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Quick ratio, debt ratio, financial forecasting

1. Which of the following transactions does not affect the quick ratio?
a. Land held for investment is sold for cash.
b. Equipment is purchased and is financed by a long-term debt issue.
c. Inventories are sold for cash.
d. Inventories are sold on a credit basis.

2. The debt ratio is a measure of a firm's:
a. leverage.
b. profitability.
c. liquidity.
d. efficiency.

3. Which of the following statements is true?
a. Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment.
b. The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
c. For the average firm, inventory is considered to be more "liquid" than accounts receivable.
d. A successful firm's current liabilities should always be greater than its current assets.

Table 1
Smith Company Balance Sheet

Assets:
Cash and marketable securities $300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
Net fixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owner's equity 2,817,000
Total liabilities and owner's equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $412,500
Income taxes 225,000
Net income $187,500
Common stock dividends $97,500
Change in retained earnings $90,000

4. Based on the information in Table 1, the current ratio is:
a. 2.97.
b. 1.46.
c. 2.11.
d. 2.23.

5. Based on the information in Table 1, the debt ratio is:
a. 0.70.
b. 0.20.
c. 0.74.
d. 0.42.

6. Based on the information in Table 1, the net profit margin is:
a. 4.61%.
b. 2.94%.
c. 1.97%.
d. 5.33%.

7. A decrease in ___________ will increase gross profit margin.
a. cost of goods sold
b. depreciation expense
c. interest expense
d. both a and b

8. Wireless Communications has a total asset turnover of 2.66, total liabilities of $1,004,162, and sales revenues of $7,025,000. What is Wireless's debt ratio?
a. 38.0%
b. 14.3%
c. 26.7%
d. 81.1%

9. What is the most important ingredient in developing a firm's financial plan?
a. A forecast of sales revenues
b. Determining the amount of dividends to pay shareholders
c. Projecting the rate of interest on proposed new debt
d. Deciding upon which method of depreciation a firm should utilize

10. Which of the following statements about the percent-of-sales method of financial forecasting is true?
a. It is the least commonly used method of financial forecasting.
b. It is a much more precise method of financial forecasting than a cash budget would be.
c. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
d. It projects all liabilities as a fixed percentage of sales.

11. The primary purpose of a cash budget is to:
a. determine the level of investment in current and fixed assets.
b. determine accounts payable.
c. provide a detailed plan of future cash flows.
d. determine the estimated income tax for the year.

12. The "percentage" used in the percent-of-sales calculation can be obtained from:
a. the most recent financial statement item as a percent of current sales.
b. an average computed over several years.
c. an analyst's judgment.
d. all of the above.

13. The present value of a single future sum:
a. increases as the number of discount periods increases.
b. is generally larger than the future sum.
c. depends upon the number of discount periods.
d. increases as the discount rate increases.

14. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
a. 6%
b. 5%
c. 7%
d. 8%

15. An increase in future value can be caused by an increase in the:
a. annual interest rate.
b. number of compounding periods.
c. original amount invested.
d. both a and b.
e. all of the above.

16. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
a. $3,525.62
b. $5,008.76
c. $3,408.88
d. $2,465.78

17. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
a. $10,065
b. $10,193
c. $22,334
d. $21,731

18. A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, how much can your friend spend in four years on the purchase? Round off to the nearest $1.
a. $1,444
b. $1,604
c. $1,764
d. $1,283

19. Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments must the company make?
a. 15
b. 13
c. 12
d. 19

20. If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?
a. $648
b. $635
c. $634
d. $645

21. The firm should accept independent projects if:
a. the payback is less than the IRR.
b. the profitability index is greater than 1.0.
c. the IRR is positive.
d. the NPV is greater than the discounted payback.

22. The NPV method:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.

23. If the IRR is greater than the required rate of return, the:
a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both a and b.

24. ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.)
a. $1,056
b. $4,568
c. $7,621
d. $6,577

25. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,520.
Year Net Cash Flow
1 $1,000
2 $1,500
3 $ 500
a. 48%
b. 40%
c. 32%
d. 28%

26. Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
a. In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.
b. The project would add value to the firm.
c. Under all conditions, the project's payback would be less than the profitability index.
d. The project's IRR would have to be less that the firm's discount rate.

27. Cost of capital is:
a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
d. the average cost of the firm's assets.

28. When calculating the average cost of capital, which of the following has to be adjusted for taxes?
a. Common stock
b. Retained earnings
c. Debt
d. Preferred stock

29. Fixed costs include all of the following EXCEPT:
a. administrative salaries.
b. property taxes.
c. sales commissions.
d. insurance.
30. Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to:
a. business risk.
b. financial leverage.
c. operating leverage.
d. all of the above.

31. As fixed costs increase, ___________ increases.
a. degree of operating leverage
b. degree of financial leverage
c. earnings per share
d. leverage

32. Tom's Trashbins, Inc. has fixed costs of $225,000. Tom's trashbins sell for $45 and have a unit variable cost of $20. What is Tom's break-even point in units?
a. 8,500
b. 8,750
c. 9,000
d. 9,250

Use the following information to answer question 33. A friend of yours is trying to determine whether to open a sandwich stand at the local mall based on the following data. She expects total fixed costs per year of $24,000, a sale price per sandwich of $3.00, and variable costs per sandwich of $1.80.

33. The break-even level of output for this endeavor is:
a. 12,000.
b. 16,000.
c. 20,000.
d. 24,000.

34. An increase in ___________ would increase net working capital.
a. plant and equipment
b. accounts payable
c. accounts receivable
d. both b and c

35. Spontaneous sources of financing include:
a. marketable securities.
b. accruals.
c. bonds.
d. both a and b.
e. all of the above.

36. A company is technically insolvent when:
a. cash outflows in a given period are greater than cash inflows.
b. earnings before interest payments are less than the interest payments.
c. it lacks the necessary liquidity to promptly pay its current debt obligations.
d. the current ratio is less than 1.0.

37. Transit float is caused by the time:
a. necessary for a deposited check to clear the banking system and become usable funds to the company.
b. funds are not available, through the company's bank account, until its payment check has cleared the banking system.
c. from the moment a customer mails his remittance check until the firm begins to process it.
d. required for the firm to process remittance checks.

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Finance Review

1. Which of the following transactions does not affect the quick ratio?
a. Land held for investment is sold for cash.
b. Equipment is purchased and is financed by a long-term debt issue.
c. Inventories are sold for cash.
d. Inventories are sold on a credit basis.

b. Equipment is purchased and is financed by a long-term debt issue.

2. The debt ratio is a measure of a firm's:
a. leverage.
b. profitability.
c. liquidity.
d. efficiency.

a. leverage.

3. Which of the following statements is true?
a. Current assets consist of cash, accounts receivable, inventory, and net plant, property, and equipment.
b. The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
c. For the average firm, inventory is considered to be more "liquid" than accounts receivable.
d. A successful firm's current liabilities should always be greater than its current assets.

b. The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.

Table 1
Smith Company Balance Sheet

Assets:
Cash and marketable securities $300,000
Accounts receivable 2,215,000
Inventories 1,837,500
Prepaid expenses 24,000
Total current assets $3,286,500
Fixed assets 2,700,000
Less: accumulated depreciation 1,087,500
Net fixed assets $1,612,500
Total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,500
Total current liabilities $1,107,000
Long-term debt 975,000
Owner's equity 2,817,000
Total liabilities and owner's equity $4,899,000
Net sales (all credit) $6,375,000
Less: Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
Interest expense 127,000
Earnings before taxes $412,500
Income taxes 225,000
Net income $187,500
Common stock dividends $97,500
Change in retained earnings $90,000

4. Based on the information in Table 1, the current ratio is:
a. 2.97.
b. 1.46.
c. 2.11.
d. 2.23.

=CURRENT ASSETS/CURRENT LIABILITIES
= ...

Solution Summary

This explains the steps to compute the quick ratio, debt ratio, financial forecasting, asset turnover, FV, NPV

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