ACCOUNTING 333 CHAPTER 3 PRACTICE QUIZ.
1. Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as:
o asset management ratios.
o liquidity meas
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ACCOUNTING 333 CHAPTER 3 PRACTICE QUIZ.
1. Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as:
o asset management ratios.
o liquidity measures.
o leverage ratios.
o profitability ratios.
o utilization ratios.
2. Which one of these measures a firm's long-run ability to meet its obligations?
o Cash ratio
o Total asset turnover
o Quick ratio
o Return on equity
o Equity multiplier
3. Which ratio measures the number of times a firm lends money to customers, collects that money, and relends it within a year?
o Total asset turnover
o Days' sales in receivables
o Total debt ratio
o Receivables turnover
o Quick ratio
4. Which ratio calculates the amount of sales generated by each $1 invested in assets?
o Total asset turnover
o Return on equity
o Return on assets
o Equity multiplier
o DuPont identity
5. The return on equity can be calculated as:
o Profit margin × 1/Capital intensity ratio × Equity multiplier.
o Return on assets × b.
o Profit margin × Total asset turnover × Debt-equity ratio
o Profit margin × 1/Equity multiplier × (1 + Debt-equity ratio).
o Return on assets × Debt-equity ratio
6. If a firm decreases its operating costs, all else constant, then:
o the profit margin increases while the cash coverage ratio decreases.
o the return on assets increases while the return on equity decreases.
o both the return on assets and the return on equity increase.
o both the profit margin and the equity multiplier increase.
o the total asset turnover rate decreases while the profit margin increases.
7. Assume a firm is operating at full capacity. Which one of these accounts is least apt to vary directly with sales?
o Inventory
o Cash
o Long-term debt
o Accounts payable
o Fixed assets
8. Financial planning, when properly executed:
o helps ensure that adequate financing is in place to support the desired level of growth.
o ensures that the primary goals of senior management are fully achieved.
o reduces the necessity of daily management oversight of the business operations.
o ignores the normal restraints encountered by a firm.
o eliminates the need to plan more than one year in advance.
9. Juno's has sales of $389,000, a tax rate of 34 percent, a dividend payout ratio of 45 percent, and a profit margin of 6 percent. What is the addition to retained earnings?
o $10,503.00
o $12,837.00
o $141,207.00
o $8,472.42
o $15,913.64
Addition to retained earnings = $389,000 × .06 × (1 - .45) = $12,837.00
10. A firm has total assets of $162,000, long-term debt of $46,000, stockholders' equity of $95,000, and current liabilities of $21,000. The dividend payout ratio is 60 percent and the profit margin is 8 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $150,000 are projected to increase by 10 percent?
o $4,220
o $54,820
o $16,200
o $38,700
o $8,820
Projected total assets = 1.1($162,000) = $178,200
Projected current liabilities = 1.1($21,000) = $23,100
Projected long-term debt = $46,000 (no change)
Projected shareholders equity = $95,000 + (1.1 × $150,000 × .08 × (1 - .60) = $100,280
EFN = $178,200 - 23,100 - 46,000 - $100,280 = $8,820
11. A firm has total assets of $262,000, long-term debt of $105,000, stockholders' equity of $111,000, and current liabilities of $46,000. The retention ratio is 60 percent and the profit margin is 6 percent. Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity. What is the external financing need if the current sales of $275,000 are projected to increase by 10 percent?
o $210
o $14,340
o $6,200
o $10,890
o $10,710
Projected total assets = 1.1($262,000) = $288,200
Projected current liabilities = 1.1($46,000) = $50,600
Projected long-term debt = $105,000 (no change)
Projected shareholders equity = $111,000 + (1.1 × $275,000 × .06 × .60 = $121,890
EFN = $288,200 - 50,600 - 105,000 - $121,890 = $10,710
12. Parker's Meats has total assets of $411,900, a price-earnings ratio of 8.4, a debt-equity ratio of .65, and earnings per share of $1.22. What is the market to book ratio if there are 45,000 shares of stock outstanding?
o 1.85 times
o .79 times
o 2.24 times
o 5.46 times
o 2.80 times
Equity multiplier = 1 + .65 = 1.65
Total equity = Total assets/Equity multiplier = $411,900/1.65 = $249,636.36
Market to book ratio = (8.4 × $1.22)/($249,636.36/45,000) = 1.85 times
13. A firm has sales of $142,600, net income of $22,800, net fixed assets of $94,300, and current assets of $42,600, of which $31,400 is inventory. What is the common-size statement value of inventory?
o 22.02%
o 12.56%
o 22.94%
o 73.71%
o 37.71%
Common-size inventory value = $31,400/($94,300 + 42,600) = .2294, or 22.94%
14. A firm has sales of $2,400, net income of $125, total assets of $1,100, and total equity of $750. Interest expense is $200. What is the common-size statement value of the interest expense?
o 13.33%
o 7.10%
o 8.33%
o 18.18%
o 26.67%
Common-size interest = $200/$2,400 = .0833, or 8.33%
15. Vaun's Pet Store paid $16,950 in interest and $21,300 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $84,200. What is the value of the cash coverage ratio?
o 4.81 times
o 6.22 times
o 7.75 times
o 8.77 times
o 8.20 times
EBIT = 3.8 × $16,950 = $64,410
Cash coverage ratio = ($64,410 + 84,200)/$16,950 = 8.77 times
This can also be calculated as:
Cash coverage ratio = 3.8 + ($84,200/$16,950) = 8.77 times
16. Burnside's has accounts receivable of $33,700, inventory of $54,200, sales of $364,200, and cost of goods sold of $193,400. How long does it take the firm to sell its inventory and collect payment on the sale?
o 128.14 days
o 88.09 days
o 163.78 days
o 136.06 days
o 154.08 days
Inventory turnover = $193,400/$54,200 = 3.57
Days in inventory = 365/3.57 = 102.29 days
Accounts receivable turnover = $364,200/$33,700 = 10.81
Days' sales in receivables = 365/10.81 = 33.77 days
Total days in inventory and receivables = 102.29 + 33.77 = 136.06 days
17. Rosario's has sales of $114,500, total debt of $46,300, total equity of $68,400, and a profit margin of 5 percent. What is the return on assets?
o 5.21%
o 4.99%
o 7.39%
o 8.37%
o 19.97%
Return on assets = (.05 × $114,500)/($46,300 + 68,400) = .0499, or 4.99%
18. Supra's has sales of $893,000, total assets of $932,500, a profit margin of 6.5 percent, and a total debt ratio of 40 percent. What is the return on equity?
o 15.56%
o 10.37%
o 8.71%
o 6.22%
o 11.49%
Return on equity = (.065 × $893,000)/[$932,500 × (1 - .40)] = .1038, or 10.37%
19. A firm has 5,000 shares of stock outstanding with a market value of $23.60 a share, $74,800 of long-term debt with an interest rate of 7.5 percent, cash on hand of $6,400, sales of $198,000, costs of $107,200, and depreciation of $13,400. The tax rate is 35 percent. What is the enterprise value multiple?
o 2.05 times
o 3.97 times
o 2.19 times
o 4.18 times
o 3.10 times
Enterprise value multiple = [(5,000 × $23.60) + $74,800 - 6,400]/($198,000 - 107,200) = 2.05 times
20. Cellar Wines has a debt-equity ratio of 42 percent, sales of $849,000, net income of $76,800, and total debt of $349,000. What is the return on equity?
o 5.24%
o 9.05%
o 10.75%
o 15.50%
o 9.24%
Return on equity = $76,800/($349,000/.42) = .0924 = 9.24%
21.
What is the times interest earned ratio for 2014?
o 5.78 times
o 7.29 times
o 3.60 times
o 8.33 times
o 9.38 times
Times interest earned = $118,200/$12,600 = 9.38 times
22-23.
22. What is the days' sales in receivable for 2014? (Use only 2014 values.)
o 44.27 days
o 20.20 days
o 98.30 days
o 31.08 days
o 36.01 days
Days' sales in receivables for 2014 = 365/($419,200/$35,700) = 31.08 days
23. What is the EV multiple for 2014 if the enterprise value is $930,000?
o 9.43 times
o 6.06 times
o 2.22 times
o 5.24 times
o 8.31 times
EV multiple = $930,000/($98,600 + 54,800) = 6.06 times
24. The Purple Cove has a 5 percent profit margin and a 40 percent dividend payout ratio. The total asset turnover is 1.40 and the equity multiplier is 1.50. What is the sustainable rate of growth?
o 6.30%
o 6.72%
o 6.83%
o 6.90%
o 6.93%
Return on equity = .05 × 1.40 × 1.50 = .105
Sustainable growth = [.105 × (1 - .40)]/{1 - [.105 × (1 - .40)]} = .0672, or 6.72%
25. The Top Shop has net income of $240 and total equity of $2,000. The debt-equity ratio is 1 and the plowback ratio is 40 percent. What is the internal growth rate?
o 2.46%
o 3.00%
o 4.92%
o 5.88%
o 6.00%
Total assets = $2,000 + 2,000 = $4,000 (The debt-equity ratio of 1 means TD = TE.)
Return on assets = $240/$4,000 = .06
Internal growth = [.06 × .40]/[1 - (.06 × .40)] = .0246, or 2.46%
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