FIN3403 Chapter 3

Barlow's Feed had the following current account values. What effect did the change in net working capital have on the firm's cash flows for the year?

Beginning Year

Cash 179

A/R 415

Inven 987

A/P 562

End Year

Cash 164

A/R 480

Inven 923

A/P 649

Net source of cash of $101.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

A. Total assets.

B. Taxable income.

C. Net income.

D. Sales.

E.Total equity.

D. Sales.

The sources and uses of cash over a stated period of time are reflected on the:

A. Statement of cash flows.

B. Tax reconciliation statement.

C. Balance sheet.

D. Statement of operating position.

E. Income statement.

A. Statement of cash flows.

Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $223, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $204, inventory of $527, and net fixed assets of $1,216. What is the common-base year value of inventory?

A. .67

B. 1.18

C. 1.04

D. .88

E. .91

C. 1.04

Common-base year inventory = $527 / $509 = 1.04

A firm has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?

A. 2.03 percent

B. 1.35 percent

C. .89 percent

D. 1.51 percent

E. 1.69 percent

D. 1.51 percent

Common-size interest = $65 / $4,300 = .0151, or 1.51 percent

A firm has a debt-total asset ratio of 58 percent and a return on total assets of 13 percent. What is the return on equity?

A. 13.50 percent

B. 45.00 percent

C. 30.95 percent

D. 26.27 percent

E. 22.41 percent

30.95%

(Total assets - Total equity) / Total assets = .58

Total equity = .42 Total assets

Net income = .13 Total assets

Return on equity = .13 Total assets / .42 Total assets = .3095, or 30.95percent

(Total assets - Total equity) / Total assets = .58

Total equity = .42 Total assets

Net income = .13 Total assets

Return on equity = .13 Total assets / .42 Total assets = .3095, or 30.95 percent

Use the below information to answer the following question.

What is the times interest earned ratio for the year?

A. 16.05

B. 10.79

C. 9.63

D. 14.97

E. 6.46

B. 10.79

Times interest earned = EBIT / Interest = 10.79

Times interest earned = $160,700 / $14,900 = 10.79

Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?

A. 1.06 percent

B. 5.20 percent

C. 10.60 percent

D. 2.48 percent

E. 3.32 percent

E. 3.32 percent

5.3 = 17.6 / (Earnings growth rate × 100); Earnings growth rate = .0332, or 3.32 percent

A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?

A. Return on equity.

B. Return on assets.

C. Total asset turnover.

D. Profit margin.

E. Equity multiplier.

E. Equity multiplier.

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

A. Decrease in the quick ratio.

B. Increase in the cash ratio.

C. Decrease in the cash coverage ratio.

D. Increase in the current ratio.

E. Increase in the net working capital to total assets ratio.

A. Decrease in the quick ratio.

Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio?

A. .73

B. .81

C. .83

D. .64

E. .42

A. .73

Equity Multiplier = .162/(.051 x 1.84) = 1.73

Debt-Equity ratio = 1.73 - 1 = .73

High Mountain Foods has an equity multiplier of 1.72, a total asset turnover of 1.16, and a profit margin of 4.5 percent. What is the return on equity?

A. 11.94 percent

B. 8.98 percent

C. 12.96 percent

D. 14.38 percent

E. 19.95 percent

B. 8.98 percent

Return on equity = .045 × 1.16 × 1.72 = .0898, or 8.98 percent

Canine Supply has sales of $2,800, total assets of $1,900, and a debt-equity ratio of .5. Its return on equity is 15 percent. What is the net income?

A. $190

B. $350

C. $240

D. $130

E. $210

A. $190

Return on equity = .15 = (Net income / $2,800) × ($2,800 / $1,900) × (1 + .50)

Net income = $190

Which one of the following accurately describes the three parts of the DuPont identity?

A. Debt-equity ratio, capital intensity ratio, and profit margin.

B. Operating efficiency, equity multiplier, and profitability ratio.

C. Equity multiplier, profit margin, and total asset turnover.

D. Financial leverage, operating efficiency, and profitability ratio.

E. Return on assets, profit margin, and equity multiplier.

C. Equity multiplier, profit margin, and total asset turnover.

A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?

A. $19,197

B. $50,159

C. $40,451

D. $52,418

E. $28,079

B. $50,159

Return on equity = .051 × 1.24 × (1 + .62) = .1024

Net income = $489,600 × .1024 = $50,159

Which one of the following statements is correct?

A. Book values should always be given precedence over market values.

B. Reviewing financial information over time has very limited value.

C. Financial statements are rarely used as the basis for performance evaluations.

D. Historical information is useful when projecting a firm's future performance.

E. Potential lenders place little value on financial statement information.

D. Historical information is useful when projecting a firm's future performance.

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current:

A. Financial ratios to the average ratios of all firms located within the same geographic area.

B. Financial ratios to the firm's historical ratios.

C. Financial statements to the projections that were created based on Tobin's Q.

D. Financial statements to those of larger firms in unrelated industries.

E. Financial statements to the financial statements of similar firms operating in other countries.

B. Financial ratios to the firm's historical ratios.

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

A. Centralized Business Index.

B. Peer Grouping codes.

C. Government Engineered Coding System.

D. Governmental ID codes.

E. Standard Industrial Classification codes.

E. Standard Industrial Classification codes.

Which of these are factors to consider when comparing utility firms that generate electric power and have the same SIC code?

I. Type of ownership.

II. Regulatory considerations.

III. Fiscal year end.

IV. Methods of power generation.

A. I, II, and III only.

B. II, and III only.

C. II, III, and IV only.

D. III only.

E. I, II, III, and IV.

E. I, II, III, and IV.

Which of the following represent problems encountered when comparing the financial statements of two separate entities?

I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.

II. The operations of the two firms may vary geographically.

III. The firms may use differing accounting methods.

IV. The two firms may be seasonal in nature and have different fiscal year ends.

A. I, II, and III only.

B. I and II only.

C. I, III, and IV only.

D. I, II, III, and IV.

E. II and III only.

D. I, II, III, and IV.