Q&A Hero

Q: Black Top Express has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year? A) $15,988 B) $16,684 C) $12,209 D) $17,878 E) $11,800

Q: Assume a firm is currently operating at 98 percent of capacity with sales of $28,400. Next year, sales are projected to increase to $35,000. What is the projected addition to fixed assets if the firm currently has fixed assets of $16,900 and total assets of $24,600? A) $0 B) $3,511 C) $2,629 D) $580 E) $1,688

Q: Muder's Market has sales of $28,400, net income of $2,250, and a retention ratio of 60 percent. Assume the profit margin and the payout ratio are constant and sales increase by 6 percent. What is the pro forma retained earnings if the current retained earnings balance is $4,100? A) $5,450 B) $5,721 C) $5,531 D) $5,648 E) $5,028

Q: The Steel Mill is currently operating at 84 percent of capacity. Annual sales are $28,400 and net income is $2,250. The firm has current liabilities of $2,700, long-term debt of $9,800, net fixed assets of $16,900, net working capital of $5,000, and owners' equity of $12,100. All costs and net working capital vary directly with sales. The tax rate and profit margin will remain constant. The dividend payout ratio is constant at 40 percent. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent? A) −$810 B) −$912 C) −$642 D) $264 E) $358

Q: Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent? A) $10,709 B) $14,680 C) $22,400 D) $16,760 E) $18,840

Q: Rural Markets has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity? A) .62 B) .88 C) .97 D) 1.03 E) 1.14

Q: Wood Refinishers currently has $298,900 in sales and is operating at 86 percent of the firm's capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. What is the full capacity level of sales? A) $245,697.67 B) $208,534.88 C) $347,558.14 D) $211,300.00 E) $254,500.00

Q: Baked at Home Cookies expects sales of $672,500 next year. The profit margin is 4.6 percent and the firm has a dividend payout ratio of 15 percent. What is the projected increase in retained earnings? A) $26,294.75 B) $17,500.50 C) $4,640.25 D) $20,640.25 E) $30,935.00

Q: Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? A) $303.33 B) $327.18 C) $405.60 D) $438.70 E) $441.10

Q: Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year? A) −$908.50 B) −$722.50 C) $967.30 D) $1,698.00 E) $1,512.00

Q: A Procrustes approach to financial planning is based on: A) a policy of producing a financial plan once every five years. B) developing a plan around the goals of senior managers. C) a proactive approach to the economic outlook. D) a flexible capital budget. E) a flexible capital structure.

Q: The financial planning process is least apt to: A) involve internal negotiations among divisions. B) quantify senior manager's goals. C) consider the development of future technologies. D) reconcile a company's activities across divisions E) consider factors that currently provide a negative rate of growth.

Q: The financial planning process tends to place the least emphasis on a firm's: A) growth limitations. B) capacity utilization. C) market value. D) capital structure. E) dividend policy.

Q: Financial plans generally tend to ignore: A) dividend policy. B) manager's goals and objectives. C) risks associated with cash flows. D) operating capacity levels. E) capital structure policy.

Q: Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate? A) Net working capital > $0 B) Total debt > $0 C) Dividend ratio = 0 D) Retention ratio = 0 E) Sales > Total assets

Q: Which one of the following has the least effect on a firm's sustainable rate of growth? A) Capital intensity ratio B) Profit margin C) Dividend policy D) Debt-equity ratio E) Quick ratio

Q: Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow? A) Internal growth rate (1 − .30) B) Sustainable growth rate (1 − .30) C) Internal growth rate D) Sustainable growth rate E) Zero percent

Q: If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the: A) maximum capacity level will have to increase at the same rate as sales growth. B) total assets will have to increase at the same rate as sales growth. C) debt-equity ratio will increase. D) retained earnings will increase. E) number of common shares outstanding will increase

Q: All else constant, a(n) ________ will increase the internal rate of growth. A) decrease in the retention ratio B) decrease in net income C) increase in the dividend payout ratio D) decrease in total assets E) increase in cost of goods sold

Q: The sustainable growth rate of a firm is best described as the ________ growth rate achievable ________. A) minimum; assuming a 100 percent retention ratio B) minimum; if the firm maintains a constant equity multiplier C) maximum; excluding external financing of any kind D) maximum; excluding any external equity financing while maintaining a constant debt-equity ratio E) maximum; with unlimited debt financing

Q: The internal growth rate of a firm is best described as the ________ growth rate achievable ________. A) minimum; assuming a retention ratio of 100 percent B) minimum; if the firm maintains a constant equity multiplier C) maximum; excluding external financing of any kind D) maximum; excluding any external equity financing while maintaining a constant debt-equity ratio E) maximum; with unlimited debt financing

Q: The maximum rate of growth a corporation can achieve can be increased by: A) avoiding new external equity financing. B) increasing the corporate tax rate. C) increasing the retention ratio. D) increasing the dividend payout ratio. E) increasing the sales forecast.

Q: BJ Company's net working capital and all of its expenses vary directly with sales. The firm is currently operating at 86 percent of capacity. The firm wants no additional external financing of any kind. The tax rate is 21 percent and the dividend payout ratio is fixed at 25 percent. Which statement related to next year's pro forma statements must be correct? A) Total equity will remain constant at this year's ending value. B) The maximum rate of sales increase is four percent. C) The firm cannot exceed its internal rate of growth. D) Accounts payable will increase at the same rate as fixed assets. E) Inventory will remain constant at the current level.

Q: The plowback 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 retention 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.

Q: Worthington Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's: A) net working capital. B) long-term debt. C) inventory. D) fixed assets. E) debt-equity ratio.

Q: The external financing need: A) will limit growth if unfunded. B) is unaffected by the dividend payout ratio. C) must be funded by long-term debt. D) ignores any changes in retained earnings. E) considers only the required increase in fixed assets.

Q: Wood Products is operating at 87 percent capacity and earning a substantial profit. A sales increase is least apt to increase the firm's: A) accounts receivable. B) cost of goods sold. C) accounts payable. D) fixed assets. E) inventory.

Q: A firm's external financing need is met by: A) retained earnings. B) net working capital and retained earnings. C) net income and retained earnings. D) debt or equity. E) owners' equity, including retained earnings.

Q: Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year? A) The pro forma profit margin is equal to the current profit margin. B) Retained earnings will increase at the same rate as sales. C) Total assets will increase at the same rate as sales. D) Long-term debt will increase in direct relation to sales. E) Owners' equity will remain constant.

Q: Which capital intensity ratio indicates the smallest need for fixed assets per dollar of sales? A) .07 B) .86 C) .39 D) 1.00 E) 1.15

Q: A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements? A) Sales B) Cost of goods sold C) Accounts receivable D) Fixed assets E) Long-term debt

Q: Next year's pro forma statement is based on an annual increase in sales of four percent. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, the: A) projected dividends must equal the current dividends. B) depreciation expense will decrease by four percent. C) retained earnings will increase by 85 percent of projected net income. D) total assets will increase by less than four percent. E) total liabilities and owners' equity will increase by four percent.

Q: When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance? A) Net working capital policy B) Capital structure policy C) Dividend policy D) Capital budgeting policy E) Capacity utilization policy

Q: A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: A) accounts payable. B) long-term debt. C) fixed assets. D) retained earnings. E) common stock.

Q: A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume the firm: A) is projected to grow at the internal rate of growth. B) is projected to grow at the sustainable rate of growth. C) currently has excess capacity. D) is currently operating at full capacity. E) retains all of its net income.

Q: When constructing a pro forma statement, net working capital generally: A) remains fixed. B) varies only if the firm is currently producing at full capacity. C) varies only if the firm maintains a fixed debt-equity ratio. D) varies only if the firm is producing at less than full capacity. E) varies proportionally with sales.

Q: Which one of the following is correct in relation to pro forma statements? A) Fixed assets must increase if sales are projected to increase. B) Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity. C) The addition to retained earnings is equal to net income less cash dividends. D) Long-term debt varies directly with sales when a firm is currently operating at maximum capacity. E) Inventory changes are not proportional to sales changes.

Q: When utilizing the percentage of sales approach, managers: A) estimate company sales based on a desired level of net income and the current profit margin. B) consider only those assets that vary directly with sales. C) consider the current production capacity level. D) can project net income but not net cash flows. E) assume all liability accounts will remain constant.

Q: Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales? A) Return on assets B) Equity multiplier C) Retention ratio D) Capital intensity ratio E) Current ratio

Q: The portion of net income that a firm reinvests in itself is called the: A) retention ratio. B) dividend yield. C) dividend payout ratio. D) internal growth rate. E) cash influx ratio.

Q: The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ________ method. A) percentage of sales B) sales dilution C) sales reconciliation D) common-size E) trend

Q: The retention ratio can be computed as: A) 1 − Plowback ratio. B) Change in retained earnings/Cash dividends. C) 1 + Dividend payout ratio. D) (Change in retained earnings + Cash dividends)/Net income. E) 1 − (Cash dividends/Net income).

Q: Pro forma statements: A) must assume that no new equity is issued. B) are projections, not guarantees. C) are limited to a balance sheet and income statement. D) must assume that no dividends will be paid. E) exclude net working capital needs.

Q: Which one of the following are you most apt to estimate first as you begin the process of preparing pro forma statements? A) Need for additional fixed assets B) Current fixed costs C) Projected sales D) Desired net income E) Desired dividend payments

Q: Financial plans: A) concentrate solely on income and expense items. B) often contain alternative options based on economic developments. C) frequently contain conflicting goals. D) assume that firms obtain no additional external financing. E) are based on a single set of economic assumptions.

Q: Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced? A) I only B) II and III only C) I and II only D) I, II, and III only E) I, II, III, and IV

Q: When planning for the long run, the planning horizon is usually a period of: A) 5 to 10 years. B) 2 to 5 years. C) 1 to 3 years. D) 3 to 7 years. E) 5 years or more.

Q: Financial planning includes the: I. determination of asset requirements. II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options. A) I and III only B) II and IV only C) I, III, and IV only D) I, II, and III only E) I, II, III, and IV

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. E) provides minimal benefits for firms that are highly responsive to economic changes.

Q: When developing a financial plan for a corporation you should consider which of the following? I. How much net working capital will be needed? 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: Atlas Industries combines the investment proposals from each operational unit into one single project for planning purposes. This process is referred to as: A) conjoining. B) aggregation. C) conglomeration. D) appropriation. E) summation.

Q: High Mountain Foods has an equity multiplier of 1.72, a total asset turnover of 1.16, and a profit margin of 4.5 percent. What is the return on assets? A) 6.94 percent B) 8.98 percent C) 2.00 percent D) 7.74 percent E) 5.22 percent

Q: A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income? A) $28,079 B) $19,197 C) $50,159 D) $40,451 E) $52,418

Q: Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity? A) 17.14 percent B) 18.63 percent C) 19.67 percent D) 21.69 percent E) 22.30 percent

Q: Coulter Supply has a total debt ratio of .46. What is the equity multiplier? A) .89 B) 1.17 C) 1.47 D) 1.85 E) 2.17

Q: Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 4.7, and a current ratio of 2.9. What is the cost of goods sold? A) $1,980,500 B) $1,760,750 C) $1,950,000 D) $2,056,250 E) $1,560,000

Q: The Docksider has net income for the most recent year of $24,650 and a combined tax rate of 24 percent. The firm paid $1,800 in total interest expense and deducted $2,900 in depreciation expense. What was the cash coverage ratio for the year? A) 20.48 times B) 11.48 times C) 19.39 times D) 20.63 times E) 13.69 times

Q: A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity? A) 26.27 percent B) 29.23 percent C) 18.48 percent D) 10.95 percent E) 13.50 percent

Q: Stone Walls has a long-term debt ratio of .6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, the profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets? A) $8,880.15 B) $8,017.43 C) $7,666.67 D) $5,848.15 E) $8,977.43

Q: Billings Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables? A) 21.90 days B) 27.56 days C) 33.18 days D) 35.04 days E) 36.19 days

Q: BL Industries has ending inventory of $302,800, annual sales of $2.33 million, and annual cost of goods sold of $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold? A) 47.43 days B) 22.18 days C) 78.38 days D) 61.78 days E) 83.13 days

Q: Corner Supply has a current accounts receivable balance of $246,000. Credit sales for the year just ended were $2,430,000. How many days on average did it take for credit customers to pay off their accounts during this past year? A) 44.29 days B) 55.01 days C) 55.50 days D) 36.95 days E) 41.00 days

Q: Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity? A) 6.85 percent B) 9.15 percent C) 11.08 percent D) 13.31 percent E) 14.21 percent

Q: Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio? A) 21.9 B) 17.4 C) 18.6 D) 26.7 E) 24.3

Q: The Tech Store has annual sales of $416,000, a price-earnings ratio of 18, and a profit margin of 3.7 percent. There are 12,000 shares of stock outstanding. What is the price-sales ratio? A) .97 B) .67 C) 1.08 D) 1.15 E) .86

Q: Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market-to-book ratio? A) 2.75 times B) 3.18 times C) 3.54 times D) 4.01 times E) 4.20 times

Q: Dixie Supply has total assets with a current book value of $368,900 and a current replacement cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q? A) .79 B) .76 C) .96 D) 1.26 E) 1.05

Q: A firm has total assets with a current book value of $71,600, a current market value of $82,300, and a current replacement cost of $90,400. What is the value of Tobin's Q? A) .85 B) .87 C) .90 D) .94 E) .91

Q: Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate? A) 2.48 percent B) 1.06 percent C) 3.32 percent D) 5.20 percent E) 10.60 percent

Q: Big Tree Lumber has earnings per share of $1.36. The firm's earnings have been increasing at an average rate of 2.9 percent annually and are expected to continue doing so. The firm has 21,500 shares of stock outstanding at a price per share of $23.40. What is the firm's PEG ratio? A) 2.27 B) 11.21 C) 4.85 D) 3.94 E) 5.93

Q: Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense of $1,600. What is the times interest earned ratio for the year? A) 9.63 B) 7.75 C) 10.81 D) 14.97 E) 10.97

Q: Jensen's Shipping has total assets of $694,800 at year's end. The beginning owners' equity was $362,400. During the year, the company had sales of $711,000, a profit margin of 5.2 percent, a tax rate of 21 percent, and paid $12,500 in dividends. What is the equity multiplier at year-end? A) 1.67 B) 1.72 C) 1.93 D) 1.80 E) 1.86

Q: Green Yard Care has net income of $62,300, a tax rate of 21 percent, and a profit margin of 6.7 percent. Total assets are $1,100,500 and current assets are $328,200. How many dollars of sales are being generated from every dollar of net fixed assets? A) $2.83 B) $1.37 C) $.84 D) $1.20 E) $1.23

Q: The Green Fiddle has current liabilities of $28,000, sales of $156,900, and cost of goods sold of $62,400. The current ratio is 1.22 and the quick ratio is .71. How many days on average does it take to sell the inventory? A) 128.13 days B) 74.42 days C) 199.81 days D) 147.46 days E) 83.53 days

Q: Frank's Welding has net fixed assets of $36,200, total assets of $51,300, long-term debt of $22,000, and total debt of $29,700. What is the net working capital to total assets ratio? A) 12.18 percent B) 16.82 percent C) 14.42 percent D) 17.79 percent E) 9.90 percent

Q: Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent. The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300. What is the return on equity? A) 24.26 percent B) 15.38 percent C) 38.96 percent D) 29.96 percent E) 17.06 percent

Q: Russell's has annual sales of $649,200, cost of goods sold of $389,400, interest of $23,650, depreciation of $121,000, and a tax rate of 21 percent. What is the cash coverage ratio for the year? A) 8.43 B) 10.99 C) 11.64 D) 5.87 E) 18.22

Q: Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio? A) .87 B) .94 C) 1.21 D) 1.15 E) 1.06

Q: Corner Books has sales of $687,400, cost of goods sold of $454,200, and a profit margin of 5.5 percent. The balance sheet shows common stock of $324,000 with a par value of $5 a share, and retained earnings of $689,500. What is the price-sales ratio if the market price is $43.20 per share? A) 4.28 B) 12.74 C) 6.12 D) 4.07 E) 14.51

Q: The Strong Box has sales of $859,700, cost of goods sold of $648,200, net income of $93,100, and accounts receivable of $102,300. How many days of sales are in receivables? A) 57.60 days B) 40.32 days C) 54.53 days D) 29.41 days E) 43.43 days