Question 1

Using the DuPont system of analysis and holding other factors constant, decrease in total asset turnover will result in ________ in the return on equity.

Accepted Answer

According to the DuPont system of analysis, return on equity (ROE) is calculated by multiplying net profit margin (NPM) and total asset turnover (TAT). If TAT decreases while other factors remain constant, the overall ROE will decrease. This is because TAT measures how efficiently a company is using its assets to generate revenue, and a decrease in TAT indicates that the company is generating less revenue for each dollar of assets. Therefore, the best choice is B.

Question 2

Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be -$230,000. The firm should prepare to

Accepted Answer

When a company has a negative external financing required, it means that it has excess funds. Therefore, Ningbo Shipping can use these excess funds to repurchase common stock totaling $230,000.

Question 3

If a firm's sale price per unit decreases, the firm's operating breakeven point will

Accepted Answer

If the selling price per unit decreases, the contribution margin per unit will reduce. To cover the same amount of fixed costs, more units must be produced and sold. So, the operating breakeven point will increase.

Question 4

Firm A has a total debt to total assets ratio of 50% and an interest coverage ratio of 1.0. Firm B has a total debt total assets ratio of 80% and an interest coverage ratio of 10.0. Based on this limited information firm ________ appears to be in ________ debt management position than firm ________.

Accepted Answer

Firm B has a higher interest coverage ratio than Firm A, indicating that it is better able to meet its interest payments with its earnings. Additionally, Firm A has a lower total debt to total assets ratio than Firm B, suggesting that it has less financial leverage. Therefore, Firm B appears to be in a better debt management position than Firm A.

Question 5

Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be $230,000. The firm should prepare to

Accepted Answer

Since external financing of $230,000 is required, the firm should arrange for a loan to meet this requirement. Repurchasing common stock or investing in marketable securities would not address the external financing requirement, and doing nothing would result in an unbalanced balance sheet.

Question 6

All other things being equal, a decrease in the selling price of a product for a firm would:

Accepted Answer

The break-even point is calculated as fixed costs divided by the price per unit minus variable costs per unit. A decrease in the selling price, with all other factors remaining constant, increases the break-even point because the firm must sell more units to cover its fixed costs.

Question 7

A firm with total asset turnover lower than the industry average may have

Accepted Answer

Total asset turnover is calculated by dividing the firm's total revenue by its total assets. Therefore, if a firm has a lower total asset turnover than the industry average, it means that it is generating less revenue per dollar of assets compared to its peers. This could be due to insufficient sales, meaning the firm is not selling enough of its product or service to fully utilize its assets. Excessive debt, excessive cost of goods sold, or insufficient fixed assets may also have an impact on the firm's financial performance, but they are not directly related to the total asset turnover ratio.

Question 8

In cost-volume-profit analysis, a firm "breaks even" when its total revenues:

Accepted Answer

In cost-volume-profit analysis, "break even" point is the level of sales where a company's revenue equals its total expenses. This includes all fixed and variable costs. So, option B - "equal total costs" is the correct answer.

Question 9

Cost-volume-profit analysis can be used to estimate the firm's operating profits at different levels of:

Accepted Answer

The answer of Cost-volume-profit analysis can be used to estimate...

Question 10

Which of the following is a variable cost?

Accepted Answer

Variable costs are expenses that change in proportion to the level of production or sales. Shipping expenses would vary based on the amount of products being shipped, making it a variable cost. CEO salary, rent, and mortgage payments are fixed costs that would remain constant regardless of the level of production or sales.

Question 11

Earnings before interest and taxes (EBIT) is another way of describing:

Accepted Answer

Earnings before interest and taxes (EBIT) is a measure of a company's profitability that shows operating profits, which is calculated by deducting operating expenses from revenue. It excludes taxes and interest expenses.

Question 12

All other things being equal, a decrease in the contribution margin for a firm would:

Accepted Answer

The break-even point is the point at which a company's total revenue equals its total expenses. A decrease in contribution margin means that the company is making less profit on each unit sold, which would require the company to sell more units to cover its expenses, thus increasing the break-even point.

Question 13

If a firm's variable cost per unit increases, the firm's operating breakeven point will

Accepted Answer

With an increase in variable cost per unit, the overall cost of producing each unit increases, which means that the firm will need to sell more units to cover its fixed costs and break even. Thus, the operating breakeven point will increase as a result.

Question 14

All other things being equal, an increase in the amount of fixed operating costs for a firm would:

Accepted Answer

When fixed operating costs increase, the overall cost structure of the firm shifts toward fixed costs, leading to a higher break-even point. This is because the firm now needs to sell more units to cover the higher fixed costs before it can start generating profits. Therefore, an increase in fixed operating costs would increase the break-even point.

Question 15

A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

Accepted Answer

A lower total asset turnover compared to the industry standard indicates that the firm is not generating as much revenue from its assets as it could be. This could be due to excessive fixed assets, which could be tying up resources that could be better utilized elsewhere. However, if the current ratio is meeting industry standards, it suggests that the firm has enough current assets to cover its current liabilities, meaning that it is not experiencing a liquidity problem. Excessive inventory or accounts receivable would typically result in a lower current ratio. Excessive debt, on the other hand, could impact the firm's ability to meet its financial obligations, but it would not necessarily affect its asset turnover ratio.

Question 16

Which one of the following is not a basic element or component of the percentage of sales approach to long-term financial planning?

Accepted Answer

The percentage of sales approach includes the consideration of asset investment requirements, internally generated financing, and spontaneous increases in current liabilities. However, there is no component of automatic increases in cash inflows within this approach.

Question 17

A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

Accepted Answer

A lower total asset turnover compared to the industry standard suggests that the firm may have excessive long-term assets, as it indicates that the firm is not efficiently using its assets to generate sales.

Question 18

The ________ method of developing a pro forma income statement forecasts sales and values for the cost of goods sold, operating expenses, and interest expense that are expressed as a ratio of projected sales.

Accepted Answer

The percent of sales method is used to develop a pro forma income statement by expressing forecasted values for various expenses as a percentage of projected sales. This allows for a more accurate prediction of future income based on expected revenue.

Question 19

The operating break-even sales level is sensitive to all of the following variables except:

Accepted Answer

The operating break-even sales level is calculated based on fixed operating costs, sales price per unit, and variable operating cost per unit. Interest expense is not included in the calculation, therefore it is not a variable that would affect the operating break-even sales level.

Question 20

A firm with total asset turnover lower than the industry average may have

Accepted Answer

Total asset turnover is calculated by dividing a company's net sales by its total assets. A lower total asset turnover indicates that the company is generating less revenue per dollar of assets compared to the industry average. This could be due to lower sales, inefficient use of assets, or a combination of both. Excessive debt or cost of goods sold and insufficient fixed assets may impact the company's profitability but are not directly related to the total asset turnover ratio.

Quiz 14: Financial Analysis and Long-Term Financial Planning

Using the DuPont system of analysis and holding other factors constant, decrease in total asset turnover will result in ________ in the return on equity.

Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be -$230,000. The firm should prepare to

If a firm's sale price per unit decreases, the firm's operating breakeven point will

Firm A has a total debt to total assets ratio of 50% and an interest coverage ratio of 1.0. Firm B has a total debt total assets ratio of 80% and an interest coverage ratio of 10.0. Based on this limited information firm appears to be in debt management position than firm .

Ningbo Shipping has prepared the coming year's pro forma balance sheet and has estimated that external financing required would be $230,000. The firm should prepare to

All other things being equal, a decrease in the selling price of a product for a firm would:

A firm with total asset turnover lower than the industry average may have

In cost-volume-profit analysis, a firm "breaks even" when its total revenues:

Cost-volume-profit analysis can be used to estimate the firm's operating profits at different levels of:

Which of the following is a variable cost?

Earnings before interest and taxes (EBIT) is another way of describing:

All other things being equal, a decrease in the contribution margin for a firm would:

If a firm's variable cost per unit increases, the firm's operating breakeven point will

All other things being equal, an increase in the amount of fixed operating costs for a firm would:

A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

Which one of the following is not a basic element or component of the percentage of sales approach to long-term financial planning?

A firm with a total asset turnover lower than the industry standard and a current ratio which meets the industry standard may have

The ________ method of developing a pro forma income statement forecasts sales and values for the cost of goods sold, operating expenses, and interest expense that are expressed as a ratio of projected sales.

The operating break-even sales level is sensitive to all of the following variables except:

A firm with total asset turnover lower than the industry average may have