Question 1

Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%.The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio.Given these requirements, the maximum rate at which Marcie's can grow is equal to:

Accepted Answer

A)  40% of the internal rate of growth.
B)  60% of the internal rate of growth.
C)  the internal rate of growth.
D)  the sustainable rate of growth.
E)  60% of the sustainable rate of growth. D

Question 2

Which is a more meaningful measure of profitability for a firm, return on assets or return on equity? Why?

Accepted Answer

Most would argue ROE since it measures returns relative to the amount of money shareholders have invested in the firm.In addition, since shareholder wealth maximization is a firm's primary goal, it makes more sense to look at this measure.

Question 3

$\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Windswept, Inc. 
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $2008 Income Statement
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ ($ in millions)
$\begin{array}{c}
\begin{array}{lll}
 \text {Net sales  }   \
 \text { Less: Cost of goods sold } &&\
 \text { Less: Depreciation } &\
 \text {Earnings before interest and taxes  } &\
 \text { Less: Interest paid } &\
 \text {Taxable Income  } &\
 \text {
Less: Taxes  } &\
 \text { 
Net income } &\
\end{array}
\begin{array}{r}
\$ 8,450 \
7,240 \
\underline{400} \
 810 \
\underline{ 70} \
 \$ 740 \
\underline{ 259} \
\underline{ \$ 481}
\end{array}
\end{array}$

-Refer to the above TableWhat is the times interest earned ratio for 2008?

Accepted Answer

A)  30
B)  36
C)  40
D)  50
E)  54  C

Question 4

Frederico's has a profit margin of 6%, a return on assets of 8%, and an equity multiplier of 1.4.What is the return on equity?

Accepted Answer

A)  6.7%
B)  8.4%
C)  11.2%
D)  14.6%
E)  19.6%

Question 5

A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively.

Accepted Answer

A)  tax reconciliation statement
B)  statement of standardization
C)  statement of cash flows
D)  common-base year statement
E)  common-size statement

Question 6

A firm has a market capitalization of $2 million, market value of interest bearing debt of $1 million, book value of interest bearing debt of $500,000 and cash of $100,000.What is the enterprise value?

Accepted Answer

A)  $2.5 million
B)  $2.9 million
C)  $3.0 million
D)  $3.5 million
E)  $3.6 million

Question 7

The financial ratio measured as the price per share of stock divided by earnings per share is known as the:

Accepted Answer

A)  return on assets.
B)  return on equity.
C)  debt-equity ratio.
D)  price-earnings ratio.
E)  Du Pont identity.

Question 8

Lee Sun's has sales of $3,000, total assets of $2,500, and a profit margin of 5%.The firm has a total debt ratio of 40%.What is the return on equity?

Accepted Answer

A)  6%
B)  8%
C)  10%
D)  12%
E)  15%

Question 9

Last year, Alfred's Automotive had a price-earnings ratio of 15.This year, the price earnings ratio is 18.Based on this information, it can be stated with certainty that:

Accepted Answer

A)  the price per share increased.
B)  the earnings per share decreased.
C)  investors are paying a higher price for each share of stock purchased.
D)  investors are receiving a higher rate of return this year.
E)  either the price per share, the earnings per share, or both changed.

Question 10

An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

Accepted Answer

A)  accounts payable
B)  cash
C)  inventory
D)  accounts receivable
E)  fixed assets

Question 11

When examining the EBITDA ratio, lower numbers are:

Accepted Answer

A)  considered good.
B)  considered mediocre.
C)  considered poor.
D)  indifferent to higher numbers.
E)  it is impossible to garner information from this ratio.

Question 12

Suppose a firm calculates its external funding needs and finds that it is negative.What are the firm's options in this case?

Accepted Answer

The answer of Suppose a firm calculates its external funding...

Question 13

One key reason a long-term financial plan is developed is because:

Accepted Answer

A)  the plan determines your financial policy.
B)  the plan determines your investment policy.
C)  there are direct connections between achievable corporate growth and the financial policy.
D)  there is unlimited growth possible in a well-developed financial plan.
E)  None of the above.

Question 14

A firm has a return on equity of 15%.The debt-equity ratio is 50%.The total asset turnover is 1.25 and the profit margin is 8%.The total equity is $3,200.What is the amount of the net income?

Accepted Answer

A)  $480
B)  $500
C)  $540
D)  $600
E)  $620

Question 15

$\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Windswept, Inc. 
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $2008 Income Statement
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ ($ in millions)
$\begin{array}{c}
\begin{array}{lll}
 \text {Net sales  }   \
 \text { Less: Cost of goods sold } &&\
 \text { Less: Depreciation } &\
 \text {Earnings before interest and taxes  } &\
 \text { Less: Interest paid } &\
 \text {Taxable Income  } &\
 \text {
Less: Taxes  } &\
 \text { 
Net income } &\
\end{array}
\begin{array}{r}
\$ 8,450 \
7,240 \
\underline{400} \
 810 \
\underline{ 70} \
 \$ 740 \
\underline{ 259} \
\underline{ \$ 481}
\end{array}
\end{array}$

-Refer to the above TableWhat is the quick ratio for 2008?

Accepted Answer

A)  .82
B)  .95
C)  1.36
D)  2.18
E)  2.28

Question 16

The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment.Moe's just purchased all new equipment which will be depreciated over eight years.Assuming all else equal:

Accepted Answer

A)  Joe's will have a lower profit margin.
B)  Joe's will have a lower return on equity.
C)  Moe's will have a higher net income.
D)  Moe's will have a lower profit margin.
E)  Moe's will have a higher return on assets.

Question 17

A firm has 5,000 shares of stock outstanding, sales of $6,000, an enterprise value of $5 million and an EBITDA of 1 million.What is the enterprise value multiple?

Accepted Answer

A)  2.2
B)  2.4
C)  3.0
D)  4.0
E)  5.0

Question 18

From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?

Accepted Answer

A)  times interest earned ratio
B)  cash coverage ratio
C)  cash ratio
D)  quick ratio
E)  Interval measure

Question 19

A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current assets of $300.The firm has $100 in inventory.What is the common-size statement value of inventory?

Accepted Answer

A)  8.3%
B)  12.5%
C)  20.0%
D)  33.3%
E)  50.0%

Question 20

Growth can be reconciled with the goal of maximizing firm value:

Accepted Answer

A)  because greater growth always adds to value.
B)  because growth must be an outcome of decisions that maximize NPV.
C)  because growth and wealth maximization are the same.
D)  because growth of any type cannot decrease value.
E)  None of the above.

Exam 3: Financial Statements Analysis and Long-Term Planning