Deck 15: Balance Sheet Analysis

Question 1

Firm A is based and operates in a country where financial markets are well developed.In this market long terms loans (from banks or through the issuance of bonds)are available and normally used by business entities as their source of external long-term funds.Firm B is based and operates in a country where the financial markets are not well developed.In this market is it commonplace for banks to offer,year after year,revolving short-term loans to their trusted customers.Assuming that both firms are identical in all aspects save for their external financing (Both firms' shareholders' equity equals a third of their total assets),how do their working capital need (WCN)compare? Which of the combinations shown below is highly improbable?

A) If A has a positive WCN,B is likely to have a positive WCN
B) If A has a positive WCN,B is likely to have a negative WCN
C) If A has a negative WCN,B is likely to have a positive WCN
D) If A has a negative WCN,B is likely to have a negative WCN

Answer 1

C

Question 2

Having a negative working capital need is generally quite advantageous to the firm since suppliers are,in this case,the most likely providers of financing and the funds they provide are not interest-bearing.Which of the following propositions is not true?

A) A firm should always have a negative Working capital need
B) Firms operating in retailing are likely to show a negative Working capital need
C) A firm that grew by financing its growth mainly through suppliers' credit is more sensitive to a downturn in its sales revenue than a firm that financed its growth through long-term debt.
D) All things being equal,the larger the negative Working capital need,the larger the profit.

Answer 2

A

Question 3

Firms who fear their capital structure indicates too high a risk level to get an advantageous cost of funding can use financial leases to hide their indebtedness.This way they replace debt they would use to acquire a resource (reported on the balance sheet on both sides,and in the income statement through depreciation and interest expense)by paying a monthly or yearly rental fee for the resource they 'leased' with an impact only on the income statement (and,incidentally,reimbursing as an 'expense' the equivalent of the principal of the debt they would have otherwise had to take on).

Answer 3

False

Question 4

Two firms are completely identical in all aspects,except for their capital structure.Firm A is more leveraged than firm B.

A) Firm A shows higher profit and lower risk than firm B
B) Firm A shows higher profit and higher risk than firm B
C) Firm A show a lower profit and a higher risk than firm B
D) Firms A shows a lower profit and a lower risk than firm B

Question 5

How is the working capital calculated?

A) Working capital need - Net cash
B) Fixed assets - Equity and Long-term liabilities
C) Current assets (except cash)- Current liabilities
D) Equity and Long-term liabilities - Fixed assets

Question 6

Balmer Company sells manufactured products for a price of 10 CU per unit.The credit terms received from suppliers of materials are 90 days.It grants credit to its customers for 10 days.Its inventory of finished products turnover is 24;its raw material inventory turnover is 48.Its transformation process takes a day.Its manufacturing value added to raw materials purchased is 10%.Its gross margin is 20%.Its net margin before tax is 5%.All costs other than materials are paid cash.The working capital need required to sell one unit is likely to be:

A) - 341.50
B) - 364.00
C) - 405.36
D) - 369.60

Question 7

If a firm faces short-term financing difficulties (as happened in the liquidity crisis of 2008-2009)and forecasts a reduction of its sales revenue due to global recession,which of the four possible course of action described below would it be best advised to implement:

A) Liquidate as much of its inventory as possible and sell its receivables so as to pay as much as possible of its short-term debt.
B) Use its cash on hand to first settle its short-term debt,negotiate longer credit terms with suppliers,and analyze receivables to stop selling to slow-paying customers.
C) Issue long-term bonds and invest in more capacity,more R&D,more product launches and higher levels of inventory to better serve customers.
D) Reduce simultaneously and within market constraints its inventory level,credit terms to customers,and cash in a reasoned way (leading to reduced activity and thus reduced payables)and weed receivables from slow payers.

Question 8

Which of the following four types of firms can safely use a high degree of leverage?

A) A firm with a high proportion of fixed tangible assets (out of total assets)and stable sales revenue
B) A firm with a high proportion of fixed tangible assets (out of total assets)and declining sales revenue
C) A firm with a low proportion of fixed tangible assets (out of total assets)and growing sales revenue
D) A firm with a low proportion of fixed tangible assets (out of total assets)and declining sales revenue

Question 9

How is the net cash calculated?

A) Bank borrowings - Bank overdrafts
B) Positive cash and cash equivalents - Bank overdrafts
C) Bank borrowings + Bank overdrafts - Positive cash and cash equivalents
D) Working capital + Working capital need

Question 10

Acme Company sells manufactured products for a price of 10 CU per unit.The credit terms received from suppliers of materials are 90 days.It grants credit to its customers for 30 days.Its inventory of finished products turnover is 6;its raw material inventory turnover is 12.Its transformation process takes a week (5 working days;the work is distributed evenly over the five days but all materials consumed are put in production on the first day).Its manufacturing value added to raw materials purchased is 50%.Its gross margin is 40%.Its net margin before tax is 10%.All costs other than materials are paid cash.The working capital need to sell one unit is likely to be:

A) 1,282.5 CU
B) 1,522.5 CU
C) 1,273.5 CU
D) - 912.5 CU

Question 11

How does one describe the way a business financed its resources?

A) By measuring its financial leverage
B) By measuring its return on capital employed
C) By measuring its financial structure
D) By calculating the net present value of future cash flows

Question 12

How is the working capital need calculated?

A) Working capital + Net cash
B) Fixed assets - Current liabilities
C) Current assets (except cash)- Current liabilities
D) Long-term debt - Current assets

Question 13

Domino Corp.reported to its shareholders a before tax profit such that the ROA is 2.33% and the ROCE is 3.5% (both based on beginning balances).The Return on sales is 8.75%.Gross margin is 40% and Sales General and Administrative expenses amount to 25% of sales.Long-term debts are bearing interest at the rate of 5% per year.The reimbursement of the principal will be in fine (i.e. ,a balloon payment at maturity).Assume that sales revenue for the year was 100 CU.What was the capital structure in the beginning balance sheet?

A) SHE= 107.12;LTD = 107.12;STD = 437.89
B) SHE= 125;LTD = 125;STD = 130.43
C) SHE= 87.50;LTD = 113.5;STD = 113.50
D) SHE= 125;LTD = 125;STD = 125

Question 14

A positive working capital need is typical of a firm operating in the distribution sector.