Entrepreneurial Finance International Edition 3rd Edition by J. Chris Leach - Test Bank

Entrepreneurial Finance International Edition 3rd Edition by J. Chris Leach – Test Bank

 

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Sample Questions Are Posted Below

 

CHAPTER 5

 

EVALUATING FINANCIAL PERFORMANCE

 

True-False Questions

 

1. 1. Showing the relationships between two or more financial variable and /or time, financial ratios are useful means of summarizing large amounts of financial data for comparative purposes.

 

2. 2. Liquidity ratios indicate the venture’s ability to pay short term assets from short-term liabilities.

 

3. 3. Net working capital reflects current assets deducted from current liabilities.

 

4. 4. Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash.

 

5. 5. The sum of the inventory-to-sale conversion period and the purchase-to-payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle.

 

6. 6. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.

 

7. 7. The equity multiplier shows the extent by which assets are supported by equity and debt.

 

8. 8. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.

 

9. 9. The proportion of a venture’s interest payment that is paid by the government because of the deductibility of interest before taxes are paid is called the income tax shield.

 

10. 10. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

 

11. 11. Trend analysis is used to examine a venture’s performance over time.

 

12. 12. Cross-sectional analysis is used to examine a venture’s performance over time.

 

13. 13. The term “cash build” as used in Chapter 5 is equal to net sales minus the change in receivables.
14. 14. The cash conversion cycle refers to the time it takes to convert a sale into net income.

 

15. 15. The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day.

 

16. 16. During the development and startup stages of a venture’s life cycle, important financial ratios and measures include cash burn rates, liquidity ratios, and conversion period ratios.

 

17. 17. During the development and startup stages of a venture’s life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).

 

18. 18. Profitability and efficiency ratios are generally considered to be more important during the development and startup stages compared to the survival and rapid-growth stages.

 

19. 19. Leverage ratios are generally considered to be more important during the survival and rapid-growth stages compared to the development and startup stages.

 

20. 20. Commercial banks are important users of financial ratios and measures during the development and startup stages of ventures.

 

21. 21. Investment bankers are users of financial ratios and measures of ventures primarily during the rapid-growth stage relative to the development and startup stages.

 

22. 22. Second-round, mezzanine, and liquidity-stage financing generally occur during a venture’s survival stage.

 

23. 23. “Cash burn” is the cash a venture expends on its operating, financing, and depreciation expenses.

 

24. 24. “Net cash burn” occurs when cash burn exceeds cash build in a specified time period.

 

25. 25. The “cash burn rate” is the cash burn for a fixed period of time, typically a month.

 

26. 26. “Net working capital” is calculated as fixed assets minus current liabilities.

 

27. 27. The “cash conversion cycle” measures the time it takes to pay off the principal on a loan.

 

 

Multiple-Choice Questions

 

1. 1. Which of the following is used to examine a venture’s performance over time?
2. qualitative analysis
3. trend analysis
4. cross sectional analysis
5. industry comparable analysis

 

2. 2. Which of the following is used to compare a venture’s performance against another firm at the same point in time?
3. qualitative analysis
4. trend analysis
5. cross sectional analysis
6. industry comparable analysis

 

3. 3. Which of the following is used to compare a venture’s performance against the average performance of other firms in the same industry?
4. qualitative analysis
5. trend analysis
6. cross sectional analysis
7. industry comparable analysis

 

4. 4. Which of the following is not part of the operating cycle?
5. time it takes to purchase products
6. time it takes to produce products
7. time it takes to sell the products
8. time it takes to pay suppliers
9. time it takes to collect receivables

 

5. 5. Which one of the following “measures” the average days of sales committed to the extension of trade credit?
6. sale-to-cash conversion period
7. inventory-to-sale conversion period
8. purchase-to-payment conversion period
9. cash conversion cycle period

 

6. 6. Which of the following is measured by dividing the average daily cost of goods sold into the average inventory?
7. sale-to-cash conversion period
8. inventory-to-sale conversion period
9. purchase-to-payment conversion period
10. cash conversion cycle

 

7. 7. Which of the following measures the average time from purchase of materials and labor to actual cash payment?
8. sale-to-cash conversion period
9. inventory-to-sale conversion period
10. purchase-to-payment conversion period
11. cash conversion cycle

 

8. 8. Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing?
9. sale-to-cash conversion period
10. inventory-to-sale conversion period
11. purchase-to-payment conversion period
12. cash conversion cycle

 

9. 9. The difference between a venture’s ability to generate cash to pay interest and the amount of interest it has to pay is determined by which of the following ratios?
10. fixed charges coverage
11. debt to asset
12. equity multiplier
13. debt to equity
14. interest coverage

 

10. 10. Which of the following is not a profitability and efficiency ratio?
11. sales-to-total-assets
12. return on equity
13. return on assets
14. inventory-to-total assets
15. NOPAT profit margin

 

 

Note: The following information should be used for the next eleven  (11 through 21) problems.

In its closing financial statements for its first year in business, the Runs and Goses Company, had cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of  $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of  $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.

 

 

 

11. 11. What is the return on equity for Runs and Goses?
12. 26.1%
13. 44.7%
14. 62.6%
15. 18.4%
16. 7.9%

 

12. 12. What is Runs and Goses’ return on total assets?
13. 9.6%
14. 13.7%
15. 19.1%
16. 37.9%
17. 22.5%

 

13. 13. What is the net profit margin for Runs and Goses?
14. 60.0%
15. 22.7%
16. 7.9%
17. 18.4%
18. 26.2%

 

14. 14. Runs and Goses operating profit margin is?
15. 26.2%
16. 56.3%
17. 43.3%
18. 30.3%
19. 60.0%

 

15. 15. The gross profit margin for Runs and Goses is?
16. 26.2%
17. 30.3%
18. 43.3%
19. 56.3%
20. 60.0%
21. 16. What is Runs and Goses’ sales to total asset ratio?
22. 1.91
23. 0.25
24. 0.52
25. 0.23
26. 0.57

 

17. 17. What is the current ratio for Runs and Goses?
18. 1.46
19. 1.33
20. 1.23
21. 1.21
22. 1.13

 

18. 18. The total-debt-total-asset ratio for Runs and Goses is?
19. 0.48
20. 0.71
21. 0.27
22. 0.53
23. 0.82

 

19. 19. What is Runs and Goses’ debt-to-equity ratio?
20. 0.92
21. 2.15
22. 0.48
23. 1.12
24. 2.32

 

20. 20. What is the equity multiplier for Runs and Goses?
21. 4.59 times
22. 2.35 times
23. 0.48 times
24. 1.12 times
25. 1.91 times

 

21. 21. The interest coverage ratio for Runs and Goses is:
22. 6.5 times
23. 4.5 times
24. 7.5 times
25. 3.5 times
26. 1.5 times

 

 

22. 22. Which one of the following conversion periods operates to reduce the length of the cash conversion cycle?
23. inventory-to-sale conversion period
24. sale-to-cash conversion period
25. purchase-to-payment conversion period
26. fixed assets-to-usage conversion period

 

23. 23. The term “cash build” is measured as:
24. net income plus depreciation
25. net sales minus expenses minus (pus) an increase (decrease) in inventories
26. net sales minus (plus) an increase (decrease) in receivables
27. net income plus depreciation minus (plus) an increase (decrease) in payables

 

24. 24. Which one of the following conversion periods is not a component in the cash conversion cycle?
25. inventory-to-sale conversion period
26. sale-to-cash conversion period
27. purchase-to-payment conversion period
28. fixed assets-to-usage conversion period

 

25. 25. Which one of the following is not a basic ratio techniques used to conduct financial analysis?
26. trend analysis
27. sensitivity analysis
28. cross-sectional analysis
29. industry comparables analysis

 

26. 26. Based on the following information, determine the venture’s cash conversion cycle: Inventory-to-sale conversion period = 112.9 days; Sale-to-cash conversion period= 57.1 days; and Purchase-to-payment conversion period = 76.8 days.
    170. 0 days
    171. 7 days
    172. 2 days
    173. 8 days
    174. 9 days

 

27. 27. Based on the following information, determine the average receivables (rounded to thousands of dollars) that were outstanding: Net sales = $575,000; Sale-to-cash conversion period = 57.1 days; Purchase-to-payment conversion period = 76.8 days; and Cost of goods sold = $380,000.

1. $90,000
2. $180,000
3. $121,000
4. $31,000
5. $41,000

 

28. 28. Based on the following information, determine the venture’s inventory-to-sale conversion period: cash conversion cycle = 250 days; sale-to-cash conversion period = 60 days; and purchase-to-payment conversion period = 70 days.
    1. 70 days
    2. 140 days
    3. 240 days
    4. 260 days
    5. 330 days

 

29. 29. Investment bankers and commercial banks are important users of financial ratios and measures during which of the following life cycle stages?
30. Development stage
31. Startup stage
32. Survival stage
33. Rapid-growth stage
34. All four stages

 

30. 30. The entrepreneur, angels, and VCs are important users of financial ratios and measures during which of the following life cycle stages?
31. Development stage
32. Startup stage
33. Survival stage
34. Rapid-growth stage
35. All four stages

 

31. 31. “Net cash burn” is calculated as:
32. cash burn plus cash build
33. cash build minus cash burn
34. cash burn minus cash build
35. cash burn minus cash build squared

 

32. 32. Using the following information, determine the monthly net cash burn rate:  net income = $20,000; interest = $10,000; cash build = $150,000; and cash burn = $186,000.
33. $1,000
34. $3,000
35. $4,000
36. $6,000
37. $7,000

 

33. 33. Determine the cash conversion cycle based on the following information:  inventory-to-sale conversion period = 112.9 days; sale-to-cash conversion period = 57.1 days; and purchase-to-payment conversion period = 76.8 days.
34. 93.2 days
35. 132.6 days
36. 170.0 days
37. 246.8 days
38. 365.0 days

 

34. 34. Use the following information to determine a firm’s “cash build:”  net sales = $150,000; net income = $15,000; beginning-of-period accounts receivable = $60,000; end-of-period accounts receivable = $90,000; and interest = $10,000.
35. $10,000
36. $15,000
37. $30,000
38. $60,000
39. $120,000

 

35. 35.  Calculate the sale-to-cash conversion period based on the following information:  average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000.
36.  240.0 days
37. 180.0 days
38. 90.0 days
39. 60.0 days
40. 45.0 days

 

36. 36.  Calculate the inventory-to-sale conversion period based on the following information:  average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000.
37. 240.0 days
38. 180.0 days
39. 90.0 days
40. 60.0 days
41. 45.0 days