Business Finance Chapter 3

The ratios that are based on financial statement values and used for comparison purposes are called:- financial ratios.- industrial statistics.- equity standards.- accounting returns.- analytical standards. – financial ratios.
The DuPont identity can be accurately defined as:- Return on equity × Total asset turnover × Equity multiplier.- Equity multiplier × Return on assets.- Profit margin × Return on equity.- Total asset turnover × Profit margin × Debt-equity ratio.- Equity multiplier × Return on assets × Profit margin. – Equity multiplier × Return on assets.
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?- DuPont rate- External growth rate- Sustainable growth rate- Internal growth rate- Cash flow rate – Internal growth rate
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?- No new external financing of any kind- No new debt but additional external equity equal to the increase in retained earnings- New debt and external equity in equal proportions- New debt and external equity, provided the debt-equity ratio remains constant- No new external equity and a constant debt-equity ratio – No new external equity and a constant debt-equity ratio
Builder’s Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm’s sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?- Income statement- Balance sheet- Common-size income statement- Common-size balance sheet- Statement of cash flows – Common-size income statement
Which one of these transactions will increase the liquidity of a firm?- Cash purchase of new production equipment- Payment of an account payable- Cash purchase of inventory- Credit sale of inventory at cost- Cash payment of employee wages – Credit sale of inventory at cost
The equity multiplier is equal to:- one plus the debt-equity ratio.- one plus the total asset turnover.- total debt divided by total equity.- total equity divided by total assets.- one divided by the total asset turnover. – one plus the debt-equity ratio.
If a firm has an inventory turnover of 15, the firm:- sells its entire inventory every 15 days.- stocks its inventory only once every 15 days.- delivers inventory to its customers every 15 days.- sells its inventory by granting customers 15 days’ of free credit.- sells its entire inventory an average of 15 times each year. – sells its entire inventory an average of 15 times each year
The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?- Receivables turnover- Equity multiplier- Profit margin- Return on assets- Total asset turnover – Total asset turnover
Which one of the following will increase the profit margin of a firm, all else held constant?- Increase in interest paid- Increase in fixed costs- Increase in depreciation expense- Decrease in the tax rate- Decrease in sales – Decrease in the tax rate
All else held constant, which one of the following will decrease if a firm increases its net income?- Return on assets- Profit margin- Return on equity- Price-sales ratio- Price-earnings ratio Price-earnings ratio
Which one of these statements is true concerning the price-earnings (PE) ratio?- A high PE ratio may indicate that a firm is expected to grow significantly.- A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings.- PE ratios are unaffected by the accounting methods employed by a firm.- The PE ratio is classified as a profitability ratio.- The PE ratio is a constant value for each firm. – A high PE ratio may indicate that a firm is expected to grow significantly.
The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm.II. operating efficiency of a firm.III. utilization rate of a firm’s assets.IV. rate of return on a firm’s assets. – II and III only- I and III only- II, III, and IV only- I, II, and III only- I, II, III, and IV – I, II, III, and IV
Donovan’s would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?- Return on assets- Net income- Retention ratio- Dividend payout ratio- Return on equity – Dividend payout ratio
If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:- zero percent.- 100 percent.- equal to the ROA.- negative.- infinite. – zero percent.
The sustainable growth rate is based on the premise that:- an additional dollar of debt will be acquired only if an – – – additional dollar in equity shares is issued.- no additional equity will be added to the firm.- the debt-equity ratio will be held constant.- the dividend payout ratio will be zero.- the dividend payout ratio will increase at a steady rate. – the debt-equity ratio will be held constant.
A firm can increase its sustainable rate of growth by decreasing its:- profit margin.- dividends.- total asset turnover.- target debt-equity ratio.- equity multiplier. – dividends.
Financial statement analysis:- is primarily used to identify account values that meet the normal standards.- is limited to internal use by a firm’s managers.- provides useful information that can serve as a basis for forecasting future performance.- provides useful information to shareholders but not to debtholders.- is enhanced by comparing results to those of a firm’s peers but not by comparing results to prior periods. – provides useful information that can serve as a basis for forecasting future performance.
Which one of the following statements is correct?- Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.- Peer group analysis is easier when seasonal firms have different fiscal years.- Peer group analysis is simplified when firms use varying methods of depreciation.- Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.- Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. – Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory.
City Plumbing has inventory of $287,800, equity of $538,800, total assets of $998,700, and sales of $1,027,400. What is the common-size percentage for the inventory account?- 28.01 percent- 33.66 percent- 53.42 percent- 28.82 percent- 31.68 percent – 28.82 percent

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