Question 1

What does a coverage ratio measure?

Accepted Answer

A) The company's ability to pay the interest on its debt 
B) The company's ability to pay the principal amount of its debt 
C) The company's ability to "cover" (pay)its operating expenses 
D) The company's ability to "cover" (meet)shareholder return expectations 
A) The company's ability to pay the interest on its debt 
B) The company's ability to pay the principal amount of its debt 
C) The company's ability to "cover" (pay)its operating expenses 
D) The company's ability to "cover" (meet)shareholder return expectations

Question 2

EXLO Company has current sales of $100,000 and projected annual sales growth of 5%, profit margins of 3%, and its dividend policy is to have a dividend payout of 15% of net income per year.Ignoring income taxes, the forecasted change to retained earnings for next year is:

Accepted Answer

A) $472.50 
B) $2,677.50 
C) $16,222.50 
D) $91,927.50 
A) $472.50 
B) $2,677.50 
C) $16,222.50 
D) $91,927.50

Question 3

EXLO Company has current sales of $100,000 and has projected annual sales growth of 5%, asset growth of 120%, profit margins of 3%, and its dividend policy is to have a dividend payout of 15% of net income per year.Assume there are no spontaneous liabilities.Ignoring income taxes, the sustainable growth rate (SGR)for EXLO is closest to:

Accepted Answer

A) 0.13% 
B) 0.38% 
C) 2.17% 
D) 4.25% 
A) 0.13% 
B) 0.38% 
C) 2.17% 
D) 4.25%

Question 4

Which of the following people would be least likely to calculate financial ratios for a company?

Accepted Answer

A) Bondholders 
B) Equity holders 
C) Suppliers 
D) Customers 
A) Bondholders 
B) Equity holders 
C) Suppliers 
D) Customers

Question 5

In assessing a firm's liquidity, which of the following ratios would be most helpful?

Accepted Answer

A) Debt/equity ratio 
B) Asset turnover ratio 
C) Current ratio 
D) Times-interest-earned ratio 
A) Debt/equity ratio 
B) Asset turnover ratio 
C) Current ratio 
D) Times-interest-earned ratio

Question 6

The following information has been obtained on Alberta Drilling Company for 2022.
 
The inventory turnover and average day's sales in inventory for Alberta Drilling Company are:

Accepted Answer

A) Inventory turnover: 67.59; Average days sales in inventory: 5.40 days 
B) Inventory turnover: 40.56; Average days sales in inventory: 9.00 days 
C) Inventory turnover: 9.00; Average days sales in inventory: 40.56 days 
D) Inventory turnover: 5.40; Average days sales in inventory: 67.59 days 
A) Inventory turnover: 67.59; Average days sales in inventory: 5.40 days 
B) Inventory turnover: 40.56; Average days sales in inventory: 9.00 days 
C) Inventory turnover: 9.00; Average days sales in inventory: 40.56 days 
D) Inventory turnover: 5.40; Average days sales in inventory: 67.59 days

Question 7

Igor the intern has obtained the following financial data for PDQ Corporation:
 
The turnover ratio for 2022 is:

Accepted Answer

A) 1.6667 
B) 1.9655 
C) 26.32% 
D) 86.21% 
A) 1.6667 
B) 1.9655 
C) 26.32% 
D) 86.21%

Question 8

What are the three ratios used in the DuPont system of financial analysis of return on equity?

Accepted Answer

ROE = Net Profit ÷ Shareholders' Equity

Question 9

If a company has good growth potential, the market to book ratio should be:

Accepted Answer

A) Higher than 1 
B) Lower than 1 
C) Less than 0 
D) Not relevant 
A) Higher than 1 
B) Lower than 1 
C) Less than 0 
D) Not relevant

Question 10

A firm began the current fiscal year with total assets of $8 million, common shares of $4 million and retained earnings of $2 million.At the end of the current year the firm reported net income of $1 million, all of which was retained by the firm.The debt-to-equity ratio for this reporting period is:

Accepted Answer

A) 0.17 
B) 0.14 
C) 0.25 
D) 0.33 
A) 0.17 
B) 0.14 
C) 0.25 
D) 0.33

Question 11

Which one of the following is FALSE?

Accepted Answer

A) A high leverage ratio increases ROE. 
B) A low leverage ratio decreases the risk of bankruptcy. 
C) A leverage ratio is a stock ratio. 
D) A low leverage ratio reduces the size of the balance sheet. 
A) A high leverage ratio increases ROE. 
B) A low leverage ratio decreases the risk of bankruptcy. 
C) A leverage ratio is a stock ratio. 
D) A low leverage ratio reduces the size of the balance sheet.

Question 12

Which one of the following is TRUE?

Accepted Answer

A) Stand-alone ratios provide sufficient information about a firm's performance. 
B) Ratios are comparative measures over time and/or across firms. 
C) Ratios are forward-looking measures. 
D) Analyzing historical ratios is not useful. 
A) Stand-alone ratios provide sufficient information about a firm's performance. 
B) Ratios are comparative measures over time and/or across firms. 
C) Ratios are forward-looking measures. 
D) Analyzing historical ratios is not useful.

Question 13

Given the following information extracted from the income statement of Widget Company (Widget Company has no depreciation expense or opening or closing inventory),
 
The gross profit margin (GPM)and operating margin (OM)for Widget Company are:

Accepted Answer

A) GPM = 26.67%; OM = 17.78% 
B) GPM = 17.78%; OM = 26.67% 
C) GPM = 53.33%; OM = 14.44% 
D) GPM = 14.44%; OM = 53.33% 
A) GPM = 26.67%; OM = 17.78% 
B) GPM = 17.78%; OM = 26.67% 
C) GPM = 53.33%; OM = 14.44% 
D) GPM = 14.44%; OM = 53.33%

Question 14

A firm has $1,750,000 of total assets and $1,330,000 of total liabilities.The firm then issued 10,000 newly created shares at a price of $17 each (prior to this share issuance the firm had 35,000 shares outstanding).What is the firm's equity book value per share (BVPS)after the share issuance?

Accepted Answer

The answer of A firm has $1,750,000 of total assets...

Question 15

Which of the following is TRUE?

Accepted Answer

A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt. 
B) Interest expenses are commonly based on a percentage of sales. 
C) Depreciation costs are commonly based on a percentage of sales. 
D) Forecasting sales is the most important step in financial forecasting. 
A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt. 
B) Interest expenses are commonly based on a percentage of sales. 
C) Depreciation costs are commonly based on a percentage of sales. 
D) Forecasting sales is the most important step in financial forecasting.

Question 16

Ratios should not be used to compare two companies in different industries since wide variations across industries can occur.But even within an industry, sometimes comparisons can be problematic.Which of the following is/are a reason(s)for concern?

Accepted Answer

A) Methods of calculating ROE may differ between analysts 
B) Company choice between weighted average and FIFO inventory valuations 
C) Companies are based in different countries 
D) All of these are reasons for concern. 
A) Methods of calculating ROE may differ between analysts 
B) Company choice between weighted average and FIFO inventory valuations 
C) Companies are based in different countries 
D) All of these are reasons for concern.

Question 17

Which of the following is TRUE?

Accepted Answer

A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses fixed interest rates on debt. 
B) Interest expenses are commonly based on a percentage of sales. 
C) Depreciation costs are commonly based on a percentage of sales. 
D) Forecasting sales is the last step in financial forecasting. 
A) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses fixed interest rates on debt. 
B) Interest expenses are commonly based on a percentage of sales. 
C) Depreciation costs are commonly based on a percentage of sales. 
D) Forecasting sales is the last step in financial forecasting.

Question 18

To produce chewing gum, DryFruit Gum Company pays $100,000 per year for rent on a long-term lease and $25 per kilogram for sorbitol and other ingredients.These are the only costs associated with making DryFruit Gum.During the year, the firm sold 30,000 kilograms of chewing gum at $45 per kilogram.Ignoring income taxes, the profit margin for DryFruit is closest to:

Accepted Answer

A) 120.00% 
B) 55.56% 
C) 44.44% 
D) 37.04% 
A) 120.00% 
B) 55.56% 
C) 44.44% 
D) 37.04%

Question 19

On the projected balance sheet for the next year, total assets are $5,000, total liabilities are $2,000, and shareholder's equity is $1,000.Which of the following is correct?

Accepted Answer

A) External Funds Required is -$1,000.This firm will have a cash deficit. 
B) External Funds Required is $1,000.This firm will have a cash surplus. 
C) External Funds Required is -$2,000.This firm will have a cash deficit. 
D) External Funds Required is $2,000.This firm will have a cash surplus. 
A) External Funds Required is -$1,000.This firm will have a cash deficit. 
B) External Funds Required is $1,000.This firm will have a cash surplus. 
C) External Funds Required is -$2,000.This firm will have a cash deficit. 
D) External Funds Required is $2,000.This firm will have a cash surplus.

Question 20

Net working capital represents:

Accepted Answer

A) The amount of money needed to start the company 
B) The difference between assets and liabilities 
C) The difference between current assets and liabilities 
D) The difference between current assets and current liabilities 
A) The amount of money needed to start the company 
B) The difference between assets and liabilities 
C) The difference between current assets and liabilities 
D) The difference between current assets and current liabilities

Exam 4: Financial Statement Analysis and Forecasting

What does a coverage ratio measure?

EXLO Company has current sales of $100,000 and projected annual sales growth of 5%, profit margins of 3%, and its dividend policy is to have a dividend payout of 15% of net income per year.Ignoring income taxes, the forecasted change to retained earnings for next year is:

Which of the following people would be least likely to calculate financial ratios for a company?

In assessing a firm's liquidity, which of the following ratios would be most helpful?

The following information has been obtained on Alberta Drilling Company for 2022. The inventory turnover and average day's sales in inventory for Alberta Drilling Company are:

Igor the intern has obtained the following financial data for PDQ Corporation: The turnover ratio for 2022 is:

What are the three ratios used in the DuPont system of financial analysis of return on equity?

If a company has good growth potential, the market to book ratio should be:

Which one of the following is FALSE?

Which one of the following is TRUE?

Given the following information extracted from the income statement of Widget Company (Widget Company has no depreciation expense or opening or closing inventory), The gross profit margin (GPM)and operating margin (OM)for Widget Company are:

A firm has $1,750,000 of total assets and $1,330,000 of total liabilities.The firm then issued 10,000 newly created shares at a price of $17 each (prior to this share issuance the firm had 35,000 shares outstanding).What is the firm's equity book value per share (BVPS)after the share issuance?

Which of the following is TRUE?

Ratios should not be used to compare two companies in different industries since wide variations across industries can occur.But even within an industry, sometimes comparisons can be problematic.Which of the following is/are a reason(s)for concern?

Which of the following is TRUE?

On the projected balance sheet for the next year, total assets are $5,000, total liabilities are $2,000, and shareholder's equity is $1,000.Which of the following is correct?

Net working capital represents:

An Introduction to Finance

Business Corporate Finance

Financial Statements

Time Value of Money

Bond Valuation and Interest Rates

Equity Valuation

Risk, Return, and Portfolio Theory

The Capital Asset Pricing Model Capm

Market Efficiency

Forwards, Futures, and Swaps

Options

Capital Budgeting, Risk Considerations, and Other Special Issues

Cash Flow Estimation and Capital Budgeting Decisions

Mergers and Acquisitions

Leasing

Investment Banking and Securities Law

Debt Instruments

Equity and Hybrid Instruments

Cost of Capital

Capital Structure Decisions

Dividend Policy

Working Capital Management: General Issues

Working Capital Management: Current Assets and Current Liabilities

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