers

b. the firm likely generates a lower level of cash by paying too much tax in cash to IRS without efficiently using the deferred tax liability tool

c. the firm likely generates a lower level of cash by paying too much cash to the suppliers of raw production materials

2. what can we concluded when a firm has a low CFO/ total debt ratio compared to its similar peers

a. the firm likely has a lower cash level to cover its interest expense obligation

b. the CFO/total debt ratio is a performance ratio, not a coverage ratio

c. the firm likely has a lower cash level to cover its debt onligations

3. what can we concluded we a firm has a low CFO: cash outfows for investing and financing activities ratio compared to its similar peers

a. the firm is operating on a great financial condition, as CFO should be lower compared to CFF and CFi

b. the firm is operating kn net cash outflow and this is understanding as long as the firm is expanding at matured stage

c. the firm is operating on net cash outflow and this is not sustainable

Answer 1

1. The correct option is (c). The firm likely generates a lower level of cash by paying too much cash to the suppliers of raw production materials

Explanation: The CFO/Operating income ratio shows the relationship between the actual profit earned from the operating activities and actual cash flows resulting from the operating activities. The lower level of CFO/Operating income ratio states that the company is generating lower level of cash as compared to its operating income. It means that the company is excessively paying to its supplier for raw material.

1. The correct option is (c). The firm likely has a lower cash level to cover its debt obligations

Explanation: The CFO/total debt shows the level of cash available for the repayment of the company’s debt. The lower level suggests that the company has low cash level for the repayment of the loan.

1. The correct option is (b). The firm is operating on net cash outflow and this is understanding as long as the firm is expanding at matured stage.

Explanation: The Company may have investing and financing cash outflows due to several reasons such as purchase of asset, payment of debt, payment of dividend & interest. Therefore, the firm may be operating on net cash outflow but is sustainable unless it is expanding at matured stage.

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