Deck 5: Evaluating Operating and Financial Performance

Question 1

Cash burn, liquidity, and conversion ratios are important during the development and startup life cycle stages.

Answer 1

True

Question 2

A venture's cash, marketable securities, and receivables comprise its liquid assets.

Answer 2

True

Question 3

The types of financing used during the survival life cycle stage is second-round, mezzanine, and liquidity-stage financing.

Answer 3

False

Question 4

Financial ratios show the relationships between two or more financial variables or between financial variables and time.

Question 5

Investment bankers are users of financial ratios and measures primarily during a venture's rapid-growth stage relative to the development and startup stages.

Question 6

Second-round, mezzanine, and liquidity-stage financing generally occur during a venture's survival stage.

Question 7

Trend analysis is used to examine a venture's performance over time.

Question 8

Liquidity ratios indicate the venture's ability to pay short-term assets from short-term liabilities.

Question 9

During the development and startup stages of a venture's life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).

Question 10

Cash burn is the cash a venture expends on its operating, financing, and depreciation expenses.

Question 11

Commercial banks are important users of financial ratios and measures during the development and startup stages of ventures.

Question 12

Leverage ratios are generally considered to be more important during a venture's survival and rapid-growth stages compared to the development and startup stages.

Question 13

Net working capital reflects current assets deducted from current liabilities.

Question 14

Cross-sectional analysis is used to examine a venture's performance over time.

Question 15

Net working capital is calculated as fixed assets minus current liabilities.

Question 16

The term "cash build" as used in Chapter 5 is equal to net sales minus the change in receivables.

Question 17

Financial ratios are a useful way to summarize large amounts of financial data to simplify comparisons of a venture's performance with itself and other firms over time.

Question 18

Net cash burn occurs when cash burn exceeds cash build in a specified time period.

Question 19

During the development and startup stages of a venture's life cycle, important financial ratios and measures include cash burn rates and liquidity ratios.

Question 20

The cash burn rate is the cash burn for a fixed period of time, typically a month.

Question 21

The part of a venture's interest payment that is subsidized by the government because of the deductibility of interest is called the interest tax shield.

Question 22

The current ratio and the quick ratio differ only because average inventories are subtracted in the numerator of the quick ratio.

Question 23

Net working capital is a dollar amount measure of the cushion between current assets and current liabilities.

Question 24

One must be cautious in stating whether a specific ratio is good or bad because "goodness" is frequently a matter of perspective or strategy.

Question 25

Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.

Question 26

For a venture with inventories, the quick ratio will always be greater than the current ratio.

Question 27

How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

Question 28

The return on assets model states: ROA = Net Profit Margin × Asset Turnover × Equity Multiplier.

Question 29

The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.

Question 30

If a firm has positive net income, a decrease in a venture's asset intensity ratio will increase its ROE.

Question 31

Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations.

Question 32

The entrepreneur, business angels, and VCs are important users of financial ratios and measures during which of the following life cycle stages?

A)development and startup stages
B)survival and rapid-growth stages
C)development, startup, and rapid-growth stages
D)development, startup, survival, and rapid-growth stages

Question 33

Profitability and efficiency ratios are generally considered to be more important during a venture's development and startup stages compared to the survival and rapid-growth stages.

Question 34

How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

Question 35

The equity multiplier is considered an efficiency ratio.

Question 36

Total debt includes current liabilities, long-term debt, and retained earnings.

Question 37

The equity multiplier shows the extent by which assets are supported by equity and debt.

Question 38

The type of financing used during the rapid-growth life cycle stage includes:

A)second-round financing
B)mezzanine financing
C)liquidity-stage financing
D)all of these choices

Question 39

Investment bankers and commercial banks are important users of financial ratios and measures during which of the following life cycle stages?

A)development stage
B)startup stage
C)survival stage
D)rapid-growth stage

Question 40

Industry comparable ratio analysis involves comparing a venture's ratios against the industry average for the same ratios.

Question 41

Which of the following ratios is calculated as (Average Current Assets - Average Inventories)÷ Average Current Liabilities?

A)current ratio
B)quick ratio
C)net-working-capital ratio
D)current liabilities-to-total-debt ratio

Question 42

How is net cash burn calculated?

A)Net Cash Burn = Cash Burn + Cash Build
B)Net Cash Burn = Cash Build - Cash Burn
C)Net Cash Burn = Cash Burn - Cash Build
D)Net Cash Burn = Cash Burn - Cash Build²

Question 43

Last year, Nemo's Fish 'n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; depreciation and amortization = $7,000; and interest expense = $12,000. The tax rate was 30%. Find Nemo's interest coverage for last year.

A)-0.29 times
B)0.66 times
C)0.86 times
D)1.25 times

Question 44

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the debt-to-equity ratio for Rogex?

A)0.91
B)2.15
C)0.48
D)1.12

Question 45

Which of the following is not a basic ratio technique used to conduct financial analysis?

A)trend analysis
B)sensitivity analysis
C)cross-sectional analysis
D)industry comparable analysis

Question 46

Which of the following is used to compare a venture's performance against the average performance of other firms in the same industry?

A)qualitative analysis
B)trend analysis
C)cross-sectional analysis
D)industry comparable analysis

Question 47

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620.What is the current ratio for Rogex?

A)1.46
B)1.33
C)1.23
D)1.21

Question 48

Which of the following is used to examine a venture's performance over time?

A)qualitative analysis
B)trend analysis
C)cross-sectional analysis
D)industry comparable analysis

Question 49

The difference between a venture's ability to generate cash to pay interest and the amount of interest it has to pay is determined by which of the following ratios?

A)fixed-charges coverage
B)debt-to-equity ratio
C)equity multiplier
D)interest coverage

Question 50

A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the firm's quick ratio?

A)1.00
B)1.11
C)1.22
D)1.33

Question 51

Which of the following ratios is computed by dividing the average total assets by the average owners' equity?

A)equity multiplier
B)debt-to-equity ratio
C)current liabilities-to-total-debt ratio
D)current ratio

Question 52

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. The total-debt-to-total-assets ratio for Rogex is:

A)0.48
B)0.71
C)0.27
D)0.53

Question 53

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the equity multiplier for Rogex?

A)2.35 times
B)0.48 times
C)1.12 times
D)1.91 times

Question 54

The term "cash build" is measured as:

A)net income plus depreciation
B)net sales minus expenses minus (plus)an increase (decrease)in inventories
C)net sales minus (plus)an increase (decrease)in receivables
D)net income plus depreciation minus (plus)an increase (decrease)in payables

Question 55

Use the following information to determine a firm's cash build: net sales = $150,000; net income = $15,000; beginning-of-period accounts receivable = $60,000; end-of-period accounts receivable = $90,000; and interest = $10,000.

A)$15,000
B)$30,000
C)$60,000
D)$120,000

Question 56

First-round financing occurs primarily during which of the following life cycle stages?

A)development stage
B)startup stage
C)survival stage
D)rapid-growth stage

Question 57

Using the following information, determine the average monthly net cash burn rate: annual net income = $20,000; annual interest = $10,000; annual cash build = $150,000; and annual cash burn = $186,000.

A)$1,000
B)$3,000
C)$4,000
D)$6,000

Question 58

A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the firm's net-working-capital-to-total-assets ratio?

A)0.11
B)0.13
C)0.15
D)0.17

Question 59

Which of the following is used to compare a venture's performance against another firm at the same point in time?

A)qualitative analysis
B)trend analysis
C)cross-sectional analysis
D)industry comparable analysis

Question 60

Investment bankers often play an important role in which of the following life cycle stages?

A)development stage
B)startup stage
C)survival stage
D)rapid-growth stage

Question 61

Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. What is the operating profit margin for Rogex?

A)26.2%
B)56.3%
C)43.3%
D)30.3%

Question 62

A venture has net sales of $400,000, cost of goods sold of $200,000, operating expenses (selling, general, and administrative)of $100,000, and interest expenses of $50,000. What is the operating profit margin?

A)50%
B)75%
C)25%
D)40%

Question 63

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid, $218. What is Rogex's sales-to-total-assets ratio?

A)1.91 times
B)0.25 times
C)0.52 times
D)0.23 times

Question 64

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218.What is Rogex's return on total assets?

A)9.6%
B)13.6%
C)19.1%
D)37.9%

Question 65

Net income divided by net sales is the calculation for:

A)net operating profit after taxes margin
B)net profit margin
C)operating profit margin
D)gross profit margin

Question 66

Which of the following statements is true?

A)ROA is always greater than or equal to ROE
B)an increase in the asset turnover ratio implies a decrease in the asset intensity ratio
C)ROE measures the return on the enterprise
D)ROA measures the return on fixed assets

Question 67

Last year, Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500, and interest expense was $700. If the tax rate is 25%, what is its NOPAT margin?

A)11.86%
B)21.43%
C)26.57%
D)29.14%

Question 68

Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. What is the return on equity for Rogex?

A)26.1%
B)44.7%
C)62.6%
D)18.4%

Question 69

Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. What is the net profit margin for Rogex?

A)22.7%
B)7.9%
C)18.4%
D)26.2%

Question 70

Which of the following is not an efficiency and return measure?

A)sales-to-total-assets ratio
B)return on equity
C)return on assets
D)inventory-to-total-assets ratio

Question 71

Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. The interest coverage ratio for Rogex is:

A)6.5 times
B)4.5 times
C)9.7 times
D)1.5 times

Question 72

Last year, Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500, and interest expense was $700. If the tax rate is 25%, what is the net profit margin for Lenny's Lemonade?

A)6.43%
B)20.70%
C)2.14%
D)22.86%

Question 73

Net sales minus cost of goods sold when divided by sales is called:

A)gross profit margin
B)operating profit margin
C)net profit margin
D)net operating profit after taxes margin

Question 74

Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. What is the gross profit margin for Rogex?

A)26.2%
B)30.3%
C)43.3%
D)56.3%