For accountsguru only

For accountsguru only

EFN Percent of sales method = SA/S ▲S + ▲FA – SL/S ▲S – ▲RE +/- Misc.

▲RE = (S + ▲S)(PM)(1 – PO)

D/A: Debt to asset ratio (EFN + (SL/S)▲S)/((SA/S)▲S + ▲FA)

Sustainable Growth: ▲S = (▲FA(1 – D/A) – S(PM)(1 – PO))/((SA/S)(D/A – 1) + (PM)(1 – PO))

Instructions:

You must complete and hand-in this exam as a word document. Type your answers where appropriate in essays and problems. In the multiple choice questions, highlight your answer.

Part 1: Multiple Choice Questions. Please select the best answer of those provided. Mark your answers by highlighting the correct response. Each question is worth 2 points.

1. Suppose that a company has a profit margin of 5%, an ROA of 12.5% and an ROE of 37.5%. What are this company’s asset turnover and equity multiplier ratios, respectively? They are:

a. 2.5 and 3.0

b. 6 and 0.667

c. 3 and 2

d. 5% and 12.5%

e. None of the above

2. A company has an ROE of 12% and an equity multiplier of 3. What is its ROA? It is:

a. 4%

b. 12%

c. 36%

d. There is insufficient information to compute this number

e. None of the above

3. Which of the following ratios does not measure the quality of liquidity?

a. Current Ratio

b. Ratio of Inventory to Working Capital

c. Ratio of Receivables to Working Capital.

d. None of the above.

4. Leverage magnifies the bottom line. So in a good year, debt can magnify (increase) a company’s positive net income.

a. True

b. False

5. If a company’s inventory to working capital increased, but its total current assets and current liabilities did not change, its quality of liquidity would…..

a. increase

b. decrease

c. not change

6. Suppose that a company has a debt to asset ratio of 75%. Its debt to equity ratio would be:

a. 75%

b. 25%

c. 300%

d. 750%

e. None of the above

7. If interest rates increase, then a company’s times interest earned ratio would most likely…… (You may assume the company has borrowed a significant amount of both long and short-term debt).

a. increase
b. decrease
c. not change

8. If inventory turnover decreases in a year in which sales and cost of goods sold have not changed, then we can assume that inventory has…….

a. increased

b. decreased

c. not changed

9. When we test the importance of an assumption that we have made in a forecast, this action is called:

a. The first pass forecast

b. Spontaneous assets

c. Sensitivity analysis

d. Long range strategy

e. None of the above

10. Budgets tend to be relatively short-term in their scope while forecasts tend to be somewhat longer-term oriented.

a. True
b. False

11.Forecasts then to be more concerned with details than budgets>

a. True
b. False

12. The company will need to raise funds to finance its growth when EFN is:

a. positive

b. negative

c. zero

d. larger than ΔFA

e. none of the above

13. The EFN model ignores depreciation entirely.

a. True
b. False

14. If a company’s profit margin increases, then their EFN will….

a. increase
b. decrease
c. not change

15. If a company’s forecasted retention ratio falls from 50% to 25% and their forecasted profit margin increases from 4% to 8%, the ΔRE (expected change to retained earnings) will….

a. increase
b. decrease
c. not change

16. Which of the following is not generally a spontaneous asset?

a. Cash

b. Accounts Receivables

c. Inventory

d. Retained Earnings

e. None of the above

17. A liability that is a current liability and is “non-negotiated” will be considered:

a. A non-spontaneous liability

b. A spontaneous liability

c. Part of stockholder’s equity

d. A spontaneous asset

e. None of the above

18. If ΔFA increases, EFN will……

a. increase
b. decrease
c. not change

19. If a company’s payout ratio increases, its sustainable sales growth will….

a. increase
b. decrease
c. not change

20. If a company’s owners are willing to put some external equity in the company, then the company’s sustainable sales growth will….

a. increase
b. decrease
c. not change

21. Generally, when a company’s collection period increases (sales are stable), the company’s current ratio will likely….

a. increase
b. decrease
c. not change

22. When a company’s inventory turnover falls, the quality of a company’s liquidity will likely…

a. increase
b. decrease
c. not change

23. The best method of correcting an overtrader’s problems is to attempt to stimulate sales growth.

a. True

c. False

24. Suppose that a profitable company has a large fixed asset to net worth ratio. What is the only “quick fix” that will be substantial enough to correct its liquidity and leverage problems?

a. Slow the rate of fixed asset growth

b. Sell idle and unused equipment

c. Obtain longer credit terms from suppliers

d. Bring in additional equity dollars through a seasoned equity offering.

e. None of the above

25. Which of the following actions would most likely create a liquidity problem for a company in the short-run?

a. Increase its fixed assets to net worth ratio by acquiring a large dollar amount of fixed assets.

b. Increase its inventory turnover

c. Decrease its collection period

d. All of the above

e. None of the above

Part 2. Short problems and essay questions. Answer these questions on the exam. Use whatever space you need to provide the answers.

26. Suppose that a company’s inventory turnover has fallen in a year in which sales did not change. How would this change impact the quality and quantity of the company’s liquidity? (8 points)

27. Describe the steps you would take to correct the following problem; you have just discovered that your company has a profit margin problem. (6 points)

28. On the next page you will find information about the Rologene Company. Using the historical data for year 2 as the base year, use the EFN equation to compute the amount of EFN the company will need given the assumptions for year 3. (Year 3 is the forecast year). (10 points)

29. In the space provided in the table on the next page, prepare a proforma balance sheet for year 3 for the Rologene Company. Use the percent of sales method. (12 points)

30. If you were to use the trend line approach to determine the year 3 proforma cash balance, what would this balance be? Show your work to receive credit. (7 points)

31. Based on the trend in the trading ratios, would you argue that the Rologene Company is an overtrader or an undertrader. Show all work and include the proforma year in your determination. (7 points)

The Rologene Company

Year 1 and 2 Historical Balance Sheet

Assets

Liabilities

Year 1

Year 2

Year 1

Year 2

Accounts Payable

35,000

45,000

Cash

40,000

50,000

Accruals

25,000

30,000

Marketable Securities

10,000

10,000

Current Note Payable

20,000

20,000

Accounts Receivable

70,000

80,000

Total Current Liabilities

80,000

95,000

Inventory

80,000

90,000

Bonds

240,000

260,000

Total Current Assets

200,000

230,000

Total Liabilities

320,000

355,000

Property Plant & Equipment

220,000

240,000

Retained Earnings

40,000

55,000

Total Assets

420,000

470,000

Common Stock

60,000

60,000

Total Liabilities and Equity

420,000

470,000

Other Information

Year 1 sales = $800,000
Year 2 sales = $900,000
Year 2 profit margin = 5%
Year 2 payout ratio = 35%

Assumptions for Year 3

1. ΔS = $200,000
2. Year 3 profit margin and payout ratio are the same as in year 2
3. Property, Plant and Equipment purchases will be $90,000 in year 3
4. Depreciation in year 3 will be $20,000
5. Marketable securities are held as a
semi-permanent
savings account
6. The current note from year 2 will be paid off in year 3

Assets

Place your answer for question 29 in the spaces below

Cash

Marketable Securities

Accounts Receivable

Inventory

Total Current Assets

Property Plant & Equipment

Total Assets

Liabilities

Accounts Payable

Accruals

Current Note Payable

Total Current Liabilities

Bonds

Total Liabilities

Retained Earnings

Common Stock

EFN

Total Liabilities and Equity