Question 1

The internal rate of growth is based on the assumption that

Accepted Answer

The internal rate of growth assumes that the company does not rely on any external funding, meaning it grows using only its retained earnings.

Question 2

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?

Accepted Answer

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

Question 3

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

Accepted Answer

Since the firm is non-dividend-paying, it is assumed that all earnings are retained. Therefore, an increase in net income leads to an increase in retained earnings. As a result, the pro forma statement must reflect a constant debt-equity ratio and an increase in retained earnings, as indicated in option D. Options A, B, and E are not necessarily true based on the information provided. Option C is irrelevant as the total asset turnover and equity multiplier are not mentioned in the question.

Question 4

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

Accepted Answer

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

Question 5

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?

Accepted Answer

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

Question 6

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

Accepted Answer

The projected addition to retained earnings using the percentage of sales approach can be calculated as Net Income multiplied by (1 - Dividend Payout Ratio). The dividend payout ratio represents the percentage of earnings distributed as dividends, so subtracting it from 1 gives the percentage of earnings retained by the firm. Hence, option B is the correct choice.

Question 7

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?

Accepted Answer

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

Question 8

The sustainable rate of growth can be increased by

Accepted Answer

Increasing the profit margin directly increases the sustainable rate of growth, as a higher profit margin means the firm can generate more earnings to reinvest in growth. Decreasing the equity multiplier, decreasing the debt-equity ratio, and increasing the capital intensity ratio can all lower the sustainable rate of growth. Increasing the dividend payout ratio may also lower the sustainable rate of growth, as the firm will have less earnings available to reinvest in growth.

Question 9

Financial planning,when properly executed

Accepted Answer

Financial planning ensures that the necessary funds are available to support growth plans and helps in determining how much financing is required.

Question 10

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

Accepted Answer

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

Question 11

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

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 12

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?

Accepted Answer

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

Question 13

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?

Accepted Answer

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

Question 14

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?

Accepted Answer

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

Question 15

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?

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 16

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?

Accepted Answer

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

Question 17

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?

Accepted Answer

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

Question 18

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

Accepted Answer

Increasing the corporate tax rate reduces net income, which can increase the need for external financing to support operations and growth.

Question 19

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

Accepted Answer

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

Question 20

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?

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

Quiz 3: Financial Statements Analysis and Financial Models