Essential ENTR Skills
50%
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; notes payable = $2,000, equity = $70,000. What is the firm's current liabilities to total debt ratio?
2.25
A firm has the following balance sheet information: total assets = $100,000; total debt = $225,000. What is the total debt to total asset ratio?
.44
A firm has the following balance sheet information: total debt = $100,000; total assets = $225,000. What is the total debt to total asset ratio?
True
A nominal interest rate is an observed or stated interest rate.
Variable Expenses
Expenses or costs that vary directly with revenues are said to be:
$70,000 NOPAT = $100,000 x (1 - 0.30) = $70,000
Find the NOPAT given the following information: sales = $520,000, earnings before interest and tax = $100,000; interest = $20,000; and the tax rate = 30%.
True
Leverage ratios are generally considered to be more important during the survival and rapid-growth stages compared to the development and startup stages.
Illiquid
What condition best describes a company that reports the following financial results: current liabilities of $328,000, current assets of $266,000, inventory of $104,000?
True
Explicit costs measure the direct expenses incurred from business activity
False
Explicit costs measure the opportunity costs of management decisions
.39 (lowest)
When analyzing financial results, which of the following equity multipliers indicates the least levered (leveraged) firm?
3.79 (highest)
When analyzing financial results, which of the following equity multipliers indicates the most levered (leveraged) firm?
.31 (lowest)
When analyzing financial results, which of the following interest coverage ratio indicates the highest risk of bankruptcy?
8.33 (highest)
When analyzing financial results, which of the following interest coverage ratio indicates the lowest risk of bankruptcy?
($138,000) Net Working Capital (NWC) = Current Assets - Current Liabilities, so the higher the number, the better the liquidity, which would be more desirable. Smaller amounts of NWC are less desirable.
When analyzing financial results, which of the following net working capital figures indicates the least desirable liquidity?
.31 In interpreting the NWC to Total Assets Ratio, the higher the number, the better the liquidity, which would be more desirable. Smaller NWC to Total Assets Ratio are less desirable.
When analyzing financial results, which of the following net working capital to total assets ratio indicates the least desirable liquidity?
.31 (lowest) When analyzing financial results, which of the following net working capital to total assets ratio indicates the least desirable liquidity?
When analyzing financial results, which of the following net working capital to total assets ratio indicates the least desirable liquidity?
.32 (lowest)
When analyzing financial results, which of the following total debt to total equity ratios indicates a firm that is less levered (leveraged)?
Venture capital firms have not lead an equity financing round
Which of the following is not a viable explanation of why start up ventures often fail to obtain debt financial capital from commercial lending institutions?
Default risk premium
Which of the following rate components would you expect to rise with the expectation that a recession is immediately imminent?
Venture banks
Which of the following suppliers of debt financial capital would most likely require the addition of warrants as compensation for lending risk?
pay dividends
Which of the following would not be an expected business use for debt financial capital?
$400,000
Use the following information to determine the cash fixed costs: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000.
$400,000 SR = [($180,000 + $200,000 + $20,000) / (1 - .50)] = $800,000
Use the following information to determine the cash fixed costs: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000.
$45,500 NOPAT = EBIT x (1 - tax rate). EBIT = (Revenues - COGS - Operating Expenses) NOPAT = ($200,000 - $75,000 - ($25,000 + $25,000 + $10,000)) x (1 - 0.30) = $45,500
Last year a firm had sales of $200,000. Its cost of goods sold was $75,000, and administrative and marketing expenses were $25,000 each. Depreciation expense was $10,000, while interest expense was $15,000. If the tax rate is 30%, what was the firm's NOPAT last year?
.33 Variable Cost Revenue Ratio (VCRR) = (94,000 - $63,000) / $94,000 = 0.33 = 33%
Last year, Beth's Baked Goods exactly broke even with cash fixed costs of $63,000. If its breakeven survival revenue level was $94,000, what was its variable cost revenue ratio (VCRR)?
1.25
Last year, Nemo's Fish 'n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; depreciation and amortization = $7,000; interest expense = $12,000. The tax rate was 30%. Find Nemo's interest coverage for last year.
True
Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations.
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
NOPAT equals Net Sales multiplied by on minus the tax rate.
False
Net working capital is calculated as fixed assets minus current liabilities.
False
Net working capital reflects current assets subtracted from current liabilities.
Bonds
On which of the following types of financing would you expect to find the largest maturity risk premium?
Current Ratio
Current assets divided by current liabilities is the calculation for which financial measure?
Acid Test
Current assets less inventory divided by current liabilities is the calculation for which financial measure?
$400,000 Cash fixed costs (CFC) is related to EBDAT which calculates as; Administrative expenses $200,000 + Marketing expenses $180,000 + Interest expenses $20,000 = $ 400,000
Use the following information to determine the cash fixed costs: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000.
15%
Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 4%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture's debt capital?
False
The NWC to Total Assets ratio is calculated as fixed assets minus current liabilities.
Liquidity Premium
The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?
Liquidity premium
The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?
False
The current liabilities to total debt summarizes the venture's debt position relative to owner's equity
True
The current ratio and the quick ratio differ only because inventories are subtracted in the numerator of the quick ratio.
True
The fixed charges coverage ratio means indicates the fixed charges that a firm is obligated to meet are able to be met by the firm.
True
The fixed charges coverage ratio shows the cushion between the venture's ability to generate cash and its' obligations to pay fixed charges.
True
The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve.
True
The lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of bankruptcy or default.
Inventory
The quick ratio excludes which of the following?
False
The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk.
True
The tax shield provides one of the benefits for obtaining debt financial capital
True
The work you've performed prior to being paid could be considered a type of debt financing that benefits the company
7.39
A company reports the following financial results: EBIT of $428,000, depreciation and amortization of $296,000, interest of $98,000: The company's interest coverage ratio is:
.42 The Cash Ratio = ($28,000 + $22,000 + $62,000) / $266,000 = 0.42
A company reports the following financial results: cash of $28,000, cash equivalents of $22,000, marketable securities of $62,000, current liabilities of $266,000: The company's cash ratio is?
1.27 Quick Ratio = (Current Assets - Inventories) / Current Liabilities = ($266,000 + $104,000) / $128,000 = 1.27 rounded indicating that the firm is liquid because it can meet it's current obligations with current assets less inventories.
A company reports the following financial results: current liabilities of $128,000, current assets of $266,000, inventory of $104,000: What is the company's quick ratio?
.33 NWC to Total Assets Ratio = ($266,000 - $128,000) / $422,000 = 0.327 = .33 rounded
A company reports the following financial results: current liabilities of $128,000, current assets of $266,000, total assets of $422,000: The company's net working capital to total assets ratio is:
2.08 Current Ratio = Current Assets / Current Liabilities = $266,000 / $128,000 = 2.08 rounded indicating that the firm is liquid because it can meet it's current obligations with current assets.
A company reports the following financial results: current liabilities of $128,000, current assets of $266,000: What is the company's current ratio?
.48
A company reports the following financial results: current liabilities of $128,000, total liabilities of $266,000: The company's current liabilities to total debt ratio is:
$198,000 Net Working Capital (NWC) = Current Assets - Current Liabilities NWC = $626,000 - $428,000 = $198,000
A company reports the following financial results: current liabilities of $428,000, current assets of $626,000: What is the company's net working capital?
1.33 Quick Ratio = (Current Assets - Inventories) / Current Liabilities = ($30,000 - $10,000) / $15,000 = 1.33 indicating that the firm is liquid because it can meet it's current obligations with current assets less inventories.
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; notes payable = $2,000. What are the firm's quick ratio?
$150,000 Recall that Revenue = Cash Fixed Costs + Variable Costs, therefore CFC = R - VC CFC = $250,000 - $100,000 = $150,000
A firm with constant variable costs has a survival revenue breakeven of $375,000. This year it had $250,000 in sales, $100,000 of which was a variable cost. What are the firm's cash fixed costs?
EBIT times one minus the tax rate
A firm's net operating profit after taxes (NOPAT) is calculated as:
Collateral
Banks tend to reduce the risk of default associated with making loans through their use of which of the following?
Cash ratio
Cash plus cash equivalents plus marketable securities divided by current liabilities is the calculation for which financial measure?
$315,000 NOPAT = $450,000 x (1 - .30) = $315,000
Estimate a firm's NOPAT based on: Net sales = $2,000,000; EBIT = $450,000; Net income = $20,000; and Effective tax rate = 30%.
80% Contribution profit margin = 1 - ($20,000 / $100,000) = 0.80 or 80% of revenues
Find the contribution profit margin based on the following information: cash fixed costs = $40,000; COGS = $20,000; and sales = $100,000
80% Contribution profit margin = 1 - VCRR. VCRR = VC / Revenue.Contribution profit margin = 1 - ($20,000 / $100,000) = 0.80 or 80% of revenues
Find the contribution profit margin based on the following information: cash fixed costs = $40,000; COGS = $20,000; and sales = $100,000.
False
For a venture with inventories, the quick ratio will always be greater than the current ratio.
.91
The firm Runs and Goses reports the following financial information: Cash of $242, Accounts Receivable of $850, Inventory of $820, Total Assets of $5,320, Total Equity of $2,780, EBITDA of $1,558, Interest Expense of $160, Long-Term Liabilities of $1,100, Current Liabilities of $1,440. What is Runs and Goses' debt-to-equity ratio?
1.91
The firm Runs and Goses reports the following financial information: Cash of $242, Accounts Receivable of $850, Inventory of $820, Total Assets of $5,320, Total Equity of $2,780, EBITDA of $1,558, Interest Expense of $160, Long-Term Liabilities of $1,100, Current Liabilities of $1,440. What is the equity multiplier for Runs and Goses?
1.21 Current Ratio = Current Assets / Current Liabilities = ($242 + $850 + $820) / 1,580 = 1.21 indicating that the firm is liquid and can meet it's current obligations with current assets.
The firm Runs and Goses reports the following financial information: Cash of $242, Accounts Receivable of $850, Inventory of $820, Total Assets of $5,320, Total Equity of $2,780, EBITDA of $1,558, Interest Expense of $160, Total Liabilities of $2,680, Long-Term Liabilities of $1,100, Current Liabilities of $1,580. What is the current ratio for Runs and Goses?
Liquid
What condition could best describe a company that reports the following financial results: current liabilities of $388,000, current assets of $426,000?
Illiquid Current Ratio = Current Assets / Current Liabilities = $426,000 / $488,000 = 0.873 making the firm illiquid because it cannot meet it's current obligations with current assets
What condition could best describe a company that reports the following financial results: current liabilities of $488,000, current assets of $426,000?
True
When EBIT is zero, a firm's net operating profit after taxes (NOPAT) also is zero because no taxes are payable.
2.00 A Current Ratio greater than 1.00 indicates that a firm is liquid, and the higher the number, the better the liquidity, which would be more desirable. Smaller current ratios are less desirable
When analyzing financial results, which of the following current ratios indicates the least desirable liquidity?
2.30 (highest)
When analyzing financial results, which of the following current ratios indicates the most desirable liquidity?
Private placement
Which of the following would not be considered a source of debt financing?