2024 – 1 An increase in financial leverage generally results in a higher return on equity ROE o True o False Reasoning

2024 – 1 An increase in financial leverage generally results in a higher return on equity ROE o True o False Reasoning.

1. An increase in financial leverage generally results in a higher return on equity (ROE).

True

o True

False

o False

Reasoning: It may or may not increase ROE, depending upon the level of leverage and the interest cost of debt.

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2. Leverage and liquidity generally rise or fall together.

True

o True

False

o False

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3. It is possible for a company to grow faster than its sustainable growth rate.

True

o True

False

o False

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4. Which of the following ratios uses sales in the denominator?

Days

o Days in inventory

o Receivables turnover

o Cash ratio

o Average collection period

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5. For a levered firm, EBIT is equivalent to:

o Net income

o Pro forma earnings

Operating profit

o Operating profit

o Net income before taxes

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6. Common-size financial statements are constructed in order to:

Adjust

o Adjust for inflation and risk

o Facilitate comparisons of different-sized companies

o To comply with SEC requirements

o All of the above

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Operating profit

7. A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. Its days in inventory is:

o 36.5 days

o 24.3 days

o 73.0 days

o Not enough information

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8. For which of the following generic businesses would you expect a combination of high asset turnover and low profit margins?

o Supermarkets

o Banks

Software developers

o Software developers

o Airlines

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9. 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 question 9.

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Toys by Tom, Inc. has a current ratio of ____, suggesting ________.

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o 9.6; reasonable ability to cover interest expense

o 0.57; potential illiquidity

o 0.21; potential collection problems

o 1.75; reasonable liquidity

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10. 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 question 10.

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What is Toys by Tom, Inc. return on assets (ROA)?

o 6.9%

o 0.86

o 18%

o 1.2

o ANSWER: NONE- OF THE ABOVE (EXPLANATION GIVEN BELOW)

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11. Operating cash flow is generated by a company’s daily operations related to production and sales of goods and/or services.

True

o True

False

o False

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12. In general, the reduction of an asset is a source of funds.

True

o True

False

o False

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13. The sustainable growth rate is the maximum growth rate achievable over an extended period of time.

True

o True

False

o False

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14. The cash conversion cycle is calculated as:

o Days in Inventory + Collection Period

o Days in Inventory – Payables Period

o Days in Inventory + Collection Period – Payables Period

o None of the above

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15. A company can shorten its cash cycle by:

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o Reducing inventory turnover

o Reducing account payables

o Reducing days receivable

o None of the above

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16. 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?

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o 2.5%

o 1.7%

o 3.75%

o Not enough information given

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17. Scenario analysis is a way of testing forecasts by changing one assumption at a time.

True

o True

False

o False

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18. Biases can and should always be eliminated in financial forecasts.

True

o True

False

o False

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19. Which of the following is commonly used in preparing pro forma statements:

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o Historical financial statements

o Projected sales

o Efficiency ratios

o All of the above

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20. Pro forma statements are:

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o Summaries of historical financial statements

o Government-mandated analyses of financial statements

o Projected statements used in financial planning

o Estimated tax liabilities

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21. Selecting investment projects according to rules based either on project NPV or IRR results in maximizing firm value.

True

o True

False

o False

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22. A dollar today is worth more than a dollar tomorrow.

True

o True

False

o False

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23. 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

o True

False

o False

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24. 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.

o 205.00

o 300.00

o 315.25

o 500.00

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25. The amount by which a project increases the value of the firm is given by which of the following?

o The project’s accounting rate of return

o The project’s net present value (NPV).

o The project’s internal rate of return (IRR).

o The project’s present value

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26. 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

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o I, II and IV

o I, II and III

o II, III and IV

o All of the above

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27. 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.

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o $229.08

o $287.60

o $233.62

o $271.53

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Year PV factor Cash PV of cash

at 10% flows flows

0 1 -100 -100.00

1 0.909091 -50 -45.45

1 0.909091 100 90.91

2 0.826446 100 82.64

3 0.751315 100 75.13

4 0.683013 100 68.30

5 0.620921 100 62.09

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PV of cash flows = 233.62

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28. 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?

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o The net present value of the project is positive

o The IRR is greater than 50 percent.

o The accounting rate of return on the project is positive.

o The payback period is less than 2 years.

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29. What is the present value of a perpetuity of $100 given a discount rate of 5%?

o $ 2,000

o $ 3,000

o $ 1,500

o $ 500