Question 1

For a dividend paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?
A)Net income × (1 - Retention ratio)
B)Net income × (1 - Dividend payout ratio)
C)(Cash dividends / Net income)× (New sales / Old sales)
D)(Retained earnings / Sales)× (New Sales / Old Sales)
E)Net income × (New Sales / Old Sales)

Accepted Answer

The projected addition to retained earnings using the percentage of sales approach is calculated as follows:

Projected addition to retained earnings = Net income × (1 - Dividend payout ratio)

The dividend payout ratio is the proportion of earnings that are paid out as dividends to shareholders, while the remaining proportion is retained by the firm. Since we want to calculate the addition to retained earnings, we subtract the dividend payout ratio from 1 to get the retention ratio. The net income is multiplied by the retention ratio to get the projected addition to retained earnings. Choice B correctly represents this calculation.

Question 2

If a non-dividend-paying firm bases its growth assumptions on the sustainable rate of growth and shows positive net income,then the pro forma statement must reflect
A)an increase in fixed assets irrespective of the firm's current operating capacity.
B)an increase in both sales and the debt-equity ratio.
C)both an increase in the total asset turnover and in the equity multiplier.
D)a constant debt-equity ratio and an increase in retained earnings.
E)increases in fixed assets,the debt-equity ratio,and the number of shares outstanding.

Accepted Answer

If the firm is non-dividend-paying and bases its growth assumptions on the sustainable rate of growth, then it is assumed that the firm will reinvest its earnings back into the business. Therefore, the pro forma statement must reflect an increase in retained earnings. The sustainable growth rate is based on the firm's profitability, asset utilization efficiency, and financial leverage, so an increase in total asset turnover and the equity multiplier may also be reflected in the pro forma statement. However, there is no reason to assume that there will be an increase in fixed assets or a change in the debt-equity ratio, so choices A, B, and E are not correct.

Question 3

A firm has total debt of $2,200 and a debt-equity ratio of 0.32.What is the value of the total assets?
A)$2,904
B)$4,675
C)$9,075
D)$6,875
E)$7,225

Accepted Answer

Total equity = $2,200 / 0.32 = $6,875
Total assets = $2,200 + $6,875 = $9,075

Question 4

When creating pro forma statements,the external financing need will increase if you
A)increase the corporate tax rate.
B)decrease the dividend payout ratio.
C)increase the plowback ratio.
D)decrease the rate of sales growth.
E)decrease the projected level of sales.

Accepted Answer

Increasing the corporate tax rate reduces the amount of net income available to the firm, potentially increasing the need for external financing to support operations or growth initiatives.

Question 5

Jensen's Boats has sales of $416,800,cost of goods sold of $234,600,depreciation of $41,200,and selling and general costs of $37,900.The firm has a loan balance of $92,400 with an interest rate of 6.7 percent.What is the value of EBITDA?
A)$103,100
B)$121,600
C)$144,300
D)$185,500
E)$162,900

Accepted Answer

EBITDA = $416,800 - $234,600 - $37,900 = $144,300

Question 6

A firm has a debt-equity ratio of 0.36.What is the total debt ratio?
A)0)26
B)0)29
C)0)67
D)0)71
E)0)74

Accepted Answer

A debt-equity ratio of 0.36 implies that for every $0.36 of debt there is $1.00 of equity and $1.36 of assets.
Total debt ratio = ($1.36 - 1.00)/ $1.36 = 0.26

Question 7

A firm has sales of $3,900,net income of $1,304,total assets of $4,200,and total equity of $2,850.Interest expense is $80.What is the common-size statement value of the interest expense?
A)1)90%
B)5)10%
C)2)05%
D)8)18%
E)6)13%

Accepted Answer

Common-size interest = $80 / $3,900 = 0.0205,or 2.05%

Question 8

The internal rate of growth is based on the assumption that
A)no dividends are paid.
B)no external funding of any type is obtained.
C)the return on equity is held constant.
D)the only additional outside capital obtained is long-term debt.
E)the debt-equity ratio is held constant.

Accepted Answer

The internal rate of growth assumes that no external funding is obtained, meaning the company relies solely on its retained earnings to finance growth.

Question 9

Les' Motors has sales of $482,800,cost of goods sold of $297,400,inventory of $169,600,and accounts receivable of $52,900.How many days,on average,does it take the firm to sell its inventory and collect payment on that sale?
A)265.27 days
B)185.20 days
C)248.14 days
D)138.22 days
E)284.67 days

Accepted Answer

Total days in inventory and receivables = 365 / ($297,400 / $169,600)+ 365 / ($482,800 / $52,900)= 248.14 days

Question 10

Jessica's Boutique has cash of $687,accounts receivable of $1,419,accounts payable of $1,308,and inventory of $2,609.What is the value of the quick ratio?
A).53 times
B)3.60 times
C).48 times
D)1.84 times
E)1.61 times

Accepted Answer

Quick ratio = ($687 + $1,419)/ $1,308 = 1.61 times

Question 11

Financial planning,when properly executed
A)helps ensure that adequate financing is in place to support the desired level of growth.
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)ignores the normal restraints encountered by a firm.
E)eliminates the need to plan more than 1 year in advance.

Accepted Answer

Financial planning involves forecasting future financial needs and taking appropriate measures to ensure adequate financing is in place to support growth. Therefore, option A is the best choice. Option B is not entirely accurate as financial planning does not focus solely on senior management goals but overall financial goals of the organization. Option C is not true as financial planning requires continuous monitoring and adjustments. Option D is not relevant as financial planning operates within normal business restraints. Option E limits the scope of financial planning as it should look further ahead than a year.

Question 12

Blue Mountain Foods has net fixed assets of $89,700 and current assets of $38,400,of which $21,400 is inventory.What is the common-size statement value of inventory?
A)23.86%
B)18.56%
C)16.71%
D)55.73%
E)24.71%

Accepted Answer

Common-size inventory value = $21,400 / ($38,400 + $89,700)= 0.1671,or 16.71%

Question 13

When creating pro forma statements,the changes in the liabilities and owners' equity sections depend primarily on the firm's
A)financing policies.
B)interest rates and financing policies.
C)dividend and financing policies.
D)retained earnings policies.
E)rate of sales growth.

Accepted Answer

The changes in the liabilities and owners' equity sections of pro forma statements are primarily influenced by the firm's dividend and financing policies, as these determine how profits are distributed and how additional funds are raised.

Question 14

Vaun's Pet Store paid $24,300 in interest and $32,000 in dividends last year.The times interest earned ratio is 4.1,and the depreciation expense is $126,200.What is the value of the cash coverage ratio?
A)8)77 times
B)5)19 times
C)7)75 times
D)9)29 times
E)8)20 times

Accepted Answer

EBIT = 4.1 × $24,300 = $99,630
Cash coverage ratio = ($99,630 + $126,200)/ $24,300 = 9.29 times
This can also be calculated as:
Cash coverage ratio = 4.1 + ($126,200 / $24,300)= 9.29 times

Question 15

The Golden Slipper has sales of $487,900,EBIT of $128,650,taxes of 35 percent,interest paid of $12,400,and a dividend payout ratio of 40 percent.What is the common-size ratio of the addition to retained earnings?
A)10.31%
B)9)29%
C)14.43%
D)11.74%
E)6)87%

Accepted Answer

Common-size ratio = {(1 - 0.40)× [($128,650 - $12,400)(1 - 0.35)]} / $487,900 = 0.0929,or 9.29%

Question 16

The sustainable rate of growth can be increased by
A)decreasing the equity multiplier.
B)increasing the profit margin.
C)decreasing the debt-equity ratio.
D)increasing the dividend payout ratio.
E)increasing the capital intensity ratio.

Accepted Answer

Increasing the profit margin directly increases the sustainable rate of growth as it allows the firm to generate more internal funds for investment in earning assets, without relying heavily on external fund sources. Decreasing the equity multiplier (choice A) and debt-equity ratio (choice C) may decrease the financial risk of the firm but will not directly increase the sustainable rate of growth. Increasing the dividend payout ratio (choice D) may decrease the funds available for investment, while increasing the capital intensity ratio (choice E) may increase the need for external funds and decrease the sustainable rate of growth.

Question 17

Which one of these combinations will provide sufficient information to determine the sustainable growth rate of a firm?
A)Profit margin,total asset turnover,and the price-earnings ratio
B)Profit margin,dividend payout ratio,debt-equity ratio,and total asset turnover
C)Return on assets and the retention ratio
D)Return on assets,capital intensity ratio,and the retention ratio
E)Profit margin,total asset turnover,return on assets,and debt-equity ratio

Accepted Answer

The sustainable growth rate can be determined using the formula: ROE * (1 - Dividend Payout Ratio). ROE can be derived from Profit Margin, Total Asset Turnover, and Debt-Equity Ratio.

Question 18

Lancaster Bakery has net fixed assets of $329,700,current assets of $87,200,a price-earnings ratio of 12.8,a debt-equity ratio of 0.42,and earnings per share of $1.97.What is the market-to-book ratio if there are 36,000 shares of stock outstanding?
A)3)09 times
B)2)79 times
C)2)24 times
D)3)46 times
E)3)80 times

Accepted Answer

Equity multiplier = 1 + 0.42 = 1.42
Total equity = ($87,200 + $329,700)/ (1 + 0.42)= $293,591.55
Market-to-book ratio = (12.8 × $1.97)/ ($293,591.55 / 36,000)= 3.09 times

Question 19

Burnside's has accounts receivable of $42,600,inventory of $97,200,sales of $614,200,and cost of goods sold of $298,400.How long does it take the firm to sell its inventory and collect payment on the sale?
A)107.14 days
B)136.06 days
C)127.78 days
D)144.21 days
E)115.52 days

Accepted Answer

Total days in inventory and receivables = 365 / ($298,400 / $97,200)+ 365 / ($614,200 / $42,600)= 144.21 days

Question 20

A firm has sales of $215,600,costs of $124,800,interest paid of $3,600,and depreciation of $11,400.The tax rate is 34 percent.What is the value of the cash coverage ratio?
A)24.22 times
B)17.06 times
C)21.06 times
D)25.22 times
E)16.47 times

Accepted Answer

Cash coverage ratio = ($215,600 - $124,800)/ $3,600 = 25.22 times

Quiz 3: Financial Statements Analysis Amcq Financial Models

For a dividend paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?

If a non-dividend-paying firm bases its growth assumptions on the sustainable rate of growth and shows positive net income,then the pro forma statement must reflect

A firm has total debt of $2,200 and a debt-equity ratio of 0.32.What is the value of the total assets?

When creating pro forma statements,the external financing need will increase if you

Jensen's Boats has sales of $416,800,cost of goods sold of $234,600,depreciation of $41,200,and selling and general costs of $37,900.The firm has a loan balance of $92,400 with an interest rate of 6.7 percent.What is the value of EBITDA?

A firm has a debt-equity ratio of 0.36.What is the total debt ratio?

A firm has sales of $3,900,net income of $1,304,total assets of $4,200,and total equity of $2,850.Interest expense is $80.What is the common-size statement value of the interest expense?

The internal rate of growth is based on the assumption that

Les' Motors has sales of $482,800,cost of goods sold of $297,400,inventory of $169,600,and accounts receivable of $52,900.How many days,on average,does it take the firm to sell its inventory and collect payment on that sale?

Jessica's Boutique has cash of $687,accounts receivable of $1,419,accounts payable of $1,308,and inventory of $2,609.What is the value of the quick ratio?

Financial planning,when properly executed

Blue Mountain Foods has net fixed assets of $89,700 and current assets of $38,400,of which $21,400 is inventory.What is the common-size statement value of inventory?

When creating pro forma statements,the changes in the liabilities and owners' equity sections depend primarily on the firm's

Vaun's Pet Store paid $24,300 in interest and $32,000 in dividends last year.The times interest earned ratio is 4.1,and the depreciation expense is $126,200.What is the value of the cash coverage ratio?

The Golden Slipper has sales of $487,900,EBIT of $128,650,taxes of 35 percent,interest paid of $12,400,and a dividend payout ratio of 40 percent.What is the common-size ratio of the addition to retained earnings?

The sustainable rate of growth can be increased by

Which one of these combinations will provide sufficient information to determine the sustainable growth rate of a firm?

Lancaster Bakery has net fixed assets of $329,700,current assets of $87,200,a price-earnings ratio of 12.8,a debt-equity ratio of 0.42,and earnings per share of $1.97.What is the market-to-book ratio if there are 36,000 shares of stock outstanding?

Burnside's has accounts receivable of $42,600,inventory of $97,200,sales of $614,200,and cost of goods sold of $298,400.How long does it take the firm to sell its inventory and collect payment on the sale?

A firm has sales of $215,600,costs of $124,800,interest paid of $3,600,and depreciation of $11,400.The tax rate is 34 percent.What is the value of the cash coverage ratio?