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 longer-term 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. ...

1. 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

2. 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

3. 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 longer-term 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.

4. 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

5. 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

6. b. Sell idle and unused equipment
c. Obtain longer credit terms from suppliers
d. Bring in additional equity dollars through a
seasoned equity offering.
e. 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.

7. 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
Liabilities
Year 1
Year 2
Year 1
Year 2

8. Accounts Payable
35,000
45,000
Cash
40,000
50,000
Accruals
25,000
30,000
Marketable Securities
10,000
10,000
Current Note Payable
20,000
20,000
Accounts Receivable
70,000
80,000
Total Current Liabilities
80,000
95,000
Inventory
80,000
90,000
Bonds
240,000

9. 260,000
Total Current Assets
200,000
230,000
Total Liabilities
320,000
355,000
Property Plant & Equipment
220,000
240,000
Retained Earnings
40,000
55,000
Total Assets
420,000
470,000
Common Stock
60,000
60,000
Total Liabilities and Equity
420,000
470,000
Other Information
Year 1 sales = $800,000
Year 2 sales = $900,000

10. Year 2 profit margin = 5%
Year 2 payout ratio = 35%
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
Place your answer for question 29 in the spaces below
Cash
Marketable Securities
Accounts Receivable
Inventory
Total Current Assets
Property Plant & Equipment
Total Assets
Liabilities
Accounts Payable
Accruals

11. Current Note Payable
Total Current Liabilities
Bonds
Total Liabilities
Retained Earnings
Common Stock
EFN
Total Liabilities and Equity