Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Chapter 4: Financial Statement Analysis and Forecasting
Multiple Choice Questions
1. Section: 4.1 Consistent Financial Analysis
Learning Objective: 4.1
Level of difficulty: Basic
2. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Intermediate
3. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Intermediate
4. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Basic
5. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
6. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of difficulty: Intermediate
7. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
8. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of difficulty: Intermediate
ADS
365/000,290,1
9. Section: 4.6 Liquidity Ratios
Learning Objective: 4.6
Level of difficulty: Intermediate
10. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of difficulty: Intermediate
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
11. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of difficulty: Basic
12. Section: 4.6 Liquidity Ratios
Learning Objective: 4.6
Level of difficulty: Basic
liabilities.
13. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Basic
14. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of difficulty: Basic
15. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of difficulty: Basic
Practice Problems
Basic
16. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Basic
Solution: The financial statements for Finns’ Fridges refer to “Owners’ Equity,” but this is
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
17. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Basic
18. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Basic
19. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of difficulty: Basic
Solution: From the year 2 statement of financial position, Debt Ratio = TL / TA = 3,210 / 4,700
20. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Basic
Intermediate
21. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
Solution: Operating Margin = NOI / S = 4.426 / 30.16 = 14.7% for the large competitor firm.
22. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of difficulty: Intermediate
Solution:
Year 1
Year 2
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Sales
23. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of difficulty: Intermediate
24. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
Solution:
25. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of difficulty: Intermediate
26. Section: 4.6
Learning Objective: 4.6 Liquidity Ratios
Level of difficulty: Intermediate
Solution:
Year 1
Year 2
Working Capital Ratio = CA / TA
1,150 / 4,990 = 23.0%
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
27. Section: 4.8 Financial Forecasting
Learning Objective: 4.8
Level of difficulty: Intermediate
Solution:
Percentage of Sales Balance Sheet for Finns’ Fridges
Year 2
% of
Sales
199.1%
28. Section: 4.8 Financial Forecasting
Learning Objective: 4.8
Level of difficulty: Intermediate
Solution:
a.
Forecast of Balance Sheet for Finns’ Fridges
% of
Sales
Year 3
Forecast
Sales
2,600
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
Common shares
–
1,000
29. Section: 4.8 Financial Forecasting
Learning Objective: 4.8
Level of difficulty: Intermediate
Solution: In Year 2, selling expenses were $220 / $2,200 = 10% of revenues. With revenues of
30. Section: 4.8 Financial Forecasting
Learning Objective: 4.8
Level of difficulty: Intermediate
Solution: For Year 1, Dividend Payout = DPS / EPS = 2.00 / 4.13 = 48.43%, and for Year 2,
31. Section: 4.8 Financial Forecasting
Learning Objective: 4.8
Level of Difficulty: Intermediate
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
32. Section: 4.8 Financial Forecasting
33. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
34. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of difficulty: Intermediate
Solution: The market value of equity is simply the market price of a share times the number of
35. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of difficulty: Intermediate
Solution: Re-arranging the P/E ratio equation, we find EPS = P/(P/E ratio). To find the expected
36. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of difficulty: Intermediate
Solution: We know (see Problem 34) that the market value of equity, MVE = $72.8 million. So,
37. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
38. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of difficulty: Intermediate
Solution:
39. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of difficulty: Intermediate
Solution:
40. Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of Difficulty: Intermediate
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
41 Section: 4.2 A Framework for Financial Analysis
Learning Objective: 4.2
Level of Difficulty: Intermediate
42 Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of Difficulty: Intermediate
Solution:
In year 1,
In year 2,
43. Section: 4.3 Leverage Ratios
Learning Objective: 4.3
Level of Difficulty: Intermediate
Solution:
44. Section: 4.4 Efficiency Ratios
Learning Objective: 4.4
Level of Difficulty: Intermediate
Solution:
45. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of Difficulty: Intermediate
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
46. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of Difficulty: Intermediate
Solution:
47. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of Difficulty: Intermediate
Solution:
48. Section: 4.6 Liquidity Ratios
Learning Objective: 4.6
Level of Difficulty: Intermediate
Solution:
49. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of Difficulty: Intermediate
Solution:
BVPS = SE/# = 1,399/100 = 13.99
50. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of Difficulty: Intermediate
Solution:
51. Section: 4.7 Valuation Ratios
Learning Objective: 4.7
Level of Difficulty: Intermediate
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
52. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of Difficulty: Intermediate
Solution:
53. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of Difficulty: Intermediate
Solution:
Challenging
54. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of difficulty: Challenging
Solution:
Forecast Balance Sheet for Finns’ Fridges
(Revised)
Year 3
Assets
Cash
431
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
55. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of Difficulty: Challenging
Solution: We can use Equation 4-34 from the text, but we will need to compute the values of the
variables from the year 2 financial statements.
56. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of difficulty: Challenging
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita
57. Section: 4.9 Formula Forecasting
Learning Objective: 4.9
Level of difficulty: Challenging
Solution:
Use Equation 4-32 from the text. The parameter values were computed in Practice Problem 56:
58. Section: 4.5 Productivity Ratios
Learning Objective: 4.5
Level of difficulty: Challenging
Solution:
Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita