CHP4
1) Which statement expresses all relative account values as a percentage of total assets?
A) Pro forma balance sheet
B) Common-size income statement
C) Statement of cash flows
D) Pro forma income statement
E) Common-size balance
E
2) You would like to compare your firm's cost structure to that of your competitors. However, your competitors are much larger in size than your firm. Which one of these would best enable you to compare costs across your industry?
E) Common-size balan
B
3) Which one of these terms is most synonymous with the term "income from operations"?
A) TTM
B) EBIT
C) LTM
D) EBITDA
E) EPS
4) Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as:
A) asset management ratios.
B) long-term solvency measures.
C) liquidity measures.
D) profitability ratios.
E) market value ratios.
C
5) The current ratio is measured as:
A) current assets minus current liabilities.
B) current assets divided by current liabilities.
C) current liabilities minus inventory, divided by current assets.
D) cash on hand divided by current liabilities.
E) current liabilities divided by current assets.
6) The quick ratio is measured as:
A) current assets divided by current liabilities.
B) cash on hand plus current liabilities, divided by current assets.
C) current liabilities divided by current assets, plus inventory.
D) current assets minus inventory, divided by current liabilities.
E) current assets minus inventory minus current liabilities.
D
7) Ratios that measure a firm's financial leverage are known as ________ ratios.
A) asset management
B) long-term solvency
C) short-term solvency
D) profitability E) market value
8) The debt-equity ratio is measured as:
A) total equity divided by long-term debt.
B) total equity divided by total debt.
C) total debt divided by total equity.
D) long-term debt divided by total equity.
E) total assets minus total debt, divided by total equity.
9) The equity multiplier is measured as total:
A) equity divided by total assets.
B) equity plus total debt.
C) assets minus total equity, divided by total assets.
D) assets plus total equity, divided by total debt.
E) assets divided by total equity.
10) Ratios that measure how efficiently a firm uses its assets to generate sales are known as ________ ratios.
D) profitability
E) market value
A
11) The inventory turnover ratio is measured as:
A) sales divided by inventory.
B) inventory times total sales.
C) cost of goods sold divided by inventory.
D) inventory divided by cost of goods sold.
E) inventory divided by sales.
12) Days' sales in inventory is measured as:
A) inventory turnover plus 365 days.
B) inventory turnover times 365 days.
C) inventory divided by cost of goods sold, times 365 days.
D) 365 days divided by the inventory.
E) 365 days divided by the inventory turnover.
13) The receivables turnover ratio is measured as:
A) sales plus accounts receivable.
B) sales divided by accounts receivable.
C) sales minus accounts receivable, divided by sales.
D) accounts receivable times sales.
E) accounts receivable divided by sales.
14) The total asset turnover ratio measures the amount of:
A) total assets needed for every $1 of sales.
B) sales generated by every $1 in total assets.
C) fixed assets required for every $1 of sales.
D) net income generated by every $1 in total assets.
E) net income that can be generated by every $1 of fixed assets.
15) Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as ________ ratios.
16) The financial ratio measured as net income divided by sales is known as the firm's:
A) profit margin.
B) return on assets.
C) return on equity.
D) asset turnover.
E) earnings before interest and taxes.
17) The measure of net income returned from every dollar invested in total assets is the:
18) The financial ratio that measures the accounting profit per dollar of book equity is referred to as the:
B) price-earnings ratio.
D) equity turnover.
E) market profit-to-book ratio.
19) The amount that investors are willing to pay for each dollar of annual earnings is reflected in the:
A) return on assets.
B) return on equity.
C) debt-equity ratio.
D) price-earnings ratio.
E) DuPont identity.
20) The market-to-book ratio is measured as the:
A) market price per share divided by the par value per share.
B) net income per share divided by the market price per share.
C) market price per share divided by the net income per share.
D) market price per share divided by the dividends per share.
E) market value per share divided by the book value per share.
21) Which one of the following statements is correct concerning ratio analysis?
A) A single ratio is often computed differently by different individuals.
B) No ratio can address the problem of size differences among firms.
C) Only a very limited number of ratios can be used for analytical purposes.
D) Every ratio is an income statement entry divided by a balance sheet item.
E) Ratios cannot be used for comparison purposes over periods of time.
22) Which one of the following is a liquidity ratio?
A) Quick ratio
B) Cash coverage ratio
C) Total debt ratio
D) EV multiple
E) Times interest earned ratio
23) An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
A) Accounts payable
B) Cash
C) Inventory
D) Accounts receivable
E) Fixed assets
24) A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?
A) Current
C) Debt-equity
D) Quick
E) Total debt
25) A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:
A) $1 in total equity.
B) $.53 in total assets.
C) $1 in current assets.
D) $.53 in total equity.
E) $1 in fixed assets.
26) The long-term debt ratio is probably of most interest to a firm's:
A) credit customers.
B) employees.
C) suppliers.
D) mortgage holder.
E) stockholders.
27) A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of ________, and a times interest earned ratio of ________.
A) .50; .75
B) .50; 1.00
C) .45; 1.75
D) .40; .75
E) .40; 1.75
28) From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A) Times interest earned ratio
C) Cash ratio
D) Quick ratio
E) Interval measure
29) The higher the inventory turnover, the:
A) less time inventory items remain on the shelf.
B) higher the inventory as a percentage of total assets.
C) longer it takes a firm to sell its inventory.
D) greater the amount of inventory held by a firm.
E) greater the selection of goods available for sale.
30) Which one of the following statements is correct if a firm has a receivables turnover of 10?
A) It takes the firm 10 days to collect payment from its customers.
B) It takes the firm 36.5 days to sell its inventory and collect the payment from the sale.
C) It takes the firm an average of 36.5 days to sell its items.
D) The firm collects its credit sales in an average of 36.5 days.
E) The firm has ten times more in accounts receivable than it does in cash.
31) A capital intensity ratio of 1.03 means a firm has $1.03 in:
A) total debt for every $1 in equity.
B) equity for every $1 in total debt.
C) sales for every $1 in total assets.
D) total assets for every $1 in sales.
E) long-term assets for every $1 in short-term assets.
32) Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has ________ of 5 percent.
A) a return on assets
B) a profit margin
C) a return on equity
D) an EV multiple
E) a price-earnings ratio
33) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:
A) has no debt of any kind.
B) is using its assets as efficiently as possible.
C) pays all its earnings out in dividends.
D) also has a current ratio of 15.
E) has an equity multiplier of 2.
34) If stockholders want to know how much profit the firm is making on their entire investment in that firm, the stockholders should refer to the:
D) equity multiplier.
E) earnings per share.
35) Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the:
A) return on equity will increase.
B) return on assets will decrease.
C) profit margin will decline.
D) total debt ratio will decrease.
E) price-earnings ratio will increase.
36) Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which will be depreciated over eight years. If Joe's and Moe's have the same sales, costs, tax rate, and enterprise value, then:
A) Joe's will have a lower profit margin.
B) Joe's will have a lower return on equity.
C) Moe's will have a higher net income.
D) Moe's and Joe's will have the same EV multiple.
E) Moe's will have a lower EV multiple.
37) Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of $1.20. This year, the price-earnings ratio is 18 and the earnings per share is $1.20. Based on this information, it can be stated with certainty that:
A) the price per share decreased.
B) the earnings per share decreased.
C) investors are paying a lower price per share this year as compared to last year.
D) investors are receiving a higher rate of return this year.
E) the investors' outlook for the firm has improved.
38) Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's:
A) has a higher market price than one share of stock in Turner's.
B) has a higher market price per dollar of earnings than does one share of Turner's.
C) sells at a lower price per share than one share of Turner's.
D) represents a larger percentage of firm ownership than does one share of Turner's stock.
E) earns a greater profit per share than does one share of Turner's stock.
39) Which one of the following is most apt to cause a profitable, stable firm to have a higher price-earnings ratio?
A) Slow industry outlook
B) Very low current earnings
C) Low market share
D) Low prospect of firm growth
E) Low investor opinion of fir
40) Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34 and earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a $1 increase in the book value per share will:
A) decrease the price-earnings ratio.
B) decrease the EV multiple.
C) decrease the market price per share.
D) increase the price-earnings ratio.
E) increase the return on equity.
41) Which one of the following sets of ratios would generally be of the most interest to stockholders?
A) Return on assets and profit margin
B) Quick ratio and times interest earned
C) Price-earnings ratio and debt-equity ratio
D) Return on equity and price-earnings ratio
E) Cash coverage ratio and equity multiplier
42) If a firm decreases its operating costs, all else constant, then the:
A) profit margin will decrease.
C) total asset turnover rate will increase.
D) cash coverage ratio will decrease.
E) price-earnings ratio will decrease.
43) A public firm's market capitalization is equal to the:
A) total book value of assets less the book value of debt.
B) par value of common equity.
C) price per share multiplied by number of shares outstanding.
D) stock price per share multiplied by the number of shares authorized.
E) maximum value an acquirer would pay for the firm in an acquisition.
44) Enterprise value is based on the:
A) market value of interest-bearing debt plus the market value of equity minus cash.
B) book values of debt and assets, other than cash.
C) market value of equity plus the book value of total debt minus cash.
D) book value of debt plus the market value of equity.
E) book values of debt and equity less cash.
45) Which one of these values best represents the funds needed to acquire a firm and payoff all of that firm's debt?
A) Market value of total assets
B) Book value of equity
C) Return on assets
D) Market value of equity
E) Enterprise value
46) A firm with a high level of growth opportunities is most apt to have a:
A) high PE ratio and a high EV multiple.
B) high cash ratio and a low EV multiple.
C) high PE ratio and a low EV multiple.
D) low PE ratio and a high EV multiple.
E) low cash ratio and a low PE ratio.
47) The equity multiplier measures:
A) financial leverage.
B) returns to stockholders.
C) operating efficiency.
D) management efficiency.
E) asset use efficiency.
48) The return on equity can be calculated as:
A) ROA × Equity multiplier.
B) Profit margin × ROA.
C) Profit margin × ROA × Total asset turnover.
D) ROA × Net income/Total assets.
E) ROA × Debt-equity ratio.
49) The DuPont identity can be computed as:
A) Net income × Profit margin × (1 + Debt-equity ratio).
B) Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).
C) Net income × Total asset turnover × Equity multiplier.
D) Profit margin × Total asset turnover × Debt-equity ratio.
E) Return on equity × Profit margin × Total asset turnover.
50) Which one of these ratios measures the efficiency at which a firm employs its assets?
A) Profit margin
B) Return on equity
C) Equity multiplier
D) P/E ratio
E) Total asset turnover
51) It is easier to evaluate a firm using its financial statements when the firm:
A) is a conglomerate.
B) is global in nature.
C) uses the same accounting procedures as other firms in its industry.
D) has a different fiscal year than other firms in its industry.
E) tends to have one-time events such as asset sales and property acquisitions.
52) The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:
A) the firm's ratios from prior time periods and to the ratios of firms with similar operations.
B) the average ratios of all firms within the same country over a period of time.
C) those of other firms located in the same geographic area that are similarly sized.
D) the average ratios of the firm's international peer group.
E) those of the largest conglomerate that has operations in the same industry as the firm.
53) The least problems encountered when comparing the financial statements of one firm with those of another firm occur when the firms:
A) are in different lines of business.
B) have geographically diverse operations.
C) use different methods of depreciation.
D) are both classified as conglomerates.
E) have the same fiscal year-end.
54) In the financial planning model, the external financing needed (EFN) as shown on a pro forma balance sheet is equal to the changes in assets:
A) plus the changes in liabilities minus the changes in equity.
B) minus the changes in both liabilities and equity.
C) minus the changes in liabilities only.
D) plus the changes in both liabilities and equity.
E) minus the change in retained earnings.
55) Which account is least apt to vary directly with sales?
A) Notes payable
B) Inventory
C) Cost of goods sold
D) Accounts payable
E) Accounts receivable
56) Projected future financial statements are called:
A) imaginative statements.
B) pro forma statements.
C) reconciled statements.
D) aggregated statements.
E) comparative statements.
57) The projected addition to retained earnings can be calculated as:
A) PM × Δ Sales.
B) PM × Δ Sales × (1 − Dividend payout ratio).
C) PM × Projected sales × (1 − Dividend payout ratio).
D) Projected sales × (1 − Dividend payout ratio).
E) PM × Projected sales.
58) The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:
A) rate of return on assets.
B) internal rate of growth.
C) average historical rate of growth.
D) rate of return on equity.
E) sustainable rate of growth.
59) The sustainable growth rate will be equivalent to the internal growth rate when, and only 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 equal to 1.
E) the retention ratio is equal to 1.
60) 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 equity financing.
E) assumes the dividend payout ratio is equal to zero.
61) If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the:
A) fixed assets will have to increase at the sustainable growth rate, even if the firm is currently operating at only 78 percent of capacity.
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, the debt-equity ratio, and number of common shares outstanding will all increase.
62) Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. 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) 35 percent of the internal rate of growth.
B) 65 percent of the internal rate of growth.
C) the internal rate of growth.
D) the sustainable rate of growth.
E) 65 percent of the sustainable rate of growth.
63) The value of the variable "b" as used in the internal growth rate formula can be computed as:
A) 1 + Growth rate.
B) Total dividends/Net income.
C) 1 − Dividend payout ratio.
D) Net income/Total sales.
E) 1 − PE ratio.
64) The sustainable rate of growth for a firm can be increased by:
A) decreasing the debt-equity ratio.
B) decreasing the profit margin.
C) increasing the dividend payout ratio.
D) increasing the capital intensity ratio.
E) increasing the total asset turnover.
65) Financial planning models are most apt to omit:
A) the changes in net working capital required for additional sales.
B) the increases in costs required to increase sales.
C) any change in retained earnings due to changes in the income statement.
D) the timing, risk, and size of the cash flows.
E) any additions that might be needed to fixed assets.
66) DL Motors has sales of $22,400, net income of $3,600, net fixed assets of $18,700, inventory of $2,800, and total current assets of $6,300. What is the common-size statement value of inventory?
A) 10.07 percent
B) 13.67 percent
C) 11.20 percent
D) 12.50 percent
E) 9.84 percent
67) Weston's has sales of $38,900, net income of $2,400, total assets of $43,100, and total equity of $24,700. Interest expense is $830. What is the common-size statement value of the interest expense?
A) 2.13 percent
B) 3.08 percent
C) 1.93 percent
D) 2.49 percent
E) 3.46 percent
68) Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold of $43,100, and depreciation of $6,800. What is the common-size statement value of EBIT?
A) 36.35 percent
B) 38.08 percent
C) 41.93 percent
D) 32.49 percent
E) 35.46 percent
69) Jessica's Boutique has cash of $218, accounts receivable of $457, accounts payable of $398, and inventory of $647. What is the value of the quick ratio?
A) .55
B) 1.05
C) 1.70
D) 1.32
E) 1.52
70) Browning's has a debt-equity ratio of .47. What is the equity multiplier?
A) 1.47
B) .53
C) 2.13
D) 1.13
E) 1.53
71) Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value of the total assets?
A) $18,889
B) $24,480
C) $23,520
D) $25,689
E) $25,360
72) Leo's Markets has sales of $684,000, costs of $437,000, interest paid of $13,800, total assets of $712,000, and depreciation of $109,400. The tax rate is 21 percent and the equity multiplier is 1.6. What is the return on equity?
A) 21.30 percent
B) 23.92 percent
C) 20.06 percent
D) 19.48 percent
E) 21.98 percent
73) Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year. The times interest earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is 21 percent. What is the value of the cash coverage ratio?
A) 3.71
B) 2.58
C) 3.60
D) 2.78
E) 3.10
74) Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of $46,300, and accounts receivable of $62,700. How many days, on average, does it take the firm to both sell its inventory and collect payment on the sale?
A) 142.10
B) 96.37
C) 178.21
D) 150.54
E) 124.03
75) Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm to sell its inventory?
A) 93.08
B) 74.92
C) 85.14
D) 56.77
E) 80.46
76) Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400, net income of $43,900, and current liabilities of $51,300. The tax rate is 21 percent and the profit margin is 9.3 percent. How many dollars of sales are generated from every $1 in total assets? A) $1.44
B) $1.32
C) $1.73
D) $.97
E) $1.06
77) Flo's Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23 percent, a debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the return on assets?
A) 6.93 percent
B) 9.50 percent
C) 11.08 percent
D) 7.13 percent
E) 13.13 percent
78) Sun Shade's has sales of $363,000, total assets of $323,500, and a profit margin of 14.6 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
A) 28.45 percent
B) 35.61 percent
C) 23.29 percent
D) 31.74 percent
E) 7.88 percent
79) Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are 32,500 shares of stock outstanding at a market price per share of $21.60. What is the price-earnings ratio?
A) 23.40
B) 22.60
C) 19.21
D) 21.08
E) 18.47
80) New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of $62,700, a price-earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 21 percent, and 37,500 shares of stock outstanding. What is the market price per share?
A) $13.48
B) $7.09
C) $9.29
D) $12.48
E) $10.92
81) A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin of 8.2 percent, a tax rate of 21 percent, a price-earnings ratio of 11.3, and a book value per share of $7.98. What is the market-to-book ratio?
A) 6.08
B) 5.42
C) 5.16
D) 6.17
E) 6.90
82) Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest- bearing debt. The market and book values of the debt are the same. The firm has sales of $697,000 and a profit margin of 6.8 percent. The tax rate is 21 percent, the debt-equity ratio is 40 percent, and the price-earnings ratio is 11.8. The firm has $130,000 of current assets of which $41,200 is cash. What is the enterprise value multiple?
A) $1,106,308
B) $994,520
C) $830,479
D) $1,018,097
E) $926,073
83) Samuelson's has sales of $317,000, a profit margin of 8.6 percent, an equity multiplier of 1.8, and total debt of $144,400. What is the return on equity?
A) 15.48 percent
B) 14.46 percent
C) 7.05 percent
D) 15.10 percent
E) 11.25 percent
84) Upriver Tours has balance sheet values of: Inventory $70,500; accounts receivable $50,700; accounts payable $58,900; cash $32,300, notes payable $20,000, long-term debt $134,700, and net fixed assets $504,500. What is the current ratio?
A) 1.95
B) .95
C) 2.11
D) 1.98
E) .98
85) Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500, net income of $11,520, and average inventory of $91,600. What is the days' sales in inventory?
A) 69.84 days
B) 70.76 days
C) 71.51 days
D) 5.16 days
E) 4.08 days
86) Jones Mfg. has current assets of $26,900, net working capital of $8,200, long-term debt of $21,500, and total equity of $57,800. What is the equity multiplier?
A) 1.70
B) 1.59
C) 1.66
D) 1.80
E) 1.99
87) Highland Lumber has net sales of $642,100, depreciation of $138,400, interest expense of $15,600, cost of goods sold of $409,800, and taxes of $16,400. What is the cash coverage ratio?
A) 11.06
B) 6.02
C) 13.79
D) 14.89
E) 8.78
88) Southern Foods has net income of $39,900, net sales of $318,600, total assets of $663,000, common stock of $106,800 with a par value of $1 per share, and retained earnings of $224,400. The stock has a market value of $5.45 per share. What is the price-earnings ratio?
A) 17.12
B) 19.94
C) 12.82
D) 14.59
E) 16.64
89) Catherine's Consulting paid dividends of $3,300 and total equity of $39,450. The debt-equity ratio is 1 and the plowback ratio is 40 percent. What is the return on assets?
A) 6.24 percent
B) 6.09 percent
C) 7.23 percent
D) 6.97 percent
E) 5.72 percent
90) Mountain Top Markets has total assets of $48,700, net working capital of $1,100, and retained earnings of $21,200. The firm has 12,500 shares of stock outstanding with a par value of $1 per share and a market value of $7.10 per share. The stock was originally issued to the firm's founders at par value. What is the market-to-book ratio?
A) 3.19
B) 2.22
C) 2.78
D) 3.03
E) 2.63
91) Georgetown Supply has sales of $318,200, net income of $41,400, current assets of $118,400, net fixed assets of $238,300, net working capital of $18,900, and long-term debt of $175,000. What is the equity multiplier?
A) 1.71
B) 4.34
C) 1.44
D) 3.82
E) 2.92
92) Black Stone Mills has an enterprise value ratio of 9.8, a profit margin of 6.5 percent, sales of $946,200, costs of $631,400, depreciation of $17,900, interest expense of $4,500, and a total tax rate of 23 percent. What is the value of the enterprise?
A) $3,102,900
B) $3,085,040
C) $2,748,300
D) $3,206,780
E) $2,918,640
93) Riverton Stores is all-equity financed and has net sales of $217,800, taxable income of $32,600, a return on assets of 11.5 percent, a tax rate of 21 percent, and total debt of $63,700. What are the values for the three components of the DuPont identity?
A) 11.82 percent; .9725; 1.3975
B) 11.82 percent; 1.0282; 1.3975
C) 11.82 percent; .9725; .7156
D) 10.24 percent; 1.0282; .7156
E) 10.24 percent; 1.0282; 1.3975
94) Kelso's has a return on equity of 16.2 percent, a debt-equity ratio of 44 percent, a capital intensity ratio of 1.08, a current ratio of 1.25, and current assets of $138,000. What is the profit margin?
A) 12.15 percent
B) 9.72 percent
C) 7.48 percent
D) 15.19 percent
E) 13.69 percent
95) Western Wear has total sales of $642,100, EBIT of $93,900, net income of $50,800, current assets of $153,500, total assets of $658,000, current liabilities of $78,900, and total liabilities of $213,600. What are the values of the three components of the DuPont identity?
A) 7.91 percent; 1.02; 1.48
B) 8.57 percent; 1.02; .68
C) 7.91 percent; .98; 1.48
D) 11.43 percent; .98; .68
E) 11.43 percent; 1.02; 1.48
96) Frederico's has a net income of $29,600, a total asset turnover of 1.4, total assets of $318,600, and a debt-equity ratio of .35. What is the return on equity?
A) 16.72 percent
B) 8.40 percent
C) 12.54 percent
D) 14.67 percent
E) 17.56 percent
97) JB Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total assets of $913,600, and current liabilities of $78,900. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 15 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.
A) $49,535
B) $68,211
C) −$10,406
D) $13,909
E) $32,408
98) The Lumber Mill has total assets of $591,600, current liabilities of $49,700, dividends paid of $12,000, net sales of $68,400, and net income of $55,400. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 6 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.
A) $3,200
B) −$13,490
C) −$17,520
D) $15,640
E) $16,380
99) Green Lumber has total sales of $387,200 on total assets of $429,600, current liabilities of $45,000, and $24,000 of dividends paid on net income of $57,700. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 12 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.
A) $11,706
B) $14,350
C) $9,911
D) $5,667
E) $8,408
100) Deep Falls Timber has net sales of $642,100, net income of $50,800, dividends paid of $12,700, total assets of $658,000, and total equity of $444,400. What is the internal growth rate?
A) 5.83 percent
B) 6.24 percent
C) 6.15 percent
D) 5.18 percent
E) 7.70 percent
101) Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales of $848,600, and net income of $94,000. The tax rate is 21 percent and the dividend payout ratio is 30 percent. What is the firm's sustainable growth rate?
A) 13.97 percent
C) 15.54 percent
D) 12.63 percent
E) 14.91 percent
102) The Blue Giant has a profit margin of 6.2 percent and a dividend payout ratio of 40 percent. The capital intensity is 1.08 and the debt-equity ratio is .54. What is the sustainable rate of growth?
A) 6.30 percent
B) 5.53 percent
C) 5.60 percent
D) 6.41 percent
E) 5.89 percent
103) You are comparing the common-size financial statements for two firms in the same industry that have very similar operations. You note that their sales revenues are similar in dollar value but yet the common-size EBIT for one firm is 30 percent compared to only 26 percent for the other firm. What are some possible explanations for this difference given the strong similarities of the two firms?
Answer: Some possible explanations are: (1) difference in the age of the fixed assets leading to differences in the depreciation expense, (2) different depreciation methods, (3) different inventory methods which affects the cost of goods sold, (4) different sales markets that allows the one firm to have a higher markup per item, (5) different markets that cause higher costs per unit sold, and (6) differing fiscal years.
104) Which is a more meaningful measure of profitability for a firm, return on assets or return on equity? Why?
Answer: Most would argue ROE since it measures returns relative to the amount shareholders have invested in the firm. In addition, since shareholder wealth maximization is a firm's primary goal, it makes more sense to look at this measure
105) A retail store has days' sales in inventory of 68 days and an average collection period of 32 days. The firm pays its suppliers in an average of 42 days, on average. Taken together, what do these average values imply about the firm's operations and its cash flows?
Answer: It takes a total of 100 days (= 68 + 32) to sell inventory and collect payment on the sale of that inventory. Meanwhile, 42 days after acquiring the inventory and prior to the inventory even being sold, the retailer must pay its suppliers. Thus, the firm must pay out cash 58 (= 100 − 42) days prior to receiving payment. This creates a negative cash flow which the firm must be able to finance.
106) Suppose a firm calculates its external financial need for a growth rate of ten percent and finds that the need is a negative value. What are the firm's options in this case?
Answer: With a negative external financing need, the firm can expect to have a surplus of funds given the projected rate of growth. The firm can use those funds to reduce current liabilities, reduce long-term debt, buy back common stock, increase dividends, or invest in assets and resources, as needed, to increase its growth rate.
107) New Tek has a sustainable growth rate of 11.2 percent. However, the firm's managers are determined that the firm should grow by at least 20 percent next year. What must the firm do if the managers are to reach their desired level of growth for the firm?
Answer: One reason that causes firms to go out of business is the lack of external funding to support the growth of the firm. Understanding the implications of both the internal and sustainable growth rates can help management know when to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that growth. For the firm to achieve growth beyond the sustainable rate, the firm must increase its debt-equity ratio, obtain additional external equity financing, reduce its dividends, improve its profitability, or some combination of these actions.
108) State the assumptions that underlie the internal growth rate and interpret what that rate means.
Answer: The usual assumptions are: Costs, assets, and current accounts (excluding notes payable) increase proportionately with sales, the dividend payout ratio is fixed (or is given), and no new external financing will be raised. The internal growth rate is the maximum rate at which sales can increase given the stated assumptions while maintaining the funding required by that growth.
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