Ch3 Test Bank

lOMoAR cPSD| 3253848
Chapter 3 Financial Statements and Cash Flow
1) Which statement expresses all relative account values as a percentage of total assets?
A) Common-size balance sheet
2) You would like to compare your firm's cost structure to that of your competitors. However,
your competitors are much larger in size than your firm. Which one of these would best enable
you to compare costs across your industry?
A) Common-size income statement
3) Which one of these terms is most synonymous with the term "income from operations"?
A) EBIT
4) Ratios that measure a firm's ability to pay its bills over the short run without undue stress are
known as:
A) Liquidity measures.
5) The current ratio is measured as:

A) current assets divided b`y current liabilities.
6) The quick ratio is measured as:

A) current assets minus inventory, divided by current liabilities.
7) Ratios that measure a firm's financial leverage are known as ________ ratios.
A) long-term solvency
8) The debt-equity ratio is measured as:

A) total debt divided by total equity.
9) The equity multiplier is measured as total:

A) assets divided by total equity.
10) Ratios that measure how efficiently a firm uses its assets to generate sales are known as
________ ratios.
A) asset management
11) The inventory turnover ratio is measured as:

A) cost of goods sold divided by inventory.
12) Days' sales in inventory is measured as:

A) 365 days divided by the inventory
turnover.
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13) The receivables turnover ratio is measured as:

A)sales divided by accounts receivable.
14) The total asset turnover ratio measures the amount of: A
B) sales generated by every $1 in total assets.
15) Ratios that measure how efficiently a firm's management uses its assets and equity to
generate bottom line net income are known as ________ ratios.
A) profitability
16) The financial ratio measured as net income divided by sales is known as the firm's:
A) profit margin.
17) The measure of net income returned from every dollar invested in total assets is the:
A) return on assets.
18) The financial ratio that measures the accounting profit per dollar of book equity is referred to
as the:
A) return on equity.
19) The amount that investors are willing to pay for each dollar of annual earnings is reflected in
the:
A) price-earnings ratio.
20) The market-to-book ratio is measured as the:

A) market value per share divided by the book value per share.
21) Which one of the following statements is correct concerning ratio analysis?
A) A single ratio is often computed differently by different individuals.
22) Which one of the following is a liquidity ratio?

A) Quick ratio
23) An increase in which one of the following accounts increases a firm's current ratio without
affecting its quick ratio?
A) Inventory
24) A supplier, who requires payment within ten days, should be most concerned with which one
of the following ratios when granting credit?
A) Cash
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25) A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:
A) $.53 in total equity.
26) The long-term debt ratio is probably of most interest to a firm's:

A).mortgage holder.
27) A banker considering loaning money to a firm for ten years would most likely prefer the firm
have a debt ratio of ________, and a times interest earned ratio of ________.
A) .40; 1.75
28) From a cash flow position, which one of the following ratios best measures a firm's ability to
pay the interest on its debts?
B) Cash coverage ratio
29) The higher the inventory turnover, the:

A) less time inventory items remain on the shelf.
30) Which one of the following statements is correct if a firm has a receivables turnover of 10?
A) The firm collects its credit sales in an average of 36.5 days.
31) A capital intensity ratio of 1.03 means a firm has $1.03 in:
A) total assets for every $1 in sales.
32) Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has
________ of 5 percent.
A) a return on equity
33) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent,
then the firm:
A) has no debt of any kind.
34) If stockholders want to know how much profit the firm is making on their entire investment
in that firm, the stockholders should refer to the:
A)return on equity.
35) Assume BGL Enterprises increases its operating efficiency by lowering its costs
while holding its sales constant. As a result, given all else constant, the:
A) return on equity will increase.
36) Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment which
will be depreciated over eight years. If Joe's and Moe's have the same sales, costs, tax rate, and
enterprise value, then:
A) Moe's and Joe's will have the same EV multiple.
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37) Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per share of
$1.20. This year, the price-earnings ratio is 18 and the earnings per share is $1.20. Based on
this information, it can be stated with certainty that:
A) the investors' outlook for the firm has improved. (price per share increased)
38) Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19.
Thus, you can state with certainty that one share of stock in Alfred's:
A)
B) has a higher market price per dollar of earnings than does one share of Turner's.
39) Which one of the following is most apt to cause a profitable, stable firm to have a higher
price-earnings ratio?
A) Very low current earnings
40) Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34 and
earnings per share are $1.36. Holding the market-to-book ratio and earnings per share constant, a
$1 increase in the book value per share will:
A) increase the price-earnings ratio.
41) Which one of the following sets of ratios would generally be of the most interest to
stockholders?
A) Return on equity and price-earnings ratioE) Cash coverage ratio and equity multiplier
42) If a firm decreases its operating costs, all else constant, then the:
A) E) price-earnings ratio will decrease.
43) A public firm's market capitalization is equal to the:

A) price per share multiplied by number of shares outstanding.
44) Enterprise value is based on the:

A) market value of interest-bearing debt plus the market value of equity minus cash.
45) Which one of these values best represents the funds needed to acquire a firm and payoff all
of that firm's debt?
A) Enterprise value
46) A firm with a high level of growth opportunities is most apt to have a:
A) high PE ratio and a high EV multiple.
47) The equity multiplier measures:

A) financial leverage.
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48) The return on equity can be calculated as:

A) ROA × Equity multiplier.
49) The DuPont identity can be computed as:

A) Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).
50) Which one of these ratios measures the efficiency at which a firm employs its assets?
A) Total asset turnover
51) It is easier to evaluate a firm using its financial statements when the firm:
A) uses the same accounting procedures as other firms in its industry.
52) The most effective method of directly evaluating the financial performance of a firm is to
compare the financial ratios of the firm to:
A) the firm's ratios from prior time periods and to the ratios of firms with similar operations.
53) The least problems encountered when comparing the financial statements of one firm with
those of another firm occur when the firms: A) are in different lines of business.
B) have the same fiscal year-end.
54) In the financial planning model, the external financing needed (EFN) as shown on a pro
forma balance sheet is equal to the changes in assets:
A) minus the changes in both liabilities and equity.
55) Which account is least apt to vary directly with sales?

A) Notes payable
56) Projected future financial statements are called:

A) imaginative statements.
B) pro forma statements.
57) The projected addition to retained earnings can be calculated as:

A) PM × Projected sales × (1 − Dividend payout ratio).
58) The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio
is best defined by its:
A) sustainable rate of growth.
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59) The sustainable growth rate will be equivalent to the internal growth rate when, and only
when:
A) a firm has no debt. (ROA = ROE)
60) The sustainable growth rate:

A) is normally higher than the internal growth rate. (issue debt + internal fund)
61) If a firm bases its growth projection on the rate of sustainable growth, shows positive net
income, and has a dividend payout ratio of 30 percent, then the:
A) debt-equity ratio will remain constant while retained earnings increase.
62) Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of
35 percent. 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:
A) the sustainable rate of growth.
63) The value of the variable "b" as used in the internal growth rate formula can be computed as:
A) 1 − Dividend payout ratio.
64) The sustainable rate of growth for a firm can be increased by:
A) increasing the total asset turnover. ( increase ROE= PMx
TATxEM)
65) Financial planning models are most apt to omit:

A) the timing, risk, and size of the cash flows.
66) DL Motors has sales of $22,400, net income of $3,600, net fixed assets of $18,700, inventory
of $2,800, and total current assets of $6,300. What is the common-size statement value of
inventory?
A) 11.20 percent
67) Weston's has sales of $38,900, net income of $2,400, total assets of $43,100, and total
equity of $24,700. Interest expense is $830. What is the common-size statement value of the
interest expense?
A) 2.13 percent
Explanation: Common-size interest expense = $830/$38,900
Common-size interest expense = .0213, or 2.13%
68) Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold of
$43,100, and depreciation of $6,800. What is the common-size statement value of EBIT?
A) 36.35 percent
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69) Jessica's Boutique has cash of $218, accounts receivable of $457, accounts payable of $398,
and inventory of $647. What is the value of the quick ratio?
A) 1.70
70) Browning's has a debt-equity ratio of .47. What is the equity multiplier?
A) 1.47
Explanation: EM = Total assets/Total equity
EM = Total equity/Total equity + Total debt/Total equity
EM = 1 + .47
EM = 1.47
71) Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value of
the total assets?
A) $25,689
Explanation: Total equity = $6,800/.36
Total equity = $18,889
Total assets = $6,800 + 18,889
Total assets = $25,689
72) Leo's Markets has sales of $684,000, costs of $437,000, interest paid of $13,800, total assets
of $712,000, and depreciation of $109,400. The tax rate is 21 percent and the equity multiplier is
1.6. What is the return on equity?
A) 21.98 percent
Explanation: Net income = ($684,000 − 437,000 − 109,400 − 13,800)(1 − .21)

Net income = $97,802
Equity = $712,000/1.6
Equity = $445,000
ROE = $97,802/$445,000
ROE = .2198, or 21.98%
73) Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year. The times
interest earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is 21 percent.
What is the value of the cash coverage ratio?
A) 3.60
Explanation: EBIT = 2.9($11,310)
EBIT = $32,799
Cash coverage ratio = ($32,799 + 7,900)/$11,310
Cash coverage ratio = 3.60
74) Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of $46,300,
and accounts receivable of $62,700. How many days, on average, does it take the firm to both
sell its inventory and collect payment on the sale?
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A) 150.54
Explanation: Days' sales in inventory = 365/($218,400/$46,300)
Days' sales in inventory = 77.38
Days' sales in receivables = 365/($312,800/$62,700)
Days' sales in receivables = 73.16
Total days' sales in inventory and receivables = 77.38 + 73.16
Total days' sales in inventory and receivables = 150.54
75) Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of
$544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm
to sell its inventory?
A) 56.77
Days' sales in inventory = 56.77
76) Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400, net
income of $43,900, and current liabilities of $51,300. The tax rate is 21 percent and the profit
margin is 9.3 percent. How many dollars of sales are generated from every $1 in total assets?
A) $1.44
Explanation: Total asset turnover = ($43,900/.093)/($43,800 + 51,300 + 232,400)
Total asset turnover = 1.44
Every $1 in total assets generates $1.44 in sales.
77) Flo's Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23 percent, a
debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the return on assets?
A) 6.93 percent
Explanation: ROA = [.051($418,000)]/[(1 + .37)($224,400)]
ROA = .0693, or 6.93%
78) Sun Shade's has sales of $363,000, total assets of $323,500, and a profit margin of 14.6
percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
A) 35.61 percent
Explanation: ROE = [.146($363,000)]/[$323,500(1 − .54)]
ROE = .3561, or 35.61%
79) Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are 32,500
shares of stock outstanding at a market price per share of $21.60. What is the price-earnings
ratio? A) 23.40
B) 21.08
Explanation: PE ratio = $21.60/{[.038($876,400)]/32,500}
PE ratio = 21.08
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80) New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of $62,700, a
price-earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 21 percent, and 37,500
shares of stock outstanding. What is the market price per share?
A) $9.29
Explanation: Market price per share = 8.6{[($62,700 − 11,400)(1 − .21)]/37,500}
Market price per share = $9.29
81) A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin of 8.2
percent, a tax rate of 21 percent, a price-earnings ratio of 11.3, and a book value per share of
$7.98. What is the market-to-book ratio?
A) 6.17
Explanation: Market-to-book ratio = {11.3[.082($638,100)]/12,000}/$7.98
Market-to-book ratio = 6.17
82) Preston Woods has 17,500 shares of stock outstanding along with $408,000 of interest-
bearing debt. The market and book values of the debt are the same. The firm has sales of
$697,000 and a profit margin of 6.8 percent. The tax rate is 21 percent, the debt-equity ratio is 40
Percent, and the price-earnings ratio is 11.8. The firm has $130,000 of current assets of which
$41,200 is cash. What is the enterprise value multiple?
A) $1,106,308
B) $994,520
C) $830,479
D) $1,018,097
E) $926,073
Explanation: EV multiple = 11.8[.068($697,000)] + $408,000 − 41,200

EV multiple = $926,073
83) Samuelson's has sales of $317,000, a profit margin of 8.6 percent, an equity multiplier of 1.8,
and total debt of $144,400. What is the return on equity?
A) 15.10 percent
Explanation: Debt-equity ratio = 1.8 − 1
Debt-equity ratio = .8
Equity = $144,400/.8
Equity = $180,500
ROE = .086($317,000)/$180,500
ROE = .1510, or 15.10%
84) Upriver Tours has balance sheet values of: Inventory $70,500; accounts receivable $50,700;
accounts payable $58,900; cash $32,300, notes payable $20,000, long-term debt $134,700, and
net fixed assets $504,500. What is the current ratio?
A) 1.95
Explanation: Current ratio = ($32,300 + 50,700 + 70,500)/($58,900 + 20,000)
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Current ratio = 1.95
85) Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500, net income
of $11,520, and average inventory of $91,600. What is the days' sales in inventory?
A) 70.76 days
Days' sales in inventory = 70.76 days
86) Jones Mfg. has current assets of $26,900, net working capital of $8,200, long-term debt of
$21,500, and total equity of $57,800. What is the equity multiplier?
A) 1.70
Explanation: Total assets = Total liabilities and equity = $26,900 − 8,200 + 21,500 + 57,800
Total assets = $98,000
Equity multiplier = $98,000/$57,800
Equity multiplier = 1.70
87) Highland Lumber has net sales of $642,100, depreciation of $138,400, interest expense of
$15,600, cost of goods sold of $409,800, and taxes of $16,400. What is the cash coverage ratio?
A) 14.89
Explanation: Cash coverage ratio = ($642,100 − 409,800)/$15,600
Cash coverage ratio = 14.89
88) Southern Foods has net income of $39,900, net sales of $318,600, total assets of $663,000,
common stock of $106,800 with a par value of $1 per share, and retained earnings of $224,400.
The stock has a market value of $5.45 per share. What is the price-earnings ratio?
A) 14.59
Explanation: PE ratio = $5.45/[$39,900/($106,800/$1)]
PE ratio = 14.59
89) Catherine's Consulting paid dividends of $3,300 and total equity of $39,450. The debt-equity
ratio is 1 and the plowback ratio is 40 percent. What is the return on assets?
A) 6.97 percent
Explanation: A debt-equity ratio of 1 means that total debt equals total equity while a plowback
ratio of 40 percent means that the dividends were 60 percent of net income.
ROA = ($3,300/.60)/($39,450 + 39,450)
ROA = .0697, or 6.97%
90) Mountain Top Markets has total assets of $48,700, net working capital of $1,100, and
retained earnings of $21,200. The firm has 12,500 shares of stock outstanding with a par value of
$1 per share and a market value of $7.10 per share. The stock was originally issued to the firm's
founders at par value. What is the market-to-book ratio?
A) 2.63
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Explanation: Market-to-book ratio = $7.10/{[$1(12,500) + $21,200]/12,500}

Market-to-book ratio = 2.63
91) Georgetown Supply has sales of $318,200, net income of $41,400, current assets of
$118,400, net fixed assets of $238,300, net working capital of $18,900, and long-term debt of
$175,000. What is the equity multiplier?
A) 4.34
Explanation: Equity multiplier = ($118,400 + 238,300)/[$118,400 + 238,300 − ($118,400 −
18,900) − $175,000]
92) Black Stone Mills has an enterprise value ratio of 9.8, a profit margin of 6.5 percent, sales of
$946,200, costs of $631,400, depreciation of $17,900, interest expense of $4,500, and a total tax
rate of 23 percent. What is the value of the enterprise?
A) $3,085,040
Explanation: Enterprise value = 9.8($946,200 − 631,400)
Enterprise value = $3,085,040
93) Riverton Stores is all-equity financed and has net sales of $217,800, taxable income of
$32,600, a return on assets of 11.5 percent, a tax rate of 21 percent, and total debt of $63,700.
What are the values for the three components of the DuPont identity?
A) 11.82 percent; .9725; 1.3975
Explanation: Profit margin = $32,600(1 − .21)/$217,800
Profit margin = .1182, or 11.82%
Total assets = $32,600(1 − .21)/.115
Total assets = $223,947.83
Total asset turnover = $217,800/$223,947.83
Total asset turnover = .9725
Equity multiplier = $223,947.83/($223,947.83 − 63,700)
94) Kelso's has a return on equity of 16.2 percent, a debt-equity ratio of 44 percent, a capital
intensity ratio of 1.08, a current ratio of 1.25, and current assets of $138,000. What is the
profit margin?
A) 12.15 percent
Explanation: Profit margin = .162/[(1/1.08)(1 + .44)]
95) Western Wear has total sales of $642,100, EBIT of $93,900, net income of $50,800, current
assets of $153,500, total assets of $658,000, current liabilities of $78,900, and total liabilities of
$213,600. What are the values of the three components of the DuPont identity?
A) 7.91 percent; .98; 1.48
Explanation: Profit margin = $50,800/$642,100
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Total asset turnover = $642,100/$658,000
Total asset turnover = .98
Equity multiplier = $658,000/($658,000 − 213,600)
96) Frederico's has a net income of $29,600, a total asset turnover of 1.4, total assets of
$318,600, and a debt-equity ratio of .35. What is the return on equity?
A) 12.54 percent
Explanation: ROE = ($29,600/$318,600)(1 + .35)
ROE = .1254, or 12.54%
97) JB Markets has sales of $848,600, net income of $94,000, dividends paid of $28,200, total
assets of $913,600, and current liabilities of $78,900. Assume that all costs, assets, and current
liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain
constant. If the firm's managers project a firm growth rate of 15 percent for next year, what will
be the amount of external financing needed to support this level of growth? Assume the firm is
currently operating at full capacity.
A) $49,535
Explanation: EFN = $913,600(.15) − $78,900(.15) − $94,000(1.15)[1 − ($28,200/$94,000)]
EFN = $49,535
98) The Lumber Mill has total assets of $591,600, current liabilities of $49,700, dividends paid
of $12,000, net sales of $68,400, and net income of $55,400. Assume that all costs, assets, and
current liabilities change spontaneously with sales. The tax rate and dividend payout ratios
remain constant. If the firm's managers project a firm growth rate of 6 percent for next year, what
will be the amount of external financing needed to support this level of growth? Assume the firm
is currently operating at full capacity.
A) −$13,490
Explanation: EFN = $591,600(.06) − $49,700(.06) − $55,400(1.06)[1 − ($12,000/$55,400)]
EFN = −$13,490
99) Green Lumber has total sales of $387,200 on total assets of $429,600, current liabilities of
$45,000, and $24,000 of dividends paid on net income of $57,700. Assume that all costs, assets,
and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios
remain constant. If the firm's managers project a firm growth rate of 12 percent for next year,
what will be the amount of external financing needed to support this level of growth? Assume
the firm is currently operating at full capacity.
A) $8,408
Explanation: EFN = $429,600(.12) − $45,000(.12) − $57,700(1.12)[1 − ($24,000/$57,700)]

EFN = $8,408
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100) Deep Falls Timber has net sales of $642,100, net income of $50,800, dividends paid of
$12,700, total assets of $658,000, and total equity of $444,400. What is the internal growth rate?
A) 6.15 percent
Explanation: Internal growth rate = {($50,800/$658,000)[1 − ($12,700/$50,800)]}/(1 −
{($50,800/$658,000)[1 − ($12,700/$50,800)]})
Internal growth rate = .0615, or 6.15%
101) Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales of
$848,600, and net income of $94,000. The tax rate is 21 percent and the dividend payout ratio is
30 percent. What is the firm's sustainable growth rate?
A) 15.54 percent
Explanation: Sustainable growth rate = {[$94,000/($913,600 – 424,500)](1 – .30)}/(1 –
{[$94,000/($913,600 – 424,500)](1 – .30)})
Sustainable growth rate = .1554, or 15.54%
102) The Blue Giant has a profit margin of 6.2 percent and a dividend payout ratio of 40 percent.
The capital intensity is 1.08 and the debt-equity ratio is .54. What is the sustainable rate of
growth?
A) 5.60 percent
Explanation: ROE = .062(1/1.08)(1 + .54)
ROE = .088407
Sustainable growth rate = [.088407(1 −.40)]/{1 – [.088407(1 − .40)]}
Sustainable growth rate = .0560, or 5.60%
103) You are comparing the common-size financial statements for two firms in the same industry
that have very similar operations. You note that their sales revenues are similar in dollar value
but yet the common-size EBIT for one firm is 30 percent compared to only 26 percent for the
other firm. What are some possible explanations for this difference given the strong similarities
of the two firms?
Answer: Some possible explanations are:

(1) difference in the age of the fixed assets leading to differences in the depreciation expense,
(2) different depreciation methods,
(3) different inventory methods which affects the cost of goods sold,
(4) different sales markets that allows the one firm to have a higher markup per item,
(5) different markets that cause higher costs per unit sold, and
(6) differing fiscal years.
104) Which is a more meaningful measure of profitability for a firm, return on assets or return
onequity? Why?
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Answer: Most would argue ROE since it measures returns relative to the amount 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.
105) A retail store has days' sales in inventory of 68 days and an average collection period of
32 days. The firm pays its suppliers in an average of 42 days, on average. Taken together, what
do these average values imply about the firm's operations and its cash flows?
Answer: It takes a total of 100 days (= 68 + 32) to sell inventory and collect payment on the sale
of that inventory. Meanwhile, 42 days after acquiring the inventory and prior to the inventory
even being sold, the retailer must pay its suppliers. Thus, the firm must pay out cash 58 (= 100 −
42) days prior to receiving payment. This creates a negative cash flow which the firm must be
able to finance.
106) Suppose a firm calculates its external financial need for a growth rate of ten percent and
finds that the need is a negative value. What are the firm's options in this case?
Answer: With a negative external financing need, the firm can expect to have a surplus of funds
given the projected rate of growth. The firm can use those funds to reduce current liabilities,
reduce long-term debt, buy back common stock, increase dividends, or invest in assets and
resources, as needed, to increase its growth rate.
107) New Tek has a sustainable growth rate of 11.2 percent. However, the firm's managers are
determined that the firm should grow by at least 20 percent next year. What must the firm do if
the managers are to reach their desired level of growth for the firm?
Answer: One reason that causes firms to go out of business is the lack of external funding to
support the growth of the firm. Understanding the implications of both the internal and
sustainable growth rates can help management know when to limit firm growth such that the
growth does not exceed the availability of the necessary financing to fund that growth. For the
firm to achieve growth beyond the sustainable rate, the firm must increase its debt-equity ratio,
obtain additional external equity financing, reduce its dividends, improve its profitability, or
some combination of these actions.
108) State the assumptions that underlie the internal growth rate and interpret what that rate
means.
Answer: The usual assumptions are: Costs, assets, and current accounts (excluding notes
payable) increase proportionately with sales, the dividend payout ratio is fixed (or is given), and
no new external financing will be raised. The internal growth rate is the maximum rate at which
sales can increase given the stated assumptions while maintaining the funding required by that
growth.
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Ch3 Test Bank

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lOMoAR cPSD| 3253848

Chapter 3 Financial Statements and Cash Flow

5) The current ratio is measured as:

6) The quick ratio is measured as:

8) The debt-equity ratio is measured as:

9) The equity multiplier is measured as total:

11) The inventory turnover ratio is measured as:

12) Days' sales in inventory is measured as:

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13) The receivables turnover ratio is measured as:

20) The market-to-book ratio is measured as the:

22) Which one of the following is a liquidity ratio?

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26) The long-term debt ratio is probably of most interest to a firm's:

29) The higher the inventory turnover, the:

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43) A public firm's market capitalization is equal to the:

44) Enterprise value is based on the:

47) The equity multiplier measures:

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48) The return on equity can be calculated as:

49) The DuPont identity can be computed as:

55) Which account is least apt to vary directly with sales?

56) Projected future financial statements are called:

57) The projected addition to retained earnings can be calculated as:

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60) The sustainable growth rate:

65) Financial planning models are most apt to omit:

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Explanation: Net income = ($684,000 − 437,000 − 109,400 − 13,800)(1 − .21)

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Explanation: EV multiple = 11.8[.068($697,000)] + $408,000 − 41,200

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Current ratio = 1.95

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Explanation: Market-to-book ratio = $7.10/{[$1(12,500) + $21,200]/12,500}

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Profit margin = .0791, or 7.91%

Explanation: EFN = $429,600(.12) − $45,000(.12) − $57,700(1.12)[1 − ($24,000/$57,700)]

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Answer: Some possible explanations are:

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