1. The primary goal of the management of a publicly traded corporation should be to ______________.
a. create jobs
b. promote social good
c. maximize profits
d. maximize shareholder wealth
e. minimize risk
2. In conducting a common-size analysis, every income statement item is divided by __________ and every balance sheet account is divided by __________.
a. its corresponding base year balance sheet item; its corresponding base year income statement item.
b. its corresponding base year income statement item; its corresponding base year balance sheet item.
c. net sales or revenues; total assets.
d. total assets; total liabilities and equity.
e. total assets; net sales or revenues.
3. __________ is an accounting statement that lists a company’s assets, liabilities and equity. The statement is a stock measure that displays these account values at a specific point in time.
a. The income statement
b. The balance sheet
c. The statement of cash flows
d. The sources and uses statement
e. None
4. According to the textbook, finance is divided into three separate subject areas. Two of the subject areas of finance are Corporate Financial Management and Financial Markets and Institutions. The third subject area of finance is:
a. International Trade
b. Banking
c. Accounting
d. Microeconomics
e. None of the above
5. Which of the following are items/accounts that typically appear on a balance sheet?
a. net sales, cost of goods sold, retained earnings
b. cash, accounts receivable, inventories
c. net sales, inventories, notes payable
d. net sales, depreciation expense, advertising expense
e. cash, depreciation expense, taxes
6. Which of the following would directly affect (either increase or decrease) net cash flow from operating activities (assuming all else remains constant)? Note: there more be more than one answer for this questions – record the letter of all that apply (this is an all or nothing answer).
a. An increase in dividends paid.
b. A decrease in accounts receivable.
c. A decrease in notes payable (i.e., bank loans).
d. An increase in inventory.
e. An increase in accounts payable.
f. An increase in retained earnings.
g. A decrease in cash.
h. A decrease in gross plant and equipment.
i. An increase in accruals.
7. If a firm’s net sales (i.e., revenue) increases, but total assets, its debt ratio, and its net profit margin and remain the same as they were before net sales increased, the firm’s:
a. ROE would not change.
b. ROE could either increase or decrease depending on the interaction between the equity multiplier and the days payable ratio.
c. ROE would increase.
d. ROE would decrease.
e. There is insufficient information to determine the effect on ROE.
8. Which of the following steps is most likely to decrease a company’s cash conversion cycle (assume that none of the following actions has any impact on sales or COGS)? Note: there more be more than one answer for this questions – record the letter of all that apply (this is an all or nothing answer).
a. Change its receivables policy from net 45 to net 35 (note that this action will decrease the firm’s average collection period from 45 days to 35 days).
b. Change its payables policy to pay bills in 30 days instead of in 40 days.
c. Decrease the inventory conversion period from 50 days to 40 days.
d. Reduce the firm’s notes payable (i.e., bank loan) balance by 20%.
e. None of the actions listed above will decrease the firm’s cash conversion cycle.
9. Which of the following actions would decrease the current ratio (assuming an initial current ratio of 0.8, and current liabilities equal to $1,000,000)?
a. Borrow $100,000 in short term debt and deposit this money (i.e., $100,000) into the firm’s cash account.
b. Borrow $200,000 in long-term debt to buy $200,000 worth of additional inventory.
c. Borrow $50,000 of short-term debt and use the proceeds to pay all operating expenses sooner, thus lowering accruals (i.e., accrued expenses) by $50,000.
d. Sell $250,000 of fixed assets to pay off an equal amount of long-term debt.
e. None of the above – that is, none of the actions listed about will decrease the current ratio.
10. RedCap Manufacturing, Inc. is planning to borrow money by taking out a short term loan (i.e., increase notes payable) and depositing this money directly into the firm’s checking account (i.e., increase cash). RedCap believes that this event will have no affect on either sales or costs, and therefore no affect on net income.
All else constant, this new policy should cause the firm’s quick ratio (assuming an initial quick ratio of 1.5) to:
a. Decrease
b. Increase
c. No Change
d. Not enough information is provided to answer this question.
11. BlueHat, Inc. is planning to use excess cash that the company has in its checking account (i.e., reduce cash) to pay off a long term loan balance. (i.e., decrease long-term debt). BlueHat believes that this event will have no affect on either sales or costs, and therefore no affect on net income.
11. All else constant, this new policy should cause the firm’s debt ratio (assuming an initial debt ratio of 45%) to:
a. Decrease
b. Increase
c. No Change
d. Not enough information is provided to answer this question.
12. GreenChapeau, Inc. is planning to increase its short-term loans (i.e., increase notes payable) to pay for an increase in the firm’s basic inventory level (i.e., increase inventory). GreenChapeau believes that this event will have no affect on either sales or costs, and therefore no affect on net income.
All else constant, this new policy should cause the firm’s current ratio (assuming a current ratio of 0.75) to:
a. Decrease
b. Increase
c. No Change
d. Not enough information is provided to answer this question.
All of the following questions are open-ended problems. You must compute an answer for every problem. For percentage answers, calculate your answer as a percent rounded to 2 decimal places. For example, you would record ROA = .1263974 as 12.64% (note that on D2L you will enter 12.64 without the percent sign). For dollar answers, round to the nearest dollar. For example, you would record $12,345.83943 as $12,346 (note that on D2L you will enter 12346 without a comma and without the dollar sign).
13. Felton Farm Supplies, Inc. has an ROA (return on assets) of 12 percent, total assets of $400,000 and a net profit margin of 4.5 percent. What are Felton Farm Supplies annual sales?
14. Krisle and Kringle's debt-to-total assets ratio is 0.54.4 (i.e., debt ratio = 54.4%). What is the company’s debt-to-equity ratio? (Enter answer as a ratio rounded to 2 decimal places – that is, do not convert to a percent; for example, enter 80/35 = 2.2857 as 2.29).
15. Philips, Inc has a debt ratio of 22.5% and ROE = 15%. What is Phillips’ ROA? (Enter answer as a percent).
16. A firm has an ROA of 18% and a debt/equity ratio of 0.55. The firm's ROE is _________. (Enter answer as a percent).
17. Assume that XYZ, Inc. has:
? _D_e_b_t_ _r_a_t_i_o_ _=_ _7_0_%_ _
? _N_e_t_ _p_r_o_f_i_t_ _m_a_r_g_i_n_ _=_ _1_5_%_ _
? _R_e_t_u_r_n_ _o_n_ _a_s_s_e_t_s_ _(_R_O_A_)_ _=_ _7_._5_%_ _
18. Assume that your firm has ROA of 20.5%, ROE of 42% and Total Asset Turnover ratio of 3.5. Calculate the debt ratio for the firm. (Enter answer as a percent).
USE THE DATA IN THE TABLE BELOW TO ANSWER QUESTIONS 19 – 24
2014 2015
Accounts payable 440 3 80
Accounts receivable, net 1,810 2,040
Accruals 95 1 20
Cash 120 100
Capital surplus 1,120 1,290
Common stock 1,000 1,100
Cost of goods sold 6,610 6,420
Depreciation expense 1,550 1,650
Interest expense 140 170
Inventory (end of year) 5,720 5,530
Long-term debt 3,890 4,150
Net fixed assets 7,530 8,050
Net sales 10,750 11,050
Notes payable 800 740
Operating expenses (excluding depreciation) 1,680 1,780
Retained earnings 7,835 7,940
Taxes 250 360
(Assume all account figures are in dollars)
19. This company’s operating profit margin (as a percent rounded to 1 decimal place) in 2014 was ________.
20. The total asset turnover ratio for this company in 2015 = _______.
21. ROE for 2015 is _____%.
22. Cash flow from operating activities in 2015 is $ _______.
23. Cash flow from investing activities in 2015 is $ _________.
24. Cash flow from financing activities in 2015 is $ _________.