Lahore School of Economics

Adv Corp Finance. Winter 2021. Quiz 1.

Your Name:______________________________________ ID:___________________

Please circle T or F

1. Expected sales for the next year is 100 and net profits are10% of sales. Co gives half of its net profits
as cash dividends. You would conclude that increase in RE would be 5 T

2. TA/Sales ratio is 0.4; Spontaneous CL /Sales ratio is 0.1; NI/sales ratio is 0.05; and dividend payout
ratio is 0.2. Last year’s sales (S0) was 100. You would conclude sustainable growth rate of sales of this
Co is 15.38% T

3. Constant growth rate is another name for sustainable growth rate F

4. Sustainable growth rate of a business is equal to its ROE if its “d” is zero F

5. Net profit Margin on sales, total asset turnover, financial leverage, number of shares outstanding and
spontaneous CL to Sales ratio must be held constant at the level of previous year only then constant
growth rate can be calculated as ROE (1 - d) F

6. Beginning of 2020 RE was 100, during 2020 NI was 40 and company gave cash dividends of 30 to
shareholders. No stock dividends (bonus shares) were given during 2020. You would conclude ending
RE in the balance sheet made on the last day of 2020 was 110 T

7. Beginning of 2020 OE was 100, during 2020 NI was 40. Company issued shares worth 50 during 2020
but repurchased no shares. Co paid cash dividends of 5 during 2020 to its shareholders. You would
conclude Ending OE on the last day of 2020 was 185 T

8. Beginning Inventory in a Co was 100, purchases of inventory during the year were 50 an Ending
Inventory was 130. You would conclude CGS for the year was 20 T

9. TFN (total funds needed) were estimated 10. Net profit for the next year is projected 10 and cash
dividends as 5. Increase in spontaneously CL are expected to be 3 . You would conclude IGF (internally
generated funds) are expected to be 8. You would further conclude that Co would experience EFN
(external funds needed) of 2 T

10. If Co is growing at constant growth rate then it needs no external equity financing by issuing new
shares ; but it may need to take bank loan to raise debt financing. On the other hand when Co is growing
at sustainable growth rate it needs neither external equity financing by issuing new shares nor does it
need external debt financing by taking bank loan T