Q&A Hero

Q: Which of the following statements related to market efficiency tends to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only F. None of the above.

Q: At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2012? A. 1.79% B. 4.33% C. 13.43% D. 15.22% E. 17.76% F. None of the above.

Q: Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Private equity financing is a common source of financing for startup firms. A. I and II only B. I and III only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV F. None of the above.

Q: Which one of the following statements is true? A. Equity securities offer fixed claims on future cash payouts. B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation. C. In theory, common shareholders exercise very little control over company decisions. D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the above.

Q: Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2010 period)? A. Short-term government bills, long-term corporate bonds, long-term government bonds, common stocks B. Long-term corporate bonds, long-term government bonds, common stocks, short-term government bills C. Common stocks, long-term government bonds, long-term corporate bonds, short-term government bills D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills E. Long-term corporate bonds, common stocks, short-term government bills, long-term government bonds F. None of the above.

Q: Which one of the following statements is true? A. Debt instruments offer residual claims to future cash payouts. B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds. C. Bondholders enjoy a direct voice in company decisions. D. Bonds are low-risk investments that do well in inflationary periods. E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation. F. None of the above.

Q: Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the: A. coupon. B. par value. C. discount. D. yield. E. call premium. F. None of the above.

Q: Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is also called the: A. coupon. B. par value. C. discount. D. call premium. E. yield. F. None of the above.

Q: Which of the following securities has a purely residual claim against a firm's cash flows? A. preferred stock B. callable bonds C. common stock D. non-callable bonds E. None of the above.

Q: Which of the following securities has a purely fixed claim against a firm's cash flows? A. preferred stock B. options C. common stock D. bonds E. None of the above.

Q: Which one of the following statements is false? A. Financial executives must design financial securities to meet the needs of the firm and its investors. B. Financial instruments are subject to full disclosure requirements. C. Financial instruments are greatly constrained by law and regulation. D. Financial instruments are claims against a company's cash flows and assets. E. None of the above.

Q: Is the increase in dividends a good idea for Hard Knock?

Q: Do you think Hard Knock Doors is having a problem financing its growth?

Q: Use the information from Hard Knock's annual financial statements to answer the following questions:Calculate the actual and sustainable growth rate for each year.

Q: Law Dog paid its first dividends in 2004. As an analyst, assess the company's decision to pay dividends.

Q: Why do financial managers need to understand the implications of the sustainable rate of growth?

Q: Which of the following actions might a firm take if its actual sales growth exceeds its sustainable rate of growth?I. Increase pricesII. Decrease financial leverageIII. Decrease dividendsIV. Prune away less marginal productsA. I and II onlyB. I and III onlyC. I, II, and IV onlyD. I, III, and IV onlyE. I, II, III, and IVF. None of the above.

Q: Use the information from Boss's annual financial statements. What is the difference between the sustainable growth and actual growth rates for 2011?A. - 11.40%B. - 7.09%C. -3.04%D. 5.47%E. 13.98%F. 21.40%

Q: Use the above information from Boss's annual financial statements. What is the sustainable sales growth rate for 2010?A. - 17.6%B. - 7.9%C. 9.07%D. 10.27%E. 12.23%F. 21.4%

Q: Use the information from Boss's annual financial statements. What is the actual sales growth rate for 2010?A. - 17.6%B. - 7.9%C. 8.51%D. 21.4%E. None of the above.

Q: The following table presents financial information for Boss Stores, Inc., a retail chain store in the U.S.Use the information from Boss's annual financial statements. What is the retention ratio for 2009?A. 0.32B. 0.68C. 0.97D. 1.00E. None of the above.

Q: Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is the sustainable growth rate? A. 15.32 percent B. 15.79 percent C. 17.78 percent D. 18.01 percent E. 18.24 percent

Q: A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. The asset turnover ratio is 0.85 and the assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is the profit margin? A. 3.79 percent B. 5.69 percent C. 6.75 percent D. 10.13 percent E. 18.24 percent

Q: Komatsu has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is the sustainable rate of growth? A. 1.91 percent B. 6.12 percent C. 10.83 percent D. 11.26 percent E. 12.74 percent F. None of the above.

Q: Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? A. $14,700 B. $17,500 C. $18,300 D. $20,600 E. $21,000 F. None of the above.

Q: Which of the following can affect a firm's sustainable rate of growth? I. Asset turnover ratio II. Profit margin III. Dividend policy IV. Financial leverage A. III only B. I and III only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV F. None of the above.

Q: The sustainable growth rate: A. assumes there is no external financing of any kind. B. assumes no additional long-term debt is available. C. assumes the debt-equity ratio is constant. D. assumes the debt-equity ratio is 1.0. E. assumes all income is retained by the firm. F. None of the above.

Q: The sustainable growth rate of a firm is best described as the: A. minimum growth rate achievable assuming a 100 percent retention ratio. B. minimum growth rate achievable if the firm maintains a constant equity multiplier. C. maximum growth rate achievable excluding external financing of any kind. D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio. E. maximum growth rate achievable with unlimited debt financing. F. None of the above.

Q: Which of the following questions are appropriate to address upon conducting sustainable growth analysis and the financial planning process? I. Should the firm merge with a competitor? II. Should additional equity be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A. I, II, and III only B. I, II, and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV F. None of the above.

Q: Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? A. net working capital policy B. capital structure policy C. dividend policy D. capital budgeting policy E. capacity utilization policy F. None of the above.

Q: Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.

Q: Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.

Q: The retention ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the asset turnover ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales. F. None of the above.

Q: Which of these ratios are the determinants of a firm's sustainable growth rate? I. Assets-to-equity ratio II. Profit margin III. Retention ratio IV. Asset turnover ratio A. I and III only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV F. None of the above.

Q: Which one of the following will increase the sustainable rate of growth a corporation can achieve? A. avoidance of external equity financing B. increase in corporate tax rates C. reduction in the retention ratio D. decrease in the dividend payout ratio E. decrease in sales given a positive profit margin F. None of the above.

Q: Suppose your colleague constructed a pro forma balance sheet and a cash budget for your company for the same time period, and the external financing required from the pro forma forecast exceeded the cash deficit estimated on the cash budget. How would you interpret this result?

Q: Preston Fencing Company's sales, half of which are for cash and the other half sold on credit, over the past three months were: a. Estimate Preston's cash receipts in October if the company's collection period is 30 days.b. Estimate Preston's cash receipts in October if the company's collection period is 45 days.c. What would be the October balance of accounts receivable for Preston Fencing if the company's collection period is 30 days? 45 days?

Q: Edna's Laundry Services just completed pro forma statements using the percentage of sales approach. The pro forma shows a projected external financing need of -$5,500. Interpret this figure. What are the firm's options in this case?

Q: Pro forma financial statements, by definition, are predictions of a company's financial statements at a future point in time. So, why is it important to analyze the historical performance of the company before constructing pro forma financial statements?

Q: Please refer to Oscar's financial statements. Assume a constant debt-equity ratio, net profit margin and dividend payout ratio, and further assume all of Oscar's costs, assets and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?A. $10,857.50B. $10,931.38C. $11,663.75D. $15,587.50E. $18,987.50F. None of the above.

Q: Please refer to Oscar's financial statements. Assume a constant net profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is the external financing need for next year?A. -$410B. -$260C. $235D. $1,320E. $7,240F. None of the above.

Q: Please refer to Oscar's financial statements. All of Oscar's costs and net working capital vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?A. $949B. $1,034C. $1,113D. $1,730E. $2,670F. None of the above.

Q: Please refer to Oscar's financial statements. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year?A. $1,309.19B. $1,421.40C. $1,884.90D. $2,667.78E. $3,001.40F. None of the above.

Q: Please refer to Oscar's financial statements. What was the increase in retained earnings of Oscar's during 2012?A. $450B. $1,380C. $1,830D. $2,280E. None of the above.

Q: On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya's sales for April were $430 and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya's accounts receivable period is 30 days. What is the firm's beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265

Q: Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643

Q: Financial planning: A. focuses solely on the short-term outlook for a firm. B. is a process that firms employ only when major changes to a firm's operations are anticipated. C. is a process that firms undergo once every five years. D. considers multiple options and scenarios for the next two to five years. E. provides minimal benefits for firms that are highly responsive to economic changes.

Q: You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a: A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the above.

Q: The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales.

Q: Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April

Q: Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit indicates a borrowing need. E. The ending cash balance must equal the minimum desired cash balance.

Q: Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

Q: The most common approach to developing proforma financial statements is called the: A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the above.

Q: To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the above.

Q: You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the above.

Q: Use Limited Brands, Inc.'s financial statements, above, to prepare common-size financial statements for Limited Brands, Inc. for 2006 - 2007.

Q: The financial statements for Limited Brands, Inc. follow (fiscal years ending January):Use Limited Brands, Inc.'s financial statements, above, to answer the following question. Use the company's operating profit as an approximation of its EBIT, and assume a 40% tax rate for your calculations. For the fiscal years ending in January of 2006 and 2007, calculate:a) Limited Brands' total liabilities-to-equity ratio;b) Times interest earned ratio; andc) Times burden covered.

Q: The profit margin for 2012 is:A. -94%B. -57%C. 13%D. 31%E. None of the above.

Q: The gross margin for 2012 is:A. -94%B. 13%C. 26%D. 31%E. None of the above.

Q: Assume a 365-day year for your calculations. The days' sales in cash at the end of 2012 is:A. 24.3B. 28.8C. 35.7D. 219.6E. None of the above.

Q: Assume a 365-day year for your calculations. The payables period in days, based on cost of goods sold, at the end of 2012 is:A. 5.2B. 24.3C. 28.8D. 35.7E. None of the above.

Q: Assume a 365-day year for your calculations. The inventory turnover, based on cost of goods sold, at the end of 2012 is:A. 5.2B. 24.3C. 28.8D. 35.7E. None of the above.

Q: Assume a 365-day year for your calculations. The collection period in days, based on sales, at the end of 2012 is:A. 24.3B. 219.6C. 35.7D. 28.8E. None of the above.

Q: Which of the following statements best describes how the company's short-term liquidity changed from 2011 to 2012?A. Link's short-run liquidity has improved modestly.B. Link's short-run liquidity has deteriorated very little, but from a low initial base.C. Link's short-run liquidity has improved considerably, but from a low initial base.D. Link's short-run liquidity has deteriorated considerably, but from a high initial base.E. None of the above.

Q: Selected financial data for Link, Inc. follows: ($ in thousands)The current ratio at the end of 2012 is:A. 10.21B. 2.31C. 2.76D. 10.30E. None of the above.

Q: Which one of the following statements does NOT describe a problem with using ROE as a performance measure? A. ROE measures return on accounting book value, and this problem is not solved by using market value. B. ROE is a forward-looking, one-period measure, while business decisions span the past and present. C. ROE measures only return, while financial decisions involve balancing risk against return. D. None of these describe problems with ROE. E. All of these describe problems with ROE.

Q: On a common-size balance sheet, all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year.

Q: Which one of the following statements is correct? A. If the debt-to-assets ratio is greater than 0.50, then the debt-to-equity ratio must be less than 1.0. B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C. The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio. D. To realize the best risk and reward profile, financial leverage should be maximized. E. None of the above is correct.

Q: Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios? A. decrease in the fixed asset turnover rate B. decrease in the financial leverage ratio C. increase in the inventory turnover rate D. increase in the day's sales in inventory E. no change in the total asset turnover rate

Q: Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan? A. current ratio B. debt-to-equity ratio C. times interest earned ratio D. times burden covered ratio E. None of the above.

Q: Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales? A. current ratio B. debt-to-equity C. retention D. asset turnover E. return on assets

Q: Ptarmigan Travelers had sales of $420,000 in 2010 and $480,000 in 2011. The firm's current accounts remained constant. Given this information, which one of the following statements must be true? A. The total asset turnover rate increased. B. The days' sales in receivables increased. C. The inventory turnover rate increased. D. The fixed asset turnover decreased. E. The collection period decreased.

Q: Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. I, III, and IV only

Q: Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. A. asset turnover and control B. financial leverage C. coverage D. profitability E. None of the above.

Q: Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover A. I and IV only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV

Q: The most popular yardstick of financial performance among investors and senior managers is the: A. profit margin. B. return on equity. C. return on assets. D. times burden covered ratio. E. earnings yield. F. None of the above.

Q: During 2011, Lele Design earned net income of $250,000. The firm neither bought nor sold any capital assets. The book value of its assets declined by the year's depreciation charge of $200,000. The firm's operating cash flow for the year was $450,000. The market value of its assets increased by $300,000. What was Lele Design's economic income for the year? Why is this figure different from its accounting income? Please ignore taxes for this problem.

Q: The book value of Little Statistic's total assets is $400,000. Suppose Number Crunching Inc. acquires Little Statistic's assets for $1 million and finances the purchase by selling $600,000 in new stock, $300,000 in new debt, and reducing cash by $100,000. Describe how the acquisition affects Number Crunching's balance sheet.

Q: JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase?A. $1,000,000B. $1,750,000C. $3,250,000D. $4,000,000E. $5,000,000F. None of the above.