Finance Test 3
If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is: A. zero percent. B. 100 percent. C. equal to the ROA. D. negative. E. infinite
A
The equity multiplier is equal to: A. one plus the debt-equity ratio. B. one plus the total asset turnover. C. total debt divided by total equity. D. total equity divided by total assets. E. one divided by the total asset turnover
A
Which one of these statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio may indicate that a firm is expected to grow significantly. B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C. PE ratios are unaffected by the accounting methods employed by a firm. D. The PE ratio is classified as a profitability ratio. E. The PE ratio is a constant value for each firm
A
The DuPont identity can be accurately defined as: A. Return on equity xTotal asset turnover xEquity multiplier. B. Equity multiplier xReturn on assets. C. Profit margin xReturn on equity. D. Total asset turnover xProfit margin xDebt-equity ratio. E. Equity multiplier xReturn on assets Profit margin.
B
Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A. A decrease in the total asset turnover B. A decrease in the capital intensity ratio C. An increase in days' sales in receivables D. A decrease in the profit margin E. A decrease in the inventory turnover rate
B
Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past? A. A decrease in the total asset turnover B. A decrease in the capital intensity ratio C. An increase in days' sales in receivables D. A decrease in the profit margin E. A decrease in the inventory turnover rate
B
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? A. Income statement B. Balance sheet C. Common-size income statement D. Common-size balance sheet E. Statement of cash flows
C
The sustainable growth rate is based on the premise that: A. an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued. B. no additional equity will be added to the firm. C. the debt-equity ratio will be held constant. D. the dividend payout ratio will be zero. E. the dividend payout ratio will increase at a steady rate.
C
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: A. remain constant over time. B. be equal to the dividend amount divided by the net income. C. vary in direct relation to the net profit percentage. D. vary in direct relation to changes in the sales level. E. vary but not in direct relation to any other variable
C
Which one of the following is a measure of long-term solvency? A. Price-earnings ratio B. Profit margin C. Cash coverage ratio D. Receivables turnover E. Quick ratio
C
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? A. 28.01 percent B. 33.66 percent C. 53.42 percent D. 28.82 percent E. 31.68 percent
D
Common-size financial statements present all balance sheet account values as a percentage of: A. the forecasted budget. B. sales. C. total equity. D. total assets. E. last year's account value
D
Donovan & Rosquo would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio E. Return on equity
D
Financial statement analysis: A. is primarily used to identify account values that meet the normal standards. B. is limited to internal use by a firm's managers. C. provides useful information to shareholders but not to debtholders. D. provides useful information that can serve as a basis for forecasting future performance. E. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods
D
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. DuPont rate B. External growth rate C. Sustainable growth rate D. Internal growth rate E. Cash flow rate
D
Which one of the following will increase the profit margin of a firm, all else held constant? A. Increase in interest paid B. Increase in fixed costs C. Increase in depreciation expense D. Decrease in the tax rate E. Decrease in sales
D
Which one of these transactions will increase the liquidity of a firm? A. Cash purchase of new production equipment B. Payment of an account payable C. Cash purchase of inventory D. Credit sale of inventory at cost E. Cash payment of employee wages
D
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? A. Times interest earned = 1.7; debt-equity ratio = 1.6 B. Times interest earned = 1.5; debt-equity ratio = 1.2 C. Cash coverage ratio = .8; debt-equity ratio = .8 D. Cash coverage ratio = 2.6; debt-equity ratio = .3 E. Cash coverage ratio = .5; total debt ratio = .2
D
A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm: A. pays cash for its inventory. B. has more than half its current assets invested in inventory. C. has more cash than inventory. D. has more current liabilities than it does current assets. E. has positive net working capital
E
All else held constant, which one of the following will decrease if a firm increases its net income? A. Return on assets B. Profit margin C. Return on equity D. Price-sales ratio E. Price-earnings ratio
E
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. A. Current ratio B. Debt ratio C. Cash coverage ratio D. Cash ratio E. Quick ratio
E
The DuPont identity can be used to help a financial manager determine the I. degree of financial leverage used by a firmII. operating efficiency of a firmIII. utilization rate of a firm's assets IV. rate of return on a firm's assets A. II and III only B. I and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV
E
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions? A. No new external financing of any kind B. No new debt but additional external equity equal to the increase in retained earnings C. New debt and external equity in equal proportions D. New debt and external equity, provided the debt-equity ratio remains constant E. No new external equity and a constant debt-equity ratio
E
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
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
