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chapter 5
Indicate whether the statement is true or false.
1. The equity multiplier is considered an efficiency ratio.
a. True
b. False
2. 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).
a. True
b. False
3. Industry comparable ratio analysis involves comparing a venture’s ratios against the industry average for the same
ratios.
a. True
b. False
4. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency
ratios.
a. True
b. False
5. Net cash burn occurs when cash burn exceeds cash build in a specified time period.
a. True
b. False
6. The current ratio and the quick ratio differ only because average inventories are subtracted in the numerator of the
quick ratio.
a. True
b. False
7. Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations.
a. True
b. False
8. Financial ratios are a useful way to summarize large amounts of financial data to simplify comparisons of a venture’s
performance with itself and other firms over time.
a. True
b. False
9. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.
a. True
b. False
10. Commercial banks are important users of financial ratios and measures during the development and startup stages of
ventures.
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a. True
b. False
11. During the development and startup stages of a venture’s life cycle, important financial ratios and measures include
cash burn rates and liquidity ratios.
a. True
b. False
12. Leverage ratios are generally considered to be more important during a venture’s survival and rapid-growth stages
compared to the development and startup stages.
a. True
b. False
13. Profitability and efficiency ratios are generally considered to be more important during a venture’s development and
startup stages compared to the survival and rapid-growth stages.
a. True
b. False
14. Total debt includes current liabilities, long-term debt, and retained earnings.
a. True
b. False
15. The part of a venture’s interest payment that is subsidized by the government because of the deductibility of interest is
called the interest tax shield.
a. True
b. False
16. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.
a. True
b. False
17. Investment bankers are users of financial ratios and measures primarily during a venture’s rapid-growth stage relative
to the development and startup stages.
a. True
b. False
18. Cash burn is the cash a venture expends on its operating, financing, and depreciation expenses.
a. True
b. False
19. Financial ratios show the relationships between two or more financial variables or between financial variables and
time.
a. True
b. False
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chapter 5
20. The return on assets model states: ROA = Net Profit Margin × Asset Turnover × Equity Multiplier.
a. True
b. False
21. The cash burn rate is the cash burn for a fixed period of time, typically a month.
a. True
b. False
22. Net working capital is calculated as fixed assets minus current liabilities.
a. True
b. False
23. The types of financing used during the survival life cycle stage is second-round, mezzanine, and liquidity-stage
financing.
a. True
b. False
24. Trend analysis is used to examine a venture’s performance over time.
a. True
b. False
25. Second-round, mezzanine, and liquidity-stage financing generally occur during a venture’s survival stage.
a. True
b. False
26. If a firm has positive net income, a decrease in a venture’s asset intensity ratio will increase its ROE.
a. True
b. False
27. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and
efficiency ratios.
a. True
b. False
28. For a venture with inventories, the quick ratio will always be greater than the current ratio.
a. True
b. False
29. A venture’s cash, marketable securities, and receivables comprise its liquid assets.
a. True
b. False
30. The term “cash build” as used in Chapter 5 is equal to net sales minus the change in receivables.
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a. True
b. False
31. Net working capital is a dollar amount measure of the cushion between current assets and current liabilities.
a. True
b. False
32. Liquidity ratios indicate the venture’s ability to pay short-term assets from short-term liabilities.
a. True
b. False
33. The equity multiplier shows the extent by which assets are supported by equity and debt.
a. True
b. False
34. One must be cautious in stating whether a specific ratio is good or bad because “goodness” is frequently a matter of
perspective or strategy.
a. True
b. False
35. Net working capital reflects current assets deducted from current liabilities.
a. True
b. False
36. Cross-sectional analysis is used to examine a venture’s performance over time.
a. True
b. False
37. Cash burn, liquidity, and conversion ratios are important during the development and startup life cycle stages.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
38. A venture has net sales of $400,000, cost of goods sold of $200,000, operating expenses (selling, general, and
administrative) of $100,000, and interest expenses of $50,000. What is the operating profit margin?
a. 50%
b. 75%
c. 25%
d. 40%
39. Which of the following statements is true?
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
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c. ROE measures the return on the enterprise
d. ROA measures the return on fixed assets
40. Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218. The interest coverage ratio for Rogex is:
a. 6.5 times
b. 4.5 times
c. 9.7 times
d. 1.5 times
41. Net income divided by net sales is the calculation for:
a. net operating profit after taxes margin
b. net profit margin
c. operating profit margin
d. gross profit margin
42. Which of the following is used to compare a venture’s performance against another firm at the same point in time?
a. qualitative analysis
b. trend analysis
c. cross-sectional analysis
d. industry comparable analysis
43. Which of the following is not a basic ratio technique used to conduct financial analysis?
a. trend analysis
b. sensitivity analysis
c. cross-sectional analysis
d. industry comparable analysis
44. Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218. What is the operating profit margin for Rogex?
a. 26.2%
b. 56.3%
c. 43.3%
d. 30.3%
45. A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories =
$10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the
firm’s quick ratio?
a. 1.00
b. 1.11
c. 1.22
d. 1.33
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chapter 5
46. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid,
$218. What is Rogex’s sales-to-total-assets ratio?
a. 1.91 times
b. 0.25 times
c. 0.52 times
d. 0.23 times
47. How is net cash burn calculated?
a. Net Cash Burn = Cash Burn + Cash Build
b. Net Cash Burn = Cash Build – Cash Burn
c. Net Cash Burn = Cash Burn – Cash Build
d. Net Cash Burn = Cash Burn – Cash Build2
48. Last year, Lenny’s Lemonade had $3,500 in sales, and cost of goods sold 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?
a. 6.43%
b. 20.70%
c. 2.14%
d. 22.86%
49. 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?
a. fixed-charges coverage
b. debt-to-equity ratio
c. equity multiplier
d. interest coverage
50. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. The total-debt-to-total-assets ratio for Rogex
is:
a. 0.48
b. 0.71
c. 0.27
d. 0.53
51. A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories =
$10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the
firm’s net-working-capital-to-total-assets ratio?
a. 0.11
b. 0.13
c. 0.15
d. 0.17
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chapter 5
52. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the debt-to-equity ratio for Rogex?
a. 0.91
b. 2.15
c. 0.48
d. 1.12
53. Net sales minus cost of goods sold when divided by sales is called:
a. gross profit margin
b. operating profit margin
c. net profit margin
d. net operating profit after taxes margin
54. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the equity multiplier for Rogex?
a. 2.35 times
b. 0.48 times
c. 1.12 times
d. 1.91 times
55. Using the following information, determine the average monthly net cash 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
56. Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218. What is the net profit margin for Rogex?
a. 22.7%
b. 7.9%
c. 18.4%
d. 26.2%
57. Which of the following is used to compare a venture’s performance against the average performance of other firms in
the same industry?
a. qualitative analysis
b. trend analysis
c. cross-sectional analysis
d. industry comparable analysis
58. First-round financing occurs primarily during which of the following life cycle stages?
a. development stage
b. startup stage
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c. survival stage
d. rapid-growth stage
59. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620.What is the current ratio for Rogex?
a. 1.46
b. 1.33
c. 1.23
d. 1.21
60. Which of the following is not an efficiency and return measure?
a. sales-to-total-assets ratio
b. return on equity
c. return on assets
d. inventory-to–total-assets ratio
61. Last year, Lenny’s Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled
$500, and interest expense was $700. If the tax rate is 25%, what is its NOPAT margin?
a. 11.86%
b. 21.43%
c. 26.57%
d. 29.14%
62. Which of the following ratios is calculated as (Average Current Assets – Average Inventories) ÷ Average Current
Liabilities?
a. current ratio
b. quick ratio
c. net-working-capital ratio
d. current liabilities-to–total-debt ratio
63. Which of the following ratios is computed by dividing the average total assets by the average owners’ equity?
a. equity multiplier
b. debt-to-equity ratio
c. current liabilities-to-total-debt ratio
d. current ratio
64. The term “cash build” is measured as:
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
65. Which of the following is used to examine a venture’s performance over time?
a. qualitative analysis
b. trend analysis
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c. cross-sectional analysis
d. industry comparable analysis
66. Investment bankers often play an important role in which of the following life cycle stages?
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
67. Last year, Nemo’s Fish ‘n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000;
selling and administrative expenses = $25,000; depreciation and amortization = $7,000; and interest expense = $12,000.
The tax rate was 30%. Find Nemo’s interest coverage for last year.
a. –0.29 times
b. 0.66 times
c. 0.86 times
d. 1.25 times
68. Investment bankers and commercial banks are important users of financial ratios and measures during which of the
following life cycle stages?
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
69. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218. What is the return on equity for Rogex?
a. 26.1%
b. 44.7%
c. 62.6%
d. 18.4%
70. 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.
a. $15,000
b. $30,000
c. $60,000
d. $120,000
71. The type of financing used during the rapid-growth life cycle stage includes:
a. second-round financing
b. mezzanine financing
c. liquidity-stage financing
d. all of these choices
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72. Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218. What is the gross profit margin for Rogex?
a. 26.2%
b. 30.3%
c. 43.3%
d. 56.3%
73. The entrepreneur, business angels, and VCs are important users of financial ratios and measures during which of the
following life cycle stages?
a. development and startup stages
b. survival and rapid-growth stages
c. development, startup, and rapid-growth stages
d. development, startup, survival, and rapid-growth stages
74. Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850;
inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term
liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210;
depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid =
$218.What is Rogex’s return on total assets?
a. 9.6%
b. 13.6%
c. 19.1%
d. 37.9%
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Answer Key
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