Business Finance 3

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. total assets.

The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio? a. .68 b. .33 c. .52 d. .47 e. .67

d. .47 Debt-equity ratio = 1.47 - 1 = .47

A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity? a. 11.67 percent b. 18.98 percent c. 14.45 percent d. 16.22 percent e. 15.06 percent

c. 14.45 percent Return on equity = .084 ×(1 + .72) = .1445, or 14.45 percent

World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm's net income? a. $119,359.43 b. $88,303.33 c. $104,624.14 d. $121,548.09 e. $92,236.67

a. $119,359.43

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio? a. 5.11 percent b. 4.88 percent c. 6.62 percent d. 7.67 percent e. 8.37 percent

a. 5.11 percent Internal growth rate = [($32,600/$503,000) ×(1 -.25)]/{1 - [($32,600/$503,000) ×(1 -.25)]} = .0511, or 5.11 percent

Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets? a. 5.56 percent b. 8.06 percent c. 13.67 percent d. 15.24 percent e. 17.41 percent

a. 5.56 percent

Which ratio was primarily designed to monitor firms with negative earnings? a. Price-sales ratio b. Market-to-book ratio c. Profit margin d. ROE e. ROA

a. Price-sales ratio

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. one plus the debt-equity ratio.

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio? a. .08 b. .25 c. .30 d. .46 e. .51

b. .25 Cash ratio = $2,950/$11,900 = 0.25

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent? a. -2.43 percent b. 1.56 percent c. 3.33 percent d. -5.29 percent e. -6.11 percent

b. 1.56 percent Profit margin = {[(.058 × $137,000) - $4,700] × (1 - .34)} / $137,000 = .0156, or 1.56 percent

Kessler Cleaners has accounts receivable of $28,943, total assets of $387,600, cost of goods sold of $317,400, and a capital intensity ratio of .97. What is the accounts receivable turnover rate? a. 12.63 b. 13.81 c. 12.42 d. 14.61 e. 10.97

b. 13.81

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year. a. 24.78 days b. 26.78 days c. 29.09 days d. 31.15 days e. 33.33 days

b. 26.78 days

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate? a. 7.33 times b. 6.90 times c. 5.70 times d. 7.14 times e. 8.47 times

b. 6.90 times Inventory turnover = $512,900 / $74,315 = 6.90 times

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets? a. 6.92 percent b. 8.00 percent c. 8.45 percent d. 9.03 percent e. 9.29 percent

b. 8.00 percent Debt-equity ratio = .42/(1 -.42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00 percent

Sweet Candies reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity a. I and II only b. II and III only c. II, III, and IV only d. I, II, and IV only e. I, II, III, and IV

b. II and III only

A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio? a. .69 b. .60 c. 1.45 d. 1.67 e. .92

c. 1.45 Current ratio = $21,800 / ($21,800 - 6,800) = 1.45

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 that can serve as a basis for forecasting future performance. d. provides useful information to shareholders but not to debtholders. e. is enhanced by comparing results to those of a firm's peers but not by comparing results to prior periods.

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

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. the debt-equity ratio will be held constant.

The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin? a. 15.06 percent b. 13.57 percent c. 15.84 percent d. 16.92 percent e. 14.60 percent

d. 16.92 percent

Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm's customers to pay for their purchases? Assume a 365-day year. a. 8.65 days b. 11.28 days c. 25.01 days d. 42.83 days e. 45.33 days

d. 42.83 days Days' sales in receivables = 365 / ($738,800 / $86,700) = 42.83 days

Donegal's Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve? a. 4.68 percent b. 5.29 percent c. 6.33 percent d. 6.97 percent e. 8.19 percent

d. 6.97 percent Sustainable growth = 0.06 = {[(PM × (1/1.25) × (1 + 0.45)] × (1 - 0.30)}/{1 - {[(PM × (1/1.25) × (1 + 0.45)] × (1 - 0.30)}} = 6.97 percent

A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio? a. 8.78 b. 20.10 c. 14.14 d. 16.32 e. 19.55

e. 19.55 Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55

High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio? a. 3.54 b. 3.81 c. 3.99 d. 4.47 e. 4.23

e. 4.23 Market-to-book = $5.60 /($992,300 / 750,000) = 4.23

Which one of the following statements is correct? a. Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business. b. Peer group analysis is easier when seasonal firms have different fiscal years. c. Peer group analysis is simplified when firms use varying methods of depreciation. d. Comparing results across geographic locations is easier since all countries now use a common set of accounting standards. e. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.

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

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. No new external equity and a constant debt-equity ratio