chapter 3 corporate finance

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

A decrease in the capital intensity ratio

Which one of these statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

According to the DuPont Identity, the growth of a firm occurs when profit margin increases as a result of limited sources of generating additional funds.

False

According to the DuPont Identity, when Total Asset Turnover decreases, both internal and sustainable growth rates increase; as there is no need to purchase additional assets.

False

The DuPont identity can be used to help a financial manager determine the

I, II, III, and IV

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new external equity and a constant debt-equity ratio

All else held constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

has positive net working capital

The equity multiplier is equal to:

one plus the debt-equity ratio.

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.

City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?

28.82 percent

Which one of the following is a measure of long-term solvency?

Cash coverage ratio

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = .3

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Which one of the following will increase the profit margin of a firm, all else held constant?

Decrease in the tax rate

Donovan & Rosquo would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

The DuPont identity can be accurately defined as:

Equity multiplier xReturn on assets.

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal growth rate

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

Quick ratio

A low Total Asset Turnover is not necessarily a problem for most firms as it might suggests a higher book value for its assets.

True

According to the DuPont Identity, a decrease in dividend payout ratio increases the growth rate of a firm by allowing the retention of more internally generated funds.

True

According to the DuPont Identity, increase in financial leverage increases the sustainable growth rate by increasing the debt-equity ratio, which makes additional financing available.

True

Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

True

The sustainable growth rate is expected to be higher than the internal growth rate because the possibility of external borrowing can help maintain the total debt ratio.

True

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

The sustainable growth rate is based on the premise that:

the debt-equity ratio will be held constant.

Tower Pharmacy pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will:

vary in direct relation to the net profit percentage.

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

zero percent.