Chapter 3 & 4 Flashcards
A firm’s liquidity is measured with which one of the following ratios?
A. Market-to-book ratio
B. Current ratio
C. Debt-equity ratio
D. Net profit margin
E. Net working capital ratio
B. Current ratio
Current assets/current liabilities
- Ratios that measure a firm’s liquidity are known as ______ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. book value
C. short-term solvency
Short-term solvency ratios provide information about a firm’s liquidity
All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:
A. increase the cash ratio.
B. increase the net working capital to total assets ratio.
C. decrease the cash coverage ratio.
D. decrease the quick ratio.
E. increase the current ratio.
D. decrease the quick ratio.
quick ratio = current assets-inventory/current liabilities
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ______ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. Turnover
D. profitability
Which one of the following accurately lists the three components of the DuPont identity?
A. Equity multiplier, net profit margin, and total asset turnover
B. Debt-equity ratio, capital intensity ratio, and net profit margin
C. Operating efficiency, equity multiplier, and profitability ratio
D. Return on assets, net profit margin, and equity multiplier
E. Financial leverage, operating efficiency, and profitability ratio
A. Equity multiplier, net profit margin, and total asset turnover
ROE= Profit margin (PM) x total assets turnover (TAT) x Equity multiplier (EM)
Financial planning:
A. focuses solely on the short-term outlook for a firm.
B. is a process that firms employ only when major changes to a firm’s operations are anticipated.
C. is a process that firms undergo once every five years.
D. considers multiple options and scenarios.
E. provides minimal benefits for firms that are highly responsive to economic changes.
D. considers multiple options and scenarios.
The financial planning process includes:
I. determining asset requirements.
II. developing contingency plans.
III. establishing priorities.
IV. analyzing funding options.
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
E. I, II, III, and IV
The financial planning process tends to place the least emphasis on a firm’s:
A. growth limitations.
B. capacity utilization.
C. market value.
D. capital structure.
E. dividend policy.
C. market value.
The financial planning process is directly involved with operational and strategic decisions.
The need for external financing:
A. will limit growth if unfunded.
B. is unaffected by the dividend payout ratio.
C. must be funded by long-term debt.
D. ignores any changes in retained earnings.
E. considers only the required increase in fixed assets.
A. will limit growth if unfunded.
Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt.
Which one of the following defines the maximum rate at which this firm can currently grow?
A. Internal growth rate × (1 − .25)
B. Sustainable growth rate × (1 − .25)
C. Internal growth rate
D. Sustainable growth rate
E. Zero percent
C. Internal growth rate
The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.
A. minimum; assuming a 100 percent retention ratio
B. minimum; if the firm maintains a constant equity multiplier
C. maximum; excluding external financing of any kind
D. maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio
E. maximum; with unlimited debt financing
D. maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio
All else constant, if a firm decreases its operating costs, which one of the following will also decrease?
A. Return on equity
B. Return on assets
C. Net profit margin
D. Total asset turnover
E. Price-earnings ratio
E. Price-earnings ratio
Hulsey Outdoor had a return on assets of 15 percent and a return on equity of 15 percent. Given this information, the firm:
A. may have short-term, but not long-term debt.
B. is using its assets as efficiently as possible.
C. has no net working capital.
D. has a debt-equity ratio of 1.0.
E. has an equity multiplier of 1.0.
E. has an equity multiplier of 1.0.
ROE = ROA x equity multiplier
The relationship between the return on assets and the return on equity is identified by the:
A. net profit margin.
B. profitability determinant.
C. balance sheet multiplier.
D. DuPont identity.
E. debt-equity ratio.
D. DuPont identity.
Which one of the following is a correct formula for computing the return on equity?
A. Net profit margin × ROA
B. ROA × Equity multiplier
C. Net profit margin × Total asset turnover × Debt-equity ratio
D. Net income/Total assets
E. Debt-equity ratio × ROA
B. ROA × Equity multiplier
All else constant, a(n) ______ will increase the internal rate of growth.
A. decrease in the retention ratio
B. decrease in net income
C. increase in the dividend payout ratio
D. decrease in total assets
E. increase in cost of goods sold
D. decrease in total assets
Financial plans generally tend to ignore:
A. dividend policy.
B. managers’ goals and objectives.
C. risks associated with cash flows.
D. operating capacity levels.
E. capital structure policy.
C. risks associated with cash flows.
The financial planning process is least apt to:
A. involve internal negotiations among divisions.
B. quantify senior manager’s goals.
C. consider the development of future technologies.
D. reconcile a company’s activities across divisions.
E. consider factors that currently provide a negative rate of growth.
C. consider the development of future technologies.
Financial planning is a(n) _____ process.
A. one time
B. iterative
C. static
D. inert
B. iterative
One advantage to well-executed financial planning is that the firm can _____.
A. get out ahead of the competition
B. be sure of final outcomes of investments
C. correct past mistakes
D. avoid surprises
D. avoid surprises
The ___________growth rate is the maximum rate of growth a firm can maintain without increasing its financial leverage
sustainable
Which of the following are often left out of most financial planning models?
A. Equity growth, cash flow, and financial leverage
B. Profit margins, financial leverage, and turnover
C. Sales growth, asset growth, and equity growth
D. Cash flow size, risk, and timing
D. Cash flow size, risk, and timing
If a firm maintains a constant debt-equity ratio and does not use any new external equity financing, the firm can grow at a rate no greater than its _____.
A. return on equity
B. internal growth rate
C. return on assets
D. sustainable growth rate
D. sustainable growth rate
The _____________growth rate tells us the maximum growth rate that can be achieved with no external financing of any kind.
internal
What does a current ratio of 1.2 mean?
A. The firm has $1.20 in current assets for every $1 in current liabilities.
B. The firm has $1.20 in current liabilities for every $1 in long-term debt.
C. The firm has $1.20 in current liabilities for every $1 in current assets.
D. The firm has $1.20 in current assets for every $1 in fixed assets.
A. The firm has $1.20 in current assets for every $1 in current liabilities.
Which of the following is the correct representation of the total debt ratio?
A. Total equity/Total long-term debt
B. (Total assets - Total equity)/(Total assets)
C. Long-term debt/Total assets
B. (Total assets - Total equity)/(Total assets)
The inventory ____________ is calculated as the COGS divided by the inventory.
turnover
The profit margin is equal to net income divided by ______.
A. total assets
B. operating income
C. net working capital
D. sales
D. Sales
How is market-to-book ratio measured?
A. Market value of bonds/Book value of bonds
B. Market value of sales/Book value of costs
C. Book value per share/Market value per share
D. Market value per share/Book value per share
D. Market value per share/Book value per share
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
A. It will decrease.
B. It may either increase or decrease.
C. It will increase.
D. It will not be affected.
C. It will increase.
Which one of the following does not affect ROE according to the DuPont identity?
A. Asset use efficiency
B. Investor sentiment
C. Operating efficiency
D. Financial leverage
B. Investor sentiment
The information needed to compute the profit margin can be found on the ___________
A. income statement
B. balance sheet
C. statement of cash flow
A. income statement
The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.
A. dilution
B. ratio
C. Bourne
D. DuPont
An increase in which one of the following will increase a firm’s quick ratio without affecting its cash ratio?
Accounts payable
Cash
Inventory
Accounts receivable
Fixed assets
Accounts receivable
Mario’s Home Systems has sales of $2,870, costs of goods sold of $2,210, inventory of $514, and accounts receivable of $435. How many days, on average, does it take Mario’s to sell its inventory?
Multiple Choice
83.73 days
55.32 days
84.89 days
65.37 days
71.84 days
84.89 days
Inventory Turnover = cost of goods sold/inventory
days in inventory = 365/inventory turnover
Inventory turnover = 2210/514=4.3
days in inventory = 365/4.3=84.89
Jupiter Explorers has $7,400 in sales. The profit margin is 5 percent. There are 4,100 shares of stock outstanding, with a price of $1.60 per share. What is the company’s price-earnings ratio?
17.73 times
45.12 times
8.87 times
13.60 times
14.44 times
17.73 times
Earnings per share = ($7,400 × .05)/4,100 = $.09024
Price-earnings ratio = $1.60/$.09024 = 17.73 times
A firm has a return on equity of 20 percent. The total asset turnover is 2.8 and the profit margin is 7 percent. The total equity is $6,000. What is the net income?
$1,200
$429
$1,176
$3,360
$420
$1,200
Net income = .20 × $6,000 = $1,200
If Roten Rooters, Incorporated, has an equity multiplier of 1.44, total asset turnover of 1.39, and a profit margin of 8.50 percent. What is its ROE?
15.31%
16.33%
-5.20%
18.71%
17.01%
17.01%
ROE = (PM)(TAT)(EM)
ROE = (0.085)(1.39)(1.44)
ROE = 0.1701, or 17.01%
- The Green Giant has a 7 percent profit margin and a 33 percent dividend payout ratio. The total asset turnover is 1.5 times and the equity multiplier is 1.5 times. What is the sustainable rate of growth?
A. 2.25%
B. 17.70%
C. 15.75%
D. 10.61%
E. 11.80%
E. 11.80%
ROE = .07 x 1.5 x 1.5 = .158
Sustainable growth rate = [.158 x (1-.33)]/{1-[.158 x (1-.33)]}
Sustainable growth rate = ROE x b/1 - ROE x b
ROE = PM (profit margin) *TAT (total equity turnover) * EM (equity multiplier)
ROE = NI(net income)/TE(total equity)
B = plowback ratio (retention ratio)
retention ratio = addition to retained earnings/Net Income
also = to 1 minus the dividend payout ratio
Dividend payout ratio = cash dividends/net income
- The Green Giant has a 6 percent profit margin and a 32 percent dividend payout ratio. The total asset turnover is 1.4 times and the equity multiplier is 1.5 times. What is the sustainable rate of growth?
A. 14.06%
B. 9.37%
C. 12.60%
D. 2.10%
E. 11.20%
B. 9.37%
See notes in question 7
ROE = .06 x 1.4 x 1.5 = .126
b = 1-.32 = .68
Sustainable rate of growth = .126 x .68/1 - (.126 x .68)
- A firm wants a sustainable growth rate of 2.13 percent while maintaining a dividend payout ratio of 30 percent and a profit margin of 4 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm’s desired rate of growth?
A. .70 times
B. .74 times
C. .49 times
D. .51 times
E. .21 times
C. .49 times
Sustainable growth rate ROE x b / 1 - ROE x b
Dividend payout ratio = cash dividends/net income
ROE = PM x TAT x EM
plowback ratio (b) = 1 minus dividend payout ratio
total asset turnover = Sales/total assets
capital intensity ratio = Total average assets/revenue
Debt equity ratio = equity multiplier - 1
If we know sustainable growth rate and b, we can calculate ROE
Sustainable growth rate = 2.13
b = 1 - dividend payout ratio (1-.3) = .7
If we know the ROE, PM, and TAT we can calculate the EM
If we know the capital intensity ratio, we can calculate TAT since TAT = 1/capital intensity ratio
If we know the EM, we can calculate the Debt-Equity ratio
Debt equity ratio = Equity multiplier (EM) - 1
.0213 = .7ROE/1-.7ROE
.0213(1-.7ROE) = .7ROE
.0213 - .01491ROE = .7ROE (add .01491ROE to both sides)
.0213 = .71491ROE (divide by .71491)
ROE = .02979
PM = .04
TAT = 1/capital intensity ratio (2) = 1/2
.02979 = .04 x .5 x EM
.02979 = .02EM
EM = 1.49
Debt equity ratio = 1.49 - 1 = .49
ANSWER .49
All else constant, if a firm decreases its operating costs, which one of the following will also decrease?
Return on equity
Return on assets
Net profit margin
Total asset turnover
Price-earnings ratio
Price-earnings ratio
Humphries has cash of $10,000, accounts receivable of $2,500, accounts payable of $900, and inventory of $1,200. What is the value of the quick ratio?
13.89
14.22
12.89
15.22
9.12
13.89
Quick ratio = ($10,000 + 2,500)/$900
Quick ratio = 13.89
Which of the following questions should be considered when developing a corporation’s financial plan?
I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
I and IV only
II and III only
I, III, and IV only
II, III, and IV only
I, II, III, and IV
I, II, III, and IV
Financial plans:
concentrate solely on income and expense items.
often contain alternative options based on economic developments.
frequently contain conflicting goals.
assume that firms obtain no additional external financing.
are based on a single set of economic assumptions.
often contain alternative options based on economic developments.
The internal growth rate of a firm is best described as the ______ growth rate achievable ______.
minimum; assuming a retention ratio of 100 percent
minimum; if the firm maintains a constant equity multiplier
maximum; excluding external financing of any kind
maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio
maximum; with unlimited debt financing
maximum; excluding external financing of any kind
A firm wants a sustainable growth rate of 2.93 percent while maintaining a dividend payout ratio of 23 percent and a profit margin of 7 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm’s desired rate of growth?
.53 times
.06 times
.77 times
.94 times
.18 times
.06 times
Sustainable growth rate = .0293 = [ROE × (1 − .23)]/{1 − [ROE × (1 − .23)]}
ROE = .03697
ROE = .03697 = .07 × (1/2) × Equity multiplier
Equity multiplier = 1.06
Debt-equity ratio = 1.06 − 1 = .06 times
Logano Driving School’s 2017 balance sheet showed net fixed assets of $3.6 million, and the 2018 balance sheet showed net fixed assets of $5.5 million. The company’s 2018 income statement showed a depreciation expense of $915,000. What was net capital spending for 2018?
$1,900,000
$2,815,000
$-1,900,000
$-985,000
$985,000
$2,815,000
Net capital spending = NFAend − NFAbeg + Depreciation
Net capital spending = $5,500,000 − 3,600,000 + 915,000
Net capital spending = $2,815,000
Which one of the following is an agency cost?
Accepting an investment opportunity that will add value to the firm
Investing in a new project that creates firm value
Increasing the quarterly dividend
Hiring outside accountants to audit the company’s financial statements
Closing a division of the firm that is operating at a loss
Hiring outside accountants to audit the company’s financial statements
