EFN Percent of sales method = SA/S ▲S + ▲FA - SL/S ▲S - ▲RE +/- Misc.
▲RE = (S + ▲S)(PM)(1 - PO)
D/A: Debt to asset ratio (EFN + (SL/S)▲S)/((SA/S)▲S + ▲FA)
Sustainable Growth: ▲S = (▲FA(1 - D/A) - S(PM)(1 - PO))/((SA/S)(D/A - 1) + (PM)(1 - PO))
Instructions: You must complete and hand-in this exam as a word document. Type your
answers where appropriate in essays and problems. In the multiple choice questions, highlight
your answer.
Part 1: Multiple Choice Questions. Please select the best answer of those provided. Mark your
answers by highlighting the correct response. Each question is worth 2 points.
1. Suppose that a company has a profit margin of 5%, an ROA of 12.5% and an ROE of 37.5%.
What are this company’s asset turnover and equity multiplier ratios, respectively? They are:
a. 2.5 and 3.0
b. 6 and 0.667
c. 3 and 2
d. 5% and 12.5%
e. None of the above
2. A company has an ROE of 12% and an equity multiplier of 3. What is its ROA? It is:
a. 4%
b. 12%
c. 36%
d. There is insufficient information to compute this number
e. None of the above
3. Which of the following ratios does not measure the quality of liquidity?
a. Current Ratio
b. Ratio of Inventory to Working Capital
c. Ratio of Receivables to Working Capital.
d. None of the above.
4. Leverage magnifies the bottom line. So in a good year, debt can magnify (increase) a
company’s positive net income.
a. True
b. False
5. If a company’s inventory to working capital increased, but its total current assets and current liabilities
did not change, its quality of liquidity would…..
a. increase
b. decrease
c. not change
6. Suppose that a company has a debt to asset ratio of 75%. Its debt to equity ratio would be:
a. 75%
b. 25%
c. 300%
d. 750%
e. None of the above
7. If interest rates increase, then a company’s times interest earned ratio would most likely…… (You
may assume the company has borrowed a significant amount of both long and short-term debt).
a. increase
b. decrease
c. not change
8. If inventory turnover decreases in a year in which sales and cost of goods sold have not changed, then
we can assume that inventory has…….
a. increased
b. decreased
c. not changed
9. When we test the importance of an assumption that we have made in a forecast, this action is called:
a. The first pass forecast
b. Spontaneous assets
c. Sensitivity analysis
d. Long range strategy
e. None of the above
10. Budgets tend to be relatively short-term in their scope while forecasts tend to be somewhat longerterm oriented.
a. True
b. False
11.Forecasts then to be more concerned with details than budgets>
a. True
b. False
12. The company will need to raise funds to finance its growth when EFN is:
a. positive
b. negative
c. zero
d. larger than ΔFA
e. none of the above
13. The EFN model ignores depreciation entirely.
a. True
b. False
14. If a company’s profit margin increases, then their EFN will….
a. increase
b. decrease
c. not change
15. If a company’s forecasted retention ratio falls from 50% to 25% and their forecasted profit margin
increases from 4% to 8%, the ΔRE (expected change to retained earnings) will….
a. increase
b. decrease
c. not change
16. Which of the following is not generally a spontaneous asset?
a. Cash
b. Accounts Receivables
c. Inventory
d. Retained Earnings
e. None of the above
17. A liability that is a current liability and is “non-negotiated” will be considered:
a. A non-spontaneous liability
b. A spontaneous liability
c. Part of stockholder’s equity
d. A spontaneous asset
e. None of the above
18. If ΔFA increases, EFN will……
a. increase
b. decrease
c. not change
19. If a company’s payout ratio increases, its sustainable sales growth will….
a. increase
b. decrease
c. not change
20. If a company’s owners are willing to put some external equity in the company, then the company’s
sustainable sales growth will….
a. increase
b. decrease
c. not change
21. Generally, when a company’s collection period increases (sales are stable), the company’s current
ratio will likely….
a. increase
b. decrease
c. not change
22. When a company’s inventory turnover falls, the quality of a company’s liquidity will likely…
a. increase
b. decrease
c. not change
23. The best method of correcting an overtrader’s problems is to attempt to stimulate sales growth.
a. True
c. False
24. Suppose that a profitable company has a large fixed asset to net worth ratio. What is the only “quick
fix” that will be substantial enough to correct its liquidity and leverage problems?
a. Slow the rate of fixed asset growth
b.
c.
d.
e.
Sell idle and unused equipment
Obtain longer credit terms from suppliers
Bring in additional equity dollars through a seasoned equity offering.
None of the above
25. Which of the following actions would most likely create a liquidity problem for a company in the
short-run?
a. Increase its fixed assets to net worth ratio by acquiring a large dollar amount of fixed
assets.
b. Increase its inventory turnover
c. Decrease its collection period
d. All of the above
e. None of the above
Part 2. Short problems and essay questions. Answer these questions on the exam. Use whatever space
you need to provide the answers.
26. Suppose that a company’s inventory turnover has fallen in a year in which sales did not change. How
would this change impact the quality and quantity of the company’s liquidity? (8 points)
27. Describe the steps you would take to correct the following problem; you have just discovered that
your company has a profit margin problem. (6 points)
28. On the next page you will find information about the Rologene Company. Using the historical data
for year 2 as the base year, use the EFN equation to compute the amount of EFN the company will need
given the assumptions for year 3. (Year 3 is the forecast year). (10 points)
29. In the space provided in the table on the next page, prepare a proforma balance sheet for year 3 for
the Rologene Company. Use the percent of sales method. (12 points)
30. If you were to use the trend line approach to determine the year 3 proforma cash balance, what would
this balance be? Show your work to receive credit. (7 points)
31. Based on the trend in the trading ratios, would you argue that the Rologene Company is an overtrader
or an undertrader. Show all work and include the proforma year in your determination. (7 points)
The Rologene Company
Year 1 and 2 Historical Balance Sheet
Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Total Current Assets
Property Plant & Equipment
Total Assets
Other Information
Year 1 sales = $800,000
Year 2 sales = $900,000
Year 2 profit margin = 5%
Year 2 payout ratio = 35%
Liabilities
Year 1
Year 2
40,000
10,000
70,000
80,000
200,000
220,000
420,000
50,000
10,000
80,000
90,000
230,000
240,000
470,000
Year 2
45,000
30,000
20,000
95,000
260,000
355,000
55,000
60,000
470,000
Assumptions for Year 3
1. ΔS = $200,000
2. Year 3 profit margin and payout ratio are the same as in year 2
3. Property, Plant and Equipment purchases will be $90,000 in
year 3
4. Depreciation in year 3 will be $20,000
5. Marketable securities are held as a semi-permanent savings
account
6. The current note from year 2 will be paid off in year 3
Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Total Current Assets
Property Plant & Equipment
Total Assets
Liabilities
Accounts Payable
Accruals
Current Note Payable
Total Current Liabilities
Bonds
Total Liabilities
Retained Earnings
Common Stock
Accounts Payable
Accruals
Current Note Payable
Total Current Liabilities
Bonds
Total Liabilities
Retained Earnings
Common Stock
Total Liabilities and Equity
Year 1
35,000
25,000
20,000
80,000
240,000
320,000
40,000
60,000
420,000
Place your answer for question 29 in the spaces
below
EFN
Total Liabilities and Equity