Test bank corporate finance 8e ros chap003

Chapter 003 Working with Financial Statements Multiple Choice Questions Activities of a firm which require the spending of cash are known as: a sources of cash B uses of cash c cash payments d cash receipts e cash on hand SECTION: 3.1 TOPIC: USES OF CASH TYPE: DEFINITIONS The sources and uses of cash over a stated period of time are reflected on the: a income statement b balance sheet c tax reconciliation statement D statement of cash flows e statement of operating position SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS TYPE: DEFINITIONS A common-size statement is an accounting statement that expresses all of a firm's expenses as a percentage of: a total assets b total equity c net income d taxable income E sales SECTION: 3.2 TOPIC: COMMON-SIZE STATEMENTS TYPE: DEFINITIONS 3-1 Chapter 003 Working with Financial Statements A _ standardizes items on the income statement and balance sheet relative to their values as of a common point in time a statement of standardization b statement of cash flows C common-base year statement d common-size statement e tax reconciliation statement SECTION: 3.2 TOPIC: COMMON-BASE YEAR STATEMENTS TYPE: DEFINITIONS Relationships determined from a firm's financial information and used for comparison purposes are known as: A financial ratios b comparison statements c dimensional analysis d scenario analysis e solvency analysis SECTION: 3.3 TOPIC: FINANCIAL RATIOS TYPE: DEFINITIONS Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _ ratios a asset management b long-term solvency C short-term solvency d profitability e market value SECTION: 3.3 TOPIC: SHORT-TERM SOLVENCY RATIOS TYPE: DEFINITIONS 3-2 Chapter 003 Working with Financial Statements The current ratio is measured as: a current assets minus current liabilities B current assets divided by current liabilities c current liabilities minus inventory, divided by current assets d cash on hand divided by current liabilities e current liabilities divided by current assets SECTION: 3.3 TOPIC: CURRENT RATIO TYPE: DEFINITIONS The quick ratio is measured as: a current assets divided by current liabilities b (cash on hand plus accounts receivable) divided by current assets c current liabilities divided by current assets d cash on hand divided by current liabilities E (current assets minus inventory) divided by current liabilities SECTION: 3.3 TOPIC: QUICK RATIO TYPE: DEFINITIONS The cash ratio is measured as: a current assets divided by current liabilities b (current assets minus cash on hand) divided by current liabilities c (current assets minus current liabilities) divided by cash on hand d (current assets minus inventory) divided by current liabilities E cash on hand divided by current liabilities SECTION: 3.3 TOPIC: CASH RATIO TYPE: DEFINITIONS 3-3 Chapter 003 Working with Financial Statements 10 The financial ratio measured as current assets divided by average daily operating costs is the: a cash ratio b net working capital to total assets ratio c acid-test ratio D interval measure e operating measure SECTION: 3.3 TOPIC: INTERVAL MEASURE TYPE: DEFINITIONS 11 Ratios that measure a firm's financial leverage are known as _ ratios a asset management B long-term solvency c short-term solvency d profitability e book value SECTION: 3.3 TOPIC: LONG-TERM SOLVENCY RATIOS TYPE: DEFINITIONS 12 The financial ratio measured as total assets minus total equity, divided by total assets, is the: A total debt ratio b equity multiplier c debt-equity ratio d current ratio e equity ratio SECTION: 3.3 TOPIC: TOTAL DEBT RATIO TYPE: DEFINITIONS 3-4 Chapter 003 Working with Financial Statements 13 The debt-equity ratio is measured as total: a equity minus total debt b equity divided by total debt C debt divided by total equity d debt minus total equity e debt plus total equity SECTION: 3.3 TOPIC: DEBT-EQUITY RATIO TYPE: DEFINITIONS 14 The equity multiplier ratio is measured as: a total equity divided by total assets b (total equity plus total debt) divided by total assets c (total assets minus total equity) divided by total assets d (total assets minus total equity) divided by total equity E total assets divided by total equity SECTION: 3.3 TOPIC: EQUITY MULTIPLIER TYPE: DEFINITIONS 15 The sum of the long-term debt plus the total equity of a firm is frequently referred to as the firm's: a total assets B total capitalization c total financing d debt-equity consolidation e debt-equity ratio SECTION: 3.3 TOPIC: TOTAL CAPITALIZATION TYPE: DEFINITIONS 3-5 Chapter 003 Working with Financial Statements 16 The financial ratio measured as a firm's long-term debt divided by the firm's total capitalization is the: a interval measure b equity multiplier c total debt ratio D long-term debt ratio e debt-equity ratio SECTION: 3.3 TOPIC: LONG-TERM DEBT RATIO TYPE: DEFINITIONS 17 When you divide EBIT by the amount of the interest expense you are computing the: a cash coverage ratio b debt-equity ratio C times interest earned ratio d debt margin e debt ratio SECTION: 3.3 TOPIC: TIMES INTEREST EARNED RATIO TYPE: DEFINITIONS 18 Which one of the following computations is known as the cash coverage ratio? A (EBIT + Depreciation) / Interest b EBIT / Interest c Cash on hand / Current assets d Cash on hand / Current liabilities e Cash on hand / Interest SECTION: 3.3 TOPIC: CASH COVERAGE RATIO TYPE: DEFINITIONS 3-6 Chapter 003 Working with Financial Statements 19 Ratios that measure how efficiently a firm uses its assets to generate sales are known as _ ratios A asset utilization b long-term solvency c short-term solvency d profitability e market value SECTION: 3.3 TOPIC: ASSET UTILIZATION RATIOS TYPE: DEFINITIONS 20 The inventory turnover ratio is measured as: a total sales divided by inventory b inventory divided by total sales C cost of goods sold divided by inventory d inventory divided by cost of goods sold e inventory divided by (sales minus cost of goods sold) SECTION: 3.3 TOPIC: INVENTORY TURNOVER TYPE: DEFINITIONS 21 The days' sales in inventory ratio is measured as: a sales divided by inventory b cost of goods sold divided by inventory c 365 days divided by (sales divided by inventory) d 365 days divided by the inventory amount E 365 days divided by the inventory turnover SECTION: 3.3 TOPIC: DAYS' SALES IN INVENTORY TYPE: DEFINITIONS 3-7 Chapter 003 Working with Financial Statements 22 The receivables turnover ratio is measured as: a cash divided by accounts receivable B sales divided by accounts receivable c cost of goods sold divided by accounts receivable d accounts receivable divided by cost of goods sold e accounts receivable divided by sales SECTION: 3.3 TOPIC: RECEIVABLES TURNOVER TYPE: DEFINITIONS 23 Days' sales in receivables is equal to: a receivables turnover plus 365 days b accounts receivable times 365 days c accounts receivable plus sales, divided by 365 days D 365 days divided by the receivables turnover e 365 days divided by the accounts receivable SECTION: 3.3 TOPIC: DAYS' SALES IN RECEIVABLES TYPE: DEFINITIONS 24 The net working capital turnover ratio is measured as: A sales divided by net working capital b sales minus net working capital c sales times net working capital d net working capital divided by sales e net working capital plus sales SECTION: 3.3 TOPIC: NET WORKING CAPITAL TURNOVER TYPE: DEFINITIONS 3-8 Chapter 003 Working with Financial Statements 25 The fixed asset turnover ratio is measured as: a cost of goods sold divided by net fixed assets b total assets divided by net fixed assets C sales divided by net fixed assets d net fixed assets divided by sales e net fixed assets divided by total assets SECTION: 3.3 TOPIC: FIXED ASSET TURNOVER TYPE: DEFINITIONS 26 The total asset turnover ratio is equal to: a total equity divided by total assets B sales divided by total assets c total assets divided by cost of goods sold d total assets divided by sales e total assets divided by total equity SECTION: 3.3 TOPIC: TOTAL ASSET TURNOVER TYPE: DEFINITIONS 27 Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _ ratios a asset management b long-term solvency c short-term solvency D profitability e turnover SECTION: 3.3 TOPIC: PROFITABILITY RATIOS TYPE: DEFINITIONS 3-9 Chapter 003 Working with Financial Statements 28 Net income divided by sales is known as a firm's: A profit margin b return on assets c return on equity d asset turnover e earnings before interest and taxes SECTION: 3.3 TOPIC: PROFIT MARGIN TYPE: DEFINITIONS 29 Return on assets is equal to: a sales divided by current assets b sales divided by total assets c net income divided by current assets d net income divided by net fixed assets E net income divided by total assets SECTION: 3.3 TOPIC: RETURN ON ASSETS TYPE: DEFINITIONS 30 The financial ratio measured as net income divided by total equity is known as the firm's: a profit margin b return on assets C return on equity d asset turnover e earnings before interest and taxes SECTION: 3.3 TOPIC: RETURN ON EQUITY TYPE: DEFINITIONS 3-10 Chapter 003 Working with Financial Statements 94 Taylor's Men's Wear has a debt-equity ratio of 55 percent, sales of $587,000, net income of $63,400, and total debt of $196,000 What is the return on equity? a 15.80 percent B 17.79 percent c 18.03 percent d 19.41 percent e 19.58 percent Return on equity = $63,400 ($196,000 55) = 17791 = 17.79 percent AACSB TOPIC: ANALYTIC SECTION: 3.4 TOPIC: DU PONT IDENTITY TYPE: PROBLEMS 95 A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.39, and a profit margin of 7.8 percent The total equity is $672,100 What is the amount of the net income? A $118,048 b $119,600 c $120,202 d $121,212 e $124,097 Using the Du Pont identity: Total assets = (1 + 62) $672,100 = $1,088,802; Total sales = $1,088,802 1.39 = $1,513,434.78; Net income = $1,513,434.78 078 = $118,048 AACSB TOPIC: ANALYTIC SECTION: 3.4 TOPIC: DU PONT IDENTITY TYPE: PROBLEMS 3-37 Chapter 003 Working with Financial Statements * The par value of the common stock is $1 per share 96 What is the quick ratio for 2007? (Use 2007 values.) A .58 b .63 c 1.58 d 1.74 e 2.47 Quick ratio for 2007 = ($167,600 - $128,500) $67,900 = 5758 = 58 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: LIQUIDITY RATIOS TYPE: PROBLEMS 3-38 Chapter 003 Working with Financial Statements 97 What is the days' sales in receivables? (Use 2007 values.) A 17.08 days b 23.33 days c 26.49 days d 29.41 days e 32.65 days Accounts receivable turnover for 2007 = $318,400 receivables for 2007 = 365 21.36913 = 17.08 $14,900 = 21.36913; Days' sales in AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: ASSET UTILIZATION RATIOS TYPE: PROBLEMS 98 What is the price-sales ratio if the market price is $17.70 per share? a 2.67 b 3.29 C 3.34 d 3.41 e 3.55 Price-sales ratio = $17.70 [$318,400 ($60,000 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: ASSET UTILIZATION RATIOS TYPE: PROBLEMS 3-39 $1)] = $17.70 $5.30667 = 3.34 Chapter 003 Working with Financial Statements 99 What is debt-equity ratio? (Use 2007 values.) a .84 b .92 c .97 d 1.09 E 1.19 Debt-equity ratio = ($67,900 + $89,600) 1.19 ($60,000 + $71,900) = $157,500 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: FINANCIAL LEVERAGE RATIOS TYPE: PROBLEMS 100 What is the cash coverage ratio for 2007? a 8.74 b 8.80 c 11.64 d 11.82 E 12.31 Cash coverage ratio = ($79,500 + $9,100) $7,200 = 12.31 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: FINANCIAL LEVERAGE RATIOS TYPE: PROBLEMS 3-40 $131,900 = Chapter 003 Working with Financial Statements 101 What is the return on equity? (Use 2007 values.) a 17.82 percent b 18.47 percent c 27.70 percent d 29.96 percent E 35.63 percent AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: PROFITABILITY RATIOS TYPE: PROBLEMS 3-41 Chapter 003 Working with Financial Statements 102 What amount should be included in the financing section of the 2007 statement of cash flows for dividends paid? a $0 b $5,400 C $8,600 d $14,500 e $27,300 Dividends paid = $47,000 ($71,900 $33,500) = $8,600 AACSB TOPIC: ANALYTIC SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS TYPE: PROBLEMS 103 What is the amount of the net cash from investment activity for 2007? a $37,300 b $41,800 C $46,400 d $52,000 e $52,400 Cash flow from investment activity = $121,800 AACSB TOPIC: ANALYTIC SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS TYPE: PROBLEMS 3-42 $84,500 + $9,100 = $46,400 Chapter 003 Working with Financial Statements 104 What is the net working capital to total assets ratio for 2007? a 24.18 percent b 26.23 percent C 26.38 percent d 37.43 percent e 40.17 percent Net working capital to total assets for 2007 = ($7,594 percent AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: LIQUIDITY RATIOS TYPE: PROBLEMS 3-43 $2,607) $18,904 = 26381 = 26.38 Chapter 003 Working with Financial Statements 105 How many days on average does it take Waxham's Feed Mill to sell its inventory? (Use 2007 values) a 72.18 b 87.77 c 90.18 d 111.02 E 114.71 Days' sales in inventory = 365 ($16,829 $5,289) = 114.71 days AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: ASSET UTILIZATION RATIOS TYPE: PROBLEMS 106 How many dollars of sales are being generated from every dollar of fixed assets? (Use 2007 values.) a $1.49 b $1.53 c $1.86 D $1.89 e $1.99 Fixed asset turnover for 2007 = $21,407 the firm generates $1.89 in sales $11,310 = 1.89; For every $1 in net fixed assets, AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: ASSET UTILIZATION RATIOS TYPE: PROBLEMS 3-44 Chapter 003 Working with Financial Statements 107 What is the equity multiplier for 2007? a 1.67 b 1.72 C 1.91 d 1.94 e 2.03 Equity multiplier for 2007 = $18,904 ($7,500 + $2,397) = 1.91 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: FINANCIAL LEVERAGE RATIOS TYPE: PROBLEMS 108 What is the times interest earned ratio for 2007? a 1.63 b 2.12 c 2.51 d 2.63 E 3.51 Times interest earned for 2007 = $3,254 $927 = 3.51 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: FINANCIAL LEVERAGE RATIOS TYPE: PROBLEMS 3-45 Chapter 003 Working with Financial Statements 109 What is the return on equity for 2007? (Use 2007 values.) A 15.29 percent b 16.46 percent c 17.38 percent d 18.04 percent e 18.12 percent Return on equity for 2007 = $1,513 ($7,500 + $2,397) = 15287 = 15.29 percent AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: PROFITABILITY RATIOS TYPE: PROBLEMS 3-46 Chapter 003 Working with Financial Statements 110 What is the net cash flow from investment activity for 2007? A $1,115 b $887 c $614 d $209 e $308 Cash flow from investment activity for 2007 = $11,310 $11,519 + $1,324 = $1,115 $1,115; Addition to net fixed assets = AACSB TOPIC: ANALYTIC SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS TYPE: PROBLEMS 111 How does accounts receivable affect the statement of cash flows for 2007? a a use of $115 of cash as an investment activity b a source of $115 of cash as an operating activity c a use of $115 of cash as a financing activity d a source of $115 of cash as an investment activity E a use of $115 of cash as an operating activity Change in accounts receivable for 2007 = $1,318 $1,203 = $115; An increase in accounts receivable is a use of cash as an operating activity AACSB TOPIC: ANALYTIC SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS TYPE: PROBLEMS 3-47 Chapter 003 Working with Financial Statements 112 Lander & Sons have earnings per share of $1.32 The firm's earnings have been increasing at an average rate of 2.3 percent annually and are expected to continue doing so The firm has 14,500 shares of stock outstanding at a price per share of $26.40 What is the firm's PEG ratio? a 6.10 B 8.70 c 11.48 d 13.20 e 20.00 PEG ratio = ($26.40 $1.32) (.023 100) = 20 2.3 = 8.696 = 8.70 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: MARKET VALUE RATIOS TYPE: PROBLEMS 113 Katylyn Designers has a PEG ratio of 4.6, net income of $68,400, a price-earnings ratio of 22.4, and a profit margin of 6.4 percent What is the earnings growth rate? a 1.39 percent b 2.47 percent c 3.50 percent D 4.87 percent e 5.00 percent 4.6 = 22.4 (Earnings growth rate 100); Earnings growth rate = 4.87 percent AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: MARKET VALUE RATIOS TYPE: PROBLEMS 3-48 Chapter 003 Working with Financial Statements 114 A firm has total assets with a current book value of $52,900, a current market value of $69,200, and a current replacement cost of $81,600 What is the value of Tobin's Q? A .85 b .87 c .92 d .95 e .99 Tobin's Q = $69,200 $81,600 = 848 = 85 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: MARKET VALUE RATIOS TYPE: PROBLEMS 115 Bradford Industrial Supply has total assets with a current book value of $201,016 and a current replacement cost of $271,500 The market value of the firm's debt is $75,000 and the market value of the firm's equity is $213,400 What is the value of Tobin's Q? a .86 b .92 c .97 d 1.01 E 1.06 Tobins' Q = ($75,000 + $213,400) $271,500 = 1.062 = 1.06 AACSB TOPIC: ANALYTIC SECTION: 3.3 TOPIC: MARKET VALUE RATIOS TYPE: PROBLEMS 3-49 Chapter 003 Working with Financial Statements Essay Questions 116 Assume your firm has a positive cash balance which is increasing annually Why then is it important to analyze a statement of cash flows? It is possible that the increase in the cash flows is a result of issuing more equity or assuming more debt and not the result of generating cash from operations If a firm cannot generate positive cash flows internally, the firm may eventually encounter difficulties in raising external funds and could encounter financial difficulties and possibly face bankruptcy AACSB TOPIC: REFLECTIVE THINKING SECTION: 3.1 TOPIC: STATEMENT OF CASH FLOWS 117 What analytical benefit common size statements provide to financial managers? Common size statements provide an easy means of comparing relative values across various time periods and across firms of various sizes AACSB TOPIC: REFLECTIVE THINKING SECTION: 3.2 TOPIC: COMMON SIZE STATEMENTS 118 In general, what does a high Tobin's Q value indicate and how reliable does that value tend to be? A high Tobin's Q indicates that the current market value of a firm's assets represents a high percentage of the firm's replacement cost Higher Q values tend to indicate that a firm has a significant competitive advantage and /or has attractive investment opportunities The problem with Tobin's Q is that the information used in the computation of the Q value is often questionable AACSB TOPIC: REFLECTIVE THINKING SECTION: 3.3 TOPIC: TOBIN'S Q 3-50 Chapter 003 Working with Financial Statements 119 What value does the PEG ratio provide to financial analysts? The PEG ratio divides the PE ratio by the expected future earnings growth rate A high PEG value tends to indicate that the firm's PE ratio, and thus the stock price, is too high relative to the expected growth rate of the firm's earnings AACSB TOPIC: REFLECTIVE THINKING SECTION: 3.3 TOPIC: PEG RATIO 120 What value does the price-sales ratio provide to financial managers that the priceearnings ratio cannot? The price-earnings ratio loses its value when a firm has either zero or negative earnings This problem is avoided when the price-sales ratio is applied as sales should always be a positive value In addition, the price-sales ratio is not affected by a firm's expenses whereas the priceearnings ratio is Thus, both ratios can be used to ascertain if there is any major change in the relationship between a firm's costs and its sales AACSB TOPIC: REFLECTIVE THINKING SECTION: 3.3 TOPIC: PRICE-SALES RATIO 3-51 ... average daily operating costs is the: a cash ratio b net working capital to total assets ratio c acid -test ratio D interval measure e operating measure SECTION: 3.3 TOPIC: INTERVAL MEASURE TYPE: DEFINITIONS... forced to cease operations c repay its long-term debt within the next 59 days or face possible bankruptcy proceedings by the firm's creditors d pay interest on its long-term debt every 59 days... mortgage holder e shareholders SECTION: 3.3 TOPIC: LONG-TERM SOLVENCY RATIOS TYPE: CONCEPTS 51 A banker considering loaning money to a firm for ten years would most likely prefer the firm have