1. A company has a retention rate of 50%, sales of $25,000, beginning equity of $50,000 and profit margins of 10%, an asset turnover ratio of .75 and debt of $10,000. What is its sustainable growth rate?
• 2.5% (NOTE: found on course hero)
• Not enough information given
2. Which of the following is commonly used in preparing pro forma statements:
• Historical financial statements
• Projected sales (NOTE: Marked on pre exam and was wrong)
• Efficiency ratios
• All of the above (NOTE: Based on research I think this is it! )
3. For a levered firm, EBIT is equivalent to:
• Net income
• Pro forma earnings
• Operating profit
• Net income before taxes (NOTE: Found on course hero)
4. Scenario analysis is a way of testing forecasts by changing one assumption at a time.
• False (Note: Was on pre exam and had correct)
5. Suppose a riskless project requires an initial investment of $10 and will generate a one-time cash inflow of $30 two years later. Assuming a risk-free interest rate of 5%, which of the following statements about the project is NOT true?
• The net present value of the project is positive.
• The IRR is greater than 50 percent.
• The accounting rate of return on the project is positive.
• The payback period is less than 2 years.
6. Which of the following ratios uses sales in the denominator?
• Days in inventory
• Receivables turnover
• Cash ratio
• Average collection period (NOTE: found on class formula sheet)
7. Operating cash flow is generated by a company’s daily operations related to production and sales of goods and/or services.
8. A dollar today is worth more than a dollar tomorrow.
• False (Note: Due to inflation a dollar today should be less than the past dollar)
9. An increase in financial leverage generally results in a higher return on equity (ROE).
• True ( Note: Correct on Exam 1)
10. Compute the net present value of an investment with 5 years of annual cash inflows of $100 and two cash outflows, one today of $100 and one at the beginning of the second year of $50. Use a discount rate of 10 percent.
11. The amount by which a project increases the value of the firm is given by the project’s ______.
• accounting rate of return
• net present value (NPV) (Note: correct on pre-exam)
• internal rate of return (IRR)
• present value
12. A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. What will be its days in inventory?
• 36.5 days
• 24.3 days
• 73.0 days
• Not enough information (Note: Correct on pre-exam)
13. In general, the reduction of an asset is a source of funds.
• True (Note: Correct on Pre-exam)
14. How is the cash conversion cycle calculated?
• Days in Inventory + Collection Period
• Days in Inventory – Payables Period
• Days in Inventory + Collection Period – Payables Period (Note: Correct on Exam 1)
• None of the above
15. Which items are necessary in calculating the net present value of a project?
I. Investment outlays
II. Discount rate
III. Incremental cash flow
IV. Time period for the project
• I, II and IV
• I, II and III
• II, III and IV
• All of the above (Note: found formula on web – 99.9% correct)
16. It is possible for a company to grow faster than its sustainable growth rate.
• False (Note: Found on investopedia – If I interpreted correctly)
17. Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.
Toys by Tom, Inc. has a current ratio of ____, suggesting ________.
• 9.6; reasonable ability to cover interest expense
• 0.57; potential illiquidity
• 0.21; potential collection problems
• 1.75; reasonable liquidity
18. If you invest $2,000 today for three years at 5% interest paid annually, you will earn a total of $______ in interest. Assume you re-invest all interest.
• 315.25 (Note: Correct on Exam 1)
19. Biases can and should always be eliminated in financial forecasts.
• False (Note: Correct on Exam 1)
20. Analysis of a company’s financial statements: Below are simplified versions of the balance sheet and income statement for Toys by Tom, Inc. Use this information to answer the following question.
What is Toys by Tom, Inc. return on assets (ROA)?
21. Common-size financial statements are constructed in order to:
• Adjust for inflation and risk
• Facilitate comparisons of different-sized companies (Note: correct on Exam 1)
• To comply with SEC requirements
• All of the above
22. The NPV rule, which says companies should invest in projects for which NPV is greater than 0, depends on the assumption of value maximization.
• True (Note: found on investopedia – should be correct)
23. A company can shorten its cash cycle by:
• Reducing inventory turnover
• Reducing account payables (Note: found oun course hero)
• Reducing days receivable
• None of the above
24. For which of the following generic businesses would you expect a combination of high asset turnover and low profit margins?
• Software developers
25. What are pro forma statements?
• Summaries of historical financial statements
• Government-mandated analyses of financial statements
• Projected statements used in financial planning(Note: Correct on pre-exam)
• Estimated tax liabilities
26. What is the present value of a perpetuity of $100 given a discount rate of 5%?
• $2,000 (I did it on the online perpetuity calculator)
27. Selecting investment projects according to rules based either on project NPV or IRR results in maximizing firm value.
28. Leverage and liquidity generally rise or fall together.
• True (Note: educated guess)
29. The sustainable growth rate is the maximum growth rate achievable over an extended period of time.
• False (Note: Correct on Exam 1)