Chapter 2

1. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities. a. Total cash flow b. Capital spending c. Net working capital d. Cash flow from operations e. Cash flow to creditors Answer: d 2. An increase in total assets: a. means that net working capital is also increasing. b. requires an investment in fixed assets. c. means that shareholders equity must also increase. d. must be offset by an equal increase in liabilities and shareholders equity. e. can only occur when a firm has positive net income. Answer: d 3. As seen on an income statement: a. interest is deducted from income and increases the total taxes incurred. b. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses. c. depreciation is shown as an expense but does not affect the taxes payable. d. depreciation reduces both the pretax income and the net income. e. interest expense is added to earnings before interest and taxes to get pretax income. Answer: d 4. Dividends per share: a. increase as the net income increases as long as the number of shares outstanding remains constant. b. decrease as the number of shares outstanding decrease, all else constant. c. are inversely related to the earnings per share. d. are based upon the dividend requirements established by Generally Accepted Accounting Procedures. e. are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding. Answer: e 5. An increase in which one of the following will cause the operating cash flow to increase? a. depreciation b. change in net working capital c. net working capital d. taxes e. costs Answer: a 6. A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that: a. the ending net working capital will be negative. b. both accounts receivable and inventory decreased during the year. c. the beginning current assets were less than the beginning current liabilities. d. accounts payable increased and inventory decreased during the year. e. the ending net working capital can be positive, negative, or equal to zero. Answer: e

7. Which of the following is not included in the computation of operating cash flow? a. Earnings before interest and taxes b. Interest paid c. Depreciation d. Current taxes e. All of these are included. Answer: b 8. Free cash flow is: a. without cost to the firm. b. net income plus taxes. c. an increase in net working capital. d. cash that the firm is free to distribute to creditors and stockholders. e. None of these. Answer: d 9. Brads Company has equipment with a book value of $500 that could be sold today at a 50 percent discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe them $300. What is the accounting value of its liquid assets? a. $50 b. $350 c. $700 d. $750 e. $1,000 Answer: d Feedback: Liquid assets = $400 + $50 + $300 = $750 10. Arts Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income? a. $20,400 b. $39,600 c. $50,400 d. $79,600 e. $99,600 Answer: b Feedback: Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax = . 34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600 11. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?

a. 21.38% b. 23.88% c. 25.76% d. 34.64% e. 39.00% Answer: c

Feedback: Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($126,500 - $100,000) = $32,585; Average tax rate = $32,585 $126,500 = .2576 = 25.76 percent 12. Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34 percent. The firm does not have interest expenses. What is the operating cash flow? a. $93 b. $241 c. $340 d. $383 e. $485 Answer: d Feedback: Earnings before interest and taxes = $1,200 - $715 - $145 = $340; Tax = [$198 (1 - .34)] - $198 = $102; Operating cash flow = $340 + $145 - $102 = $383 13. Thompsons Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A net total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net working capital by $38. What is the amount of the cash flow to stockholders? a. -$104 b. -$28 c. $28 d. $114 e. $142 Answer: a Feedback: Cash flow of the firm = $218 - $38 - $180 = $0; Cash flow to creditors = Feedback: $35 - (-$69) = $104; Cash flow to stockholders = $0 - $104 = -$104 Reference: 02_65

14. Refer to the figure above. What is the change in the net working capital from 2007 to 2008? a. $1,235 b. $1,035 c. $1,335 d. $3,405 e. $4,740 Answer: c Feedback: Change in net working capital = ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335 Difficulty level: Medium 15. Refer to the figure above. What is the amount of the non-cash expenses for 2008? a. $570 b. $630 c. $845 d. $1,370 e. $2,000 Answer: d Feedback: The non-cash expense is depreciation in the amount of $1,370. 16. Refer to the figure above. What is the operating cash flow for 2008? a. $845 b. $1,930 c. $2,215 d. $2,845 e. $3,060 Answer: d Feedback: Operating cash flow = $1,930 + $1,370 - $455 = $2,845 Refer To: 02_65 17. Refer to the figure above. What is the cash flow of the firm for 2008? a. $430 b. $485 c. $1,340 d. $2,590 e. $3,100 Answer: a

Feedback: Operating cash flow = $1,930 + $1,370 - $455 = $2,845; Change in net working capital = ($7,310 - $2,570) - ($6,225 - $2,820) = $1,335; Net capital spending = $10,670 $10,960 + $1,370 = $1,080; Cash flow of the firm = $2,845 - $1,335 - $1,080 = $430 Refer To: 02_65 18. Refer to the figure above. What is the amount of net new borrowing for 2008? a. -$225 b. -$25 c. $0 d. $25 e. $225 Answer: e Feedback: Net new borrowing = $8,100 - $7,875 = $225 Refer To: 02_65 Reference: 02_84

19. Refer to the figure above. What is the operating cash flow for 2008? a. $940.52 b. $985.71 c. $1,075.50 d. $1,230.00 e. $1,354.55 Answer: d Feedback: Earnings before interest and taxes = $685.71 + $300 = $985.71 (See problem 84); Operating cash flow = $985.71 + $450 - ($685.71 - $480) = $1,230 (See problem 84) Refer To: 02_84 20. Refer to the figure above. What are the sales for 2008? a. $4,000.00 b. $4,385.50 c. $5,435.71 d. $5,525.50 e. $5,680.00 Answer: e Feedback: Sales = $1,230 + $450 + $4,000 = $5,680 (see problem 85) Refer To: 02_84

Chapter 3
1. 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 liabilities plus current assets, divided by cash on hand. d. cash on hand plus inventory, divided by current liabilities. e. cash on hand divided by current liabilities. Answer: e 2. The financial ratio days sales in inventory is measured as: a. inventory turnover plus 365 days. b. inventory times 365 days. c. inventory plus cost of goods sold, divided by 365 days. d. 365 days divided by the inventory. e. 365 days divided by the inventory turnover. Answer: e 3. To calculate sustainable growth rate without using return on equity, the analyst needs the: a. profit margin. b. payout ratio. c. debt-to-equity ratio. d. asset requirement ratio. e. All of these. Answer: e 4. A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio of _____ and a times interest earned ratio of _____. a. .75; .75. b. .50; 1.00. c. .45; 1.75. d. .40; 2.50. e. .35; 3.00. Answer: e 5. A total asset turnover measure of 1.03 means that a firm has $1.03 in: a. total assets for every $1 in cash. b. total assets for every $1 in total debt. c. total assets for every $1 in equity. d. sales for every $1 in total assets. e. long-term assets for every $1 in short-term assets. Answer: d 6. Puffys Pastries generates five cents of net income for every $1 in sales. Thus, Puffys has a _____ of 5 percent. a. return on assets b. return on equity c. profit margin d. Du Pont measure e. total asset turnover Answer: c 7. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:

a. has no debt of any kind. b. is using its assets as efficiently as possible. c. has no net working capital. d. also has a current ratio of 10. e. has an equity multiplier of 2. Answer: a 8. The only difference between Joes and Moes is that Joes has old, fully depreciated equipment. Moes just purchased all new equipment which will be depreciated over eight years. Assuming all else equal: a. Joes will have a lower profit margin. b. Joes will have a lower return on equity. c. Moes will have a higher net income. d. Moes will have a lower profit margin. e. Moes will have a higher return on assets. Answer: d 9. Last year, Alfreds Automotive had a price-earnings ratio of 15. This year, the priceearnings ratio is 18. Based on this information, it can be stated with certainty that: a. the price per share increased. b. the earnings per share decreased. c. investors are paying a higher price for each share of stock purchased. d. investors are receiving a higher rate of return this year. e. either the price per share, the earnings per share, or both changed. Answer: e 10. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio? I. slow industry outlook II. high prospect of firm growth III. very low current earnings IV. investors with a low opinion of the firm a. I and II only b. II and III only c. II and IV only d. I and III only e. III and IV only Answer: b 11. Marcies Mercantile wants to maintain their current dividend policy, which is a payout ratio of 40 percent. The firm does not want to increase their equity financing but are willing to maintain their current debt-equity ratio. Given these requirements, the maximum rate at which Marcies can grow is equal to: a. 40 percent of the internal rate of growth. b. 60 percent of the internal rate of growth. c. the internal rate of growth. d. the sustainable rate of growth. e. 60 percent of the sustainable rate of growth. Answer: d

12. If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income, then the: a. fixed assets will have to increase at the same rate, regardless of the current capacity level. b. number of common shares outstanding will increase at the same rate of growth. c. debt-equity ratio will have to increase. d. debt-equity ratio will remain constant while retained earnings increase. e. fixed assets, debt-equity ratio, and number of common shares outstanding will all increase. Answer: d 13. Syeds Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost of goods sold of $3,400. How long does it take Syeds to both sell its inventory and then collect the payment on the sale? a. 128 days b. 146 days c. 163 days d. 190 days e. 211 days Answer: d Feedback: Inventory turnover = $3,400 $1,200 = 2.83; Days in inventory = 365 2.83 = 128.98; Accounts receivable turnover = $4,200 $700 = 6; Days sales in receivables = 365 6 = 60.83; Total days in inventory and receivables = 128.98 + 60.83 = 189.81 days = 190 days (rounded) 14. A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-earnings ratio of 10, and a book value per share of $.50. What is the market-to-book ratio? a. 1.6 b. 2.4 c. 3.0 d. 3.2 e. 3.6 Answer: d Feedback: Earnings per share = $800 5,000 = $.16; Price per share = $.16 x 10 = $1.60; Market-to-book ratio = $1.60 $.50 = 3.2 15. Samuelsons has a debt-equity ratio of 40 percent, sales of $8,000, net income of $600, and total debt of $2,400. What is the return on equity? a. 6.25 percent b. 7.50 percent c. 9.75 percent d. 10.00 percent e. 11.25 percent Answer: d Feedback: Return on equity = $600 ($2,400 .40) = .10 = 10 percent 16. A firm has a return on equity of 15 percent. The debt-equity ratio is 50 percent. The total asset turnover is 1.25 and the profit margin is 8 percent. The total equity is $3,200. What is the amount of the net income? a. $480 b. $500 c. $540 d. $600 e. $620

Answer: a Feedback: Using the Du Pont identity: Total assets = (1 + .50) x $3,200 = $4,800; Total sales = $4,800 x 1.25 = $6,000; Net income = $6,000 x .08 = $480 Difficulty level: Medium Reference: 03_95

17. Refer to the figure above. How many days on average does it take Bayside to sell their inventory? (Use 2008 values.) a. 126.1 days b. 127.9 days c. 153.8 days d. 176.5 days e. 178.9 days Answer: e Feedback: Inventory turnover for 2008 = $4,060 $1,990 = 2.04; Days sales in inventory = 365 178.9 days Refer To: 03_95 18. Refer to the figure above. What is the times interest earned ratio for 2008? a. 30 b. 36 c. 40 d. 50 e. 54 Answer: c Feedback: Times interest earned for 2008 = $1,200 $30 = 40 Refer To: 03_95

19. The Green Giant has a 5% profit margin and a 40% dividend payout ratio. The total asset turnover is 1.40 and the equity multiplier is 1.50. What is the sustainable rate of growth? a. 6.30 percent b. 6.53 percent c. 6.72 percent d. 6.80 percent e. 6.83 percent Answer: c Feedback: Return on equity = .05 x 1.40 x 1.50 = .105; Sustainable growth = {.105 x (1 - . 40)} {1 - [.105 x (1 - .40)]} = .06724 = 6.72 percent 20. Katelyns Kites has net income of $240 and total equity of $2,000. The debt-equity ratio is 1.0 and the plowback ratio is 40 percent. What is the internal growth rate? a. 2.46 percent b. 3.00 percent c. 4.92 percent d. 5.88 percent e. 6.00 percent Answer: a Feedback: Total assets = $2,000 + $2,000 = $4,000 (The debt-equity ratio of 1.0 means TD = TE.); Return on assets = $240 $4,000 = .06; Internal growth = [.06 x .40] [1 - (.06 x . 40)] = 2.46 percent