Untitled Flashcards Set

1. In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with a face value of $1 million, market value of $.92 million, and a coupon rate of 8%. What is the firm's times interest earned ratio? (Use value in dollars)
A. 3.75
B. 2.98
C. 2.80
D. 3.40

2. What is the ROE for a firm with a times interest earned ratio of 2, a tax liability of $1 million, and interest expense of $1.5 million if equity equals $1.5 million? (Use the values in dollars)
A. 26.67%
B. 30.00%
C. 33.33%
D. 50.00% 

3. A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million. On average, how many days does it take the firm to pay its bills?
A. 63.47 days
B. 52.91 days
C. 48.19 days
D. 59.03 days

4. What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?
A. 2.78 times
B. 4.17 times
C. 5.56 times
D. 8.33 times

5. What is the approximate total debt ratio for a firm with a total debt-equity ratio of.65?
A. 35%
B. 39%
C. 54%
D. 65% 

6. Calculate the average collection period for Dots Inc. if its accounts receivables were $550 at the beginning of a year in which the firm generated $3,000 of sales?
A. 60 days
B. 61 days
C. 67 days
D. 73 days

7. Which one of these changes indicates an improvement in a firm's asset management efficiency?
A. an increase in the amount of assets per dollar of sales.
B. an increase in the inventory turnover rate.
C. a decrease in the receivables turnover rate.
D. an increase in the average days in inventory.

8. Which of these indicates that a firm is efficient?
A. a high average collection period.
B. a high day's sales in inventories.
C. a low asset turnover.
D. a high inventory turnover. 

9. Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?
A. a leverage ratio of.0667
B. a P/E ratio of 14
C. a return on equity of 25%
D. a profit margin of 6.4%

10. Which one of the following will cause a reduction in the net working capital turnover ratio all else held constant?
A. a decrease in sales.
B. an increase in average payables.
C. an increase in average inventory.
D. an increase in the average cash balance.

11. Which one of the following changes will provide an increase (if only in the short-run) in a firm's ROE?
A. a decrease in the profit margin.
B. an increase in the dividend-payout ratio.
C. an increase in equity.
D. an increase in tax rates. 

12. Which one of the following will increase a firm's times interest earned ratio?
A. an increase in debt.
B. a decrease in cost of goods sold.
C. an increase in interest expense.
D. a decrease in net income.

 

13. Efficiency ratios:
A. include the quick ratio, asset turnover ratio, and return on equity.
B. are used to measure how well the company uses its assets.
C. are used to measure how liquid the company is.
D. measure the profits generated by a firm's equity and assets.

 14. Assume BDS acquired its main supplier, ABC. As a result of the acquisition, BDS finds that its profit margin increased but its ROA remained constant. A decrease in which one of these ratios is most apt to be the reason why the ROA did not increase with the increase in the profit margin?
A. leverage ratio
B. market-to-book ratio
C. asset turnover
D. debt burden 

15. The inventory turnover ratio compares:
A. current assets to average inventory.
B. cost of goods sold to average inventory.
C. average receivables to average inventory.
D. average assets to average inventory.
 

16. Which of the following actions could improve a firm's current ratio if it is now less than 1.0?
A. converting marketable securities to cash.
B. paying accounts payable with cash.
C. buying inventory on credit.
D. selling inventory at cost.

17. Which one of these ratios is commonly referred to as the acid-test ratio?
A. times interest earned ratio.
B. quick ratio.
C. cash coverage ratio.
D. cash ratio.

18. A firm has $600,000 in current assets and $150,000 in current liabilities. Which of the following is correct if it uses cash to pay off $50,000 in accounts payable?
A. current ratio will increase to 5.0.
B. net working capital will increase to $500,000.
C. current ratio will decrease.
D. net working capital will not change.

19. Which of the following choices would be guaranteed to increase a firm's ROE if the ROA is currently 10% and the leverage ratio equals 1?
A. decrease the leverage ratio.
B. increase the debt burden from its current level.
C. decrease assets turnover from the current level.
D. decrease the debt burden from its current level.

20. What must happen to asset turnover to leave ROE unchanged from its original 16% level if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? Asset turnover must:
A. remain constant.
B. increase from 1.46 to 2.33.
C. decrease from 1.74 to 1.67.
D. increase from 1.38 to 1.67. 

21. The current ratio is a good proxy for a firm's:
A. liquidity.
B. efficiency.
C. degree of leverage.
D. profitability. 

22. The use of debt in the firm's capital structure will increase ROE if the firm:
A. has more debt than equity.
B. pays less in taxes than in interest.
C. earns a higher return than the rate paid on debt.
D. has a times interest earned ratio greater than 1.0.

23. An asset's liquidity measures its:
A. potential for generating a profit.
B. cash requirements.
C. ease and cost of being converted to cash.
D. proportion of debt financing.

 24. Last year's return on equity was 30%. This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings. The firm has no preferred stock. What caused the decrease?
A. equity decreased by 10%.
B. equity decreased by 50%.
C. equity increased by 10%.
D. equity increased by 50%.

25. Which one of these statements is correct?
A. market value added measures the difference between the total market value and the total book value of equity.
B. net income is also called economic value added.
C. EVA measures the net profit of a firm after deducting the cost of the assets used in the production process.
D. EVA considers the cost of long-term debt financing but excludes the cost of equity financing.

26. A firm's quick ratio of.49 suggests the firm:
A. has a low level of current liabilities.
B. has been overstating the value of its inventory.
C. faces a potentially serious liquidity crisis.
D. should reduce its holdings of cash and/or marketable securities.

27. What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
A. firms have different dividend payout ratios.
B. some firms use fully depreciated assets.
C. financial leverage varies among firms.
D. unprofitable firms will not have any tax liability. 

28. Which of these assets is generally considered to be the most liquid?
A. buildings
B. land
C. finished goods inventory
D. accounts receivable

29. If a firm's cash coverage ratio is greater than its times interest earned ratio, then the:
A. firm's assets are not fully depreciated.
B. firm has no lease obligations.
C. firm has very little long-term debt.
D. firm has a high degree of liquidity.

30. A deficiency of the standard measures of liquidity is that the measures:
A. ignore a firm's reserve borrowing capacity.
B. fail to include accounts receivable as an asset.
C. give inventories equal weighting in the quick ratio.
D. do not include the current portions of long-term debt. 

Chapter 5 

1. A stream of equal cash payments lasting forever is termed as:
A. an annuity.
B. an annuity due.
C. an installment plan.
D. a perpetuity.

2. How many monthly payments remain to be paid on an 8% compounded monthly mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage?
A. approximately 268 payments
B. approximately 180 payments
C. approximately 91 payments
D. approximately 68 payments

 3. Real interest rates:
A. always exceeds inflation rates.
B. can decline to zero but no lower.
C. can be negative, zero, or positive.
D. traditionally exceed nominal rates.

4. Which one of the following will increase the present value of an annuity, other things equal?
A. increasing the interest rate
B. decreasing the interest rate
C. decreasing the number of payments
D. decreasing the amount of the payment

5. An interest rate that has been annualized using compound interest is termed the:
A. simple interest rate.
B. annual percentage rate.
C. discounted interest rate.
D. effective annual interest rate. 

6. If interest is paid m times per year, then the per-period interest rate equals the:
A. effective annual rate divided by m.
B. compound interest rate times m.
C. effective annual rate.
D. annual percentage rate divided by m.

7. Cash flows occurring in different periods should not be compared unless:
A. interest rates are expected to be stable.
B. the flows occur no more than one year from each other.
C. high rates of interest can be earned on the flows.
D. the flows have been discounted to a common date. 

8. Other things being equal, the more frequent the compounding period, the:
A. higher the annual percentage rate.
B. lower the annual percentage rate.
C. higher the effective annual interest rate.
D. lower the effective annual interest rate.

 9. Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power:
A. remained on par with inflation.
B. increased by nearly 1% annually.
C. increased by nearly 2% annually.
D. decreased.

10. What factor is fixed if you establish a scholarship fund in perpetuity?
A. present value
B. payment amount
C. interest rate
D. discount rate

11. The concept of compound interest refers to:
A. earning interest on the original investment.
B. payment of interest on previously earned interest.
C. investing for a multiyear period of time.
D. determining the APR of the investment.

12. Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance:
A. decreases with each succeeding payment.
B. increases with each succeeding payment.
C. is constant throughout the loan term.
D. fluctuates monthly with changes in market interest rates.

 13. Given a set future value, which of the following will contribute to a lower present value?
A. higher discount rate
B. fewer time periods
C. less frequent discounting
D. lower discount factor

 14. The present value of a perpetuity can be determined by:
A. multiplying the payment by the interest rate.
B. dividing the interest rate by the payment.
C. multiplying the payment by the number of payments to be made.
D. dividing the payment by the interest rate.

15. A cash-strapped young professional offers to buy your car with four, equal end of year annual payments of $3,000, beginning 2 years from today (the first payment will be made on the last day of year 2). Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept?
A. Yes; present value is $9,510.08
B. Yes; present value is $11,372.67
C. No; present value is $8,645.09
D. No; present value is $7,461.17

16. What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?
A. the APR is lower than the annually compounded rate.
B. the APR is higher than the annually compounded rate.
C. the APR equals the annually compounded rate.
D. the answer depends on the interest rate.

17. Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate?
A. the interest rate is very high.
B. the investment period is very long.
C. the compounding is annually.
D. this is not possible with positive interest rates.

 18. Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding?
A. 8.0% with monthly compounding
B. 8.5% with semiannual compounding
C. The depositor would be indifferent.
D. The time period must be known to select the preferred account.

19. When an investment pays only simple interest, this means:
A. the interest rate is lower than on comparable investments.
B. the future value of the investment will be low.
C. the earned interest is nontaxable to the investor.
D. interest is earned only on the original investment.

 20. The APR on a loan must be equal to the effective annual rate when:
A. compounding occurs monthly.
B. compounding occurs annually.
C. the loan is for less than one year.
D. the loan is for more than one year.

Chapter 19

1. Dave's Wax Inc.'s financial planners have projected a growth rate of 8% for the coming year. Currently, it has assets of $5,000,000 and retained earnings of $120,000. Calculate the amount of external financing Dave will need:
A. $0
B. $70,000
C. $184,000
D. $280,000

External financing = (Growth rate x assets) – reinvested earnings

(8% x $5,000,000) - $120,000 = $280,000

2. A forecast using a percentage of sales model expects sales to increase by 5% over each of the next four years. If costs are proportional to sales at 80%, and last year's sales were $1,000, the net income in the fourth year will be:
A. $48.62
B. $145.86
C. $227.60
D. $243.10

Sales 1000 (1.05)^4 = 1215.51

COGS 800 (1.05)^4 = 972.41

1215.51 – 972.41 = 243.10

3. Executives at Fruit Corporation forecast increased sales of 10% over the next year. $2,000,000 of assets will change in constant proportion to sales. If the addition to retained earnings is estimated to be $50,000, determine the required external financing.
A. $150,000
B. $200,000
C. $250,000
D. $300,000

External financing = (Growth rate x assets) – reinvested earnings

(10% x $2,000,000) - $50,000 = $150,000

4. With respect to the balance sheet, an increase in equity of $2,000 with an increase in net income to $2,500, leads us to believe:
A. The firm paid a dividend of $500
B. The firm plowed $500 back into the company
C. $500 went into retained earning
D. Debt increased by $2,000

5. What new investment is required for a firm that projects 12% growth has $400,000 in assets, and retained earnings of $40,000?
A. $0
B. $4,800
C. $8,000
D. $66,667 

(12% x $400,000) - $40,000 =  $8,000

6. If a firm uses external financing as a plug item, has a new capital budget of $2 million, a net income of $3 million, and a plowback ratio of 40%, how much should be raised in external funds?
A. $200,000
B. $600,000
C. $800,000
D. $1,200,000

(40% x 3,000,000) – 2,000,000 =  $800,000

7. How will a percentage of sales models treat cost of goods sold if sales revenues are expected to grow by 20% to $1 million? Cost of goods sold will:
A. Grow at a slower rate than sales
B. Remain proportionate to sales
C. Be forecast to increase at the rate of inflation
D. Increase to $800,000

 8. Sources and uses of funds are made equal through:
A. A balancing item
B. Pro forma financial statements
C. Borrowing cash
D. Additions to retained earnings

 9. Which of the following might indicate the correct choice of a plug figure if a financial plan shows sources of funds to be $100,000 and uses of funds to be $90,000?
A. External debt must increase by $10,000
B. Dividend payments must decrease by $10,000
C. Cash balances must increase by $10,000
D. The capital budget must decrease by $10,000

10. Which of the following is not a reason for building financial plans?
A. Considering options
B. Contingency planning
C. Choosing the optimal plan
D. Forcing consistency

11. The phrase, "Forecasts do not develop in a vacuum," is a reminder that:
A. Forecasters are known not to work well alone
B. Planners will offer ten plans when asked for one
C. Competitors also make plans and react to ours
D. Forecasts should be developed at headquarters

 12. The outputs of a financial planning model often include:
A. The firm's current financial statements
B. A range of macroeconomic forecasts
C. Cost projections for operating the planning models
D. Projected financial statements of the firm

13. The observation that additions to fixed assets are "lumpier" than additions to current assets indicates that:
A. Fixed assets depreciate over time
B. Fixed assets can only be acquired through external funding
C. Current assets can be acquired in smaller increments
D. Dollar for dollar, fixed assets are more expensive than current assets

14. Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:
A. Debt has grown too large, too fast
B. It is more difficult to maintain a stable dividend
C. Debt covenants always accommodate more debt, but often prevent debt prepayment
D. Equity is always less expensive to obtain than debt

 15. If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of.75 then:
A. Debt must increase by $300,000
B. Equity must increase by the full $400,000
C. Debt must increase by $171,429
D. Equity must increase by $100,000

16. A firm that wants to increase its sustainable growth rate can do so by __________ the __________ ratio or by __________ the __________ or both.
A. increasing; payout; increasing; ROE
B. increasing; plowback; increasing; ROE
C. decreasing; plowback; increasing; ROE
D. decreasing; payout; decreasing; ROE

17. A major difference between financial planning and forecasting is that financial planning:
A. Is forward-looking
B. Relies on the viewpoints of management
C. Determines the rate of profitability
D. Is equally concerned with less-likely outcomes
 

18. If a firm's dividend payout ratio is determined after achieving a specific capital structure, then:
A. Dividends are an input to the financial plan
B. The capital budget should be revised
C. Dividends are being used as a plug item
D. Dividend forecasts become crucial to planning

 19. A firm's internal growth rate of 10% means that:
A. Sales can grow by 10% before external equity is needed
B. Retained earnings can increase by 10% before total assets will change
C. External capital will not be required unless sales growth exceeds 10%
D. Debt can increase by 10% before retained earnings will fall

20. In a financial planning model:
A. Inputs are used to create the model
B. Financial ratios are used to create the model
C. Financial ratios are used to develop forecasts
D. Equations are used to develop financial statements

 21. Financial plans covering a short planning horizon rarely extend beyond:
A. one year
B. three years
C. five years
D. ten years

22. Dividend policy is determined by all of the following except:
A. The debt-equity ratio
B. The need for funds
C. Forecasting
D. As a consequence of other planning decisions

23. The rate at which the assets of a firm can grow without the requirement of external sources of financing is the:
A. Internal growth rate
B. Sustainable growth rate
C. Pro forma growth rate
D. Plowback rate

24. To avoid inconsistency, financial planners should be sure to:
A. Draw information from many resources
B. Do all forecasting themselves
C. Produce perfectly accurate forecasts
D. Use forecasts based on common macroeconomic assumptions

 25. Planners have determined that sales will increase by 20% next year, and that the profit margin will remain at 10% of sales. Which of the following statements is correct?
A. Profit will grow by 20%
B. The profit margin will grow by 10%
C. Profit will grow proportionately faster than sales
D. 10% of the increase in sales will become net income

26. Pro forma statements are:
A. Plans developed by a Certified Financial Planner
B. The inputs in the financial planning process
C. Projected financial statements
D. Deviations in results from previous financial plans

27. All of the following are part of the financial planning process except:
A. Deciding which risks are worth taking
B. Analyzing investment and financing options
C. Projecting the future
D. Minimizing risk

28. The final variable to have its value determined in a financial plan is often referred to as the:
A. Net income
B. Balancing item
C. Retained earning plowback
D. Growth forecast

29. Which of the following is correct when a firm's pro forma statements project a net income of $5,000 and an external financing requirement of $2,000?
A. Dividends cannot exceed $3,000
B. Total assets cannot grow by more than $3,000
C. Retained earnings cannot grow by more than $5,000
D. The internal growth rate is 60%

30. A firm has $1 million in current sales volume and an internal growth rate of 15%. If sales are expected to increase by $100,000, then:
A. The firm's forecast will not be met
B. Dividends will have to be reduced
C. Retained earnings will increase by $50,000
D. External funding will not be required