Finance Exam 1
What were the total dividends paid for 2017?
$833 million Retention ratio = ($740 million - 490 million)/$1,083 million = .231 Dividends paid = (1 - .231) × $1,083 million = $833 million
All else held constant, which one of the following will decrease if a firm increases its net income?
Price-earnings ratio
What is the quick ratio for 2017?
Quick ratio = ($2,675 - 1,635)/$1,285 = .81 times
Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580, inventory of $262,750, and sales of $1,941,840. What is the quick ratio?
Quick ratio = ($42,580 + 238,620 - 262,750) / $238,620 = .08
What is the return on equity for 2017?
Return on equity = $595/($2,910 + 720) = 16.39%
What is the days' sales in receivables for 2017?
33.79 days Receivables turnover = $9,290/$860 = 10.8023 times Days' sales in receivables = 365 days/10.8023 = 33.79 days
The Green Giant has a 5 percent profit margin and a 34 percent dividend payout ratio. The total asset turnover is 1.6 times and the equity multiplier is 1.5 times. What is the sustainable rate of growth?
8.60% Return on equity = .05 × 1.60 × 1.50 = .120 Sustainable rate of growth = [.120 × (1 - .34)]/{1 - [.120 × (1 - .34)]} = .0860, or 8.60 percent
Which one of these statements is true concerning the price-earnings (PE) ratio?
A high PE ratio may indicate that a firm is expected to grow significantly.
It takes K's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.
Accounts receivable turnover = 365 / 16.8 = 21.73
Oil Field Services has net income of $120,400, total assets of $1,219,000, total equity of $694,100, and total sales of $1,521,700. What is the common-size percentage for the net income?
Net income common-size percentage = $120,400 / $1,521,700 = .0791, or 7.91 percent
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?
No new external equity and a constant debt-equity ratio
Al's Markets earns $.12 in profit for every $1 of equity and borrows $.65 for every $1 of equity. What is the firm's return on assets?
ROE= ($.12/$1) = ROA×[($1 + .65)/$1] ROA = .0727, or 7.27 percent
Mike's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?
Return on equity = ($14,342/$152,080) ×(1 + .62) = .1528, or 15.28 percent
Motor Works has total assets of $919,200, long-term debt of $264,500, total equity of $466,900, net fixed assets of $682,800, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?
Current ratio = ($919,200 - 682,800) / ($919,200 - 264,500 - 466,900) = 1.26
The cash coverage ratio is used to evaluate the: A. liquidity of a firm B. speed at which a firm generates cash C. length of time that a firm can pay its bills if no additional cash becomes available D. ability of a firm to pay the interest on its debt E. relationship between the firm's cash balance and its current liabilities
D, ability of a firm to pay the interest on its debt
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, internal growth rate
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
Samuelson's has a debt-equity ratio of 26 percent, sales of $8,000, net income of $2,400, and total debt of $12,200. What is the return on equity?
Debt-equity ratio = .26 = $12,200/Total equity Total equity = $46,923.08 Return on equity = $2,400/$46,923.08 = 0.0511, or 5.11%
The equity multiplier is equal to:
one plus the debt-equity ratio.
Financial statement analysis:
provides useful information that can serve as a basis for forecasting future performance.
If a firm has an inventory turnover of 15, the firm:
sells its entire inventory an average of 15 times each year.
Jupiter Explorers has $9,200 in sales. The profit margin is 3 percent. There are 4,400 shares of stock outstanding, with a price of $1.50 per share. What is the company's price-earnings ratio?
23.91 times Earnings per share = ($9,200 × .03)/4,400 = $.06273 Price-earnings ratio = $1.50/$.06273 = 23.91 times
What is the cash coverage ratio for 2017?
Cash coverage ratio = ($1,865 + 435 )/$110 = 20.91 times
Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?
Dividend payout ratio
A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?
Debt-equity ratio = $348,092 / ($638,727 - 348,092) = 1.20
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?
Debt-equity ratio = .42/(1 -.42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00 percent
Which one of the following will increase the profit margin of a firm, all else held constant?
Decrease in the tax rate
A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?
Dividends paid common-size percentage = [$811,000 ×.051 × (1 - .56)] / $811,000 = .0224, or 2.24 percent
The Kids' Mart has a market-to-book ratio of 3.3, net income of $87,100, a book value per share of $18.50, and 7,500 shares of stock outstanding. What is the price-earnings ratio?
Price-earnings ratio = (3.3 ×$18.50)/($87,100/7,500) = 5.26
You are analyzing a company that has cash of $8,800, accounts receivable of $15,800, fixed assets of $87,600, accounts payable of $40,300, and inventory of $46,900. What is the quick ratio?
Quick ratio = ($8,800 + 15,800) / $40,300 = .61
The Saw Mill has a return on assets of 7.92 percent, a total asset turnover rate of 1.18, and a debt-equity ratio of 1.46. What is the return on equity?
Return on equity = .0792 ×(1 + 1.46) = .1948, or 19.48 percent
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?
Return on equity = .084 ×(1 + .72) = .1445, or 14.45 percent
Wiley's has total equity of $679,400, long-term debt of $316,900, net working capital of $31,600, and total assets of $1,123,900. What is the total debt ratio?
Total debt ratio = ($1,123,900 - 679,400) / $1,123,900 = .40
Towne Realty has total assets of $346,200, net fixed assets of $277,400, current liabilities of $16,100, and long-term liabilities of $124,600. What is the total debt ratio?
Total debt ratio = ($16,100 + 124,600) / $346,200 = .41
The DuPont identity can be totally defined by which one of the following? A. return on equity, total asset turnover, and equity multiplier B. equity multiplier and return on assets C. profit margin and return on equity D. total asset turnover, profit margin, and debt-equity ratio E. equity multiplier, return on assets, and profit margin
B, equity multiplier and return on assets
Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?
Current ratio = ($537,800 - 412,400) / ($388,700 - 323,900) = 1.94
SRC, Inc., sells its inventory in an average of 43 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.
Inventory turnover = 365 / 43 = 8.49 times
A firm has total debt of $1,470 and a debt-equity ratio of .32. What is the value of the total assets?
$6,063.75 $1,470/Total equity = .32 Total equity = $4,593.75 Total assets = $1,470 + 4,593.75 = $6,063.75
What are the values of the three components of the DuPont identity? Use ending balance sheet values.
.1153, 1.01, 1.9080 Profit margin = $3,540 /$30,710 = .1153 Total asset turnover = $30,710/$30,406 = 1.01 Equity multiplier = $30,406/($6,200 + 9,736) = 1.9080
A firm has sales of $1,040, net income of $208, net fixed assets of $508, and current assets of $264. The firm has $83 in inventory. What is the common-size balance sheet value of inventory?
10.75% Total assets = $508 + 264 = $772 Common-size value of inventory = $83/$772 = .1075, or 10.75%
The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio?
Debt-equity ratio = 1.47 - 1 = .47
Pizza Pie maintains a constant debt-equity ratio of .55. The firm had net income of $14,800 for the year and paid $12,000 in dividends. The firm has total assets of $248,000. What is the sustainable growth rate?
Sustainable growth rate = {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}/(1 - {[($14,800/$248,000)×(1 + .55)] ×[($14,800 -12,000)/$14,800]}) = .0178, or 1.78 percent
Briar Patch Fruits has sales of $529,600, cost of goods sold of $408,350, depreciation of $25,400, and interest expense of $9,100. The tax rate is 35 percent. What is the times interest earned ratio?
Times interest earned ratio = ($529,600 - 408,350 - 25,400) / $9,100 = 10.53
The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?
Total asset turnover
Which one of the following statements is correct?
Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.
Mistletoe Gifts has $93,840 in total assets, depreciation of $2,106, and interest of $1,214. The total asset turnover rate is .94. Earnings before interest and taxes are equal to 19 percent of sales. What is the cash coverage ratio?
Cash coverage ratio = [.19 × .94 × $93,840)] + $2,106] / $1,214 = 15.54
The Dry Dock has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio?
Cash ratio = $51,950 / $94,200 = .55
Galaxy Sales has sales of $938,300, cost of goods sold of $764,500, and inventory of $123,600. How long on average does it take the firm to sell its inventory?
Days' sales in inventory = 365 / ($764,500 / $123,600) = 59.01 days
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 equity and a constant debt-equity ratio
E, no new equity and a constant debt-equity ratio
The DuPont identity can be accurately defined as:
Equity multiplier × Return on assets.
A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must be the total asset turnover?
Internal growth rate = .045 = [.075 ×TAT ×(1 -.60)]/{1 - [.075 ×TAT ×(1 -.60)]} TAT = 1.44
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?
Internal growth rate = [($32,600/$503,000) ×(1 -.25)]/{1 - [($32,600/$503,000) ×(1 -.25)]} = .0511, or 5.11 percent
A firm has a return on equity of 20 percent. The total asset turnover is 1.9 and the profit margin is 8 percent. The total equity is $5,400. What is the net income?
Net income = .20 × $5,400 = $1,080
Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued and no shares were repurchased. What is the retention ratio?
Plowback ratio = $43,500/$67,800 = .6416, or 64.16 percent
Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?
Plowback ratio = 1 - [$4,500/(.039 ×$311,800)] = .6299, or 62.99 percent References
Goshen Industrial Sales has sales of $487,600, total equity of $367,700, a profit margin of 5.1 percent, and a debt-equity ratio of .34. What is the return on assets?
Return on assets = (.051 ×$487,600)/[(1 + .34) ×$367,700)] = .0505, or 5.05 percent
The Inside Door has total debt of $208,600, total equity of $343,560, and a return on equity of 13.27 percent. What is the return on assets?
Return on assets = (.1327× $343,560)/($208,600 + 343,560)= .0826, or 8.26 percent
Health Centers, Inc., has total equity of $948,300, sales of $1.523 million, and a profit margin of 4.4 percent. What is the return on equity?
Return on equity = (.044 ×$1,523,000)/$948,300 = .0707, or 7.07 percent
A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 65 percent dividend payout ratio. What is the sustainable growth rate?
Sustainable growth rate = [.178 ×(1 -.65)]/{1 - [.178 ×(1 -.65)]} = .0664 or 6.64 percent
Turner's Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of $542,000. If management set a goal of increasing the total asset turnover to 1.10 times, what would the new sales figure need to be, assuming no increase in total assets?
Total asset turnover = 1.10 ×$542,000 = $596,200
Net working capital is defined as:
current assets - current liabilities
A firm can increase its sustainable rate of growth by decreasing its:
dividends
The ratios that are based on financial statement values and used for comparison purposes are called:
financial ratios
A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:
has positive net working capital.
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?
internal growth rate
A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio?
Current ratio = $21,800 / ($21,800 - 6,800) = 1.45
Which one of these transactions will increase the liquidity of a firm?
Credit sale of inventory at cost
If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:
zero percent
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 change. 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, common-size income statement
Which one of the following is a measure of long-term solvency? A. price-earnings ratio B. profit margin C. equity multiplier D. receivables turnover E. quick ratio
C, equity multiplier
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?
Common-size income statement
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 = .8 D. cash coverage ratio = 2.6: debt-equity ratio = .3 E. cash coverage ratio = .5: total debt ratio = .2
D. cash coverage ratio = 2.6 : debt-equity ratio = .3
Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has? A. current ratio B. debt ratio C. cash coverage ratio D. quick ratio E. cash ratio
E, cash ratio
Kelso's pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship? A. receivable turnover B. equity multiplier C. profit margin D. return on assets E. total asset turnover
E. total asset turnover
What is the fixed asset turnover for 2017?
Fixed asset turnover = $13,850/$4,160 = 3.33 times
How many dollars of sales were generated from every dollar of fixed assets during 2017?
Fixed asset turnover = $5,770/$3,280 = 1.76 Sales generated = $1 × 1.76 = $1.76
The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets.
I, II, III, and IV
Good Foods has net income of $82,490, total equity of $518,700, and total assets of $1,089,500. The dividend payout ratio is .30. What is the internal growth rate?
Internal growth rate = [($82,490/$1,089,500) ×(1 -.30)]/{1 - [($82,490/$1,089,500) ×(1 -.30)]} = .0560, or 5.60 percent
Fast Kars has a return on equity of 22.3 percent, a profit margin of 14.2 percent, and total equity of $467,000. What is the net income?
Net income = .223 × $467,000 = $104,141
Taylor, Inc. has sales of $11,898, total assets of $9,315, and a debt-equity ratio of .55. If its return on equity is 14 percent, what is its net income?
Net income = [$9,315 / (1 + .55)]× .14 = $841.35
Last year, Teresa's Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio?
Plowback ratio = 1 - [($16,672 / 15,000)/$2.03] = .4525, or 45.25 percent
The sustainable growth rate is based on the premise that:
the debt-equity ratio will be held constant
A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?
total assets = Total liabilities and equity = $1,250 + 16,600 + 46,500 + 318,650 = $383,000 Equity common-size percentage = ($383,000 - 17,400 - 109,500) / $383,000 = .6687, or 66.87 percent
Mario's Home Systems has sales of $2,740, costs of goods sold of $2,080, inventory of $488, and accounts receivable of $422. How many days, on average, does it take Mario's to sell its inventory?
85.63 days Inventory turnover = $2,080/$488 = 4.2623 Days' sales in inventory = 365 days/4.2623 = 85.63 days
Delmont Movers has a profit margin of 7.1 percent and net income of $63,700. What is the common-size percentage for the cost of goods sold if that expense amounted to $522,600 for the year?
COGS common-size percentage = $522,600 / ($63,700 / .071) = .5825, or 58.25 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?
Cash coverage ratio = ($28,740 + 13,420 + 2,605 + 6,170) / $2,605 = 19.55
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.
Days' sales in receivables = 365 / ($738,800 / $86,700) = 42.83 days
Jessica's Sports Wear has $38,100 in receivables and $523,700 in total assets. The total asset turnover rate is 1.17 and the profit margin is 7.3 percent. How long on average does it take to collect the receivables? Assume a 365-day year.
Days' sales in receivables = 365 / [(1.17 × $523,700) / $38,100] = 22.70 days
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.
Days' sales in receivables = 365/($5,338,411 / $391,648) = 26.78 days
A firm has a current ratio of 1.4 and a quick ratio of 0.9. 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, has positive net working capital
The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm II. operating efficiency of a firm III. 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. I, II, III, and IV
Windswept, Inc., has 330 million shares of stock outstanding. Its price-earnings ratio for 2017 is 24. What is the market price per share of stock?
Earnings per share = $841/330 = $2.548485 Price = $2.548485 × 24 = $61.16
BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?
Earnings per share = (.0587 ×$911,300)/18,500 = $2.89
Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?
Equity multiplier = 1 + 1.43 = 2.43
Phil's Carvings sells its inventory in 93 days, on average. Costs of goods sold for the year are $187,200. What is the average value of the firm's inventory? Assume a 365-day year.
Inventory = $187,200 × 93 / 365 = $47,698
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?
Inventory common-size percentage = $287,800/$998,700 = .2882, or 28.82 percent
UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?
Inventory turnover = $512,900 / $74,315 = 6.90 times
KBJ has total assets of $613,000. There are 21,000 shares of stock outstanding with a market value of $13 a share. The firm has a profit margin of 6.2 percent and a total asset turnover of 1.08. What is the price-earnings ratio?
Price-earnings ratio = $13 /{[.062 ×($613,000 ×1.08)]/21,000} = 6.65
Dellf's has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?
Price-earnings ratio = $7.11/[(.038 ×$287,200)/5,000] = 3.26
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?
Profit margin = {[(.058 × $137,000) - $4,700] × (1 - .34)} / $137,000 = .0156, or 1.56 percent
