Question 1

Which of the following is true when a firm is operating at the sustainable growth rate (SGR)?
A)The firm sells all of its inventory.
B)The firm's net income is zero.
C)The firm neither needs nor generates financing.
D)The firm pays a dividend equal to exactly half of its retained earnings.

Accepted Answer

The sustainable growth rate (SGR) is the rate at which the firm can grow without needing external financing while maintaining a constant debt-to-equity ratio. This means that the firm neither needs nor generates financing at SGR. Options A, B, and D are all incorrect as they do not reflect the characteristics of a firm operating at its SGR.

Question 2

In 2022, Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The price-earnings (P/E)ratio was:
A)4.167
B)3.0000
C)0.3333
D)0.1500

Accepted Answer

Dividend Yield = Dividend/Price
8% = 15/P
P = 187.5

P/E Ratio = Price/Earnings per Share
P/E Ratio = 187.5/45
P/E Ratio = 4.167

Question 3

Which of the following is NOT a step in the financial planning process?
A)Deciding how additional required assets will be financed
B)Estimating various cost categories as per the income statement
C)Preparing projected funds-flow statement
D)Ordering supplies in anticipation of future sales

Accepted Answer

Ordering supplies in anticipation of future sales is not a step in the financial planning process. The financial planning process typically includes steps such as analyzing current financial status, setting financial goals, creating a budget and cash flow analysis, estimating future income and expenses, deciding how to finance required assets, and preparing financial statements such as income statements and funds-flow statements.

Question 4

Alberta High Skies Company has net income of $3 million.It issued 500,000 shares two years ago at an issue price of $20 per share, and the shares are now trading at $35 per share.What is Alberta High Skies' price-earnings ratio?
A)1.75
B)3.33
C)5.83
D)9.17

Accepted Answer

First, we need to calculate the earnings per share (EPS):
EPS = Net Income / Number of Shares = $3,000,000 / 500,000 = $6
Then, we can calculate the price-earnings (P/E) ratio:
P/E ratio = Price per Share / EPS = $35 / $6 = 5.83
Therefore, the correct answer is C.

Question 5

Company A's current sales are $120 and the most current balance sheet is presented below.Suppose the sales growth rate is 10% and that short-term debt, long-term debt, and equity are not expected to change.What is the external financing needed for next year?

A)-$13.5
B)$13.5
C)$165
D)$151.5

Accepted Answer

To calculate the external financing needed for next year, we need to use the formula: 
EFN = (A*/S0)*ΔS - (L*/S0)*ΔS - (M*/S0)*ΔS, 
where A* represents assets that vary directly with sales (in this case, assume it is equal to current assets), L* represents liabilities that vary directly with sales (in this case, assume it is equal to current liabilities), M* represents retained earnings (in this case, assume it is equal to equity), S0 represents current sales, and ΔS represents the change in sales (in this case, it is 10%).

Plug in the given values:
EFN = ((180/120)*0.1*120) - ((60/120)*0.1*120) - ((120/120)*0.1*120)
EFN = (1.5*120) - (0.5*120) - (1*120)
EFN = 180 - 60 - 120
EFN = $0

Since the external financing needed is $0, the closest answer choice is B, $13.5, since it represents no external financing needed.

Question 6

On the projected balance sheet for the next year, total assets are $5,000, total liabilities are $2,000, and shareholder's equity is $1,000.Which of the following is correct?
A)External Funds Required is -$1,000.This firm will have a cash deficit.
B)External Funds Required is $1,000.This firm will have a cash surplus.
C)External Funds Required is -$2,000.This firm will have a cash deficit.
D)External Funds Required is $2,000.This firm will have a cash surplus.

Accepted Answer

The answer of On the projected balance sheet for the...

Question 7

When using a percent of sales method for forecasting, which is the most important variable to estimate?
A)COGS
B)Inventory
C)Revenue
D)Bank debt

Accepted Answer

When using a percent of sales method for forecasting, the most important variable to estimate is revenue. This method involves estimating future sales and then using a percentage of those sales to forecast other financial factors such as costs, expenses, and profits. Therefore, revenue is critical in this approach as it serves as the starting point for all other predictions. COGS and inventory are also important, but they are dependent on the level of revenue. Bank debt is not directly relevant to this method as it is a financing item, not an operational one.

Question 8

What is the difference between the P/E ratio and the forward P/E ratio?
A)The P/E ratio uses the current share price while the forward P/E ratio uses the future share price.
B)The P/E ratio uses the current earnings per share while the forward P/E ratio uses the expected earnings per share.
C)The P/E ratio uses both the current price and earnings, while the forward P/E ratio uses both the future price and earnings.
D)The P/E ratio uses EPS while the forward P/E ratio uses net income.

Accepted Answer

The P/E ratio measures a company's current stock price relative to its earnings per share (EPS) over the past 12 months, while the forward P/E ratio uses analysts' estimates of future earnings per share. Therefore, the difference between the two is that the P/E ratio uses historical earnings, while the forward P/E ratio uses estimated future earnings.

Question 9

What is the difference between invested capital and spontaneous liabilities?
A)The firm knows who invests capital in the firm, but not the identity of who the firm owes its spontaneous liabilities.
B)Invested capital is randomly determined, so the corresponding liabilities must be spontaneous and therefore also random.
C)Invested capital is the amount of equity invested in the firm, while spontaneous liabilities are the sum of long-term and short-term debt.
D)Invested capital is the result of investor decisions while spontaneous liabilities arise from the firm's business operations.

Accepted Answer

Invested capital refers to the amount of funding that a company receives from investors, such as through issuing shares or taking out loans. Spontaneous liabilities, on the other hand, arise from the company's normal business operations, such as accounts payable or accrued expenses. They are not the result of deliberate investor decisions but rather everyday transactions and obligations. Therefore, the correct answer is D.

Question 10

In 2022, Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The dividend payout ratio was:
A)4.167
B)3.0000
C)0.3333
D)0.1500

Accepted Answer

Dividend yield = (dividend per share / market price per share) * 100
8% = (15 / market price per share) * 100
Market price per share = 187.50

Dividend payout ratio = dividend per share / earnings per share
= 15 / 45
= 0.3333

Question 11

Which of the following is NOT true?
A)The relationship between cash and sales can be determined by estimating the past relationship between sales levels and cash balances.
B)Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt.
C)Selling expenses are commonly based on a percentage of sales.
D)A pro forma income statement may also include projected dividend payments based on the firm's established dividend policies.

Accepted Answer

It is difficult to predict interest expenses, even if a firm uses variable interest rates on debt, due to the uncertainty of the market conditions and changing interest rates.

Question 12

The external financing requirements (EFR)of a firm are a function of:
A)Sales growth
B)Retention ratio
C)Profit margins
D)All of the above

Accepted Answer

External financing requirements can be influenced by sales growth, retention ratio (the amount of earnings retained by the firm versus distributed as dividends), and profit margins. Therefore, all of the above factors contribute to the external financing requirements of a firm.

Question 13

Which of the following is TRUE?
A)Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses fixed interest rates on debt.
B)Interest expenses are commonly based on a percentage of sales.
C)Depreciation costs are commonly based on a percentage of sales.
D)Forecasting sales is the last step in financial forecasting.

Accepted Answer

Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses fixed interest rates on debt. This is because fixed interest rates remain the same over the time period for which they are fixed, making it easier to project interest expenses.

Question 14

The current stock price of Bay James Tourism Company is $25.Current earnings per share are $15 and are expected to grow by 20% next year.Bay James Tourism's trailing and forward price-earnings ratios are:
A)Trailing = 1.67; Forward = 1.39
B)Trailing = 1.67; Forward = 1.20
C)Trailing = 1.39; Forward = 1.67
D)Trailing = 1.20; Forward = 1.67

Accepted Answer

Trailing P/E = Current Stock Price / Current EPS = $25 / $15 = 1.67Forward P/E = Current Stock Price / Expected EPS = $25 / ($15 * 1.20) = 1.39

Question 15

Which of the following is TRUE?
A)Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt.
B)Interest expenses are commonly based on a percentage of sales.
C)Depreciation costs are commonly based on a percentage of sales.
D)Forecasting sales is the most important step in financial forecasting.

Accepted Answer

Forecasting sales is crucial in financial forecasting because it serves as the foundation for estimating other financial figures, such as expenses, profits, and cash flows. The accuracy of the entire financial forecast largely depends on the accuracy of the sales forecast.

Question 16

The dividend payout ratio aids investors by:
A)providing information about the sustainability of the dividend
B)providing information about the company's future revenue growth
C)measuring the company's dividend yield
D)reporting the company's net income margin

Accepted Answer

The dividend payout ratio indicates what portion of earnings the company is using to pay dividends. A high payout ratio may not be sustainable if the company experiences a drop in earnings in the future, while a low payout ratio may indicate that the company has room to increase its dividends in the future. Thus, the dividend payout ratio provides investors with information about the sustainability of the dividend.

Question 17

What does the retention ratio measure?
A)Contribution margin minus fixed costs
B)The percentage of net earnings not paid out in dividends
C)Earnings before tax minus taxes
D)Cash from operations minus cash from investing

Accepted Answer

The retention ratio measures the percentage of net earnings that a company chooses to retain or reinvest in the business instead of paying out as dividends to shareholders. It is calculated as (Net Income - Dividends) / Net Income. Therefore, option B, which states "The percentage of net earnings not paid out in dividends," is the correct answer.

Question 18

GoHabs Firm has assets and liabilities with book values of $65 million and $35 million, respectively.The market value of the assets is $75 million and the market value of the debt is $40 million.If GoHabs's EBITDA is $20 million, what is the EBITDA multiple?
A)0.67
B)1.50
C)1.75
D)3.75

Accepted Answer

The answer of GoHabs Firm has assets and liabilities with...

Question 19

Which of the following is NOT true?
A)The process of preparing financial forecasts begins by preparing a projected income statement.
B)In preparing a projected income statement, start with a sales or revenue forecast prepared by marketing personnel.
C)The relationship between sales and some costs may be complex, for example sales and fixed costs.
D)Interest expenses are commonly based on a percentage of sales.

Accepted Answer

Interest expenses are not commonly based on a percentage of sales. They are typically based on the amount of debt a company has and its interest rate.

Question 20

If a company has good growth potential, the market to book ratio should be:
A)Higher than 1
B)Lower than 1
C)Less than 0
D)Not relevant

Accepted Answer

A market to book ratio higher than 1 indicates that the market is valuing the company at a higher price than its book value, which suggests that investors believe in the company's growth potential. An M/B ratio lower than 1 indicates the opposite, that the market has a lower valuation than the book value of the assets.

Quiz 4: Financial Statement Analysis and Forecasting

Which of the following is true when a firm is operating at the sustainable growth rate (SGR) ?

In 2022, Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The price-earnings (P/E) ratio was:

Which of the following is NOT a step in the financial planning process?

Alberta High Skies Company has net income of $3 million.It issued 500,000 shares two years ago at an issue price of $20 per share, and the shares are now trading at $35 per share.What is Alberta High Skies' price-earnings ratio?

Company A's current sales are $120 and the most current balance sheet is presented below.Suppose the sales growth rate is 10% and that short-term debt, long-term debt, and equity are not expected to change.What is the external financing needed for next year?

On the projected balance sheet for the next year, total assets are $5,000, total liabilities are $2,000, and shareholder's equity is $1,000.Which of the following is correct?

When using a percent of sales method for forecasting, which is the most important variable to estimate?

What is the difference between the P/E ratio and the forward P/E ratio?

What is the difference between invested capital and spontaneous liabilities?

In 2022, Voyage Company had earnings per share of $45 and paid a dividend of $15 per share.The dividend yield was 8%.The book value per share is $100.The dividend payout ratio was:

Which of the following is NOT true?

The external financing requirements (EFR) of a firm are a function of:

Which of the following is TRUE?

The current stock price of Bay James Tourism Company is $25.Current earnings per share are $15 and are expected to grow by 20% next year.Bay James Tourism's trailing and forward price-earnings ratios are:

Which of the following is TRUE?

The dividend payout ratio aids investors by:

What does the retention ratio measure?

GoHabs Firm has assets and liabilities with book values of $65 million and $35 million, respectively.The market value of the assets is $75 million and the market value of the debt is $40 million.If GoHabs's EBITDA is $20 million, what is the EBITDA multiple?

Which of the following is NOT true?

If a company has good growth potential, the market to book ratio should be: