FIN 309 Exam 2

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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


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