Question 1

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

The sustainable growth rate assumes that a firm does not issue new equity, so if a firm has no debt, it also has no equity and thus no need to issue new equity. This means that the company can sustain growth at the same rate as its internal growth rate.

Question 2

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

Market capitalization is equal to the firm's stock price multiplied by the number of outstanding shares. It represents the market's total valuation of the company.

Question 3

Jessica's Boutique has cash of $50, accounts receivable of $60, accounts payable of $200, and inventory of $150.What is the value of the quick ratio?
A).30
B).55
C).77
D)1.30
E)1.82

Accepted Answer

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

Question 4

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 the current financial ratios to those of the same firm from prior time periods (I) helps to evaluate the financial performance of the firm over time, and whether it has improved or not. Comparing a firm's financial ratios to those of other firms in the firm's peer group who have similar operations (II) helps to benchmark the firm's financial performance against similar companies in the same industry, and identify areas where the firm may be lagging behind or outperforming its peers. Comparing 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 as I and II, as they may not accurately reflect the performance of the firm due to different economic and industry factors in different countries or regions.

Question 5

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

The answer of Which of the following represent problems encountered...

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. This is important for the long-term success of the business as it allows for strategic investments and expansion. Financial planning does not ignore normal restraints or eliminate the need for daily management oversight, nor does it guarantee the achievement of primary goals or eliminate the need to plan for more than one year in advance.

Question 7

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 answer of A firm has a debt-equity ratio of...

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 $60.What is the value of the cash coverage ratio?
A)2.40
B)3.52
C)3.80
D)4.04
E)4.28

Accepted Answer

The answer of Rosita's Resources paid $250 in interest and...

Question 9

A firm has total debt of $1,200 and a debt-equity ratio of .30.What is the value of the total assets?
A)$1,560
B)$3,000
C)$3,600
D)$4,000
E)$5,200

Accepted Answer

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

Question 10

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...

Question 11

A firm has sales of $3,600, costs of $2,800, interest paid of $100, and depreciation of $400.The tax rate is 34%.What is the value of the cash coverage ratio?
A)2
B)4
C)6
D)8
E)10

Accepted Answer

The answer of A firm has sales of $3,600, costs...

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 $100 in inventory.What is the common-size statement value of inventory?
A)8.3%
B)12.5%
C)20.0%
D)33.3%
E)50.0%

Accepted Answer

The common-size statement value of inventory is calculated as (Inventory / Total Assets) * 100. Total assets = Net fixed assets + Current assets = $500 + $300 = $800. Thus, the common-size value of inventory is ($100 / $800) * 100 = 12.5%.

Question 13

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

If a firm bases its growth projection on the rate of sustainable growth, it means that it aims to grow at a rate that can be sustained without increasing its debt-equity ratio. If the firm shows positive net income, it can use this to finance growth through retained earnings rather than increasing debt-equity ratio. Therefore, the debt-equity ratio will remain constant while retained earnings increase. The increase in fixed assets and number of common shares outstanding may or may not happen, depending on the individual circumstances of the firm.

Question 14

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 calculated using market values of debt and equity, rather than book values. Book values are based on historical costs and may not reflect current market conditions, while market values reflect current investor sentiment and expectations.

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 the above.

Accepted Answer

A firm's sustainable growth rate in sales is influenced by its profit margin, dividend policy, asset efficiency, and debt to equity ratio, as these factors collectively determine how much the firm can grow without needing additional external financing.

Question 16

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 maximum rate of growth that a firm can achieve without increasing its leverage (debt-to-equity ratio) or issuing more equity. This rate is limited by the retained earnings, which are the earnings that are not paid out as dividends but are reinvested in the firm to finance growth. 
Given that Marcie's Mercantile wants to maintain its current dividend policy with a payout ratio of 40%, the sustainable rate of growth is equal to the retention ratio times the internal rate of growth. The retention ratio is the complement of the payout ratio, which is 1 - 0.4 = 0.6.
Therefore, the sustainable rate of growth = 0.6 x internal rate of growth.
Since the firm does not want to increase its equity financing, the maximum rate of growth that it can achieve is the sustainable rate of growth, which is 60% of the internal rate of growth. 
Therefore, the answer is D.

Question 17

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 the company can grow internally without the need for external financing. It takes into account the retention rate of earnings and the return on equity. The internal growth rate assumes that the company can grow with no external financing and only with the retention of earnings. The sustainable growth rate is typically lower than the internal growth rate because it also includes the impact of debt financing. Therefore, option B is the correct answer.

Question 18

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...

Question 19

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

Many financial planning models ignore the size, risk, and timing of cash flows which can lead to inaccurate projections and decision-making. It is important to consider these factors in order to create a comprehensive financial plan.

Question 20

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 answer of A firm has sales of $1,500, net...

Quiz 3: Financial Statements Analysis and Long-Term Planning

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

A firm's market capitalization is equal to:

Jessica's Boutique has cash of $50, accounts receivable of $60, accounts payable of $200, and inventory of $150.What is the value of the quick ratio?

Financial planning, when properly executed:

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

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 $60.What is the value of the cash coverage ratio?

A firm has total debt of $1,200 and a debt-equity ratio of .30.What is the value of the total assets?

When examining the EBITDA ratio, lower numbers are:

A firm has sales of $3,600, costs of $2,800, 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 $1,200, net income of $200, net fixed assets of $500, and current assets of $300.The firm has $100 in inventory.What is the common-size statement value of inventory?

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

Enterprise value focused on:

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

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:

The sustainable growth rate:

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:

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?