Analysis for Financial Management 12Th Edition BY Robert Higgins – Test Bank
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Sample Test
Chapter 03 Test Bank
1. The
percent-of-sales approach to financial forecasting works well for forecasting
the income statement but is not useful for forecasting the balance sheet.
FALSE
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2. An
advantage of the percent-of-sales approach to financial forecasting is that
effective forecasts can be prepared without consulting historical financial
statements.
FALSE
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3. The
forecast for retained earnings on the 2019 balance sheet can be determined as
2018 retained earnings plus projected 2019 after-tax earnings less projected
2019 dividends.
TRUE
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4. An
annual financial forecast for 2017 showing no external funding required assures
a company that no cash shortfalls are likely to occur during 2017.
FALSE
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5. All
else equal, increasing the assumed payables period in a financial forecast will
decrease external funding required.
TRUE
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6. All
else equal, increasing the assumed collection period in a financial forecast
will decrease external funding required.
FALSE
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7. Given
the same assumptions, cash flow forecasts and pro forma projections will yield
the same need for external funding.
TRUE
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8. A
drawback of forecasting using spreadsheets is that typical spreadsheet programs
are not equipped to deal with the circularity involving interest expense and
debt.
FALSE
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9. Scenario
analysis involves changing one input to a financial forecast, whereas
sensitivity analysis involves changing multiple inputs.
FALSE
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10.
Cash flow forecasts are less informative than pro forma
financial statements.
TRUE
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11.
You are estimating your company’s external financing needs for
the next year. At the end of next 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 next year?
1. $20
million
2. $70
million
3. $150
million
4. $160
million
5. $180
million
6. None
of the options are correct.
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12.You are estimating your company’s external financing needs
for the next year. Your first-pass pro forma financial statements showed a
large financing deficit for next year. Which of the following changes to your
company’s operating plan would reduce the financing deficit if incorporated in
revised pro forma financial statements?
1. Increase
the sales growth rate
2. Increase
cost of goods sold as a percentage of sales
3. Reduce
the collection period
4. Increase
the dividend payout ratio
5. None
of the options are correct.
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13.
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?
1. $169,000
2. $170,400
3. $181,400
4. $506,300
5. $518,700
6. None
of the options are correct.
158,000 + 23,400 − 12,400 = $169,000
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14.
The most common approach to developing pro forma financial
statements is called the
1. cash budget
method.
2. financial
planning method.
3. seasonality
approach.
4. percent-of-sales
method.
5. market-oriented
approach.
6. None
of the options are correct.
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15.
Which of the following are viable techniques to cope with the
uncertainty inherent in realistic financial projections?
16.
Simulation
17.
Ad hoc adjustments
III. Scenario analysis
1. Sensitivity
analysis
1. II
and IV only
2. III
and IV only
3. II,
III, and IV only
4. I,
II, and III only
5. I,
III, and IV only
6. I,
II, III, and IV
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16.
Which one of the following statements is correct concerning the
cash balance of a firm?
1. Most
firms attempt to maintain a zero cash balance at all times.
2. The
cumulative cash surplus shown on a cash budget is equal to the ending cash
balance plus the minimum desired cash balance.
3. Most
firms attempt to maximize the cash balance at all times.
4. A
cumulative cash deficit on a cash budget indicates the need to acquire
additional funds.
5. The
ending cash balance must equal the minimum desired cash balance.
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17.
Assume each month has 30 days and AmDocs has a 60-day accounts
receivable period. During the second calendar quarter of the year (April, May,
and June), AmDocs will collect payment for the sales it made during which of
the months listed below?
1. October,
November, and December
2. November,
December, and January
3. December,
January, and February
4. January,
February, and March
5. February,
March, and April
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18.
The Limited collects 25 percent of sales in the month of sale,
60 percent of sales in the month following the month of sale, and 15 percent of
sales in the second month following the month of sale. During the month of
April, the firm will collect
1. 60
percent of February sales.
2. 15
percent of April sales.
3. 60
percent of March sales.
4. 15
percent of March sales.
5. 25
percent of February sales.
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19.
Steve has estimated the cash inflows and outflows for his
sporting goods store for next year. The report that he has prepared summarizing
these cash flows is called a
1. pro
forma income statement.
2. sales
projection.
3. cash
budget.
4. receivables
analysis.
5. credit
analysis.
6. None
of the options are correct.
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20.
You are developing a financial plan for a corporation. Which of
the following questions will be considered as you develop this plan?
1. How
much will our sales grow?
2. Will
additional fixed assets be required?
III. Will dividends be paid to shareholders?
1. How
much new debt must be obtained?
1. I and
IV only
2. II
and III only
3. I,
III, and IV only
4. II,
III, and IV only
5. I,
II, III, and IV
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21.Ruff Wear expects sales of $560, $650, $670, and $610 for the
months of May through August, respectively. The firm collects 20 percent of
sales in the month of sale, 70 percent in the month following the month of
sale, and 8 percent in the second month following the month of sale. The remaining
2 percent of sales is never collected. How much money does the firm expect to
collect in the month of August?
1. $621
2. $628
3. $633
4. $639
5. $643
August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643
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22.
On May 1, Vaya Corp. had a beginning cash balance of $175.
Vaya’s sales for April were $430, and May sales were $480. During May, the firm
had cash expenses of $110 and made payments on accounts payable of $290. Vaya’s
accounts receivable period is 30 days. What is the firm’s beginning cash
balance on June 1?
1. $145
2. $155
3. $205
4. $215
5. $265
Cash balance = $175 − $110 − $290 + $430 = $205
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23.
You are preparing pro forma financial statements for 2017 using
the percent-of-sales method. Sales were $100,000 in 2016 and are projected to
be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be
$6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end
2016. 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 2017?
1. $55,000
2. $56,000
3. $60,000
4. Insufficient
information is provided to project equity in 2017.
All of net income was added to equity in 2016, so all of net
income will be added to equity in 2017. $50,000 + $6,000 = $56,000.
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|
[The following information
applies to the questions displayed below.] |
|||
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Oscar’s Incredible Eatery ($ thousands) |
||
|
|
Income Statement for the year ending
Dec. 31, 2017 |
||
|
|
Net sales |
17,300 |
|
|
|
Cost of goods sold |
10,600 |
|
|
|
Depreciation |
3,250 |
|
|
|
Earnings before interest and taxes |
3,450 |
|
|
|
Interest expense |
680 |
|
|
|
Earnings before tax |
2,770 |
|
|
|
Tax |
940 |
|
|
|
Earnings after tax |
1,830 |
|
|
|
Dividends |
450 |
|
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|
Oscar’s Incredible Eatery ($ thousands) |
|
|
|
||
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|
Balance Sheet as of Dec. 31, 2017 |
1,920 |
|
|
||
|
|
Cash |
350 |
Accounts payable |
|
|
|
|
|
Accounts receivable |
940 |
Long-term debt |
3,500 |
|
|
|
|
Inventory |
2,360 |
Common stock |
7,500 |
|
|
|
|
Total current assets |
3,650 |
Retained earnings |
1,580 |
|
|
|
|
Net fixed assets |
10,850 |
|
|
|
|
|
|
Total assets |
14,500 |
Total liab. & equity |
14,500 |
|
|
|
|
|
|
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|
|
|
24.
Please refer to Oscar’s financial statements above. What was
Oscar’s increase in retained earnings during 2017?
1. $450
2. $1,380
3. $1,830
4. $2,280
5. None
of the options are correct.
1,830 − 450 = 1,380
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25.
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?
309.
$1,309.19
310.
$1,421.40
311.
$1,884.90
312.
$2,667.78
313.
$3,001.40
314.
None of the options are correct.
Projected addition to retained earnings = $1,380 × (1 + 0.03) =
$1,421.40
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26.
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?
1. $949
2. $1,034
3. $1,113
4. $1,730
5. $2,670
6. None
of the options are correct.
Pro forma accounts receivable = $940 × (1 + 0.10) = $1,034
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27.
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?
1. -$410
2. -$260
3. $235
4. $1,320
5. $7,240
6. None
of the options are correct.
Projected total assets = $14,500 × 1.10 = $15,950 Projected
total liabilities = $1,920 × 1.10 + $3,500 = $5,612 Projected total equity =
$7,500 + ($1,580 + $1,380 × 1.1) = $10,598 External financing needed = $15,950
− ($5,612 + $10,598) = −$260
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28.
Please refer to Oscar’s financial statements above. Assume a
constant debt-equity ratio, net profit margin, and dividend payout ratio, and
further assume all of Oscar’s expenses, assets, and current liabilities vary
directly with sales. What is the pro forma net fixed asset value for next year
if sales are projected to increase by 7.5 percent?
857.
$10,857.50
858.
$10,931.38
859.
$11,663.75
860.
$15,587.50
861.
$18,987.50
862.
None of the options are correct.
Pro forma net fixed assets = $10,850 × (1 + 0.075) = $11,663.75
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[The following information applies to the questions displayed
below.]
Financial Statements for Royal Corporation
Actual 2016 and Pro Forma 2017 ($ millions)
|
|
Income Statement |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
2016 |
|
|
2017 |
Cash & securities |
|
2016 |
|
|
2017 |
|
|
|
|
|
|
$ |
47,616 |
|
$ |
52,378 |
$ |
951 |
|
$ |
1,046 |
|
|
|
|||
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|
Cost of goods sold |
|
40,718 |
|
|
44,790 |
Accounts receivable |
|
5,666 |
|
|
6,233 |
|
|
|
|
|
|
Other expenses |
|
5,171 |
|
|
5,688 |
Inventories |
|
4,236 |
|
|
4,660 |
|
|
|
|
|
|
Depreciation expense |
|
1,000 |
|
|
1,100 |
|
Net fixed assets |
|
4,048 |
|
|
|
|
|
|
|
|
EBIT |
|
727 |
|
|
800 |
Total assets |
|
14,901 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
215 |
|
|
215 |
|
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|
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|
|
|
|
|
|
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|
||||
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|
Earnings before tax |
|
512 |
|
|
585 |
Bank loan (short-term) |
$ |
392 |
$ |
431 |
|
|
|
||
|
|
Tax |
|
154 |
|
|
176 |
|
Accounts payable |
|
7,419 |
|
|
8,161 |
|
|
|
|
|
Net income |
$ |
359 |
|
$ |
409 |
Long-term debt |
|
2,148 |
|
|
|
|
|
|
|
|
|
Dividends paid |
|
90 |
|
|
102 |
|
Total liabilities |
|
9,959 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
4,942 |
|
|
|
|
|
|
|||
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Add. to retained earnings |
$ |
269 |
|
|
|
|
Total liabilities & equity |
$ |
14,901 |
|
|
|
|
|
|
29.
In the above financial statements, Royal Corporation has
prepared (incomplete) pro forma financial statements for 2017 based on actual financial
statements for 2016. Royal Corp. used the percent-of-sales method, assuming a
sales growth rate of 10% for 2017. If capital expenditures are planned to be
$1,615 in 2017, then what would be the appropriate projection for net fixed
assets in 2017?
1. $4,453
2. $4,563
3. $4,663
4. $5,663
4,048 + 1,615 − 1,100 = $4,563
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30.
Please refer to the pro forma financial statements for Royal
Corporation above. If Royal Corporation plans to issue $100 in new equity in
2017, what should be the projection for shareholders’ equity for 2017?
1. $5,349
2. $5,436
3. $5,451
4. $5,536
4,942 + 307 + 100 = $5,349
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31.
Please refer to the pro forma financial statements for Royal
Corporation above. Assume that net fixed assets are projected to be $5,000 for
2017 and that shareholders’ equity is projected to be $5,500 for 2017. If
long-term debt is the plug figure, what should be the projection for long-term
debt for Royal Corporation in 2017?
1. $2,206
2. $2,363
3. $2,455
4. $2,847
Total assets would be 1,046 + 6,233 + 4,660 + 5,000 = $16,939
Total liabilities and equity, without long-term debt, would be
431 + 8,161 + 5,500 = $14,092 Long-term debt must make up the difference =
16,939 − 14,092 = $2,847
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Difficulty: 2 Medium
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[The following information applies to the questions displayed
below.]
|
Selected assumptions for 2018 |
||
|
Sales growth rate |
9 |
% |
|
Cost of goods sold/Sales |
62 |
% |
|
Dividends/Net income |
40 |
% |
|
Income Statement |
Balance Sheet |
||||||||||||
|
Actual |
Forecast |
Actual |
Forecast |
||||||||||
|
2017 |
2018 |
2017 |
2018 |
||||||||||
|
Sales |
$ |
1,000 |
Cash |
$ |
100 |
||||||||
|
Cost of goods sold |
600 |
Accounts receivable |
200 |
||||||||||
|
Operating expense |
200 |
Inventory |
500 |
||||||||||
|
Depreciation expense |
100 |
Total Current Assets |
800 |
||||||||||
|
EBIT |
100 |
Net PP&E |
1,000 |
||||||||||
|
Interest expense |
35 |
Total Assets |
1,800 |
||||||||||
|
Pre-tax income |
65 |
Accounts payable |
300 |
||||||||||
|
Tax |
26 |
Bank loan |
100 |
||||||||||
|
Net Income |
$ |
39 |
Total Current Liabilities |
400 |
|||||||||
|
Long-Term Debt |
400 |
||||||||||||
|
Shareholders’ Equity |
1,000 |
||||||||||||
|
Total Liabilities & Equity |
$ |
1,800 |
|||||||||||
32.
Please refer to the spreadsheet above. Selected assumptions are
given for preparing pro forma financial statements for 2018. Which of the
following formulas would correctly give the forecast for sales in cell C8?
1. = B8
× B2
2. = B8
+ B8 × B2
3. = (1
+ B8) × B2
4. =
(1/B2) × B8
5. None
of the options are correct.
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33.
Please refer to the spreadsheet above. Selected assumptions are
given for preparing pro forma financial statements for 2018. When the pro formas
are completed, which of the following formulas would correctly give the
forecast for cost of goods sold in cell C9?
1. = B9
× B3
2. = B9
+ B9 × B3
3. = B8
× B3
4. = B9
× B2
5. None
of the options are correct.
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34.
Please refer to the spreadsheet above. Selected assumptions are
given for preparing pro forma financial statements for 2018. Assume that no new
equity will be issued in 2018. When the pro formas are completed, which of the
following formulas would correctly give the forecast for shareholders’ equity
in cell G19?
1. = F19
× B2
2. = F19
× (1 + B2)
3. = F19
+ (1 − B4) × C16
4. = F19
+ B4 × C16
5. None
of the options are correct.
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35.
Which of the following statements is correct if a firm’s pro
forma financial statements project net income of $12,000 and external financing
required of $5,000?
1. Total
assets cannot grow by more than $10,000.
2. Dividends
cannot exceed $10,000.
3. Retained
earnings cannot grow by more than $12,000.
4. Long-term
debt cannot grow by more than $5,000.
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36.
Pro forma financial statements, by definition, are predictions
of a company’s financial statements at a future point in time. So, why is it
important to analyze the historical performance of the company before
constructing pro forma financial statements?
Historical analysis helps decide for which financial statement
items a percent-of-sales forecast might be appropriate. For example, a stable
trend in the collection period would tell you that, unless you expect changes
in the management of the accounts receivable, future collection periods should
continue along this trend.
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37.
Edna’s Laundry Services just completed pro forma statements
using the percentage-of-sales approach. The pro forma shows a projected
external financing need of -$5,500. Interpret this figure. What are the firm’s
options in this case?
A negative value implies that the company has excess cash above
its desired minimum. With a negative external financing need, the firm has a
surplus of funds that it can use to reduce current liabilities, reduce
long-term debt, buy back common stock, or increase dividends. If acceptable
opportunities exist, the firm might also use the extra funds to purchase fixed
assets, thereby increasing its potential growth, should that action be
warranted.
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38.
Preston Fencing Company’s sales, half of which are for cash and
the other half sold on credit, over the past three months were:
39.
Estimate Preston’s cash receipts in October if the company’s
collection period is 30 days.
40.
Estimate Preston’s cash receipts in October if the company’s
collection period is 45 days.
41.
What would be Preston’s accounts receivable balance at the end
of October if the company’s collection period is 30 days? 45 days?
1. If
the collection period is 30 days, October cash receipts from September sales
will equal half of September sales or $60,000. In addition, the company will
receive cash from half of October sales, which were for cash of $40,000. The
total is $100,000.
2. With
a 45–day collection period, cash collected during the first half of October is
from credit sales made from the middle until the end of August; and collections
during the second half of October are from credit sales made from the beginning
until the middle of September. Therefore, cash receipts from credit sales
(which are half of total sales) are from the period mid-August through
mid–September, or (70,000/2 + 120,000/2)/2 = $47,500. Adding sales for cash of
$40,000 in October, the total is $87,500.
3. If
the collection period is 30 days, then the October accounts receivable balance
should be the last 30 days” worth of credit sales. October credit sales were
$40,000, thus the accounts receivable balance would be $40,000.
If the collection period is 45 days, then the balance would be October”s credit
sales and half of September”s credit sales, or 40,000 + 60,000/2 = $70,000.
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39.
Suppose your colleague constructed a pro forma balance sheet and
a cash budget for your company for the same time period, and the external
financing required from the pro forma forecast exceeded the cash deficit
estimated on the cash budget. How would you interpret this result?
This would tell you that your colleague had erred in
constructing one or both of the forecasts. Using the same assumptions and
avoiding accounting and arithmetic errors, estimated external financing
required should equal estimated cash surplus or deficit for the same date.
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40.
Complete the following pro forma financial statements for XYZ
Corporation. Use the percent-of-sales method and use long-term debt as the plug
figure (balancing item). Assume the following: 20% sales growth, capital
expenditures of $200 in 2018, no equity issues or repurchases in 2018, no sale
or disposal of fixed assets in 2018, and a 50% dividend payout ratio. Round
figures to the nearest whole dollar.
XYZ Corporation Financial Statements
Actual 2017 and Pro Forma 2018
|
Income Statement |
|
|
|
|
Balance Sheet |
|
|
|
|
2017 |
2018 |
|
2017 |
2018 |
|
sales |
$ |
1,000 |
|
Current assets |
$ 300 |
|
|
COGS |
|
700 |
|
Net fixed assets |
500 |
|
|
Operating expense |
|
100 |
|
Total assets |
800 |
|
|
Depreciation expense |
|
100 |
130 |
|
|
|
|
EBIT |
|
100 |
|
Current liabilities |
400 |
|
|
Interest expense |
|
25 |
20 |
Long-term debt |
200 |
|
|
Pre-tax income |
|
75 |
|
Equity |
200 |
|
|
Tax |
|
25 |
|
Total liabilities & equity |
$ 800 |
|
|
Net income |
$ |
50 |
|
|
|
|
XYZ Corporation Financial Statements
Actual 2017 and Pro Forma 2018
|
Income Statement |
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
2017 |
|
2018 |
|
2017 |
|
2018 |
|
sales |
$ |
1,000 |
$ |
1,200 |
Current assets |
$ 300 |
$ |
360 |
|
COGS |
|
700 |
|
840 |
Net fixed assets |
500 |
|
570 |
|
Operating expense |
|
100 |
|
120 |
Total assets |
800 |
|
930 |
|
Depreciation expense |
|
100 |
|
130 |
|
|
|
|
|
EBIT |
|
100 |
|
110 |
Current liabilities |
400 |
|
480 |
|
Interest expense |
|
25 |
|
20 |
Long-term debt |
200 |
|
220 |
|
Pre-tax income |
|
75 |
|
90 |
Equity |
200 |
|
230 |
|
Tax |
|
25 |
|
30 |
Total liabilities & equity |
$ 800 |
$ |
930 |
|
Net income |
$ |
50 |
$ |
60 |
|
|
|
|
Notes: Net fixed assets = 500 + 200 − 130 = 570
Equity = 200 + 0.5 × 60 = 230
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: manual
Chapter 03 Test BankSummary
|
Category |
# of Questions |
|
Accessibility: Keyboard Navigation |
40 |
|
Difficulty: 1 Easy |
27 |
|
Difficulty: 2 Medium |
13 |
|
Gradable: automatic |
35 |
|
Gradable: manual |
5 |
Chapter 05 Test Bank
1. In
the steps a company takes to prepare for an IPO, the “road show” precedes the
“bake-off”.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
2. The
only reason why the price would fall on a corporate bond is if market interest
rates increase.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
3. After
issue, the market price of a fixed-rate bond can differ substantially from its
par value.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
4. Bond
investors should be more concerned with real returns than with nominal returns.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
5. Investment–grade
bonds are usually defined as bonds with ratings of BBB– or higher.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
6. Private
equity firms comprise a relatively insignificant portion of the American
economy.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
7. Shelf
registration is possible for both debt and equity issues.
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