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finance homework mcq

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Question;Question 1 of 20;The percentage of sales method is based on which of the;following assumptions?;A. a. All balance;sheet accounts are tied directly to sales.;B. b. Most balance;sheet accounts are tied directly to sales.;C. c. The current;level of total assets is optimal for the current sales level.;D. d. Answers a and c;above.;E. e. Answers b and c;above.;Question 2 of 20;The percentage of sales method produces accurate results;unless which of the following conditions is (are) present?;A. a. Fixed assets;are "lumpy.;B. b. Strong;economies of scale are present.;C. c. Excess capacity;exists because of a temporary recession.;D. d. Answers a, b;and c all make the percentage of sales method inaccurate.;E. e. Answers a and c;make the percentage of sales method inaccurate, but, as the text explains, the;assumption of increasing economies of scale is built into the percentage of;sales method.;Question 3 of 20;Which of the following statements is correct?;A. a. One of the key;steps in the development of pro forma financial statements is to identify those;assets and liabilities which increase spontaneously with net income.;B. b. The first, and;most critical, step in constructing a set of pro forma financial statements is;establishing the sales forecast.;C. c. Pro forma;financial statements as discussed in the text are used primarily to assess a;firm's historical performance.;D. d. The capital;intensity ratio reflects how rapidly a firm turns over its assets and is the;reciprocal of the fixed assets turnover ratio.;E. e. The percentage;of sales method produces accurate results when fixed assets are lumpy and when;economies of scale are present;Question 4 of 20;Considering each action independently and holding other;things constant, which of the following actions would reduce a firm's need for;additional capital?;A. a. An increase in;the dividend payout ratio.;B. b. A decrease in;the profit margin.;C. c. A decrease in;the days sales outstanding.;D. d. An increase in;expected sales growth.;E. e. A decrease in;the accrual accounts (accrued wages and taxes).;Question 5 of 20;Which of the following statements is correct?;A. a. Since accounts;payable and accruals must eventually be paid, as these accounts increase, AFN;also increases.;B. b. Suppose a firm;is operating its fixed assets below 100 percent capacity but is at 100 percent;with respect to current assets. If sales grow, the firm can offset the needed;increase in current assets with its idle fixed assets capacity.;C. c. If a firm;retains all of its earnings, then it will not need any additional funds to;support sales growth.;D. d. Additional;funds needed are typically raised from some combination of notes payable;long-term bonds, and common stock. These accounts are nonspontaneous in that;they require an explicit financing decision to increase them.;E. e. All of the;statements above are false.;Question 6 of 20;Which of the following statements is correct?;A. a. Any forecast of;financial requirements involves determining how much money the firm will need;and is obtained by adding together increases in assets and spontaneous;liabilities and subtracting operating income.;B. b. The percentage;of sales method of forecasting financial needs requires only a forecast of the;firm's balance sheet. Although a forecasted income statement helps clarify the;need, it is not essential to the percentage of sales method.;C. c. Because;dividends are paid after taxes from retained earnings, dividends are not;included in the percentage of sales method of forecasting.;D. d. Financing;feedbacks describe the fact that interest must be paid on the debt used to help;finance AFN and dividends must be paid on the shares issued to raise the equity;part of the AFN. These payments would lower the net income and retained;earnings shown in the projected financial statements.;E. e. All of the;statements above are false.;Question 7 of 20;Which of the following statements is correct?;A. a. Inherent in the;AFN formula is the assumption that each asset item must increase in direct;proportion to sales increases and that spontaneous liability accounts also grow;at the same rate as sales.;B. b. If a firm has;positive growth in its assets, but has no increase in retained earnings, AFN for;the firm must be positive.;C. c. Using the AFN;formula, if a firm increases its dividend payout ratio in anticipation of;higher earnings, but sales actually decrease, the firm will automatically;experience an increase in additional funds needed.;D. d. Higher sales;usually require higher asset levels. Some of the increase in assets can be;supported by spontaneous increases in accounts payable and accruals, and by;increases in certain current asset accounts and retained earnings.;E. e. Dividend policy;does not affect requirements for external capital under the AFN formula method.;Question 8 of 20;Jill's Wigs Inc. had the following balance sheet last year;Cash 800 Accounts Payable 350;Accounts Receivable 450 Accrued Wages 150;Inventories 950 Notes Payable 2,000;Fixed Assets 34,000 Mortgage 26,500;Common;Stock 3,200;Retained;earnings 4,000;Total Assets 36,200 Total liabilites and equity 36,200;Jill has just invented a non-slip wig for men which she;expects will cause sales to double from $10,000 to $20,000, increasing net;income to $1,000. She feels that she can handle the increase without adding any;fixed assets. (1) Will Jill need any outside capital if she pays no dividends?;(2) If so, how much?;A. a. No, zero;B. b. Yes, $7,700;C. c. Yes, $1,700;D. d. Yes, $700;E. e. No, there will;be a $700 surplus.;Question 9 of 20;Brown & Sons recently reported sales of $100 million;and net income equal to $5 million. The company has $70 million in total;assets. Over the next year, the company is forecasting a 20 percent increase in;sales. Since the company is at full capacity, its assets must increase in;proportion to sales. The company also estimates that if sales increase 20;percent, spontaneous liabilities will increase by $2 million. If the company's;sales increase, its profit margin will remain at its current level. The;company's dividend payout ratio is 40 percent. Based on the formula, how much additional capital must the;company raise in order to support the 20 percent increase in sales?;A. a. $ 2.0 million;B. b. $ 6.0 million;C. c. $ 8.4 million;D. d. $ 9.6 million;E. e. $14.0 million;Question 10 of 20;Splash Bottling's December 31st balance sheet is given;below;Cash 10 Accounts payable 15;Accounts Receivable 25 Notes payable 20;Inventories 40 Accrued wages and taxes 15;Net fixed assets 75 Long-term debt 30;Common;equity 70;Total assets 150 Total liabilities and equity 150;Sales during the past year were $100, and they are expected;to rise by 50 percent to $150 during next year. Also, during last year fixed;assets were being utilized to only 85 percent of capacity, so Splash could have;supported $100 of sales with fixed assets that were only 85 percent of last;year's actual fixed assets. Assume that Splash's profit margin will remain;constant at 5 percent and that the company will continue to pay out 60 percent;of its earnings as dividends. To the nearest whole dollar, what amount of;nonspontaneous, additional funds (AFN) will be needed during the next year?;A. a. $57;B. b. $51;C. c. $36;D. d. $40;E. e. $48;Reset Selection;Question 11 of 20;Which of the following would reduce the additional funds;required if all other things are held constant?;A. a. An increase in;the dividend payout ratio.;B. b. A decrease in;the profit margin.;C. c. An increase in;the capital intensity ratio.;D. d. An increase in;the expected sales growth rate.;E. e. A decrease in;the firm's tax rate.;Question 12 of 20;Which of the following statements is correct?;A. a. Suppose;economies of scale exist in a firm's use of assets. Under this condition, the;firm should use the regression method of forecasting asset requirements rather;than the percent of sales method.;B. b. If a firm must;acquire assets in lumpy units, it can avoid errors in forecasts of its need for;funds by using the linear regression method of forecasting asset requirements;because all the points will lie on the regression line.;C. c. If economies of;scale in the use of assets exist, then the AFN formula rather than the percent;of sales method should be used to forecast additional funds requirements.;D. d. Notes payable;to banks are included in the AFN formula, along with a projection of retained earnings.;E. e. One problem;with the AFN formula is that it does not take account of the firm's dividend;policy.;Question 13 of 20;Elvis Inc. has the following balance sheet;Current assets $5,000 Accounts payable $1,000;Notes;payable 1,000;Net fixed assets 5,000 Long-term debt 4,000;Common;equity 4,000;Total assets $10,000 Total liabilities and equity $10,000;Business has been slow, therefore, fixed assets are vastly;underutilized. Management believes it can triple sales next year with the;introduction of a new product. No new fixed assets will be required, and;management expects that there will be no earnings retained next year. What is;next year's additional financing requirement?;A. a. $3,500;B. b. $4,600;C. c. $5,900;D. d. $8,000;E. e. $10,000;Question 14 of 20;The 2007 balance sheet for Laura Inc. is shown below (in;millions of dollars);Cash $;3.0 Accounts payable $ 2.0;Accounts receivable 3.0 Notes payable 1.5;Inventory 5.0;Current Assets $11.0 Current liabilities $ 3.5;Fixed assets 3.0 Long-term debt 3.0;Common;equity 7.5;Total assets $14.0 Total liabilities and;equity $14.0;In 2007, sales were $60 million. In 2008, management;believes that sales will increase by 30 percent to a total of $78 million. The;profit margin is expected to be 6 percent, and the retention ratio is targeted;at 40 percent. No excess capacity exists. What is the additional financing;requirement (in millions) for 2008 using the formula method?;A. a. $1.73;B. b. $6.67;C. c. $18.2;D. d. -$6.67;E. e. -$1.73;Question 15 of 20;The 2007 balance sheet for Laura Inc. is shown below (in;millions of dollars);Cash $;3.0 Accounts payable $ 2.0;Accounts receivable 3.0 Notes payable 1.5;Inventory 5.0;Current Assets $11.0 Current liabilities $ 3.5;Fixed assets 3.0 Long-term debt 3.0;Common;equity 7.5;Total assets $14.0 Total liabilities and;equity $14.0;In 2007, sales were $60 million. In 2008, management;believes that sales will increase by 30 percent to a total of $78 million. The;profit margin is expected to be 6 percent, and the retention ratio is targeted;at 40 percent. No excess capacity exists. How much can sales grow above the;2007 level of $60 million without requiring any additional funds?;A. a. 10.34%;B. b. 13.64%;C. c. 14.83%;D. d. 15.63%;E. e. 19.17%;(A/2000)*(1000) - (500/2000)*(1000) - (500/2000)*(3000*0.7);Question 16 of 20;Smith Machines Inc. has a net income this year of $500 on;sales of $2,000 and is operating its fixed assets at full capacity. Management;expects sales to increase by 50 percent next year and is forecasting a dividend;payout ratio of 30 percent. The profit margin is not expected to change. If;spontaneous liabilities are $500 this year and no excess funds are expected;next year, what are Smith's total assets this year?;A. a. $ 1,250;B. b. $1,550;C. c. $2,750;D. d. $3,425;E. e. $3,574;Question 17 of 20;Bill Inc.'s 2007 financial statements are shown below;Bill Inc. Balance Sheet as of December 31, 2007;Cash $;90,000 Accounts;payable $;180,000;Receivables 180,000 Notes payable 78,000;Inventory 360,000 Accruals 90,000;Total current assets $630,000 Total current;liabilities $ 348,000;Common;stock 900,000;Net fixed assets 720,000 Retained earnings 102,000;Total assets $1,350,000 Total liabilities and;equity $1,350,000;Bill Inc. Income Statement for December 31, 2007;Sales $1,800,000;Operating costs 1,639,860;EBIT $;160,140;Interest 10,140;EBT $;150,000;Taxes (40%) 60,000;Net income $90,000;Dividends (60%) $;54,000;Addition to retained earnings $ 36,000;Suppose that in 2008, sales increase by 20 percent over 2007;sales. Construct the pro forma financial statements using the percent of sales;method. Assume the firm operated at full capacity in 2007. How much additional;capital will be required?;A. e. $263,921;B. b. $95,288;C. c. $100,251;D. d. $172,313;E. e. $263,921;Question 18 of 20;Bill Inc. Balance Sheet as of December 31, 2007;Cash $;90,000 Accounts;payable $;180,000;Receivables 180,000 Notes payable 78,000;Inventory 360,000 Accruals 90,000;Total current assets $;630,000 Total;current liabilities $;348,000;Common;stock 900,000;Net fixed assets 720,000 Retained earnings 102,000;Total assets $1,350,000 Total liabilities and;equity $1,350,000;Bill Inc. Income Statement for December 31, 2007;Sales $1,800,000;Operating costs 1,639,860;EBIT $;160,140;Interest 10,140;EBT $;150,000;Taxes (40%) 60,000;Net income $;90,000;Dividends (60%) $;54,000;Addition to retained earnings $ 36,000;Suppose that in 2008, sales increase by 20 percent over 2007;sales. Assume that fixed assets are only being operated at 95 percent of;capacity. Construct the proforma financial statements using the percent of;sales method. How much additional capital will be required?;A. a. $73,218;B. b. $85,201;C. c. $91,873;D. d. $100,800;E. e. $129,113;Question 19 of 20;Your company's sales were $2,000 last year, and they are;forecasted to rise by 100 percent during the coming year. Here is the latest;balance sheet;Cash $;100 Accounts payable $200;Receivables 300 Notes;payable 200;Inventory 800 Accruals 20;Total current assets $1,200 Total current liabilities $420;Long-term;debt 780;Common;stock 400;Net Fixed Assets 800 Retained earnings 400;Total assets $2,000 Total liabilities and equity $2,000;Fixed assets were used to only 80 percent of capacity last;year, and year-end inventory holdings were $100 greater than were needed to;support the $2,000 of sales. The other current assets (cash and receivables);were at their proper levels. All assets would be a constant percentage of sales;if excess capacity did not exist, that is, all assets would increase at the;same rate as sales if no excess capacity existed. The company's after-tax;profit margin will be 3 percent, and its payout ratio will be 80 percent. If;all additional funds needed (AFN) are raised as notes payable and financing;feedbacks are ignored, what will the current ratio be at the end of the coming;year?;A. a. 1.17;B. b. 1.93;C. c. 2.19;D. d. 2.50;E. e. 2.73 (Not sure);Question 20 of 20;The Bouchard Company's sales are forecasted to increase from;$500 in 2007 to $ 1,000 in 2008. Here is the December 31, 2007, balance sheet;Cash $;50 Accounts payable $25;Receivables 100 Notes payable 75;Inventory 100 Accruals 25;Total current assets $250 Total current liabilities $125;Long-term;debt 200;Common;stock 50;Net Fixed Assets 250 Retained earnings 125;Total assets $500 Total liabilities and;equity $500;Bouchard's fixed assets were used to only 50 percent of;capacity during 2007, but its current assets were at their proper levels. All;assets except fixed assets should be a constant percentage of sales, and fixed;assets would also increase at the same rate if the current excess capacity did;not exist. Bouchard's after-tax profit margin is forecasted to be 8 percent;and its payout ratio will be 40 percent. What is Bouchard's additional funds;needed (AFN) for the coming year?;A. a. $102;B. b. $152;C. c. $197;D. d. $167;E. e. $183

 

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