FIN 309 Exam 2
The sum of the inventory-to-sale conversion period and the purchase-to-payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle.
False
Short-term cash planning tools include preparation of a sales schedule, purchases schedule, wages and commissions schedule, and cash budget.
True
Short-term financial planning forecasts address whether a venture is expected to generate the required cash to meet its coming obligations.
True
Short-term financial planning is critical during the survival stage because operations not yet turning a profit and the associated cash burn often lead to a venture's inability to pay its maturing liabilities.
True
The actions of monitoring financial performance, projecting cash needs, and obtaining first-round financing occurs during a venture's survival stage.
True
The actions of screening business ideas, preparing a business plan, and obtaining seed financing occurs during a venture's development stage.
True
Due to the difficulty of projecting financial statements for a young firm, short-term financial forecasts are never required of early-stage ventures.
False
Early-stage ventures are defined as firms that are only operating in either their development or startup stages.
False
For a venture with inventories, the quick ratio will always be greater than the current ratio.
False
Inflation premium is the rising prices not offset by increasing quality of goods being purchased.
False
Liquidity premiums reflect the risk associated with firms that possess few liquid assets.
False
Liquidity ratios indicate the venture's ability to pay short-term assets from short-term liabilities.
False
Most early-stage ventures can easily locate debt-financing arrangements.
False
Net working capital is calculated as fixed assets minus current liabilities.
False
Net working capital reflects current assets deducted from current liabilities.
False
Subordinated debt is secured by a venture's assets, while senior debt has an inferior claim to a venture's assets.
False
The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.
False
The cash conversion cycle measures the time it takes to pay off the principal on a loan.
False
The cash conversion cycle refers to the time it takes to convert a sale into net income.
False
The prime rate is the interest rate charged by banks to their highest default-risk business customers.
False
The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates.
False
The return on assets model states: ROA = Net Profit Margin × Asset Turnover × Equity Multiplier
False
The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day.
False
A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the firm's quick ratio?
1.33
Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%.
13.5%
Generally speaking accountants use how many days when calculating interest?
360
How Many days do accountants use?
360 days
Last year, Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500, and interest expense was $700. If the tax rate is 25%, what is the net profit margin for Lenny's Lemonade?
6.43% EBT (3,500-2,000-500-700) = 300 Taxes: EBT * Tax rate (300 *25%)= 75 Net Profit Margin EBT- Taxes / Revenue (300-75)/3,500= 0.0643
A potential venture has the following possible outcomes: Outcome Probability Return Good .15 600 Average .35 1,200 Weak .50 800 What is the expected return on the venture?
910
A cash budget shows a venture's projected revenues and expenses over a forecast period.
False
How to calculate Average Collection period
Accounts Receivable/average daily credit sales
A venture's operating cycle is the same as its cash conversion cycle.
False
Quick Ratio
Current Assets minus inventory divided by current liabilities is the ratio formula for ?
______________ is the additional interest rate premium required to compensate the lender for the probability that a borrower will default on a loan
Default Risk Premium
9.7
Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. The interest coverage ratio for Rogex is:
_________ is charged when a debt instrument cannot be converted to cash quickly at its existing value
Liquidity premium
A ________________ is the amount of extra return you'll see on your investment by purchasing a bond with a longer maturity date.
Maturity Risk Premium
How to calculate Profit Margin
Net Income/Sales
How to calculate return on Equity
Net Income/Stockholders equity
Profit Margin Ratio
Net income divided by sales
Gross Proft Margin
Net sales minus cost of goods sold when divided by sales is called:
You receive an order in the amount of $16,700. The distributor offers you a trade credit discount of 2/10 net 120. If you can borrow funds from the bank at 7% should you take the trade credit?
No wait until the end of 120 days
Which of the following is NOT one of the four parts of the Survival Stage in the venture life cycle?
Possible Actions: Go Public v. Sell/Merge
The interest rate charged by banks to their highest quality (lowest default risk) business customers is called?
Prime Rate
development stage
Seed financing is generally associated with which of the following life cycle stages?
loans secured by collateral (assets) that must be paid off before any other debts when a company goes into default are called?
Senior debt
interest coverage
The difference between a venture's ability to generate cash to pay interest and the amount of interest it has to pay is determined by
Investment bankers are users of financial ratios and measures primarily during a venture's rapid-growth stage relative to the development and startup stages.
True
Leverage ratios are generally considered to be more important during a venture's survival and rapid-growth stages compared to the development and startup stages.
True
Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations.
True
Most initial business plans contain monthly projected (pro forma) financial statements for at least one year, and sometimes for two or more years.
True
Net cash burn occurs when cash burn exceeds cash build in a specified time period.
True
rapid-growth stage
The process of examining exit opportunities is generally associated with which one of the following life cycle stages?
Succession plan
The term ______________refers to a business strategy companies use to pass leadership roles down to another employee or group of employees.
A common way to express a venture's anticipated cash needs is to project the balance sheet and income statement into the future and produce the statement of cash flows.
True
A nominal interest rate is an observed or stated interest rate.
True
A venture's operating cycle measures the time it takes to purchase required materials, assemble, and sell the product plus the time needed to collect receivables if the sales are on credit.
True
A venture's operating schedules typically include a sales schedule, purchases schedule, and wages and commissions schedule.
True
A venture's riskiness in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle.
True
Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.
True
Cash burn, liquidity, and conversion ratios are important during the development and startup life cycle stages.
True
Cash shortages during the rapid-growth stage frequently derive from the lack of operating profits to fund working capital and fixed asset investments needed to support sales growth.
True
Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash.
True
Default risk is the risk that a borrower will not pay the interest and/or the principal on a loan.
True
During the development and startup stages of a venture's life cycle, important financial ratios and measures include cash burn rates and liquidity ratios.
True
During the development and startup stages of a venture's life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).
True
Even in a young, successful venture, restricted access to bank credit and little to no access to short-term lending markets can hinder operations until the next round of financing.
True
Financial ratios show the relationships between two or more financial variables or between financial variables and time.
True
First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks.
True
The cash conversion cycle is the amount of time taken to buy materials and produce a finished good plus the time needed to collect sales made on credit minus the time taken to pay suppliers for purchases on credit.
True
The current ratio and the quick ratio differ only because average inventories are subtracted in the numerator of the quick ratio.
True
The equity multiplier shows the extent by which assets are supported by equity and debt
True
____________________________ represents a firm's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt.
WACC
sale-to-cash conversion period
Which of the following measures the average days of sales committed to the extension of trade credit?
equity multiplier
Which of the following ratios is computed by dividing the average total assets by the average owners' equity?
Profitability ratios
________________ is a Measurement of the firm's ability to earn an adequate return on: -Sales -Assets -Invested capital
Which of the following is NOT considered to be an operating schedule?
balance sheet schedule
Which of the following ratios is calculated as (Average Current Assets - Average Inventories) ÷ Average Current Liabilities?
quick ratio
Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing?
cash conversion cycle
The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as a(n):
default risk premium
Seed financing is generally associated with which of the following life cycle stages?
development stage
A firm would NOT be considered to be an early-stage venture when it reaches which of the following life cycle stages?
early-maturity stage
Which of the following conversion periods is NOT a component in the cash conversion cycle?
fixed assets-to-usage conversion period
Operational Efficiency
is the ability of an organization to reduce waste in time, effort and materials as much as possible, while still producing a high-quality service or product.
conversion period ratio
is the average time it takes in days to convert certain current assets and current liability accounts into cash
Which of the following components is not used when estimating the cost of risky debt capital?
market risk premium
Which of the following describes the observed or stated interest rate?
nominal rate
Which of the following markets involve direct two-party negotiations over illiquid, nonstandardized contracts such as bank loans and direct placement of debt?
private financial market
Which of the following markets involve liquid securities with standardized contract features such as stocks and bonds?
public financial market
A venture's operating cycle measures the time it takes to:
purchase raw materials, assemble a product, book the sale, and collect on the sale
Which of the following conversion periods operates to reduce the length of the cash conversion cycle?
purchase-to-payment conversion period
Which of the following measures the average time from purchase of materials and labor to actual cash payment?
purchase-to-payment conversion period
Which of the following describes the interest rate on debt that is virtually free of default risk?
risk-free rate
Financial Ratios
show the relationship between two or more financial variables
Blue Sky Laws
state-level, anti-fraud regulations that require issuers of securities to be registered and to disclose details of their offerings.
First-round financing is generally associated with which of the following life cycle stages?
survival stage
First-round financing occurs primarily during which of the following life cycle stages?
survival stage
Which of the following is not part of the operating cycle?
time it takes to pay suppliers
trend analysis
used to examine a venture's performance over time