31
CHAPTER 5
EVALUATING OPERATING AND FINANCIAL PERFORMANCE
True-False Questions
time, financial ratios are useful means of summarizing large amounts of
financial data for comparative purposes.
during a venture’s survival stage.
F. 3. Commercial banks are important users of financial ratios and measures
during the development and startup stages of ventures.
primarily during the rapid-growth stage relative to the development and
startup stages.
T. 5. Trend analysis is used to examine a venture’s performance over time.
time.
depreciation expenses.
time period.
T. 9. The “cash burn rate” is the cash burn for a fixed period of time, typically a
month.
change in receivables.
short-term liabilities.
liabilities.
F. 13. “Net working capital” is calculated as fixed assets minus current liabilities.
Chapter 5: Evaluating Operating and Financial Performance
32
venture’s “liquid assets”.
inventories are subtracted in the numerator of the quick ratio.
F. 16. For a venture with inventories, the quick ratio will always be greater than
the current ratio.
current assets and current liabilities.
its ability to meet debt obligations.
F. 19. Total debt includes current liabilities, long–term debt, and retained
earnings.
F. 20. How efficiently a venture controls its expenses and uses its assets and debt
is evaluated with profitability and efficiency ratios.
important financial ratios and measures include cash burn rates and liquidity
ratios.
important users of financial ratios and measures include the entrepreneur,
business angels, and venture capitalists (VCs).
survival and rapid–growth stages compared to the development and startup
stages.
F. 24. The equity multiplier is considered an efficiency ratio.
obligations is indicated by leverage ratios.
equity and debt.
T. 27. Accounting rules require that the current maturities of long-term debt
obligations be classified as short-term liabilities.
Chapter 5: Evaluating Operating and Financial Performance
33
important during the development and startup stages compared to the survival
and rapid-growth stages.
government because of the deductibility of interest is called the interest tax
shield.
F. 30. How efficiently a venture controls its expenses and uses its assets and debt
is evaluated with profitability and efficiency ratios.
turnover × the equity multiplier.
T. 32. If a firm has positive net income, a drop in a venture’s asset intensity ratio
will increase its ROE.
round, mezzanine, and liquidity-stage financing.
startup life cycle stages.
Multiple-Choice Questions
ratios and measures during which of the following life cycle stages?
a. Development stage
b. Startup stage
c. Survival stage
d. Rapid-growth stage
e. All four stages
and measures during which of the following life cycle stages?
a. Development stage
b. Startup stage
c. Survival stage
d. Rapid-growth stage
e. All four stages
time?
a. qualitative analysis
b. trend analysis
Chapter 5: Evaluating Operating and Financial Performance
34
c. cross sectional analysis
d. industry comparable analysis
another firm at the same point in time?
a. qualitative analysis
b. trend analysis
c. cross sectional analysis
d. industry comparable analysis
the average performance of other firms in the same industry?
a. qualitative analysis
b. trend analysis
c. cross sectional analysis
d. industry comparable analysis
financial analysis?
a. trend analysis
b. sensitivity analysis
c. cross-sectional analysis
d. industry comparables analysis
a. net income plus depreciation
b. net sales minus expenses minus (plus) an increase (decrease) in
inventories
c. net sales minus (plus) an increase (decrease) in receivables
d. net income plus depreciation minus (plus) an increase (decrease) in
payables
a. cash burn plus cash build
b. cash build minus cash burn
c. cash burn minus cash build
d. cash burn minus cash build squared
burn rate: annual net income = $20,000; annual interest = $10,000; annual
cash build = $150,000; and annual cash burn = $186,000.
a. $1,000
b. $3,000
c. $4,000
d. $6,000
Chapter 5: Evaluating Operating and Financial Performance
35
e. $7,000
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.
a. $10,000
b. $15,000
c. $30,000
d. $60,000
e. $120,000
average current liabilities is called which of the following ratios?
a. current ratio
b. quick ratio
c. net working capital ratio
d. current liabilities to total debt ratio
which of the following ratios?
a. equity multiplier
b. debt to equity ratio
c. current liabilities to total debt ratio
d. current ratio
of the following ratios?
a. gross profit margin
b. operating profit margin
c. net profit margin
d. net operating profit after taxes margin
a. net operating profit after taxes margin
b. net profit margin’
c. operating profit margin
d. gross profit margin
and the amount of interest it has to pay is determined by which of the
following ratios?
a. fixed charges coverage
b. debt to asset
c. equity multiplier
Chapter 5: Evaluating Operating and Financial Performance
36
d. debt to equity
e. interest coverage
a. sales-to-total-assets
b. return on equity
c. return on assets
d. inventory-to-total assets
e. NOPAT profit margin
a. ROA is always greater than or equal to ROE
b. an increase in the asset turnover ratio implies a decrease in the asset
intensity ratio
c. a and b
d. none of the above
$100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total
liabilities = $30,000; current liabilities = $15,000; notes payable = $2,000.
What are the firm’s quick and NWC–to-Total-Assets ratios?
a. 1.00 and .13
b. 1.33 and .13
c. 1.00 and .15
d. 1.33 and .15
sales = $85,000; cost of goods sold = $45,000; selling and administrative
expenses = $25,000; depreciation and amortization = $7,000; interest expense
= $12,000. The tax rate was 30%. Find Nemo’s interest coverage for last year.
a. –.29 times
b. .66 times
c. .86 times
d. 1.25 times
e. 3.33 times
operating expenses (selling, general, and administrative) of $100,000, and
interest expenses of $50,000. What is the operating profit margin?
a. 50.0%
b. 75%
c. 25%
d. 40%
Chapter 5: Evaluating Operating and Financial Performance
37
was $2,000. Depreciation expenses totaled $500 and interest expense was
$700. If the tax rate is 25%, what is the net profit margin for Lenny’s
Lemonade? What is its NOPAT margin?
a. 6.43% and 21.43%
b. 20.7% and 21.43%
c. 2.14% and 32.14%
d. 22.86% and 32.14%
Note: The following information should be used for the next eleven (22 through 32)
problems.
In its closing financial statements for its first year in business, the Runs and
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.
a. 26.1%
b. 44.7%
c. 62.6%
d. 18.4%
e. 7.9%
a. 9.6%
b. 13.6%
c. 19.1%
d. 37.9%
e. 22.5%
a. 60.0%
b. 22.7%
c. 7.9%
d. 18.4%
e. 26.2%
a. 26.2%
b. 56.3%
Chapter 5: Evaluating Operating and Financial Performance
38
c. 43.3%
d. 30.3%
e. 60.0%
d. 26. The gross profit margin for Runs and Goses is?
a. 26.2%
b. 30.3%
c. 43.3%
d. 56.3%
e. 60.0%
a. 1.91
b. 0.25
c. 0.52
d. 0.23
e. 0.57
a. 1.46
b. 1.33
c. 1.23
d. 1.21
e. 1.13
a. 0.48
b. 0.71
c. 0.27
d. 0.53
e. 0.82
a. 0.91
b. 2.15
c. 0.48
d. 1.12
e. 2.32
a. 4.59 times
b. 2.35 times
c. 0.48 times
d. 1.12 times
e. 1.91 times
Chapter 5: Evaluating Operating and Financial Performance
39
a. 6.5 times
b. 4.5 times
c. 9.7 times
d. 3.5 times
e. 1.5 times
include:
a. second-round financing
b. mezzanine financing
c. liquidity–stage financing
d. all of the above
cycle stages?
a. development stage
b. startup stage
c. survival stage
d. rapid–growth stage
life cycle stages?
a. development stage
b. startup stage
c. survival stage
d. rapid–growth stage