Chapter03
1.Projectedfuturefinancialstatementsarecalled:
A.plugstatements.
B.proformastatements.
C.reconciledstatements.
D.aggregatedstatements.
E.comparativestatements.
2.Theextendedversionofthepercentageofsalesmethod:
A.assumesthatallnetincomewillbepaidoutindividendstostockholders.
B.assumesthatallnetincomewillberetainedbythefirmandoffsetbyareductionindebt.
C.isbasedonacapitalintensityratioof1.0.
D.requiresthatallfinancialstatementaccountschangeatthesamerate.
E.separatesaccountsthatvarywithsalesfromthosethatdonotvarywithsales.
3.Whichstatementexpressesallaccountsasapercentageoftotalassets?
A.proformabalancesheet
B.common-sizeincomestatement
C.statementofcashflows
D.proformaincomestatement
E.common-sizebalancesheet
4.Ratiosthatmeasureafirm'sabilitytopayitsbillsovertheshortrunwithoutunduestressare knownas:
A.assetmanagementratios.
B.long-termsolvencymeasures.
C.liquiditymeasures.
D.profitabilityratios.
E.marketvalueratios.
5.Thecurrentratioismeasuredas:
A.currentassetsminuscurrentliabilities.
B.currentassetsdividedbycurrentliabilities.
C.currentliabilitiesminusinventory,dividedbycurrentassets.
D.cashonhanddividedbycurrentliabilities.
E.currentliabilitiesdividedbycurrentassets.
6.Thequickratioismeasuredas:
A.currentassetsdividedbycurrentliabilities.
B.cashonhandpluscurrentliabilities,dividedbycurrentassets.
C.currentliabilitiesdividedbycurrentassets,plusinventory.
D.currentassetsminusinventory,dividedbycurrentliabilities.
E.currentassetsminusinventoryminuscurrentliabilities.
7.Ratiosthatmeasureafirm'sfinancialleverageareknownas________ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
8.Thedebt-equityratioismeasuredas:
A.totalequitydividedbylong-termdebt.
B.totalequitydividedbytotaldebt.
C.totaldebtdividedbytotalequity.
D.long-termdebtdividedbytotalequity.
E.totalassetsminustotaldebt,dividedbytotalequity.
9.Theequitymultiplierismeasuredastotal:
A.equitydividedbytotalassets.
B.equityplustotaldebt.
C.assetsminustotalequity,dividedbytotalassets.
D.assetsplustotalequity,dividedbytotaldebt.
E.assetsdividedbytotalequity.
10.Ratiosthatmeasurehowefficientlyafirmusesitsassetstogeneratesalesareknownas _______ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
11.Theinventoryturnoverratioismeasuredas:
A.totalsalesminusinventory.
B.inventorytimestotalsales.
C.costofgoodssolddividedbyinventory.
D.inventorydividedbycostofgoodssold.
E.inventorydividedbysales.
12.Thefinancialratiodays'salesininventoryismeasuredas:
A.inventoryturnoverplus365days.
B.inventorytimes365days.
C.inventorypluscostofgoodssold,dividedby365days.
D.365daysdividedbytheinventory.
E.365daysdividedbytheinventoryturnover.
13.Thereceivablesturnoverratioismeasuredas:
A.salesplusaccountsreceivable.
B.salesdividedbyaccountsreceivable.
C.salesminusaccountsreceivable,dividedbysales.
D.accountsreceivabletimessales.
E.accountsreceivabledividedbysales.
14.Thetotalassetturnoverratiomeasurestheamountof:
A.totalassetsneededforevery$1ofsales.
B.salesgeneratedbyevery$1intotalassets.
C.fixedassetsrequiredforevery$1ofsales.
D.netincomegeneratedbyevery$1intotalassets.
E.netincomethancanbegeneratedbyevery$1offixedassets.
15.Ratiosthatmeasurehowefficientlyafirm'smanagementusesitsassetsandequitytogenerate bottomlinenetincomeareknownas_______ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
16.Thefinancialratiomeasuredasnetincomedividedbysalesisknownasthefirm's:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.assetturnover.
E.earningsbeforeinterestandtaxes.
17.Themeasureofnetincomereturnedfromeverydollarinvestedintotalassetsisthe:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.assetturnover.
E.earningsbeforeinterestandtaxes.
18.Thefinancialratiothatmeasurestheaccountingprofitperdollarofbookequityisreferredtoas the:
A.profitmargin.
B.price-earningsratio.
C.returnonequity.
D.equityturnover.
E.marketprofit-to-bookratio.
19.Theamountthatinvestorsarewillingtopayforeachdollarofannualearningsisreflectedinthe:
A.returnonassets.
B.returnonequity.
C.debt-equityratio.
D.price-earningsratio.
E.DuPontidentity.
20.Themarket-to-bookratioismeasuredasthe:
A.marketpricepersharedividedbytheparvaluepershare.
B.netincomepersharedividedbythemarketpricepershare.
C.marketpricepersharedividedbythenetincomepershare.
D.marketpricepersharedividedbythedividendspershare.
E.marketvaluepersharedividedbythebookvaluepershare.
21.Theexternalfundsneeded(EFN)equationprojectstheadditiontoretainedearningsas:
A.PM×ΔSales.
B.PM×ΔSales×(1-d).
C.PM×Projectedsales×(1-d).
D.Projectedsales×(1-d).
E.PM×Projectedsales.
22.Whichoneofthefollowingstatementsiscorrectconcerningratioanalysis?
A.Asingleratioisoftencomputeddifferentlybydifferentindividuals.
B.Ratiosdonotaddresstheproblemofsizedifferencesamongfirms.
C.Onlyaverylimitednumberofratioscanbeusedforanalyticalpurposes.
D.Eachratiohasaspecificformulathatisusedconsistentlybyallanalysts.
E.Ratioscannotbeusedforcomparisonpurposesoverperiodsoftime.
23.Whichoneofthefollowingisaliquidityratio?
A.quickratio
B.cashcoverageratio
C.totaldebtratio
D.EVmultiple
E.timesinterestearnedratio
24.Anincreaseinwhichoneofthefollowingaccountsincreasesafirm'scurrentratiowithout affectingitsquickratio?
A.accountspayable
B.cash
C.inventory
D.accountsreceivable
E.fixedassets
25.Asupplier,whorequirespaymentwithintendays,shouldbemostconcernedwithwhichoneof thefollowingratioswhengrantingcredit?
A.current B.cash
C.debt-equity
D.quick
E.totaldebt
26.Afirmhasatotaldebtratioof.47.Thismeansthefirmhas47centsindebtforevery:
A.$1intotalequity.
B.$.53intotalassets.
C.$1incurrentassets.
D.$.53intotalequity.
E.$1infixedassets.
27.Thelong-termdebtratioisprobablyofmostinteresttoafirm's:
A.creditcustomers.
B.employees.
C.suppliers.
D.mortgageholder.
E.stockholders.
28.Abankerconsideringloaningmoneytoafirmfortenyearswouldmostlikelypreferthefirmhave adebtratioof_______andatimesinterestearnedratioof_______.
A..50;.75
B..50;1.00
C..45;1.75
D..40;.75
E..40;1.75
29.Fromacashflowposition,whichoneofthefollowingratiosbestmeasuresafirm'sabilitytopay theinterestonitsdebts?
A.timesinterestearnedratio
B.cashcoverageratio
C.cashratio
D.quickratio
E.intervalmeasure
30.Thehighertheinventoryturnover,the:
A.lesstimeinventoryitemsremainontheshelf.
B.highertheinventoryasapercentageoftotalassets.
C.longerittakesafirmtosellitsinventory.
D.greatertheamountofinventoryheldbyafirm.
E.lessertheamountofinventoryheldbyafirm.
31.Whichoneofthefollowingstatementsiscorrectifafirmhasareceivablesturnoverof10?
A.Ittakesthefirm10daystocollectpaymentfromitscustomers.
B.Ittakesthefirm36.5daystosellitsinventoryandcollectthepaymentfromthesale.
C.Ittakesthefirmanaverageof36.5daystosellitsitems.
D.Thefirmcollectsonitssalesinanaverageof36.5days.
E.Thefirmhastentimesmoreinaccountsreceivablethanitdoesincash.
32.Acapitalintensityratioof1.03meansafirmhas$1.03in:
A.totaldebtforevery$1inequity.
B.equityforevery$1intotaldebt.
C.salesforevery$1intotalassets.
D.totalassetsforevery$1insales.
E.long-termassetsforevery$1inshort-termassets.
33.Puffy'sPastriesgeneratesfivecentsofnetincomeforevery$1inequity.Thus,Puffy'shas _______of5percent.
A.areturnonassets
B.aprofitmargin
C.areturnonequity
D.anEVmultiple
E.aprice-earningsratio
34.Ifafirmproducesareturnonassetsof15percentandalsoareturnonequityof15percent,then thefirm:
A.hasnodebtofanykind.
B.isusingitsassetsasefficientlyaspossible.
C.hasnonetworkingcapital.
D.alsohasacurrentratioof15.
E.hasanequitymultiplierof2.
35.Ifstockholderswanttoknowhowmuchprofitthefirmismakingontheirentireinvestmentinthat firm,thestockholdersshouldrefertothe:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.equitymultiplier.
E.earningspershare.
36.AssumeBGLEnterprisesincreasesitsoperatingefficiencybyloweringitscostswhileholdingits salesconstant.Asaresult,givenallelseconstant,the:
A.returnonequitywillincrease.
B.returnonassetswilldecrease.
C.profitmarginwilldecline.
D.equitymultiplierwilldecrease.
E.price-earningsratiowillincrease.
37.Joe'shasold,fullydepreciatedequipment.Moe'sjustpurchasedallnewequipmentwhichwillbe depreciatedovereightyears.IfJoe’sandMoe’shavethesamesales,costs,taxrate,and enterprisevalue,then:
A.Joe'swillhavealowerprofitmargin.
B.Joe'swillhavealowerreturnonequity.
C.Moe'swillhaveahighernetincome.
D.Moe'sandJoe’swillhavethesameEVmultiple.
E.Moe'swillhavealowerEVmultiple.
38.Lastyear,Alfred'sAutomotivehadaprice-earningsratioof15andearningspershareof$1.20. Thisyear,thepriceearningsratiois18andtheearningspershareis$1.20.Basedonthis information,itcanbestatedwithcertaintythat:
A.thepricepersharedecreased.
B.theearningspersharedecreased.
C.investorsarepayingalowerpricepersharethisyearascomparedtolastyear.
D.investorsarereceivingahigherrateofreturnthisyear.
E.theinvestors’outlookforthefirmhasimproved.
39.Turner'sInc.hasaprice-earningsratioof16.Alfred'sCo.hasaprice-earningsratioof19.Thus, youcanstatewithcertaintythatoneshareofstockinAlfred's:
A.hasahighermarketpricethanoneshareofstockinTurner's.
B.hasahighermarketpriceperdollarofearningsthandoesoneshareofTurner's.
C.sellsatalowerpricepersharethanoneshareofTurner's.
D.representsalargerpercentageoffirmownershipthandoesoneshareofTurner'sstock.
E.earnsagreaterprofitpersharethandoesoneshareofTurner'sstock.
40.Whichoneofthefollowingismostapttocauseafirmtohaveahigherprice-earningsratio?
A.slowindustryoutlook
B.verylowcurrentearnings
C.lowmarketshare
D.lowprospectoffirmgrowth
E.lowinvestoropinionoffirm
41.Vinnie'sMotorshasamarket-to-bookratioof3.4.Thebookvaluepershareis$34andearnings pershareare$1.36.Holdingthemarket-to-bookratioandearningspershareconstant,a$1 increaseinthebookvaluepersharewill:
A.decreasetheprice-earningsratio.
B.decreasetheEVmultiple.
C.decreasethemarketpricepershare.
D.increasetheprice-earningsratio.
E.increasethereturnonequity.
42.Whichoneofthefollowingsetsofratioswouldgenerallybeofthemostinteresttostockholders?
A.returnonassetsandprofitmargin
B.quickratioandtimesinterestearned
C.price-earningsratioanddebt-equityratio
D.returnonequityandprice-earningsratio
E.cashcoverageratioandequitymultiplier
43.TheDuPontidentitycanbecomputedas:
A.Netincome×Profitmargin×(1+Debt-equityratio).
B.Profitmargin×(1/Capitalintensity)×(1+Debt-equityratio).
C.Netincome×Totalassetturnover×Equitymultiplier.
D.Profitmargin×Totalassetturnover×Debt-equityratio.
E.Returnonequity×Profitmargin×Totalassetturnover.
44.Ifafirmdecreasesitsoperatingcosts,allelseconstant,thenthe:
A.profitmarginwilldecrease.
B.returnonassetswilldecrease.
C.totalassetturnoverratewillincrease.
D.cashcoverageratiowilldecrease.
E.price-earningsratiowilldecrease.
45.Itiseasiertoevaluateafirmusingitsfinancialstatementswhenthefirm:
A.isaconglomerate.
B.isglobalinnature.
C.usesthesameaccountingproceduresasotherfirmsinitsindustry.
D.hasadifferentfiscalyearthanotherfirmsinitsindustry.
E.tendstohaveone-timeeventssuchasassetsalesandpropertyacquisitions.
46.Themosteffectivemethodofdirectlyevaluatingthefinancialperformanceofafirmistocompare thefinancialratiosofthefirmto:
A.thefirm’sratiosfrompriortimeperiodsandtotheratiosoffirmswithsimilaroperations.
B.theaverageratiosofallfirmswithinthesamecountryoveraperiodoftime.
C.thoseofotherfirmslocatedinthesamegeographicareathataresimilarlysized.
D.theaverageratiosofthefirm’sinternationalpeergroup.
E.thoseofthelargestconglomeratethathasoperationsinthesameindustryasthefirm.
47.Inthefinancialplanningmodel,theexternalfinancingneeded(EFN)asshownonaproforma balancesheetisequaltothechangesinassets:
A.plusthechangesinliabilitiesminusthechangesinequity.
B.minusthechangesinbothliabilitiesandequity.
C.minusthechangesinliabilities.
D.plusthechangesinbothliabilitiesandequity.
E.minusthechangeinretainedearnings.
48.Theleastproblemencounteredwhencomparingthefinancialstatementsofonefirmwiththoseof anotherfirmoccurswhenthefirms:
A.areindifferentlinesofbusiness.
B.havegeographicallydiverseoperations.
C.usedifferentmethodsofdepreciation.
D.arebothclassifiedasconglomerates.
E.havethesamefiscalyear-end.
49.Themaximumrateatwhichafirmcangrowwhilemaintainingaconstantdebt-equityratioisbest definedbyits:
A.rateofreturnonassets.
B.internalrateofgrowth.
C.averagehistoricalrateofgrowth.
D.rateofreturnonequity.
E.sustainablerateofgrowth.
50.Thesustainablegrowthratewillbeequivalenttotheinternalgrowthratewhen,andonlywhen,:
A.afirmhasnodebt.
B.thegrowthrateispositive.
C.theplowbackratioispositivebutlessthan1.
D.afirmhasadebt-equityratioequalto1.
E.theretentionratioisequalto1.
51.Thesustainablegrowthrate:
A.assumesthereisnoexternalfinancingofanykind.
B.isnormallyhigherthantheinternalgrowthrate.
C.assumesthedebt-equityratioisvariable.
D.isbasedonreceivingadditionalexternaldebtandequityfinancing.
E.assumesthedividendpayoutratioisequaltozero.
52.Ifafirmbasesitsgrowthprojectionontherateofsustainablegrowth,showspositivenetincome, andhasadividendpayoutratioof30percent,thenthe:
A.fixedassetswillhavetoincreaseatthesamerate,evenifthefirmiscurrentlyoperatingatonly 78percentofcapacity.
B.numberofcommonsharesoutstandingwillincreaseatthesamerateofgrowth.
C.debt-equityratiowillhavetoincrease.
D.debt-equityratiowillremainconstantwhileretainedearningsincrease.
E.fixedassets,thedebt-equityratio,andnumberofcommonsharesoutstandingwillallincrease.
53.Marcie'sMercantilewantstomaintainitscurrentdividendpolicy,whichisapayoutratioof35 percent.Thefirmdoesnotwanttoincreaseitsequityfinancingbutiswillingtomaintainits currentdebt-equityratio.Giventheserequirements,themaximumrateatwhichMarcie'scan growisequalto:
A.35percentoftheinternalrateofgrowth.
B.65percentoftheinternalrateofgrowth.
C.theinternalrateofgrowth.
D.thesustainablerateofgrowth.
E.65percentofthesustainablerateofgrowth.
54.Oneoftheprimaryweaknessesofmanyfinancialplanningmodelsisthatthey:
A.relytoomuchonfinancialrelationshipsandtoolittleonaccountingrelationships.
B.areiterativeinnature.
C.ignorethegoalsandobjectivesofseniormanagement.
D.ignorecashpayoutstostockholders.
E.ignorethesize,risk,andtimingofcashflows.
55.Financialplanning,whenproperlyexecuted:
A.ignoresthenormalrestraintsencounteredbyafirm.
B.isbasedontheinternalrateofgrowth.
C.reducesthenecessityofdailymanagementoversightofthebusinessoperations.
D.ensuresinternalconsistencyamongthefirm’svariousgoals.
E.eliminatestheneedtoplanmorethanoneyearinadvance.
56.Apublicfirm'smarketcapitalizationisequaltothe:
A.totalbookvalueofassetslessbookvalueofdebt.
B.parvalueofcommonequity.
C.pricepersharemultipliedbynumberofsharesoutstanding.
D.firm'sstockpricemultipliedbythenumberofsharesauthorized.
E.themaximumvalueanacquirerwouldpayforthefirminanacquisition.
57.Enterprisevalueisbasedonthe:
A.marketvalueofinterestbearingdebtplusthemarketvalueofequityminuscash.
B.bookvaluesofdebtandassets,otherthancash.
C.marketvalueofequityplusthebookvalueoftotaldebtminuscash.
D.bookvalueofdebtplusthemarketvalueofequity.
E.bookvaluesofdebtandequitylesscash.
58.Theequitymultipliermeasures:
A.financialleverage.
B.returnstostockholders.
C.operatingefficiency.
D.managementefficiency.
E.assetuseefficiency.
59.Thereturnonequitycanbecalculatedas:
A.ROA×Equitymultiplier.
B.Profitmargin×ROA.
C.Profitmargin×ROA×Totalassetturnover.
D.ROA×(Netincome/Totalassets).
E.ROA×Debt-equityratio.
60. Whichoneofthefollowingdepictsacorrectrelationship?
A. Dividendpayoutratio=1–Retentionratio
B. Totalassetturnover=1+Capitalintensityratio
C. ROA=ROE×(1+Debt-equityratio)
D. ROE=1–ROA
E. Equitymultiplier=1–Debt-equityratio
Whichaccountisleastapttovarydirectlywithsales?
A. notespayable
B. inventory
C. costofgoodssold
D. accountspayable
E. accountsreceivable
62.Afirmhassalesof$22,400,netincomeof$3,600,netfixedassetsof$18,700,inventoryof $2,800,andtotalcurrentassetsof$6,300.Whatisthecommon-sizestatementvalueof inventory?
A.10.07%
B.13.67%
C.11.20%
D.12.50%
E.9.84%
63.Afirmhassalesof$38,900,netincomeof$2,400,totalassetsof$43,100,andtotalequityof $24,700.Interestexpenseis$830.Whatisthecommon-sizestatementvalueoftheinterest expense?
A.2.13%
B.3.08%
C.1.93%
D.2.49%
E.3.46%
64.Jessica'sBoutiquehascashof$218,accountsreceivableof$457,accountspayableof$398, andinventoryof$647.Whatisthevalueofthequickratio?
A..55
B.1.05
C.1.70
D.1.32
E.1.52
65.Browning’shasadebt-equityratioof.47.Whatistheequitymultiplier?
A.1.47
B..53
C.2.13
D.1.13
E.1.53
66.CadoIndustrieshastotaldebtof$6,800andadebt-equityratioof.36.Whatisthevalueofthe totalassets?
A.$18,889
B.$24,480
C.$23,520
D.$25,689
E.$25,360
67.Wybro’sMarketshassalesof$684,000,costsof$437,000,interestpaidof$13,800,totalassets of$712,000,anddepreciationof$109,400.Thetaxrateis35percentandtheequitymultiplieris 1.6.Whatisthereturnonequity?
A.11.30%
B.13.92%
C.7.06%
D.15.48%
E.18.08%
68.Rosita'sResourcespaid$11,310ininterestand$16,500individendslastyear.Thetimes interestearnedratiois2.9,thedepreciationexpenseis$7,900,andthetaxrateis35percent. Whatisthevalueofthecashcoverageratio?
69.HomeSystemshassalesof$312,800,costofgoodssoldof$218,400,inventoryof$46,300,and accountsreceivableof$62,700.Howmanydays,onaverage,doesittakethefirmtobothsellits inventoryandcollectpaymentonthesale?
A.142.10
B.96.37
C.178.21
D.150.54
E.124.03
70.NorthernIndustrieshasaccountsreceivableof$42,300,inventoryof$61,200,salesof$544,200, andcostofgoodssoldof$393,500.Howmanydays,onaverage,doesittakethefirmtosellits inventory?
A.93.08
B.74.92
C.85.14
D.56.77
E.80.46
71.TwoSistersDresseshasnetworkingcapitalof$43,800,netfixedassetsof$232,400,netincome of$43,900,andcurrentliabilitiesof$51,300.Thetaxrateis35percentandtheprofitmarginis 9.3percent.Howmanydollarsworthofsalesaregeneratedfromevery$1intotalassets?
A.$1.44
B.$1.32
C.$1.73
D.$.97
E.$1.06
72.UptowneRestauranthassalesof$418,000,totalequityof$224,400,ataxrateof34percent,a debt-equityratioof.37,andaprofitmarginof5.1percent.Whatisthereturnonassets?
A.6.93%
B.9.50%
C.11.08%
D.7.13%
E.13.13%
73.SunShade’shassalesof$363,000,totalassetsof$323,500,andaprofitmarginof14.6percent. Thefirmhasatotaldebtratioof54percent.Whatisthereturnonequity?
A.28.45%
B.35.61%
C.23.29%
D.31.74%
E.7.88%
74.DiscountMarthas$876,400insales.Theprofitmarginis3.8percent.Thereare32,500sharesof stockoutstanding.Themarketpricepershareis$21.60.Whatistheprice-earningsratio?
A.23.40
B.22.60
C.19.21
D.21.08
E.18.47
75.NewMetalshasdepreciationof$28,300,interestexpenseof$11,400,EBITof$62,700,apriceearningsratioof8.6,aprofitmarginof7.2percent,ataxrateof34percent,and37,500sharesof stockoutstanding.Whatisthemarketpricepershare?
A.$3.48
B.$5.09
C.$7.76
D.$12.48
E.$9.92
76.Afirmhas12,000sharesofstockoutstanding,salesof$638,100,aprofitmarginof8.2percent,a taxrateof35percent,aprice-earningsratioof11.3,andabookvaluepershareof$7.98.Whatis themarket-to-bookratio?
A.6.08
B.5.42
C.5.16
D.6.17
E.6.90
77.PrestonWoodshas17,500sharesofstockoutstandingalongwith$408,000ofinterestbearing debt.Themarketandbookvaluesofthedebtarethesame.Thefirmhassalesof$697,000and aprofitmarginof6.8percent.Thetaxrateis35percent,thedebt-equityratiois40percent,and theprice-earningsratiois11.8.Thefirmhas$130,000ofcurrentassetsofwhich$41,200iscash. Whatistheenterprisevaluemultiple?
A.$1,106,308
B.$994,520
C.$830,479
D.$1,018,097
E.$926,073
78.Frederico'shasanetincomeof$29,600,atotalassetturnoverof1.4,totalassetsof$318,600, andadebt-equityratioof.35.Whatisthereturnonequity?
A.16.72%
B.8.40%
C.12.54%
D.14.67%
E.17.56%
79.Samuelson'shassalesof$317,000,aprofitmarginof8.6percent,anequitymultiplierof1.8,and totaldebtof$144,400.Whatisthereturnonequity?
A.15.48%
B.14.46%
C.7.05%
D.15.10%
E.11.25%
80.Afirmhasareturnonequityof16.2percent,adebt-equityratioof44percent,acapitalintensity ratioof1.08,acurrentratioof1.25,andcurrentassetsof$138,000.Whatistheprofitmargin?
A.12.15%
B.9.72%
C.7.48%
D.15.19%
E.13.69%
Whatisthecurrentratiofor2015?
B. 62.79days
C.67.51days
D.42.97days
E.40.08days
83. Whatistheequitymultiplierfor2015?
A.1.48
B.1.28
C.1.66
D.2.13
E.2.99
WhatarethevaluesofthethreecomponentsoftheDuPontidentityfor2015?
A.7.91%;1.0248;1.4806
B.8.57%;1.0248;.6754
C.7.91%;.9758;1.4806
D.11.43%;.9758;.6754
E.11.43%;1.0248;1.4806
DeepFallsTimberstocksoldfor$6.50ashareasof2015.Whatwastheprice-earningsratioat thattime?
DeepFallsTimberstocksoldfor$6.50ashareasof2015.Whatwasthemarket-to-bookratioat thattime?
Whatistheinternalgrowthratefor2015?
A.5.83%
B.6.24%
C.6.15%
D.5.18%
E.7.70%
Whatisthesustainablegrowthratefor2015?
A.13.97%
B.14.46%
C.15.54%
D.12.63%
E.10.91%
Whatistheequitymultiplierfor2015? A.1.71 B.1.87 C.1.44 D.1.82 E.1.92
WhatarethevaluesforthethreecomponentsoftheDuPontidentityfor2015?
A.11.08%;.9289;1.8679
B.11.08%;1.0765;1.8679
C.11.08%;.9289;.5354
D.7.75%;1.0765;.5354
E.7.75%;1.0765;1.8679
92.TheBlueGianthasaprofitmarginof6.2percentandadividendpayoutratioof40percent.The capitalintensityis1.08andthedebt-equityratiois.54.Whatisthesustainablerateofgrowth?
A.6.30%
B.5.53%
C.5.60%
D.6.41%
E.5.89%
93.Catherine'sConsultinghasnetincomeof$4,400andtotalequityof$39,450.Thedebt-equity ratiois1andtheplowbackratiois40percent.Whatisthereturnonassets?
A.6.24%
B.6.09%
C.5.23%
D.5.58%
E.5.72%
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(eventhough youknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthefirm’s managersprojectafirmgrowthrateof15percentfornextyear,whatwillbetheamountof externalfinancingneededtosupportthislevelofgrowth?
A.$49,535
B.$68,211
C.$10,406
D.$13,909
E.$32,408
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(eventhough youknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthefirm’s managersprojectafirmgrowthrateof22percentfornextyear,whatwillbetheamountof externalfinancingneededtosupportthislevelofgrowth?
A.$63,200 B.$66,270
C.$47,520
D.$63,200
E.$53,640
F.$47,520
G.$56,400
H.$53,640
I.$56,400
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(eventhough youknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthefirm’s managersprojectafirmgrowthrateof16percentfornextyear,whatwillbetheamountof externalfinancingneededtosupportthislevelofgrowth?ANS$$ANSA.$22,444
A.$18,700
B.$24,350
97.NewTekhasasustainablegrowthrateof11.2percent.However,thefirm’smanagersare determinedthatthefirmshouldgrowbyatleast20percentnextyear.Whatmustthefirmdoif themanagersaretoreachtheirdesiredlevelofgrowthforthefirm?
98.Statetheassumptionsthatunderliethesustainablegrowthrateandinterpretwhatthe sustainablegrowthratemeans.
99.Supposeafirmcalculatesitsexternalfinancialneedforagrowthrateof10percentandfindsthat theneedisanegativevalue.Whatarethefirm'soptionsinthiscase?
100.Aretailstorehasdays'salesininventoryof68daysandanaveragecollectionperiodof32days. Thefirmpaysitssuppliersinanaverageof42days,onaverage.Takentogether,whatdothese averagevaluesimplyaboutthefirm'soperationsanditscashflows?
101.Whichisamoremeaningfulmeasureofprofitabilityforafirm,returnonassetsorreturnon equity?Why?
102.Youarecomparingthecommon-sizefinancialstatementsfortwofirmsinthesameindustrythat haveverysimilaroperations.Younotethattheirsalesrevenuesaresimilarindollarvaluebutyet thecommon-sizeEBITforonefirmis30percentcomparedtoonly26percentfortheotherfirm. Whataresomepossibleexplanationsforthisdifferencegiventhestrongsimilaritiesofthetwo firms?
Chapter03Key
1. Projectedfuturefinancialstatementsarecalled:
A.plugstatements.
B.proformastatements.
C.reconciledstatements.
D.aggregatedstatements.
E.comparativestatements.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#1 Section:3.4
Topic:Proformastatements
2. Theextendedversionofthepercentageofsalesmethod:
A.assumesthatallnetincomewillbepaidoutindividendstostockholders.
B.assumesthatallnetincomewillberetainedbythefirmandoffsetbyareductionindebt.
C.isbasedonacapitalintensityratioof1.0.
D.requiresthatallfinancialstatementaccountschangeatthesamerate.
E.separatesaccountsthatvarywithsalesfromthosethatdonotvarywithsales.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#2 Section:3.4
Topic:Financialplanningmodels
3. Whichstatementexpressesallaccountsasapercentageoftotalassets?
A.proformabalancesheet
B.common-sizeincomestatement
C.statementofcashflows
D.proformaincomestatement
E.common-sizebalancesheet
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Blooms:Remember
Difficulty:1Basic Ross-Chapter03#3 Section:3.1
Topic:Standardizedfinancialstatements
4. Ratiosthatmeasureafirm'sabilitytopayitsbillsovertheshortrunwithoutunduestressare knownas:
A.assetmanagementratios.
B.long-termsolvencymeasures.
C.liquiditymeasures.
D.profitabilityratios.
E.marketvalueratios.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#4 Section:3.2
Topic:Short-termsolvencyratios
5. Thecurrentratioismeasuredas:
A.currentassetsminuscurrentliabilities.
B.currentassetsdividedbycurrentliabilities.
C.currentliabilitiesminusinventory,dividedbycurrentassets.
D.cashonhanddividedbycurrentliabilities.
E.currentliabilitiesdividedbycurrentassets.
6. Thequickratioismeasuredas:
A.currentassetsdividedbycurrentliabilities.
B.cashonhandpluscurrentliabilities,dividedbycurrentassets.
C.currentliabilitiesdividedbycurrentassets,plusinventory.
D.currentassetsminusinventory,dividedbycurrentliabilities.
E.currentassetsminusinventoryminuscurrentliabilities.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#5 Section:3.2
Topic:Short-termsolvencyratios
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#6 Section:3.2
Topic:Short-termsolvencyratios
7. Ratiosthatmeasureafirm'sfinancialleverageareknownas________ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#7 Section:3.2 Topic:Long-termsolvencyratios
8. Thedebt-equityratioismeasuredas:
A.totalequitydividedbylong-termdebt.
B.totalequitydividedbytotaldebt.
C.totaldebtdividedbytotalequity.
D.long-termdebtdividedbytotalequity.
E.totalassetsminustotaldebt,dividedbytotalequity.
9. Theequitymultiplierismeasuredastotal:
A.equitydividedbytotalassets.
B.equityplustotaldebt.
C.assetsminustotalequity,dividedbytotalassets.
D.assetsplustotalequity,dividedbytotaldebt.
E.assetsdividedbytotalequity.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#8 Section:3.2 Topic:Long-termsolvencyratios
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#9 Section:3.2 Topic:Long-termsolvencyratios
10. Ratiosthatmeasurehowefficientlyafirmusesitsassetstogeneratesalesareknownas _______ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
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Blooms:Remember Difficulty:1Basic
Ross-Chapter03#10
Section:3.2
Topic:Assetmanagementratios
11. Theinventoryturnoverratioismeasuredas:
A.totalsalesminusinventory.
B.inventorytimestotalsales.
C.costofgoodssolddividedbyinventory.
D.inventorydividedbycostofgoodssold.
E.inventorydividedbysales.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#11
Section:3.2
Topic:Assetmanagementratios
12. Thefinancialratiodays'salesininventoryismeasuredas:
A.inventoryturnoverplus365days.
B.inventorytimes365days.
C.inventorypluscostofgoodssold,dividedby365days.
D.365daysdividedbytheinventory.
E.365daysdividedbytheinventoryturnover.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#12
Section:3.2
Topic:Assetmanagementratios
13. Thereceivablesturnoverratioismeasuredas:
A.salesplusaccountsreceivable.
B.salesdividedbyaccountsreceivable.
C.salesminusaccountsreceivable,dividedbysales.
D.accountsreceivabletimessales.
E.accountsreceivabledividedbysales.
14. Thetotalassetturnoverratiomeasurestheamountof:
A.totalassetsneededforevery$1ofsales.
B.salesgeneratedbyevery$1intotalassets.
C.fixedassetsrequiredforevery$1ofsales.
D.netincomegeneratedbyevery$1intotalassets.
E.netincomethancanbegeneratedbyevery$1offixedassets.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#13
Section:3.2
Topic:Assetmanagementratios
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#14 Section:3.2 Topic:Assetmanagementratios
15. Ratiosthatmeasurehowefficientlyafirm'smanagementusesitsassetsandequityto generatebottomlinenetincomeareknownas_______ratios.
A.assetmanagement
B.long-termsolvency
C.short-termsolvency
D.profitability
E.marketvalue
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#15 Section:3.2 Topic:Profitabilityratios
16. Thefinancialratiomeasuredasnetincomedividedbysalesisknownasthefirm's:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.assetturnover.
E.earningsbeforeinterestandtaxes.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#16
Section:3.2 Topic:Profitabilityratios
17. Themeasureofnetincomereturnedfromeverydollarinvestedintotalassetsisthe:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.assetturnover.
E.earningsbeforeinterestandtaxes.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#17 Section:3.2 Topic:Profitabilityratios
18. Thefinancialratiothatmeasurestheaccountingprofitperdollarofbookequityisreferredto asthe:
A.profitmargin.
B.price-earningsratio.
C.returnonequity.
D.equityturnover.
E.marketprofit-to-bookratio.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#18 Section:3.2 Topic:Profitabilityratios
19. Theamountthatinvestorsarewillingtopayforeachdollarofannualearningsisreflectedin the:
A.returnonassets.
B.returnonequity.
C.debt-equityratio.
D.price-earningsratio.
E.DuPontidentity.
20. Themarket-to-bookratioismeasuredasthe:
A.marketpricepersharedividedbytheparvaluepershare.
B.netincomepersharedividedbythemarketpricepershare.
C.marketpricepersharedividedbythenetincomepershare.
D.marketpricepersharedividedbythedividendspershare.
E.marketvaluepersharedividedbythebookvaluepershare.
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Blooms:Remember Difficulty:1Basic Ross-Chapter03#19 Section:3.2
Topic:Marketvalueratios
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:1Basic Ross-Chapter03#20 Section:3.2
Topic:Marketvalueratios
21. Theexternalfundsneeded(EFN)equationprojectstheadditiontoretainedearningsas:
A.PM×ΔSales.
B.PM×ΔSales×(1-d).
C.PM×Projectedsales×(1-d).
D.Projectedsales×(1-d).
E.PM×Projectedsales.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#21 Section:3.4
Topic:Externalfinancingneed
22. Whichoneofthefollowingstatementsiscorrectconcerningratioanalysis?
A.Asingleratioisoftencomputeddifferentlybydifferentindividuals.
B.Ratiosdonotaddresstheproblemofsizedifferencesamongfirms.
C.Onlyaverylimitednumberofratioscanbeusedforanalyticalpurposes.
D.Eachratiohasaspecificformulathatisusedconsistentlybyallanalysts.
E.Ratioscannotbeusedforcomparisonpurposesoverperiodsoftime.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#22 Section:3.2 Topic:Ratioanalysis
23. Whichoneofthefollowingisaliquidityratio?
A.quickratio
B.cashcoverageratio
C.totaldebtratio
D.EVmultiple
E.timesinterestearnedratio
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#23 Section:3.2 Topic:Short-termsolvencyratios
24. Anincreaseinwhichoneofthefollowingaccountsincreasesafirm'scurrentratiowithout affectingitsquickratio?
A.accountspayable
B.cash
C.inventory
D.accountsreceivable
E.fixedassets
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#24 Section:3.2
Topic:Short-termsolvencyratios
25. Asupplier,whorequirespaymentwithintendays,shouldbemostconcernedwithwhichone ofthefollowingratioswhengrantingcredit?
A.current
B.cash
C.debt-equity
D.quick
E.totaldebt
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#25 Section:3.2
Topic:Short-termsolvencyratios
26. Afirmhasatotaldebtratioof.47.Thismeansthefirmhas47centsindebtforevery:
A.$1intotalequity.
B.$.53intotalassets.
C.$1incurrentassets.
D.$.53intotalequity.
E.$1infixedassets.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#26 Section:3.2 Topic:Long-termsolvencyratios
27. Thelong-termdebtratioisprobablyofmostinteresttoafirm's:
A.creditcustomers.
B.employees.
C.suppliers.
D.mortgageholder. E.stockholders.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#27 Section:3.2
Topic:Long-termsolvencyratios
28. Abankerconsideringloaningmoneytoafirmfortenyearswouldmostlikelypreferthefirm haveadebtratioof_______andatimesinterestearnedratioof_______.
A..50;.75
B..50;1.00
C..45;1.75
D..40;.75
E..40;1.75
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#28 Section:3.2
Topic:Long-termsolvencyratios
29. Fromacashflowposition,whichoneofthefollowingratiosbestmeasuresafirm'sabilityto paytheinterestonitsdebts?
A.timesinterestearnedratio
B.cashcoverageratio
C.cashratio
D.quickratio
E.intervalmeasure
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#29 Section:3.2
Topic:Long-termsolvencyratios
30. Thehighertheinventoryturnover,the:
A.lesstimeinventoryitemsremainontheshelf.
B.highertheinventoryasapercentageoftotalassets.
C.longerittakesafirmtosellitsinventory.
D.greatertheamountofinventoryheldbyafirm.
E.lessertheamountofinventoryheldbyafirm.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#30 Section:3.2
Topic:Assetmanagementratios
31. Whichoneofthefollowingstatementsiscorrectifafirmhasareceivablesturnoverof10?
A.Ittakesthefirm10daystocollectpaymentfromitscustomers.
B.Ittakesthefirm36.5daystosellitsinventoryandcollectthepaymentfromthesale.
C.Ittakesthefirmanaverageof36.5daystosellitsitems.
D.Thefirmcollectsonitssalesinanaverageof36.5days.
E.Thefirmhastentimesmoreinaccountsreceivablethanitdoesincash.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#31 Section:3.2
Topic:Assetmanagementratios
32. Acapitalintensityratioof1.03meansafirmhas$1.03in:
A.totaldebtforevery$1inequity.
B.equityforevery$1intotaldebt.
C.salesforevery$1intotalassets.
D.totalassetsforevery$1insales.
E.long-termassetsforevery$1inshort-termassets.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#32 Section:3.2 Topic:Assetmanagementratios
33. Puffy'sPastriesgeneratesfivecentsofnetincomeforevery$1inequity.Thus,Puffy'shas _______of5percent.
A.areturnonassets
B.aprofitmargin
C.areturnonequity
D.anEVmultiple
E.aprice-earningsratio
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#33 Section:3.2 Topic:Profitabilityratios
34. Ifafirmproducesareturnonassetsof15percentandalsoareturnonequityof15percent, thenthefirm:
A.hasnodebtofanykind.
B.isusingitsassetsasefficientlyaspossible.
C.hasnonetworkingcapital.
D.alsohasacurrentratioof15.
E.hasanequitymultiplierof2.
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Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#34
Section:3.2
Topic:Profitabilityratios
35. Ifstockholderswanttoknowhowmuchprofitthefirmismakingontheirentireinvestmentin thatfirm,thestockholdersshouldrefertothe:
A.profitmargin.
B.returnonassets.
C.returnonequity.
D.equitymultiplier.
E.earningspershare.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#35
Section:3.2 Topic:Profitabilityratios
36. AssumeBGLEnterprisesincreasesitsoperatingefficiencybyloweringitscostswhileholding itssalesconstant.Asaresult,givenallelseconstant,the:
A.returnonequitywillincrease.
B.returnonassetswilldecrease.
C.profitmarginwilldecline.
D.equitymultiplierwilldecrease.
E.price-earningsratiowillincrease.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#36 Section:3.2 Topic:Profitabilityratios
37. Joe'shasold,fullydepreciatedequipment.Moe'sjustpurchasedallnewequipmentwhichwill bedepreciatedovereightyears.IfJoe’sandMoe’shavethesamesales,costs,taxrate,and enterprisevalue,then:
A.Joe'swillhavealowerprofitmargin.
B.Joe'swillhavealowerreturnonequity.
C.Moe'swillhaveahighernetincome.
D.Moe'sandJoe’swillhavethesameEVmultiple.
E.Moe'swillhavealowerEVmultiple.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#37 Section:3.2 Topic:Marketvalueratios
38. Lastyear,Alfred'sAutomotivehadaprice-earningsratioof15andearningspershareof $1.20.Thisyear,thepriceearningsratiois18andtheearningspershareis$1.20.Basedon thisinformation,itcanbestatedwithcertaintythat:
A.thepricepersharedecreased.
B.theearningspersharedecreased.
C.investorsarepayingalowerpricepersharethisyearascomparedtolastyear.
D.investorsarereceivingahigherrateofreturnthisyear.
E.theinvestors’outlookforthefirmhasimproved.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#38 Section:3.2 Topic:Marketvalueratios
39. Turner'sInc.hasaprice-earningsratioof16.Alfred'sCo.hasaprice-earningsratioof19. Thus,youcanstatewithcertaintythatoneshareofstockinAlfred's:
A.hasahighermarketpricethanoneshareofstockinTurner's.
B.hasahighermarketpriceperdollarofearningsthandoesoneshareofTurner's.
C.sellsatalowerpricepersharethanoneshareofTurner's.
D.representsalargerpercentageoffirmownershipthandoesoneshareofTurner'sstock.
E.earnsagreaterprofitpersharethandoesoneshareofTurner'sstock.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#39 Section:3.2 Topic:Marketvalueratios
40. Whichoneofthefollowingismostapttocauseafirmtohaveahigherprice-earningsratio?
A.slowindustryoutlook
B.verylowcurrentearnings
C.lowmarketshare
D.lowprospectoffirmgrowth
E.lowinvestoropinionoffirm
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#40 Section:3.2
Topic:Marketvalueratios
41. Vinnie'sMotorshasamarket-to-bookratioof3.4.Thebookvaluepershareis$34and earningspershareare$1.36.Holdingthemarket-to-bookratioandearningspershare constant,a$1increaseinthebookvaluepersharewill:
A.decreasetheprice-earningsratio.
B.decreasetheEVmultiple.
C.decreasethemarketpricepershare.
D.increasetheprice-earningsratio.
E.increasethereturnonequity.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#41 Section:3.2 Topic:Marketvalueratios
42. Whichoneofthefollowingsetsofratioswouldgenerallybeofthemostinterestto stockholders?
A.returnonassetsandprofitmargin
B.quickratioandtimesinterestearned
C.price-earningsratioanddebt-equityratio
D.returnonequityandprice-earningsratio
E.cashcoverageratioandequitymultiplier
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#42 Section:3.2 Topic:Marketvalueratios
43. TheDuPontidentitycanbecomputedas:
A.Netincome×Profitmargin×(1+Debt-equityratio).
B.Profitmargin×(1/Capitalintensity)×(1+Debt-equityratio).
C.Netincome×Totalassetturnover×Equitymultiplier.
D.Profitmargin×Totalassetturnover×Debt-equityratio.
E.Returnonequity×Profitmargin×Totalassetturnover.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#43 Section:3.3 Topic:DuPontidentity
44. Ifafirmdecreasesitsoperatingcosts,allelseconstant,thenthe:
A.profitmarginwilldecrease.
B.returnonassetswilldecrease.
C.totalassetturnoverratewillincrease.
D.cashcoverageratiowilldecrease.
E.price-earningsratiowilldecrease.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#44 Section:3.2 Topic:Marketvalueratios
45. Itiseasiertoevaluateafirmusingitsfinancialstatementswhenthefirm:
A.isaconglomerate.
B.isglobalinnature.
C.usesthesameaccountingproceduresasotherfirmsinitsindustry.
D.hasadifferentfiscalyearthanotherfirmsinitsindustry.
E.tendstohaveone-timeeventssuchasassetsalesandpropertyacquisitions.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#45 Section:3.3 Topic:Financialstatementanalysisandissues
46. Themosteffectivemethodofdirectlyevaluatingthefinancialperformanceofafirmisto comparethefinancialratiosofthefirmto:
A.thefirm’sratiosfrompriortimeperiodsandtotheratiosoffirmswithsimilaroperations.
B.theaverageratiosofallfirmswithinthesamecountryoveraperiodoftime.
C.thoseofotherfirmslocatedinthesamegeographicareathataresimilarlysized.
D.theaverageratiosofthefirm’sinternationalpeergroup.
E.thoseofthelargestconglomeratethathasoperationsinthesameindustryasthefirm.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#46 Section:3.3
Topic:Financialstatementanalysisandissues
47. Inthefinancialplanningmodel,theexternalfinancingneeded(EFN)asshownonaproforma balancesheetisequaltothechangesinassets:
A.plusthechangesinliabilitiesminusthechangesinequity.
B.minusthechangesinbothliabilitiesandequity.
C.minusthechangesinliabilities.
D.plusthechangesinbothliabilitiesandequity.
E.minusthechangeinretainedearnings.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#47 Section:3.4
Topic:Financialplanningmodels
48. Theleastproblemencounteredwhencomparingthefinancialstatementsofonefirmwith thoseofanotherfirmoccurswhenthefirms:
A.areindifferentlinesofbusiness.
B.havegeographicallydiverseoperations.
C.usedifferentmethodsofdepreciation.
D.arebothclassifiedasconglomerates.
E.havethesamefiscalyear-end.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#48 Section:3.3
Topic:Financialstatementanalysisandissues
49. Themaximumrateatwhichafirmcangrowwhilemaintainingaconstantdebt-equityratiois bestdefinedbyits:
A.rateofreturnonassets.
B.internalrateofgrowth.
C.averagehistoricalrateofgrowth.
D.rateofreturnonequity.
E.sustainablerateofgrowth.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#49 Section:3.5
Topic:Internalandsustainablegrowthrates
50. Thesustainablegrowthratewillbeequivalenttotheinternalgrowthratewhen,andonly when,:
A.afirmhasnodebt.
B.thegrowthrateispositive.
C.theplowbackratioispositivebutlessthan1.
D.afirmhasadebt-equityratioequalto1.
E.theretentionratioisequalto1.
51. Thesustainablegrowthrate:
A.assumesthereisnoexternalfinancingofanykind.
B.isnormallyhigherthantheinternalgrowthrate.
C.assumesthedebt-equityratioisvariable.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#50 Section:3.5
Topic:Internalandsustainablegrowthrates
D.isbasedonreceivingadditionalexternaldebtandequityfinancing.
E.assumesthedividendpayoutratioisequaltozero.
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Blooms:Apply Difficulty:2Intermediate Ross-Chapter03#51 Section:3.5
Topic:Internalandsustainablegrowthrates
52. Ifafirmbasesitsgrowthprojectionontherateofsustainablegrowth,showspositivenet income,andhasadividendpayoutratioof30percent,thenthe:
A.fixedassetswillhavetoincreaseatthesamerate,evenifthefirmiscurrentlyoperatingat only78percentofcapacity.
B.numberofcommonsharesoutstandingwillincreaseatthesamerateofgrowth.
C.debt-equityratiowillhavetoincrease.
D.debt-equityratiowillremainconstantwhileretainedearningsincrease.
E.fixedassets,thedebt-equityratio,andnumberofcommonsharesoutstandingwillall increase.
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#52 Section:3.3
Topic:Internalandsustainablegrowthrates
53. Marcie'sMercantilewantstomaintainitscurrentdividendpolicy,whichisapayoutratioof35 percent.Thefirmdoesnotwanttoincreaseitsequityfinancingbutiswillingtomaintainits currentdebt-equityratio.Giventheserequirements,themaximumrateatwhichMarcie'scan growisequalto:
A.35percentoftheinternalrateofgrowth.
B.65percentoftheinternalrateofgrowth.
C.theinternalrateofgrowth.
D.thesustainablerateofgrowth.
E.65percentofthesustainablerateofgrowth.
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Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#53 Section:3.5
Topic:Internalandsustainablegrowthrates
54. Oneoftheprimaryweaknessesofmanyfinancialplanningmodelsisthatthey:
A.relytoomuchonfinancialrelationshipsandtoolittleonaccountingrelationships.
B.areiterativeinnature.
C.ignorethegoalsandobjectivesofseniormanagement.
D.ignorecashpayoutstostockholders.
E.ignorethesize,risk,andtimingofcashflows.
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Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#54 Section:3.6
55. Financialplanning,whenproperlyexecuted:
A.ignoresthenormalrestraintsencounteredbyafirm.
B.isbasedontheinternalrateofgrowth.
C.reducesthenecessityofdailymanagementoversightofthebusinessoperations.
D.ensuresinternalconsistencyamongthefirm’svariousgoals.
E.eliminatestheneedtoplanmorethanoneyearinadvance.
56. Apublicfirm'smarketcapitalizationisequaltothe:
A.totalbookvalueofassetslessbookvalueofdebt.
B.parvalueofcommonequity.
C.pricepersharemultipliedbynumberofsharesoutstanding.
D.firm'sstockpricemultipliedbythenumberofsharesauthorized.
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Blooms:Remember
Difficulty:2Intermediate Ross-Chapter03#55
Section:3.5
Topic:Financialplanningandforecasting
E.themaximumvalueanacquirerwouldpayforthefirminanacquisition.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#56 Section:3.2
Topic:Ratioanalysis
57. Enterprisevalueisbasedonthe:
A.marketvalueofinterestbearingdebtplusthemarketvalueofequityminuscash.
B.bookvaluesofdebtandassets,otherthancash.
C.marketvalueofequityplusthebookvalueoftotaldebtminuscash.
D.bookvalueofdebtplusthemarketvalueofequity.
E.bookvaluesofdebtandequitylesscash.
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Remember Difficulty:2Intermediate Ross-Chapter03#57 Section:3.2
Topic:Ratioanalysis
58. Theequitymultipliermeasures:
A.financialleverage.
B.returnstostockholders.
C.operatingefficiency.
D.managementefficiency.
E.assetuseefficiency.
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Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#58
Section:3.3 Topic:DuPontidentity
59. Thereturnonequitycanbecalculatedas:
A.ROA×Equitymultiplier.
B.Profitmargin×ROA.
C.Profitmargin×ROA×Totalassetturnover.
D.ROA×(Netincome/Totalassets).
E.ROA×Debt-equityratio.
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Blooms:Apply
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#59
Section:3.3
Section:3.4
Section:3.5 Topic:DuPontidentity Topic:Financialplanningmodels
Whichoneofthefollowingdepictsacorrectrelationship?
A. Dividendpayoutratio=1–Retentionratio
B. Totalassetturnover=1+Capitalintensityratio
C. ROA=ROE×(1+Debt-equityratio)
D. ROE=1–ROA
E. Equitymultiplier=1–Debt-equityratio
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Apply Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#60 Section:3.3 Section:3.4 Section:3.5 Topic:DuPontidentity Topic:Financialplanningmodels
Whichaccountisleastapttovarydirectlywithsales?
A. notespayable
B. inventory
C. costofgoodssold
D. accountspayable
E. accountsreceivable
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Blooms:Apply
Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#61 Section:3.3 Section:3.4 Section:3.5
Topic:Financialplanningmodels
62. Afirmhassalesof$22,400,netincomeof$3,600,netfixedassetsof$18,700,inventoryof $2,800,andtotalcurrentassetsof$6,300.Whatisthecommon-sizestatementvalueof inventory?
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#62 Section:3.1
Topic:Standardizedfinancialstatements
63. Afirmhassalesof$38,900,netincomeof$2,400,totalassetsof$43,100,andtotalequityof $24,700.Interestexpenseis$830.Whatisthecommon-sizestatementvalueoftheinterest expense?
A.2.13%
B.3.08%
C.1.93%
D.2.49%
E.3.46%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#63 Section:3.1
Topic:Standardizedfinancialstatements
64. Jessica'sBoutiquehascashof$218,accountsreceivableof$457,accountspayableof$398, andinventoryof$647.Whatisthevalueofthequickratio? A..55
1.70
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#64 Section:3.2 Topic:Ratioanalysis
65. Browning’shasadebt-equityratioof.47.Whatistheequitymultiplier? A.1.47 B..53 C.2.13 D.1.13 E.1.53
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#65 Section:3.2 Topic:Ratioanalysis
66. CadoIndustrieshastotaldebtof$6,800andadebt-equityratioof.36.Whatisthevalueofthe totalassets?
A.$18,889
B.$24,480
C.$23,520
D.$25,689
E.$25,360
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#66 Section:3.2 Topic:Ratioanalysis
67. Wybro’sMarketshassalesof$684,000,costsof$437,000,interestpaidof$13,800,total assetsof$712,000,anddepreciationof$109,400.Thetaxrateis35percentandtheequity multiplieris1.6.Whatisthereturnonequity?
A.11.30%
B.13.92%
C.7.06%
D.15.48%
E.18.08%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#67 Section:3.2 Topic:Ratioanalysis
68. Rosita'sResourcespaid$11,310ininterestand$16,500individendslastyear.Thetimes interestearnedratiois2.9,thedepreciationexpenseis$7,900,andthetaxrateis35percent. Whatisthevalueofthecashcoverageratio?
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#68 Section:3.2 Topic:Ratioanalysis
69. HomeSystemshassalesof$312,800,costofgoodssoldof$218,400,inventoryof$46,300, andaccountsreceivableof$62,700.Howmanydays,onaverage,doesittakethefirmtoboth sellitsinventoryandcollectpaymentonthesale? A.142.10 B.96.37
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#69 Section:3.2 Topic:Ratioanalysis
70. NorthernIndustrieshasaccountsreceivableof$42,300,inventoryof$61,200,salesof $544,200,andcostofgoodssoldof$393,500.Howmanydays,onaverage,doesittakethe firmtosellitsinventory? A.93.08 B.74.92 C.85.14 D.56.77 E.80.46
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#70 Section:3.2 Topic:Ratioanalysis
71. TwoSistersDresseshasnetworkingcapitalof$43,800,netfixedassetsof$232,400,net incomeof$43,900,andcurrentliabilitiesof$51,300.Thetaxrateis35percentandtheprofit marginis9.3percent.Howmanydollarsworthofsalesaregeneratedfromevery$1intotal assets?
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#71 Section:3.2 Topic:Ratioanalysis
72. UptowneRestauranthassalesof$418,000,totalequityof$224,400,ataxrateof34percent, adebt-equityratioof.37,andaprofitmarginof5.1percent.Whatisthereturnonassets?
A.6.93%
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#72 Section:3.2
73. SunShade’shassalesof$363,000,totalassetsof$323,500,andaprofitmarginof14.6 percent.Thefirmhasatotaldebtratioof54percent.Whatisthereturnonequity?
A.28.45%
B.35.61%
C.23.29%
D.31.74%
E.7.88%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#73 Section:3.2 Topic:Ratioanalysis
74. DiscountMarthas$876,400insales.Theprofitmarginis3.8percent.Thereare32,500 sharesofstockoutstanding.Themarketpricepershareis$21.60.Whatistheprice-earnings ratio? A.23.40
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#74 Section:3.2 Topic:Ratioanalysis
75. NewMetalshasdepreciationof$28,300,interestexpenseof$11,400,EBITof$62,700,a price-earningsratioof8.6,aprofitmarginof7.2percent,ataxrateof34percent,and37,500 sharesofstockoutstanding.Whatisthemarketpricepershare?
A.$3.48
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#75
76. Afirmhas12,000sharesofstockoutstanding,salesof$638,100,aprofitmarginof8.2 percent,ataxrateof35percent,aprice-earningsratioof11.3,andabookvaluepershareof $7.98.Whatisthemarket-to-bookratio?
A.6.08
B.5.42
C.5.16
D.6.17
E.6.90
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#76 Section:3.2 Topic:Ratioanalysis
77. PrestonWoodshas17,500sharesofstockoutstandingalongwith$408,000ofinterest bearingdebt.Themarketandbookvaluesofthedebtarethesame.Thefirmhassalesof $697,000andaprofitmarginof6.8percent.Thetaxrateis35percent,thedebt-equityratiois 40percent,andtheprice-earningsratiois11.8.Thefirmhas$130,000ofcurrentassetsof which$41,200iscash.Whatistheenterprisevaluemultiple?
A.$1,106,308
B.$994,520
C.$830,479
D.$1,018,097
E.$926,073
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Analyze Difficulty:3Challenge Ross-Chapter03#77 Section:3.2 Topic:Ratioanalysis
78. Frederico'shasanetincomeof$29,600,atotalassetturnoverof1.4,totalassetsof $318,600,andadebt-equityratioof.35.Whatisthereturnonequity?
A.16.72%
B.8.40%
C.12.54%
D.14.67%
E.17.56%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#78 Section:3.3 Topic:DuPontidentity
79. Samuelson'shassalesof$317,000,aprofitmarginof8.6percent,anequitymultiplierof1.8, andtotaldebtof$144,400.Whatisthereturnonequity?
A.15.48%
B.14.46%
C.7.05%
D.15.10%
E.11.25%
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Blooms:Analyze Difficulty:3Challenge Ross-Chapter03#79 Section:3.2 Topic:Ratioanalysis
80. Afirmhasareturnonequityof16.2percent,adebt-equityratioof44percent,acapital intensityratioof1.08,acurrentratioof1.25,andcurrentassetsof$138,000.Whatistheprofit margin?
A.12.15%
B.9.72%
C.7.48%
D.15.19%
E.13.69%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#80 Section:3.3 Topic:DuPontidentity
Whatisthecurrentratiofor2015?
A.1.95 B..95
C.2.06
D.1.98 E..98
Ross-Chapter03#81
Section:3.2
Topic:Ratioanalysis
C.67.51days
D.42.97days
E.40.08days
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#82 Section:3.2 Topic:Ratioanalysis 83. Whatistheequitymultiplierfor2015?
A.1.48 B.1.28
C.1.66
D.2.13
E.2.99
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#83 Section:3.2
Topic:Ratioanalysis
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Blooms:Analyze
Difficulty:2Intermediate
Ross-Chapter03#84
Section:3.2
Topic:Ratioanalysis
WhatarethevaluesofthethreecomponentsoftheDuPontidentityfor2015?
A.7.91%;1.0248;1.4806
B.8.57%;1.0248;.6754
C.7.91%;.9758;1.4806
D.11.43%;.9758;.6754
E.11.43%;1.0248;1.4806
Blooms:Analyze
Difficulty:2Intermediate
Ross-Chapter03#85
Section:3.3
Topic:DuPontidentity
DeepFallsTimberstocksoldfor$6.50ashareasof2015.Whatwastheprice-earningsratio atthattime?
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Blooms:Analyze
Difficulty:2Intermediate
Ross-Chapter03#86
Section:3.2
Topic:Ratioanalysis
DeepFallsTimberstocksoldfor$6.50ashareasof2015.Whatwasthemarket-to-bookratio atthattime?
Blooms:Analyze
Difficulty:2Intermediate
Ross-Chapter03#87
Section:3.2
Topic:Ratioanalysis
Whatistheinternalgrowthratefor2015?
A.5.83%
B.6.24%
C.6.15%
D.5.18%
E.7.70%
Blooms:Analyze
Difficulty:3Challenge
Ross-Chapter03#88
Section:3.5
Topic:Internalandsustainablegrowthrates
Whatisthesustainablegrowthratefor2015?
A.13.97%
B.14.46%
C.15.54%
D.12.63%
E.10.91%
Blooms:Analyze
Difficulty:3Challenge
Ross-Chapter03#89
Section:3.5
Topic:Internalandsustainablegrowthrates
Whatistheequitymultiplierfor2015?
A.1.71
B.1.87
C.1.44
D.1.82
E.1.92
Ross-Chapter03#90
Section:3.2
Topic:Ratioanalysis
WhatarethevaluesforthethreecomponentsoftheDuPontidentityfor2015?
A.11.08%;.9289;1.8679
B.11.08%;1.0765;1.8679
C.11.08%;.9289;.5354
D.7.75%;1.0765;.5354
E.7.75%;1.0765;1.8679
Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#91 Section:3.3
Topic:DuPontidentity
92. TheBlueGianthasaprofitmarginof6.2percentandadividendpayoutratioof40percent. Thecapitalintensityis1.08andthedebt-equityratiois.54.Whatisthesustainablerateof growth?
A.6.30%
B.5.53%
C.5.60%
D.6.41%
E.5.89%
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Blooms:Analyze Difficulty:3Challenge Ross-Chapter03#92 Section:3.5 Topic:Internalandsustainablegrowthrates
93. Catherine'sConsultinghasnetincomeof$4,400andtotalequityof$39,450.Thedebt-equity ratiois1andtheplowbackratiois40percent.Whatisthereturnonassets?
A.6.24%
B.6.09%
C.5.23%
D.5.58%
E.5.72%
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Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#93 Section:3.2 Topic:Ratioanalysis
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(even thoughyouknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthe firm’smanagersprojectafirmgrowthrateof15percentfornextyear,whatwillbetheamount ofexternalfinancingneededtosupportthislevelofgrowth?
A.$49,535
B.$68,211
C.−$10,406
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Blooms:Analyze
Difficulty:3Challenge
Ross-Chapter03#94
Section:3.4
Topic:Externalfinancingneed
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(even thoughyouknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthe firm’smanagersprojectafirmgrowthrateof22percentfornextyear,whatwillbetheamount ofexternalfinancingneededtosupportthislevelofgrowth? A.$63,200 B.$66,270
C.$47,520
D.$63,200
E.$53,640
F.$47,520
G.$56,400
H.$53,640
I.$56,400
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Blooms:Analyze
Difficulty:3Challenge
Ross-Chapter03#95
Section:3.4
Topic:Externalfinancingneed
Assumethatallcosts,assets,andaccountspayablechangespontaneouslywithsales.For simplicity’ssake,assumeinterestexpensealsochangesspontaneouslywithsales(even thoughyouknowifmaynot).Thetaxrateanddividendpayoutratiosremainconstant.Ifthe firm’smanagersprojectafirmgrowthrateof16percentfornextyear,whatwillbetheamount ofexternalfinancingneededtosupportthislevelofgrowth?ANS$$ANSA.$22,444
A.$18,700
C.$23,911
D.$25,667
AACSB:AnalyticalThinking Accessibility:KeyboardNavigation Blooms:Analyze Difficulty:3Challenge Ross-Chapter03#96 Section:3.4
Topic:Externalfinancingneed
97. NewTekhasasustainablegrowthrateof11.2percent.However,thefirm’smanagersare determinedthatthefirmshouldgrowbyatleast20percentnextyear.Whatmustthefirmdoif themanagersaretoreachtheirdesiredlevelofgrowthforthefirm?
Onereasonthatcausesfirmstogooutofbusinessisthelackofexternalfundingtosupport thegrowthofthefirm.Understandingtheimplicationsofboththeinternalandsustainable growthratescanhelpmanagementknowwhentolimitfirmgrowthsuchthatthegrowthdoes notexceedtheavailabilityofthenecessaryfinancingtofundthatgrowth.Forthefirmto achievegrowthbeyondthesustainablerate,thefirmmustincreaseitsdebt-equityratio,obtain additionalexternalequityfinancing,reduceitsdividends,improveitsprofitability,orsome combinationoftheseactions.
AACSB:ReflectiveThinking Blooms:Evaluate Difficulty:3Challenge Ross-Chapter03#97 Section:3.5
Topic:Internalandsustainablegrowthrates
98. Statetheassumptionsthatunderliethesustainablegrowthrateandinterpretwhatthe sustainablegrowthratemeans.
Theusualassumptionsare:Costs,assets,andcurrentaccounts(excludingnotespayable) increaseproportionatelywithsales,thedividendpayoutratioisfixed(orisgiven),thecurrent debt-equityratioisoptimalandfixed,andnonewequitysaleswilloccur.Thesustainable growthrateisthemaximumrateatwhichsalescanincreasegiventhestatedassumptions whilemaintainingthefundingrequiredbythatgrowth.
AACSB:ReflectiveThinking Blooms:Understand Difficulty:2Intermediate Ross-Chapter03#98 Section:3.5
Topic:Internalandsustainablegrowthrates
99. Supposeafirmcalculatesitsexternalfinancialneedforagrowthrateof10percentandfinds thattheneedisanegativevalue.Whatarethefirm'soptionsinthiscase?
Withanegativeexternalfinancingneed,thefirmcanexpecttohaveasurplusoffundsgiven theprojectedrateofgrowth.Thefirmcanusethosefundstoreducecurrentliabilities,reduce long-termdebt,buybackcommonstock,increasedividends,orinvestinassetsand resources,asneeded,toincreaseitsgrowthrate.
AACSB:ReflectiveThinking Blooms:Evaluate Difficulty:2Intermediate Ross-Chapter03#99 Section:3.4
Topic:Externalfinancingneed
100.Aretailstorehasdays'salesininventoryof68daysandanaveragecollectionperiodof32 days.Thefirmpaysitssuppliersinanaverageof42days,onaverage.Takentogether,what dotheseaveragevaluesimplyaboutthefirm'soperationsanditscashflows?
Ittakesatotalof100days(=68+32)tosellinventoryandcollectpaymentonthesaleofthat inventory.Meanwhile,42daysafteracquiringtheinventoryandpriortotheinventoryeven beingsold,theretailermustpayitssuppliers.Thus,thefirmmustpayoutcash58(=100-42) dayspriortoreceivingpayment.Thiscreatesanegativecashflowwhichthefirmmustbeable tofinance.
AACSB:ReflectiveThinking Blooms:Evaluate Difficulty:3Challenge Ross-Chapter03#100 Section:3.2 Topic:Ratioanalysis
101.Whichisamoremeaningfulmeasureofprofitabilityforafirm,returnonassetsorreturnon equity?Why?
MostwouldargueROEsinceitmeasuresreturnsrelativetotheamountshareholdershave investedinthefirm.Inaddition,sinceshareholderwealthmaximizationisafirm'sprimarygoal, itmakesmoresensetolookatthismeasure.
AACSB:ReflectiveThinking Blooms:Analyze Difficulty:2Intermediate Ross-Chapter03#101 Section:3.2 Topic:Ratioanalysis
102.Youarecomparingthecommon-sizefinancialstatementsfortwofirmsinthesameindustry thathaveverysimilaroperations.Younotethattheirsalesrevenuesaresimilarindollarvalue butyetthecommon-sizeEBITforonefirmis30percentcomparedtoonly26percentforthe otherfirm.Whataresomepossibleexplanationsforthisdifferencegiventhestrongsimilarities ofthetwofirms?
Somepossibleexplanationsare:(1)differenceintheageofthefixedassetsleadingto differencesinthedepreciationexpense,(2)differentdepreciationmethods,(3)different inventorymethodswhichaffectsthecostofgoodssold,(4)differentsalesmarketsthatallows theonefirmtohaveahighermarkupperitemandthusahighersellingpriceperunit,(5) differentmarketsthatcauseshighercostsperunitproducedforonefirm(ifthefirmsarein manufacturing),(6)differingfiscalyears.
AACSB:ReflectiveThinking Blooms:Evaluate Difficulty:3Challenge Ross-Chapter03#102
Section:3.1
Topic:Standardizedfinancialstatements
