FINA5340-001 Financial Applications Practice Question 1

Spring 2019

Chapter 01 Interpreting Financial Statements

1. Which of the following statements concerning the cash flow-production cycle is true?
A. The profits reported in a given time period equal the cash flows generated.
B. A company's operations and finances are independent of each other.
C. Financial statements have nothing to do with reality.
D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the
firm's working capital cycle.
E. A profitable company will always have sufficient cash to meet its obligations.

2. Which of the following is NOT a typical reason for differences between profits and cash flow?
A. Goodwill
B. Depreciation expense
C. Changes in accounts receivable
D. Accrual accounting practices

3. A company sells used equipment with a book value of $100,000 for $250,000 cash. How would
this transaction affect the company's balance sheet?
A. Equity rises $250,000; net plant and equipment falls $250,000.
B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.
C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000.
D. Cash rises $250,000; net plant and equipment falls $250,000.

4. Which one of the following is a source of cash?

A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in inventory
E. increase in accounts payable

5. The book value of a firm is:

A. equivalent to the firm's market value provided that the firm has some fixed assets.
B. based on historical cost.
C. generally greater than the market value when fixed assets are included.
D. more of a financial than an accounting valuation.
E. adjusted to the market value whenever the market value exceeds the stated book value.

6. Depreciation expense:
A. reduces both taxes and net income.
B. increases net fixed assets as shown on the balance sheet.
C. is a noncash item that increases net income.
D. decreases current assets, net income, and operating cash flows.

7. Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book
value of $70 million and an estimated replacement value of $80 million. What amount would be allocated
to the acquiring firm's goodwill account?

A. $0 million

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B. $20 million
C. $30 million
D. $70 million
E. $80 million

8. Please refer to the financial information for Foodtek, Inc. above. During 2014, how much cash (in
$ millions) did Foodtek collect from sales?
A. 364
B. 277
C. 404
D. 324
E. 451

9. Please refer to the financial information for Foodtek, Inc. above. During 2014, what was the cost
of merchandise (in $ millions) produced by Foodtek?
A. 223
B. 194
C. 252
D. 228
E. 218

10. Please refer to the financial information for Foodtek, Inc. above. Assuming that there were no
financing cash flows during 2014 and basing your answer solely on the information provided, what were
Foodtek's cash flows from operations (in $ millions) for 2014?
A. 45
B. 110
C. 70
D. 80
E. 35

Chapter 02 Evaluating Financial Performance

11. Which of these ratios, or levers of performance, are the determinants of ROE?
I. profit margin
II. financial leverage
III. times interest earned
IV. asset turnover

A. I and IV only

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B. II and IV only
C. I, II, and IV only
D. I, II, and III only
E. I, III, and IV only

12. Ptarmigan Travelers had sales of $420,000 in 2013 and $480,000 in 2014. The firm's current asset
accounts remained constant. Given this information, which one of the following statements must be true?
A. The total asset turnover rate increased.
B. The days' sales in receivables increased.
C. The inventory turnover rate increased.
D. The fixed asset turnover decreased.
E. The collection period decreased.

13. A times-interest-earned ratio of 3.5 indicates that the firm:

A. pays 3.5 times its earnings in interest expense.
B. has interest expense equal to 3.5% of EBIT.
C. has interest expense equal to 3.5% of net income.
D. has EBIT equal to 3.5 times its interest expense.

14. Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5.
What is Klamath Corporation's return on equity?
A. 8.7%
B. 9.1%
C. 18.2%
D. Insufficient information to find ROE.

15. Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the
amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price
per unit also remained constant. All else held constant, how will this accomplishment be reflected in the
firm's financial ratios?
A. decrease in the fixed asset turnover rate
B. decrease in the financial leverage ratio
C. increase in the inventory turnover rate
D. increase in the days' sales in inventory
E. decrease in the total asset turnover rate

16. Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5 and financial leverage
(assets to equity) of 1.5. Primavera has $20 billion in assets, of which half is in cash and marketable
securities. Assume that Primavera earns a 3 percent after-tax return on cash and securities. What would
Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to
shareholders?
A. Negative
B. Between 0% and 20%
C. Between 20% and 40%
D. between 40% and 60%
E. Greater than 60%

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17. Please refer to the financial data for Link, Inc. above. The current ratio for Link at the end of
2014 is:
A. 10.21
B. 2.31
C. 2.76
D. 10.30
E. None of the above.

18. Please refer to the financial data for Link, Inc. above. Which of the following statements best
describes how the Link's short-term liquidity changed from 2013 to 2014?
A. Link's short-term liquidity has improved modestly.
B. Link's short-term liquidity has deteriorated very little, but from a low initial base.
C. Link's short-term liquidity has improved considerably, but from a low initial base.
D. Link's short-term liquidity has deteriorated considerably, but from a high initial base.
E. None of the above.

19. Please refer to the financial data for Link, Inc. above. Link's profit margin for 2014 is:
A. -94%
B. -57%
C. 13%
D. 31%
E. None of the above.

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20. Please refer to the income statement for VGA Associates below. Assuming that cost of goods
sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in
2014?
A. $20,000
B. $80,000
C. $150,000
D. $180,000
E. None of the above.

Chapter 03 Financial Forecasting

21. You are estimating your company's external financing needs for the next year. At the end of the
year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total
liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from
outside sources during the year?
A. $20 million
B. $70 million
C. $150 million
D. $160 million
E. $180 million
F. None of the above.

22. To estimate Missed Places Inc.'s (MP) external financing needs, the CFO needs to figure out how
much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's
retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will
be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the
estimated retained earnings at the end of next year?
A. $169,000
B. $170,400
C. $181,400
D. $506,300
E. $518,700
F. None of the above.

23. Which of the following are viable techniques to cope with the uncertainty inherent in realistic
financial projections?
I. Simulation
II. Ad hoc adjustments
III. Scenario analysis
IV. Sensitivity analysis

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A. II and IV only
B. III and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, III, and IV only
F. I, II, III, and IV

24. You are developing a financial plan for a corporation. Which of the following questions will be
considered as you develop this plan?
I. How much will our sales grow?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

25. You are preparing pro forma financial statements for 2014 using the percent-of-sales method.
Sales were $100,000 in 2013 and are projected to be $120,000 in 2014. Net income was $5,000 in 2013
and is projected to be $6,000 in 2014. Equity was $45,000 at year-end 2012 and $50,000 at year-end 2013.
Assuming that this company never issues new equity, never repurchases equity, and never changes its
dividend payout ratio, what would be projected for equity at year-end 2014?
A. $55,000
B. $56,000
C. $60,000
D. Insufficient information is provided to project equity in 2014.

26. Please refer to Oscar's financial statements above. What was Oscar's increase in retained earnings
during 2014?
A. $450

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B. $1,380
C. $1,830
D. $2,280
E. None of the above.

27. Please refer to Oscar's financial statements above. Sales are projected to increase by 3 percent
next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the
projected addition to retained earnings for next year?
A. $1,309.19
B. $1,421.40
C. $1,884.90
D. $2,667.78
E. $3,001.40
F. None of the above.

28. Please refer to Oscar's financial statements above. All of Oscar's costs and current asset accounts
vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts
receivable balance for next year?
A. $949
B. $1,034
C. $1,113
D. $1,730
E. $2,670
F. None of the above.

29. Please refer to Oscar's financial statements above. Assume a constant profit margin and dividend
payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales.
Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10
percent. What is Oscar's external financing need for next year?
A. -$410
B. -$260
C. $235
D. $1,320
E. $7,240
F. None of the above.

Chapter 04 Managing Growth

30. Which one of the following will increase the sustainable rate of growth a corporation can achieve?
A. avoidance of external equity financing
B. increase in corporate tax rates
C. reduction in the retention ratio
D. decrease in the dividend payout ratio
E. decrease in sales given a positive profit margin
F. None of the above.

31. Which of these ratios are the determinants of a firm's sustainable growth rate?
I. Assets-to-equity ratio.
II. Profit margin
III. Retention ratio
IV. Asset turnover ratio
A. I and III only

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B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
F. None of the above.

32. Which of the following statements is true?

A. Rapid growth spurs increases in market share and profits and thus, is always a blessing.
B. Firms that grow rapidly only very rarely encounter financial problems.
C. The cash flows generated in a given time period are equal to the profits reported.
D. Profits provide assurance that cash flow will be sufficient to maintain solvency.
E. Due to required cash investments in current assets, fast-growing and profitable companies can
literally "grow broke".
F. None of the above.

33. Which of the following questions are appropriate to address upon conducting sustainable growth
analysis and the financial planning process?
I. Should the firm merge with a competitor?
II. Should additional equity be sold?
III. Should a particular division be sold?
IV. Should a new product be introduced?
A. I, II, and III only
B. I, II, and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
F. None of the above.

34. Hayesville Corporation had net income of $5 million this year on net sales of $125 million per
year. At the beginning of this year, its debt-to-equity ratio was 1.5 and it held $75 million in total
liabilities. It paid out $2 million in dividends for the year. What is Hayesville Corporation's sustainable
growth rate?
A. 3%
B. 4%
C. 5%
D. 6%

35. A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent. Its asset
turnover ratio is 0.85 and its assets-to-equity ratio (using beginning-of-period equity) is 1.80. What is its
profit margin?
A. 3.79%
B. 5.69%
C. 6.75%
D. 10.13%
E. 18.24%

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36. Please refer to the selected financial information for Boss Stores above. What is the retention
ratio for 2013?
A. 0.32
B. 0.68
C. 0.97
D. 1.00
E. None of the above.

37. Please refer to the selected financial information for Boss Stores above. What is the sustainable
growth rate for 2013?
A. - 17.6%
B. - 7.9%
C. 9.97%
D. 10.27%
E. 12.23%
F. 21.40%

Chapter 05 Financial Instruments and Markets

38. Which one of the following statements is true?
A. Debt instruments offer residual claims to future cash payouts.
B. Bonds with call provisions will have lower coupon rates than otherwise identical bonds.
C. Bondholders enjoy a direct voice in company decisions.
D. Bonds are low-risk investments that do well in inflationary periods.
E. None of the above.

39. Which one of the following statements is true?

A. Equity securities offer fixed claims on future cash payouts.
B. Unlike bondholders, for their returns, shareholders rely entirely on price appreciation.
C. In theory, common shareholders exercise very little control over company decisions.
D. Historically, common shareholders have earned a risk premium as compensation for risk borne in
excess of government bonds.
E. Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.

40. Which of the following statements regarding junk bonds is true?

A. Junk bonds typically offer lower yields to maturity than investment-grade bonds.
B. Junk bonds have higher priority in bankruptcy than preferred stock.
C. Junk bonds offer no coupon payments to investors.
D. Junk bonds are typically defined as bonds with default probabilities of 25% or higher.

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41. Which of the following statements regarding preferred stock is true?
A. Holders of preferred stock have the same voting rights as common stockholders.
B. Preferred stock dividend payments are a deductible expense for corporate tax purposes.
C. Almost all public corporations are at least partly financed with preferred stock.
D. None of the above.

42. Which of the following statements are true?

I. Underwriters help private companies access public stock markets through IPOs.
II. Shelf registrations and private placements are examples of seasoned security issues.
III. Issue costs for debt are typically greater than issue costs for equity.
IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.
A. I and II only
B. I and III only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV
F. None of the above.

43. Which of the following statements related to market efficiency tends to be supported by current
evidence?
I. Markets tend to respond quickly to new information.
II. It is difficult for the typical investor to earn above-average returns without taking above-average risks.
III. Short-run prices are difficult to predict accurately based on public information.
IV. Markets are most likely strong-form efficient.
A. I and III only
B. II and IV only
C. I and IV only
D. I, III, and IV only
E. I, II, and III only

44. Which of the following are the most likely reasons for why a stock price might not react at all on
the day that new information related to the stock issuer is released?
I. Insiders knew the information prior to the announcement
II. Investors need time to digest the information prior to reacting
III. The information has no bearing on the value of the firm
IV. The information was anticipated
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
F. None of the above.

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