Finance Test 1

Sustainable Growth Rate

(ROE x b) / (1 - ROE x b)

Days' Sales in Inventory

365 days / inventory turnover

Days' Sales in Receivables

365/receivables turnover

11. The higher the degree of financial leverage employed by a firm, the: A. higher the probability that the firm will encounter financial distress. B. lower the amount of debt incurred. C. less debt a firm has per dollar of total assets. D. higher the number of outstanding shares of stock. E. lower the balance in accounts payable.

A

14. On the Statement of Cash Flows, which of the following are considered financing activities? I. increase in long-term debt II. decrease in accounts payable III. interest paid IV. dividends paid A. I and IV only B. III and IV only C. II and III only D. I, III, and IV only E. I, II, III, and IV

A

6. Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. statement of cash flows D. tax reconciliation statement E. market value report

A

Sole Proprietorship

A business owned by one person Advantages: Easiest to start, Single Owner keeps all profits, Taxed once as personal income Disadvantages: Limited to life of owner, Unlimited Liability

Partnership

A business owned by two or more people Advantages: Two or more owners, Easy to start, taxed as personal income Disadvantages: Unlimited Liability, Difficult to transfer ownership

Corporation

A business that is owned by many investors. Advantages: Limited Liability, Transfer of ownership easy, Easier to raise capital Disadvantages: Double taxation, Costly and complicated to set up.

Limited Liability Company (LLC)

Advantages: Limited Liability, Relatively easy to start Disadvantages: Partnership dissolves when one partner dies or wishes to sell

12. Activities of a firm which require the spending of cash are known as: A. sources of cash. B. uses of cash. C. cash collections. D. cash receipts. E. cash on hand.

B

15. A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? A. current B. cash C. debt-equity D. quick E. total debt

B

19. The plowback ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the retention ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales.

B

1. Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life A. I and II only B. III and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C

10. Which one of the following accounts is the most liquid? A. inventory B. building C. accounts receivable D. equipment E. land

C

17. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent. The total equity is $511,640. What is the amount of the net income? A. $28,079 B. $35,143 C. $44,084 D. $47,601 E. $52,418

C

18. You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process? A. fixed assets B. current expenses C. sales forecast D. projected net income E. external financing need

C

20. The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm.

C

21. Designer's Outlet has a capital intensity ratio of 0.87 at full capacity. Currently, total assets are $48,900 and current sales are $52,300. At what level of capacity is the firm currently operating? A. 89 percent B. 91 percent C. 93 percent D. 96 percent E. 98 percent

C

22. The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity ratio is 0.60 and the payout ratio is 20 percent. What is the internal growth rate? A. 14.47 percent B. 17.78 percent C. 25.09 percent D. 29.40 percent E. 33.33 percent

C

Inventory Turnover

COGS/Average Inventory

7. Noncash items refer to: A. accrued expenses. B. inventory items purchased using credit. C. the ownership of intangible assets such as patents. D. expenses which do not directly affect cash flows. E. sales which are made using store credit.

D

9. Which one of the following is classified as an intangible fixed asset? A. accounts receivable B. production equipment C. building D. trademark E. inventory

D

13. Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

E

16. Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

E

8. Cash flow to stockholders is defined as: A. the total amount of interest and dividends paid during the past year. B. the change in total equity over the past year. C. cash flow from assets plus the cash flow to creditors. D. operating cash flow minus the cash flow to creditors. E. dividend payments less net new equity raised.

E

Operating Cash Flow

EBIT + Depreciation - Taxes

Time Interest Earned

EBIT/Interest

Changes in NWC

Ending NWC - Beginning NWC

Cash inflows

For instance, if a company brings in $17,000 in a given month, and its expenses are $14,500, it has a positive cash flow of $2,500. Or, if this same company makes $17,000 in a month but spends $23,000, it has a negative cash flow of -$6,000.

Return on Assets (ROA)

Net Income/Total Assets

Return on Equity (ROE)

Net Income/Total Equity

Du Pont Identity

ROE = PM x TAT x EM

Receivable turnover

Sales / Accounts Receivable

NWC Turnover

Sales / NWC

Total Asset Turnover

Sales/Total Assets

Most Liquid

accounts receivable

Net Working Capital

current assets - current liabilities

Net Capital Spending

ending net fixed assets - beginning net fixed assets + depreciation

4 elements of financial planning

investment in new assets degree of financial leverage cash paid to shareholders liquidity requirements

Profit Margin

net income/net sales

Cash flow from assets

operating cash flow - net capital spending - change in net working capital

Market Value

the price at which the assets, liabilities, or equity can actually be bought or sold