Question 1

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 calculated as the current stock price multiplied by the number of outstanding shares, which represents the total market value of the company. Option A is incorrect because book value does not factor in the market value of assets and liabilities. Option B is incorrect because par value is a nominal value assigned to shares and does not reflect the market value. Option D is incorrect because authorized shares are not the same as outstanding shares. Option E is not relevant to calculating market capitalization.

Question 2

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 at which a company can grow without external financing while maintaining its current 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 answer is D.

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

Cash coverage ratio = ($4,000 - $3,000)F1F1F1S1F1F1F10 $100 = 10

Question 4

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 ensure that proper financing is in place to support the desired level of growth. It is an important component of strategic planning and involves identifying and evaluating financial opportunities, risks, and constraints to achieve the company's goals. Proper financial planning can provide a roadmap for future investments and avoid potential financial crises.

Question 5

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

Common-size inventory = $200 F1F1F1S1F1F1F10 ($500 + $300)= 25%

Question 6

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 firm will only use internal financing sources, such as retained earnings, and that the debt-equity ratio will remain constant. It is calculated as the maximum rate at which a firm can grow without requiring external financing. It is usually lower than the internal growth rate because the internal growth rate assumes that external financing can be used, while the sustainable growth rate does not.

Question 7

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

Common-size interest = $50 F1F1F1S1F1F1F10 $1,500 = .033 = 3.3%

Question 8

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

Quick ratio = ($50 + $60)F1F1F1S1F1F1F10 $400 = .275

Question 9

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)considered...

Question 10

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 answer of The sustainable growth rate will be equivalent...

Question 11

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 12

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, not book values. Therefore, choices B, C, D, and E are not correct.

Question 13

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 14

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

Total equity = $1,200 F1F1F1S1F1F1F10 .40 = $3,000;Total assets = $1,200 + $3,000 = $4,200

Question 15

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 is a primary weakness of many financial planning models. This can result in inaccurate projections and financial decisions that do not align with the financial goals of the organization.

Question 16

Mario's Home Systems has sales of $2,800,cost of goods sold of $2,100,inventory of $600,and accounts receivable of $600.How many days,on average,does it take Mario's to sell its inventory?
A)42.10 days
B)66.37 days
C)78.21 days
D)104.29 days
E)273.75 days

Accepted Answer

Inventory turnover = $2,100 F1F1F1S1F1F1F10 $600 = 3.5;Days in inventory = 365 F1F1F1S1F1F1F10 4.2 = 104.29 days

Question 17

Syed's Industries has accounts receivable of $700,inventory of $1,200,sales of $4,200,and cost of goods sold of $3,500.How long does it take Syed's to both sell its inventory and then collect the payment on the sale?
A)110 days
B)131 days
C)145 days
D)186 days
E)210 days

Accepted Answer

Inventory turnover = $3,500 F1F1F1S1F1F1F10 $1,200 = 2.92;Days in inventory = 365 F1F1F1S1F1F1F10 2.92 = 125;Accounts receivable turnover = $4,200 F1F1F1S1F1F1F10 $700 = 6;Days' sales in receivables = 365 F1F1F1S1F1F1F10 6 = 60.83;Total days in inventory and receivables = 125 + 60.83 = 185.83 days = 186 days (rounded)

Question 18

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

EBIT = 3.8 F1F1F1S1F1F1F10 $250 = $950;Cash coverage ratio = ($950 + $80)F1F1F1S1F1F1F10 $250 = 4.12

Question 19

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 .40.Thus,if total debt is $40,total equity is $100 and total assets are $140.Total debt ratio = $40 F1F1F1S1F1F1F10 $140 = .29

Question 20

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

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

Quiz 3: Financial Statements Analysis and Long-Term Planning

A firm's market capitalization is equal to:

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 $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?

Financial planning,when properly executed:

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:

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?

When examining the EBITDA ratio,lower numbers are:

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

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

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

Mario's Home Systems has sales of $2,800,cost of goods sold of $2,100,inventory of $600,and accounts receivable of $600.How many days,on average,does it take Mario's to sell its inventory?

Syed's Industries has accounts receivable of $700,inventory of $1,200,sales of $4,200,and cost of goods sold of $3,500.How long does it take Syed's to both sell its inventory and then collect the payment on the sale?

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

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