Question 1

The sustainable growth rate:
A) assumes there is no external financing of any kind.
B) is normally higher than the internal growth rate.
C) assumes the debt-equity ratio is variable.
D) is based on receiving additional external debt and equity financing.
E) assumes that 100% of all income is retained by the firm.

Accepted Answer

The sustainable growth rate assumes that a firm will grow using internally generated funds and maintain a constant debt-equity ratio, which typically allows for some external financing, making it higher than the internal growth rate which assumes no external financing.

Question 2

A firm has total debt of $1,200 and a debt-equity ratio of .40. What is the value of the total assets?
A) $1,680
B) $3,000
C) $3,520
D) $4,200
E) $5,300

Accepted Answer

The answer of A firm has total debt of $1,200...

Question 3

A firm has sales of $4,000,costs of $3,000,interest paid of $100,and depreciation of $400. The tax rate is 34%. What is the value of the cash coverage ratio?
A) 3
B) 4
C) 6
D) 7
E) 10

Accepted Answer

The answer of A firm has sales of $4,000,costs of...

Question 4

A firm has sales of $1,500,net income of $100,total assets of $1,000,and total equity of $700. Interest expense is $50. What is the common-size statement value of the interest expense?
A) 3.3%
B) 5.0%
C) 7.1%
D) 16.7%
E) 50.0%

Accepted Answer

The common-size statement value of the interest expense is calculated as (Interest Expense / Sales) * 100 = ($50 / $1,500) * 100 = 3.3%.

Question 5

Jessica's Boutique has cash of $50,accounts receivable of $60,accounts payable of $400,and inventory of $100. What is the value of the quick ratio?
A) .125
B) .15
C) .275
D) .525
E) 1.525

Accepted Answer

The answer of Jessica's Boutique has cash of $50,accounts receivable...

Question 6

Financial planning,when properly executed:
A) ignores the normal restraints encountered by a firm.
B) ensures that the primary goals of senior management are fully achieved.
C) reduces the necessity of daily management oversight of the business operations.
D) helps ensure that proper financing is in place to support the desired level of growth.
E) eliminates the need to plan more than one year in advancE.

Accepted Answer

Financial planning helps to ensure that proper financing is in place to support the desired level of growth. It involves creating a financial roadmap that considers a company’s current financial situation and provides a plan for achieving financial goals. This includes budgeting, forecasting, and identifying potential sources of funding. By properly executing financial planning, a company can ensure that it has the necessary resources to support its growth plans.

Question 7

Which two of the following represent the most effective methods of directly evaluating the financial performance of a firm?
I. comparing the current financial ratios to those of the same firm from prior time periods
II. comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations
III. comparing the financial statements of the firm to the financial statements of similar firms operating in other countries
IV. comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
E) I and III only

Accepted Answer

Comparing a firm's current financial ratios to those of the same firm from prior time periods (I) is an effective method of evaluating the financial performance of a firm as it shows trends and changes in the company's financials. Comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations (II) is also an effective method as it benchmarks the company's performance against its competitors. Comparing the financial statements of the firm to the financial statements of similar firms operating in other countries (III) and comparing the financial ratios of the firm to the average ratios of all firms located in the same geographic area (IV) are not as effective methods in evaluating financial performance as they do not provide a relevant comparison group.

Question 8

Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $80. What is the value of the cash coverage ratio?
A) 2.71
B) 3.64
C) 4.12
D) 5.78
E) 6.10

Accepted Answer

Cash coverage ratio = (EBIT + Depreciation) / Interest Expense

From the times interest earned (TIE) ratio formula, we know that:

TIE = EBIT / Interest Expense

Rearranging the formula gives us:

EBIT = TIE x Interest Expense

Therefore:

Cash coverage ratio = (TIE x Interest Expense + Depreciation) / Interest Expense
                         = TIE + (Depreciation / Interest Expense)
                         = 3.8 + (80 / 250)
                         = 4.12

Therefore, the answer is C.

Question 9

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?
I. Either one,or both,of the firms may be conglomerates and thus have unrelated lines of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods for inventory purposes.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
A) I and II only
B) II and III only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Accepted Answer

All the listed factors can create difficulties in comparing financial statements between firms due to differences in business lines, geographic operations, accounting methods, and fiscal year timing.

Question 10

If a firm bases its growth projection on the rate of sustainable growth,and shows positive net income,then the:
A) fixed assets will have to increase at the same rate, regardless of the current capacity level.
B) number of common shares outstanding will increase at the same rate of growth.
C) debt-equity ratio will have to increase.
D) debt-equity ratio will remain constant while retained earnings increase.
E) fixed assets, debt-equity ratio, and number of common shares outstanding will all increasE.

Accepted Answer

Sustainable growth assumes that the firm will grow without changing its financial leverage, meaning the debt-equity ratio remains constant, while retained earnings increase to support growth.

Question 11

Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements,the maximum rate at which Marcie's can grow is equal to:
A) 40% of the internal rate of growth.
B) 60% of the internal rate of growth.
C) the internal rate of growth.
D) the sustainable rate of growth.
E) 60% of the sustainable rate of growth.

Accepted Answer

The sustainable rate of growth is the rate at which a company can grow using only internal financing (retained earnings) while maintaining a constant debt-equity ratio. Since Marcie's wants to maintain its current debt-equity ratio, the maximum rate at which it can grow is the sustainable rate of growth. Therefore, the correct answer is D. Choice A and B are incorrect because the internal rate of growth takes into account both retained earnings and new external financing, which Marcie's does not want to increase. Choice C is incorrect for the same reason as choices A and B. Choice E is incorrect because it incorrectly applies the 60% factor to the sustainable rate of growth rather than the internal rate of growth.

Question 12

A firm has sales of $1,200,net income of $200,net fixed assets of $500,and current assets of $300. The firm has $200 in inventory. What is the common-size statement value of inventory?
A) 10.0%
B) 16.67%
C) 25.0%
D) 40.0%
E) 67.67%

Accepted Answer

The answer of A firm has sales of $1,200,net income...

Question 13

The sustainable growth rate will be equivalent to the internal growth rate when:
A) a firm has no debt.
B) the growth rate is positive.
C) the plowback ratio is positive but less than 1.
D) a firm has a debt-equity ratio exactly equal to 1.
E) net income is greater than zero.

Accepted Answer

When a firm has no debt, the sustainable growth rate, which considers both equity and debt financing, becomes equivalent to the internal growth rate, which considers only equity financing.

Question 14

When examining the EBITDA ratio,lower numbers are:
A) considered good.
B) considered mediocre.
C) considered poor.
D) indifferent to higher numbers.
E) it is impossible to garner information from this ratio.

Accepted Answer

The answer of When examining the EBITDA ratio,lower numbers are:
A)...

Question 15

A firm's sustainable growth rate in sales directly depends on its:
A) debt to equity ratio.
B) profit margin.
C) dividend policy.
D) asset efficiency.
E) All of

Accepted Answer

The answer of A firm's sustainable growth rate in sales...

Question 16

A firm's market capitalization is equal to:
A) total book value of assets less book value of debt.
B) par value of common equity.
C) firm's stock price multiplied by number of shares outstanding.
D) firm's stock price multiplied by the number of shares authorized.
E) the maximum value an acquirer would pay for a firm in an acquisition.

Accepted Answer

A firm's market capitalization is calculated by multiplying its stock price by its number of outstanding shares. It represents the total value of the company as perceived by the market.

Question 17

Enterprise value focused on:
A) market values of debt and equity.
B) book values of debt and assets.
C) market value of equity and book value of debt.
D) book value if debt and market value of equity.
E) book values of debt and equity.

Accepted Answer

Enterprise value is focused on the market values of debt and equity, which represent the total value of a company's operations. Book values of debt and assets, as well as book values of debt and equity, do not reflect the current market value of a company and may be outdated. The market value of equity and book value of debt may be used when calculating a company's equity value, but not when calculating enterprise value.

Question 18

A firm has a debt-equity ratio of .40. What is the total debt ratio?
A) .29
B) .33
C) .67
D) 1.40
E) 1.50

Accepted Answer

The debt-equity ratio is 0.40, which means debt is 0.40 times equity. The total debt ratio is calculated as debt divided by total assets (debt + equity). If equity is 1, debt is 0.40, so total assets are 1 + 0.40 = 1.40. The total debt ratio is 0.40 / 1.40 = 0.29.

Question 19

In the financial planning model,external funds needed (EFN) is equal to changes in
A) assets - (liabilities - equity).
B) assets - (liabilities + equity).
C) (assets + liabilities - equity).
D) (assets + equity - liabilities).
E) assets - equity.

Accepted Answer

The answer of In the financial planning model,external funds needed...

Question 20

One of the primary weaknesses of many financial planning models is that they:
A) rely too much on financial relationships and too little on accounting relationships.
B) are iterative in nature.
C) ignore the goals and objectives of senior management.
D) are based solely on best case assumptions.
E) ignore the size, risk, and timing of cash flows.

Accepted Answer

Ignoring the size, risk, and timing of cash flows can lead to inaccurate financial planning models, as these factors are critical in determining the feasibility and effectiveness of financial plans.

Quiz 3: Financial Statements Analysis and Financial Models

The sustainable growth rate:

A firm has total debt of $1,200 and a debt-equity ratio of .40. What is the value of the total assets?

A firm has sales of $4,000,costs of $3,000,interest paid of $100,and depreciation of $400. The tax rate is 34%. What is the value of the cash coverage ratio?

A firm has sales of $1,500,net income of $100,total assets of $1,000,and total equity of $700. Interest expense is $50. What is the common-size statement value of the interest expense?

Jessica's Boutique has cash of $50,accounts receivable of $60,accounts payable of $400,and inventory of $100. What is the value of the quick ratio?

Financial planning,when properly executed:

Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $80. What is the value of the cash coverage ratio?

If a firm bases its growth projection on the rate of sustainable growth,and shows positive net income,then the:

Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements,the maximum rate at which Marcie's can grow is equal to:

A firm has sales of $1,200,net income of $200,net fixed assets of $500,and current assets of $300. The firm has $200 in inventory. What is the common-size statement value of inventory?

The sustainable growth rate will be equivalent to the internal growth rate when:

When examining the EBITDA ratio,lower numbers are:

A firm's sustainable growth rate in sales directly depends on its:

A firm's market capitalization is equal to:

Enterprise value focused on:

A firm has a debt-equity ratio of .40. What is the total debt ratio?

In the financial planning model,external funds needed (EFN) is equal to changes in

One of the primary weaknesses of many financial planning models is that they: