Description
Fundamentals Of Corporate Finance 10Th Canadian Edition By Ross – Test Bank
Sample Questions
Instant Download With Answers
Chapter 02
Financial Statements, Cash Flow, and Taxes
True / False Questions
- Formerly called the income statement, the statement of financial position is best described as a financial statement summarizing a firm’s performance over a period of time. Formerly called the income statement.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
- If an asset has a carrying value of $1,000 and its recoverable amount is $750, then a $250 impairment loss has been incurred.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
Topic: 02-02 Assets
Topic: 02-07 Value versus Cost
- If an asset has a carrying value of $2,000 and its recoverable amount is $2,500, then $500 impairment loss has been incurred.
FALSE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
Topic: 02-02 Assets
Topic: 02-07 Value versus Cost
- Impairment loss is the amount by which the carrying value of an asset or cash-generating unit exceeds its recoverable amount.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
Topic: 02-02 Assets
Topic: 02-07 Value versus Cost
- According to generally accepted accounting principles (GAAP), assets are generally shown on financial statements at the higher of current market value or historical cost.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
Topic: 02-02 Assets
Topic: 02-07 Value versus Cost
- A fundamental difference between Canadian GAAP and IFRS is that fair value accounting plays a more important role under IFRS.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
Topic: 02-02 Assets
Topic: 02-03 Liabilities and Owners’ Equity
Topic: 02-07 Value versus Cost
- The financial statement summarizing the value of a firm’s equity on a particular date is the statement of comprehensive income.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-01 Statement of Financial Position
- Patents on new anti-cholesterol drug are considered intangible fixed assets.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-02 Assets
- The difference between a firm’s current assets and its current liabilities is called net working capital.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-04 Net Working Capital
Topic: 02-05 Liquidity
- Statement of comprehensive income, also, referred to as the balance sheet, is a snapshot of the firm. It is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm’s equity) at a given time.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-02 The difference between accounting income and cash flow.
Topic: 02-08 Statement of Comprehensive Income
- Net income divided by the total number of outstanding shares is referred to as the profit margin.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-02 The difference between accounting income and cash flow.
Topic: 02-08 Statement of Comprehensive Income
- Non-cash items refer to expenses charged against revenues that do not directly affect cash flow.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-02 The difference between accounting income and cash flow.
Topic: 02-08 Statement of Comprehensive Income
Topic: 02-10 Non-Cash Items
- If a firm’s cash flow to stockholders is negative, then total dividends must have exceeded the value of net new equity sold by the firm during the year.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-12 Cash Flow
Topic: 02-14 Cash Flow to Creditors and Shareholders
- A firm’s marginal tax rate may differ from its average tax rate. However, it is the average tax rate that is relevant for financial decision-making purposes.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-04 The difference between average and marginal tax rates.
Topic: 02-17 Average versus Marginal Tax Rates
Topic: 02-19 Corporate Taxes
- The financial statement summarizing a firm’s performance over a period of time is the statement of cash flows
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-02 The difference between accounting income and cash flow.
Topic: 02-03 Liabilities and Owners’ Equity
Topic: 02-08 Statement of Comprehensive Income
Topic: 02-12 Cash Flow
- Conceptually, capital cost allowance (CCA) is equivalent to depreciation.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-05 The basics of Capital Cost Allowance (CCA) and undepreciated Capital Cost (UCC).
Topic: 02-23 Capital Cost Allowance
Multiple Choice Questions
- Janex Corporation had OCF of $250, net capital spending of $500 and change in net working capital of $150. Given this information, determine its cash flow from assets.
A.$400
B. $800
C. $(400)
D. $(800)
E. $150
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-12 Cash Flow
Topic: 02-13 Cash Flow from Assets
Topic: 02-15 Taxes
Topic: 02-16 Individual Tax Rates
- Shareholders’ equity in a firm is $500. The firm owes a total of $400 of which 75 percent is payable this year. The firm has net fixed assets of $600. What is the amount of the net working capital?
A.-$200
B. -$100
C. $0
D. $100
E. $200
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-04 Net Working Capital
| Nabors, Inc. 2018 statement of comprehensive income ($ in millions) |
|
| Net sales | $9,610 |
| Less: Cost of goods sold | 6,310 |
| Less: Depreciation | 1,370 |
| Earnings before interest and taxes | 1,930 |
| Less: Interest paid | 630 |
| Taxable Income | $1,300 |
| Less: Taxes | 455 |
| Net income | $845 |
| Nabors, Inc. 2017 and 2018 Statement of financial positions ($ in millions) |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | $310 | $405 | Accounts payable | $2,720 | $2,570 |
| Accounts rec. | 2,640 | 3,055 | Notes payable | 100 | 0 |
| Inventory | 3,275 | 3,850 | Total | $2,820 | $2,570 |
| Total | $6,225 | $7,310 | Long-term debt | 7,875 | 8,100 |
| Net fixed assets | 10,960 | 10,670 | Common stock | 5,000 | 5,250 |
| Retained earnings | 1,490 | 2,060 | |||
| Total assets | $17,185 | $17,980 | Total liab. & equity | $17,185 | $17,980 |
What is the amount of net new borrowing for 2018 ($ in millions)?
A. -$225
B. -$25
C. $0
D. $25
E. $225
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-14 Cash Flow to Creditors and Shareholders
- Knickerdoodles, Inc.
| 2017 | 2018 | |
| Sales | $740 | $785 |
| COGS | 430 | 460 |
| Interest | 33 | 35 |
| Dividends | 16 | 17 |
| Depreciation | 250 | 210 |
| Cash | 70 | 75 |
| Accounts receivables | 563 | 502 |
| Current liabilities | 390 | 405 |
| Inventory | 662 | 640 |
| Long-term debt | 340 | 410 |
| Net fixed assets | 1,680 | 1,413 |
| Common stock | 700 | 235 |
| Tax rate | 35% | 35% |
What is net capital spending for 2018?
A. -$250
B. -$57
C. $0
D. $57
E. $477
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-15 Taxes
- RDJ Manufacturing had 300 million shares of stock outstanding at the end of 2018. During 2018, the company reported net income of $600 million, retained earnings of $900 million, and $240 million in dividends paid. What is RDJ’s earnings per share?
A.$0.50
B. $0.67
C. $0.80
D. $1.25
E. $2.00
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-02 The difference between accounting income and cash flow.
Topic: 02-08 Statement of Comprehensive Income
| 2018 | |
| Cost of goods sold | $3,210 |
| Interest | 215 |
| Dividends | 160 |
| Depreciation | 375 |
| Change in retained earnings | 360 |
| Tax rate | 35% |
What is the operating cash flow for 2015?
A. $520
B. $800
C. $1,015
D. $1,110
E. $1,390
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-12 Cash Flow
Topic: 02-13 Cash Flow from Assets
| Nabors, Inc. 2018 statement of comprehensive income ($ in millions) |
|
| Net sales | $9,610 |
| Less: Cost of goods sold | 6,310 |
| Less: Depreciation | 1,370 |
| Earnings before interest and taxes | 1,930 |
| Less: Interest paid | 630 |
| Taxable Income | $1,300 |
| Less: Taxes | 455 |
| Net income | $845 |
| Nabors, Inc. 2017 and 2018 Statement of financial positions ($ in millions) |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | $310 | $405 | Accounts payable | $2,720 | $2,570 |
| Accounts rec. | 2,640 | 3,055 | Notes payable | 100 | 0 |
| Inventory | 3,275 | 3,850 | Total | $2,820 | $2,570 |
| Total | $6,225 | $7,310 | Long-term debt | 7,875 | 8,100 |
| Net fixed assets | 10,960 | 10,670 | Common stock | 5,000 | 5,250 |
| Retained earnings | 1,490 | 2,060 | |||
| Total assets | $17,185 | $17,980 | Total liab. & equity | $17,185 | $17,980 |
What is the amount of the net capital spending for 2018 ($ in millions)?
A. -$290
B. $795
C. $1,080
D. $1,660
E. $2,165
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-15 Taxes
- Martha’s Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today’s statement of financial position but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. What is the book value of shareholders’ equity?
A.$200
B. $800
C. $1,200
D. $1,400
E. The answer cannot be determined from the information provided.
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-07 Value versus Cost
| KLM, Inc. 2018 Statement of comprehensive income |
|
| Net sales | $3,685 |
| Cost of goods sold | $3,180 |
| Depreciation | $104 |
| Earnings before interest and taxes | $401 |
| Interest paid | $25 |
| Taxable income | $376 |
| Taxes | $128 |
| Net income | $248 |
| Dividends paid | $60 |
| Addition to retained earnings | $188 |
| KLM, Inc. Statement of financial positions as of December 31, 2017 and 2018 |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | $520 | $601 | Accounts payable | $621 | $704 |
| Accounts rec. | $235 | $219 | Notes payable | $333 | $272 |
| Inventory | $964 | $799 | Current liabilities | $954 | $976 |
| Current assets | $1,719 | $1,619 | Long-term debt | $350 | $60 |
| Net fixed assets | $890 | $930 | Common stock | $800 | $820 |
| Retained earnings | $505 | $693 | |||
| Total assets | $2,609 | $2,549 | Total liabilities and Owner’s equity | $2,609 | $2,549 |
What is the cash flow from assets for 2018?
A. $111
B. $355
C. $1,307
D. $2,259
E. $2,503
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-13 Cash Flow from Assets
Topic: 02-15 Taxes
Topic: 02-16 Individual Tax Rates
| Nabors, Inc. 2018 statement of comprehensive income ($ in millions) |
|
| Net sales | $9,610 |
| Less: Cost of goods sold | 6,310 |
| Less: Depreciation | 1,370 |
| Earnings before interest and taxes | 1,930 |
| Less: Interest paid | 630 |
| Taxable Income | $1,300 |
| Less: Taxes | 455 |
| Net income | $845 |
| Nabors, Inc. 2017 and 2018 Statement of financial positions ($ in millions) |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | $310 | $405 | Accounts payable | $2,720 | $2,570 |
| Accounts rec. | 2,640 | 3,055 | Notes payable | 100 | 0 |
| Inventory | 3,275 | 3,850 | Total | $2,820 | $2,570 |
| Total | $6,225 | $7,310 | Long-term debt | 7,875 | 8,100 |
| Net fixed assets | 10,960 | 10,670 | Common stock | 5,000 | 5,250 |
| Retained earnings | 1,490 | 2,060 | |||
| Total assets | $17,185 | $17,980 | Total liab. & equity | $17,185 | $17,980 |
What is the change in the net working capital from 2017 to 2018 ($ in millions)?
A. $1,235
B. $1,035
C. $1,335
D. $3,405
E. $4,740
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-16 Individual Tax Rates
| Nabors, Inc. 2018 statement of comprehensive income ($ in millions) |
|
| Net sales | $9,610 |
| Less: Cost of goods sold | 6,310 |
| Less: Depreciation | 1,370 |
| Earnings before interest and taxes | 1,930 |
| Less: Interest paid | 630 |
| Taxable Income | $1,300 |
| Less: Taxes | 455 |
| Net income | $845 |
| Nabors, Inc. 2017 and 2018 Statement of financial positions ($ in millions) |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | $310 | $405 | Accounts payable | $2,720 | $2,570 |
| Accounts rec. | 2,640 | 3,055 | Notes payable | 100 | 0 |
| Inventory | 3,275 | 3,850 | Total | $2,820 | $2,570 |
| Total | $6,225 | $7,310 | Long-term debt | 7,875 | 8,100 |
| Net fixed assets | 10,960 | 10,670 | Common stock | 5,000 | 5,250 |
| Retained earnings | 1,490 | 2,060 | |||
| Total assets | $17,185 | $17,980 | Total liab. & equity | $17,185 | $17,980 |
What is the cash flow from assets for 2018 ($ in millions)?
A. $430
B. $485
C. $1,340
D. $2,590
E. $3,100
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-13 Cash Flow from Assets
Topic: 02-15 Taxes
Topic: 02-16 Individual Tax Rates
- Dale Corporation had beginning fixed assets of $3,500 an ending fixed asset balance of $4,800 invested and depreciation expense of $200. Given this information, determine the net investment in fixed assets.
A.$1,200
B. $1,300
C. $1,400
D. $1,500
E. $1,600
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value.
Topic: 02-02 Assets
| Aussel Motors, Inc. 2018 statement of comprehensive income ($ in millions) |
|
| Net sales | $6,080 |
| Less: Cost of goods sold | 3,890 |
| Less: Depreciation | 860 |
| Earnings before interest and taxes | 1,330 |
| Less: Interest paid | 270 |
| Earnings before taxes | 1,060 |
| Less: Taxes | 360 |
| Net Income | 700 |
| Aussel Motors, Inc. 2017 and 2018 statement of financial position ($ in millions) |
|||||
| 2017 | 2018 | 2017 | 2018 | ||
| Cash | 415 | 560 | Accounts payable | 540 | 610 |
| Accounts receivable | 860 | 840 | Current portion of LTD | 0 | 50 |
| Inventory | 1,270 | 1,390 | Total | 540 | 660 |
| Total | 2,545 | 2,790 | Long-term debt | 2165 | 3480 |
| Net fixed assets | 3,180 | 4,660 | Common stock | 2000 | 2250 |
| Retained earnings | 1020 | 1060 | |||
| Total assets | 5,725 | 7,450 | Total liab. & equity | 5725 | 7450 |
What is the amount of the net capital spending for 2018 ($ in millions)?
A. $240
B. $620
C. $1,480
D. $1,860
E. $2,340
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 02-03 How to determine a firm’s cash flow from its financial statements.
Topic: 02-15 Taxes
Chapter 04
Long-Term Financial Planning and Corporate Growth
True / False Questions
- Financial planning helps investigate the linkages between goals and the different aspects of a firm’s business.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-04 What Can Planning Accomplish?
- Financial planning is important because the only way for a firm to prosper is for it to grow.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-01 What Is Financial Planning?
- Aggregation refers to the process by which a firm first projects its aggregate investment requirement, then it breaks that total up and allocates it to the investment proposals of the firm’s smaller units.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-03 Dimensions of Financial Planning
- By developing a financial plan, a firm benefits by being forced to set goals and establish priorities.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-04 What Can Planning Accomplish?
- Conventional wisdom holds that financial plans don’t work, but financial planning does.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-04 What Can Planning Accomplish?
- In most industries, planning beyond the period of one year is not very useful.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-03 Dimensions of Financial Planning
- The firm’s investment and financing decisions are unrelated and should not be analyzed at the same time.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-03 Dimensions of Financial Planning
- With good financial planning, managers can be less vigilant in their day to day management of the firm.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-01 What Is Financial Planning?
Topic: 04-02 Growth as a Financial Management Goal
Topic: 04-03 Dimensions of Financial Planning
- By developing a financial plan, a firm benefits by being forced to think about and forecast the future.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-01 What Is Financial Planning?
- By developing a financial plan, a firm benefits by being forced to focus on best case scenarios.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-01 The objectives and goals of financial planning.
Topic: 04-01 What Is Financial Planning?
- A pro forma balance sheet must always maintain the current debt-equity ratio of a firm.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- A pro forma balance sheet should include consideration of the capacity level of the firm.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- Asset requirements is a common element among financial planning models.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- Pro forma statements are a common element among financial planning models.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- Pro forma statements should consider the dividend policy of the firm.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- All else equal, the lower the forecast growth the larger the level of external financing needed.
FALSE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- Sales forecasts are a common element among financial planning models.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- A pro forma income statement should consider both macroeconomic and industry forecasts.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- Very few financial planning models require an externally supplied sales forecast.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-06 A Financial Planning Model: The Ingredients
- If total assets increase by the same percentage as sales increase it is likely assets and sales will increase by identical dollar amounts.
FALSE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- If total assets increase by the same percentage as sales increase the larger the increase in sales, the more likely there will be a need for external financing.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- All else equal, an increase in a firm’s capital intensity ratio will increase its external financing needed.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- When utilizing the percentage of sales approach, managers can ignore any projected dividends.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- When utilizing the percentage of sales approach, managers need to determine the level of sales required based on the desired profit margin percentage.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- When utilizing the percentage of sales approach, managers need to identify which expenses are variable and which are fixed.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- When utilizing the percentage of sales approach, managers need to determine the capital intensity ratio.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- All else the same, lower return on assets (ROA) ratio would likely be associated with a firm which has a high capital intensity ratio, relative to other firms in the same industry.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- An increase in a firm’s capital intensity ratio implies a decrease in how efficiently it uses its assets to generate sales.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- If the Ballard Institute currently operates at full capacity, then fixed assets would most likely vary directly with sales.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- If the Ballard Institute currently operates at full capacity, then long-term debt would most likely vary directly with sales.
FALSE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- If the Limberger Institute currently operates at full capacity, then accounts receivable would most likely vary directly with sales.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- If total assets increase by the same percentage as sales increase: the firm is assumed to be operating at full capacity.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- One would expect the capital intensity ratio of an auto manufacturing firm to be lower than that of a software development firm.
FALSE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- The dividend policy decision is a basic policy element of financial planning.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-01 The objectives and goals of financial planning.
Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth.
Topic: 04-01 What Is Financial Planning?
Topic: 04-06 A Financial Planning Model: The Ingredients
- All else the same, greater depreciation expense would likely be associated with a firm which has a high capital intensity ratio, relative to other firms in the same industry.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- All else the same, lower fixed asset turnover ratio would likely be associated with a firm which has a high capital intensity ratio, relative to other firms in the same industry.
TRUE
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- The retention ratio is also known as the plowback ratio.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- The retention ratio is equal to one plus the dividend payout ratio.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- Generally speaking, actions that increase the firm’s ability to generate funds internally decrease its ability to grow without obtaining external financing.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-15 Determinants of Growth
- All else equal, a firm that utilizes assets inefficiently will have a higher sustainable growth rate than a firm that does not.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
- All else the same, an increase in a firm’s dividend payout ratio will decrease its sustainable growth rate.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
- All else the same, an increase in a firm’s dividend payout ratio will decrease its internal growth rate.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
- All else the same, an increase in a firm’s dividend payout ratio will decrease its external financing needed.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
- Profit margin is a determinant of growth.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-14 Financial Policy and Growth
- The equity multiplier is a determinant of growth.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-14 Financial Policy and Growth
- The sustainable growth rate includes a constant debt-equity ratio.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
- There are no direct connections between the growth that a company can achieve and the financial policies undertaken by the financial managers.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-14 Financial Policy and Growth
- Total asset turnover is a determinant of growth.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-14 Financial Policy and Growth
- The sustainable growth rate excludes additional equity financing.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
Topic: 04-14 Financial Policy and Growth
Topic: 04-15 Determinants of Growth
- The sustainable growth rate excludes any kind of external financing.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
Topic: 04-14 Financial Policy and Growth
Topic: 04-15 Determinants of Growth
- The sustainable growth rate includes a variable debt-equity ratio.
FALSE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
Topic: 04-14 Financial Policy and Growth
Topic: 04-15 Determinants of Growth
- The sustainable growth rate is dependent on profit margin.
TRUE
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Learning Objective: 04-05 Some of the problems in planning for growth.
Topic: 04-13 Internal Growth Rate
Topic: 04-14 Financial Policy and Growth
Topic: 04-15 Determinants of Growth
Multiple Choice Questions
- Jack’s currently has $798,200 in sales and is operating at 73% of the firm’s capacity. What is the full capacity level of sales?
A.$582,686
B. $804,927
C. $1,013,714
D. $1,093,425
E. $1,380,886
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
| Delalo, Inc. 2018 Income Statement |
|
| Net sales | $12,400 |
| Cost of goods sold | 9,100 |
| Depreciation | 1,800 |
| Earnings before interest and taxes | 1,500 |
| Interest paid | 340 |
| Taxable Income | $1,160 |
| Taxes | 406 |
| Net Income | $754 |
| Dividends | $301.60 |
| Addition to retained earnings | $452.40 |
| Delalo, Inc. 2015 Balance Sheet |
|||
| Cash | $990 | Accounts payable | $1,330 |
| Account Rec. | 840 | Long-term debt | 3,700 |
| Inventory | 620 | Common stock | 4,600 |
| Total | $2,450 | Retained earings | 2,840 |
| Net fixed assets | 10,020 | ||
| Total assets | $12,470 | Total Liabilities & equity | $12,470 |
Assume that Delalo, Inc. is operating at full capacity. Also assume that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the projected increase in net fixed assets if sales are projected to increase by 11 percent?
A. $269.50
B. $506.00
C. $1,102.20
D. $1,371.70
E. $2,719.50
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- The following balance sheet and income statement should be used:
| [Question]Taylor, Inc. 2009 Income Statement |
|
| Net Sales | $28,900 |
| Less: Cost of Goods Sold | 23,400 |
| Less: Depreciation | 1,600 |
| Earnings Before Interest and Taxes | 3,900 |
| Less: Interest Paid | 280 |
| Taxable Income | $3,620 |
| Less: Taxes | 1,230 |
| Net Income | $2,390 |
| Dividends | $956 |
| Additions to retained earnings | $1,434 |
| [Question]Taylor, Inc. 2009 Balance Sheet |
|||
| Cash | $1,530 | Accounts payable | $2,750 |
| Accounts rec | 2,780 | Long-term debt | 4,000 |
| Inventory | 3,410 | Common stock | 8,000 |
| Total | $7,720 | Retained earnings | 5,810 |
| Net fixed assets | 12,840 | ||
| Total assets | $20,560 | Total liabilities & equity | $20,560 |
Taylor, Inc. is projecting sales to increase by 7% next year with the profit margin remaining constant. The firm is increasing the dividend payout ratio to 50 percent. What is the amount of the projected addition to retained earnings for next year?
A. $822.16
B. $989.13
C. $1,106.67
D. $1,278.65
E. $1,534.38
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
- The following balance sheet and income statement should be used:
| [Question] Hilltop, Inc. 2009 Income Statement |
|
| Net Sales | $38,900 |
| Less: Cost of Goods Sold | 31,400 |
| Less: Depreciation | 2,600 |
| Earnings Before Interest and Taxes | 4,900 |
| Less: Interest Paid | 1,800 |
| Taxable Income | $3,100 |
| Less: Taxes | 1,150 |
| Net Income | $1,950 |
| Dividends | $390 |
| Additions to retained earnings | $1,560 |
| [Question]Hilltop, Inc. 2009 Balance Sheet |
|||
| Cash | $3,160 | Accounts Payable | $8,120 |
| Accounts rec | 4,160 | Long-term debt | 21,200 |
| Inventory | 6,480 | Common stock | 7,500 |
| Total | $13,800 | Retained earnings | 6,380 |
| Net fixed assets | 29,400 | ||
| Total assets | $43,200 | Total liabilities & equity | $43,200 |
Hilltop, Inc. is currently operating at 82% of capacity. The profit margin and the dividend payout ratio are constant. Net working capital and fixed assets vary directly with sales. Sales are projected to increase by 20 percent. What is the external financing need?
A. -$736
B. -$487
C. $1,144
D. $5,708
E. $6,768
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Hard
Learning Objective: 04-03 How to apply the percentage of sales method.
Topic: 04-09 An Illustration of the Percentage of Sales Approach
| Wintergreen, Inc. Income Statement for the Present Year |
|
| Net sales | $14,650 |
| Costs | $12,103 |
| Taxable income | $2,547 |
| Taxes | $866 |
| Net income | $1,681 |
| Wintergreen, Inc. Balance Sheet for the Present Year |
|||
| Cash | $525 | Accounts payable | $1,963 |
| Accounts receivable | $3,135 | Notes payable | $2,618 |
| Inventory | $976 | Total | $4,581 |
| Total | $4,636 | Long-term debt | $6,600 |
| Net fixed assets | $23,770 | Common stock | $7,500 |
| Retained earnings | $9,725 | ||
| Total assets | $28,406 | Total liabilities and equity | $28,406 |
Reviews
There are no reviews yet.