Question 1

On the projected balance sheet for the next year,total assets are $5,000,total liabilities are $2000,and shareholder's equity is $1,000.Which of the following is correct?
A) EFR is $1,000. This firm will have a cash deficit.
B) EFR is $1,000. This firm will have a cash surplus.
C) EFR is $2,000. This firm will have a cash deficit.
D) EFR is $2,000. This firm will have a cash surplus.

Accepted Answer

The Equity Financing Requirement (EFR) is calculated as Total Assets minus Total Liabilities minus Shareholder's Equity. Here, EFR = $5,000 - $2,000 - $1,000 = $2,000, indicating a cash deficit.

Question 2

Which of the following is true at the sustainable growth rate?
A) The firm sells all of its inventory.
B) The firm's net income is zero.
C) The firm neither needs nor generates financing.
D) The firm pays a dividend equal to exactly half of its retained earnings.

Accepted Answer

The sustainable growth rate (SGR) is the maximum rate at which a company can grow without needing any external financing. In other words, the company is able to fund its growth through its own retained earnings. Therefore, the correct option is C as at the sustainable growth rate, the firm neither needs nor generates financing.

Question 3

The external financing requirements of a firm are a function of:
A) Sales growth
B) Retention ratio
C) Profit margins
D) All of the above

Accepted Answer

The external financing requirements of a firm depend on all the factors mentioned in options A, B, and C. Sales growth increases the demand for investment in fixed assets and working capital, leading to a higher need for external financing. Retention ratio measures the portion of earnings retained by the firm for reinvestment, and a lower retention ratio indicates a greater need for external financing. Profit margins directly impact the firm's ability to generate internal funds for reinvestment and, therefore, also affect the external financing requirements. Therefore, all the options contribute to the external financing requirements of a firm.

Question 4

What is the difference between the P/E ratio and the forward P/E ratio?
A) The P/E ratio uses the current share price while the forward P/E ratio uses the future share price.
B) The P/E ratio uses the current earnings per share while the forward P/E ratio uses the expected earnings per share.
C) The P/E ratio uses both the current price and earnings, while the forward P/E ratio uses both the future price and earnings.
D) The P/E ratio uses EPS while the forward P/E ratio uses net income.

Accepted Answer

The P/E ratio uses the current earnings per share, while the forward P/E ratio uses the expected earnings per share. The forward P/E gives investors a sense of what the P/E ratio might look like in the future based on expected earnings growth or contraction.

Question 5

In 2015,Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The price-earnings (P/E)ratio was:
A) 4.167
B) 3.0000
C) 0.3333
D) 0.1500

Accepted Answer

Price per share = 15/.08 = $187.50.P/E = $187.50 /$ 45 = 4.167

Question 6

Which of the following is not true?
A) In projecting financial statements, the process begins by preparing a projected income statement.
B) In preparing a projected income statement, start with a sales or revenue forecast prepared by marketing personnel.
C) The relationship between sales and some costs may be complex, for example sales and fixed costs.
D) Interest expenses are commonly based on a percentage of sales.

Accepted Answer

Interest expense is typically based on the level of debt and interest rates, not sales.

Question 7

The dividend payout ratio aids investors by:
A) providing information about the sustainability of the dividend
B) providing information about the company's future revenue growth
C) measuring the company's dividend yield
D) reporting the company's net income margin

Accepted Answer

The dividend payout ratio provides information about the sustainability of the dividend, which is important for investors looking for steady income from their investments. It is calculated by dividing the total dividends paid out by the company by its net income for the same period. A higher payout ratio may indicate a higher level of risk for the sustainability of the dividend in the future, while a lower payout ratio may indicate a more conservative approach to dividend payments.

Question 8

Alberta High Skies Company has net income of $3 million.It issued 500,000 shares two years ago at an issue price of $20 per share,and the stock is now trading at $35 per share.What is Alberta High Skies' price-earnings ratio?
A) 1.75
B) 3.33
C) 5.83
D) 9.17

Accepted Answer

EPS: $3 mil / .5 mil = $6.P/E = $35/$6 = 5.83

Question 9

What does the retention ratio measure?
A) Contribution margin minus fixed costs
B) The percentage of net earnings not paid out in dividends
C) Earnings before tax minus taxes
D) Cash from operations minus cash from investing

Accepted Answer

The retention ratio measures the percentage of net earnings that a company chooses to retain rather than paying out as dividends.

Question 10

The current stock price of Bay James Tourism Company is $25.Current earnings per share are $15 and are expected to grow by 20% next year.Bay James Tourism's trailing and forward price-earnings ratios are:
A) Trailing = 1.67; Forward = 1.39
B) Trailing = 1.67; Forward = 1.20
C) Trailing = 1.39; Forward = 1.67
D) Trailing = 1.20; Forward = 1.67

Accepted Answer

Trailing: 25/15 = 1.6667,Forward: 25/(15*1.2)= 1.3889

Question 11

GoHabs Firm has assets and liabilities with book values of $65 million and $35 million,respectively.The market value of the assets is $75 million and the market value of the debt is $40 million.If GoHabs's EBITDA is $20 million,what is the EBITDA multiple?
A) 0.57
B) 0.67
C) 1.50
D) 1.75

Accepted Answer

TEV: $75-$40 = $35.Multiple = $35/$20 = 1.75

Question 12

Which of the following is not true?
A) The relationship between cash and sales can be determined by estimating the past relationship between sales levels and cash balances.
B) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt.
C) Selling expenses are commonly based on a percentage of sales.
D) A pro forma income statement also has to include projected dividend payments based on the firm's established dividend policies.

Accepted Answer

The answer of Which of the following is not true?
A)...

Question 13

In 2015,Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The dividend payout ratio was:
A) 4.167
B) 3.0000
C) 0.3333
D) 0.1500

Accepted Answer

DPS / EPS = 15 / 45 = .3333

Question 14

Which of the following is not a step in the financial planning process?
A) Deciding on how additional required assets will be financed
B) Estimating various cost categories as per the income statement
C) Preparing projected funds-flow statement
D) Ordering supplies in anticipation of future sales

Accepted Answer

Ordering supplies in anticipation of future sales is not a step in the financial planning process. The financial planning process includes analyzing the current financial situation, setting financial goals, creating a financial plan, implementing the plan, and monitoring and adjusting the plan as necessary.

Question 15

Which of the following is TRUE?
A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses fixed interest rates on debt.
B) Interest expenses are commonly based on a percentage of sales.
C) Depreciation costs are commonly based on a percentage of sales.
D) Forecasting sales is the last step in financial forecasting.

Accepted Answer

Interest expenses can be predicted with a reasonable degree of accuracy when the firm uses fixed interest rates on debt. However, interest expenses are not commonly based on a percentage of sales as in option B. Similarly, depreciation costs are not commonly based on a percentage of sales as in option C. Forecasting sales is not necessarily the last step in financial forecasting, and it depends on the specific approach used.

Question 16

When using a percent of sales method for forecasting,which is the most important variable to estimate?
A) COGS
B) Inventory
C) Revenue
D) Bank debt

Accepted Answer

The percent of sales method involves estimating future sales and then applying a predetermined percentage to those sales to estimate expenses such as COGS, inventory, and operating expenses. Therefore, the most important variable to estimate using this method is revenue.

Question 17

If a company has good growth potential,the market to book ratio should be:
A) Higher than 1
B) Lower than 1
C) Less than 0
D) Not relevant

Accepted Answer

A market to book ratio higher than 1 indicates that the market values the company's growth potential higher than its existing assets and liabilities, which is a good indication of a company's potential for growth.

Question 18

Which of the following is TRUE?
A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt.
B) Interest expenses are commonly based on a percentage of sales.
C) Depreciation costs are commonly based on a percentage of sales.
D) Forecasting sales is the most important step in financial forecasting.

Accepted Answer

Forecasting sales is crucial in financial forecasting because it serves as the foundation for estimating other financial figures, such as expenses, profits, and cash flows. The accuracy of the entire financial forecast largely depends on the accuracy of the sales forecast.

Question 19

Company A's current sales are $120.The balance sheet is below.Suppose the sales growth rate is 10%.Short-term debt,long-term debt,and equity do not change.What is the external financing needed for next year?
  
A) $13.5
B) -$13.5
C) $165
D) $151.5

Accepted Answer

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Question 20

What is the difference between invested capital and spontaneous liabilities?
A) The firm knows who invests capital in the firm, but not the identity of who the firm owes its spontaneous liabilities.
B) Invested capital is randomly determined, so the corresponding liabilities must be spontaneous and therefore also random.
C) Invested capital is the amount of equity invested in the firm, while spontaneous liabilities are the sum of long-term and short-term debt.
D) Invested capital is the result of investor decisions while spontaneous liabilities arise from the firm's business operations.

Accepted Answer

Invested capital is the result of investor decisions, such as issuing new stock or retaining earnings, while spontaneous liabilities arise from the firm's day-to-day business operations, such as accounts payable and accrued expenses.

Quiz 4: Financial Statement Analysis and Forecasting

On the projected balance sheet for the next year,total assets are $5,000,total liabilities are $2000,and shareholder's equity is $1,000.Which of the following is correct?

Which of the following is true at the sustainable growth rate?

The external financing requirements of a firm are a function of:

What is the difference between the P/E ratio and the forward P/E ratio?

In 2015,Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The price-earnings (P/E) ratio was:

Which of the following is not true?

The dividend payout ratio aids investors by:

Alberta High Skies Company has net income of $3 million.It issued 500,000 shares two years ago at an issue price of $20 per share,and the stock is now trading at $35 per share.What is Alberta High Skies' price-earnings ratio?

What does the retention ratio measure?

The current stock price of Bay James Tourism Company is $25.Current earnings per share are $15 and are expected to grow by 20% next year.Bay James Tourism's trailing and forward price-earnings ratios are:

GoHabs Firm has assets and liabilities with book values of $65 million and $35 million,respectively.The market value of the assets is $75 million and the market value of the debt is $40 million.If GoHabs's EBITDA is $20 million,what is the EBITDA multiple?

Which of the following is not true?

In 2015,Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The dividend payout ratio was:

Which of the following is not a step in the financial planning process?

Which of the following is TRUE?

When using a percent of sales method for forecasting,which is the most important variable to estimate?

If a company has good growth potential,the market to book ratio should be:

Which of the following is TRUE?

Company A's current sales are $120.The balance sheet is below.Suppose the sales growth rate is 10%.Short-term debt,long-term debt,and equity do not change.What is the external financing needed for next year?

What is the difference between invested capital and spontaneous liabilities?