QUESTION 16 An analyst has provided you with the following actual and forecasted financial information for Squamish Ltd.: 2020 A 2021 E 2022 E Sales $500,000 S525.000 $540,000 Operating Profit Margin (after tax) 0.075 0.075 Financial Leverage (FLEV) 1.50 2.00 Shareholders' Equity (S/E) $175,000 S190,000 $200,000 In conjunction, the analyst has also provided you with the following additional information: the forecasted growth rate in comprehensive income after tax (CI) after 2022 is 4% Squamish's net borrowing cost (NBC) after tax is 3% Squamish's cost of equity capital is 7% Squartish has 50,000 common shares outstanding While you agree with the analyst's forecasts of future sales and operating profit margins, you do not believe that the firm will change its capital structure. As such, you believe that its financial leverage ratio (FLEV) will remain at its 2020 level of 1.50 and that as a result, the appropriate cost of equity capital will be 6.5% and the net borrowing cost will be 2.5% after tax because the firm will be less risky, but that its terminal growth rate will only be 3% because its CI will grow more slowly without the benefits of the increased financial leverage. Given this information, which of the following statements is TRUE? 1. Your estimate of the price of a common share of Squamish Ltd. will be higher than the analyst's estimate 2. Based on the information provided, it is not possible to estimate the price of Squamish's common shares 3. Your estimate of the price of a common share of Squamish Ltd. will be the same as the analyst's estimate 4. Your estimate of the price of a common share of Squamish Ltd. will be lower than the analyst's estimate QUESTION 17 You work for ABC Bank and are reviewing the financial statements for one of the bank's customers under the terms of the line of credit facility. The credit facility requires the customer to maintain a debt-to-equity ratio of less than 1.0. During the year, the customer's debt-to-equity ratio increased from 0.8 to 1.1, so you asked the customer to explain the reason for this change. Which of the following is the most plausible explanation for this result? O 1. The company repurchased some of its own stock this year O2. The company refinanced a mortgage that came due during the year O 3. The company improved its cash collection practices 4. The company generated record profits this year QUESTION 18 A company has sales of $10 million and a gross profit margin of 65%. It has $1.2 million in current assets, its current ratio is 1.50 and its quick ratio is 1.10. What is its inventory turnover ratio based on end-of-year balances? 01.10.938 2.3.977 O 3.7.386 04.20.313 QUESTION 19 Which of the following calculations is correct if sales are $25,000, operating profit after tax is $1,000, the tax rate is 30%, there are no other comprehensive income items, operating liabilities (OL) are 55,000, the short-term borrowing rate (STBC) is 3% after tax, and the asset turnover ratio (ATO) IS 2? 1. RNOA - 0.066 2.RNOA - 0.092 3. Operating profit margin after tax = 0.046 4. Operating liability leverage (OLLEV) - 0.286 QUESTION 20 Which of the following statements relating to financial statement analysis is NOT true? 1. The common size Balance Sheet expresses items as a percentage of sales in order to measure the efficiency with which each item is being used i.e., its turnover ratio) 2. If the firm is profitable and its RNOA exceeds its net borrowing costs, then ROCE will be greater than RNOA 3.RNOA is an unlevered measure of profitability 4. An increase in the inventory ratio indicates that the firm is generating more sales per dollar invested in inventory than before QUESTION 16 An analyst has provided you with the following actual and forecasted financial information for Squamish Ltd.: 2020 A 2021 E 2022 E Sales $500,000 S525.000 $540,000 Operating Profit Margin (after tax) 0.075 0.075 Financial Leverage (FLEV) 1.50 2.00 Shareholders' Equity (S/E) $175,000 S190,000 $200,000 In conjunction, the analyst has also provided you with the following additional information: the forecasted growth rate in comprehensive income after tax (CI) after 2022 is 4% Squamish's net borrowing cost (NBC) after tax is 3% Squamish's cost of equity capital is 7% Squartish has 50,000 common shares outstanding While you agree with the analyst's forecasts of future sales and operating profit margins, you do not believe that the firm will change its capital structure. As such, you believe that its financial leverage ratio (FLEV) will remain at its 2020 level of 1.50 and that as a result, the appropriate cost of equity capital will be 6.5% and the net borrowing cost will be 2.5% after tax because the firm will be less risky, but that its terminal growth rate will only be 3% because its CI will grow more slowly without the benefits of the increased financial leverage. Given this information, which of the following statements is TRUE? 1. Your estimate of the price of a common share of Squamish Ltd. will be higher than the analyst's estimate 2. Based on the information provided, it is not possible to estimate the price of Squamish's common shares 3. Your estimate of the price of a common share of Squamish Ltd. will be the same as the analyst's estimate 4. Your estimate of the price of a common share of Squamish Ltd. will be lower than the analyst's estimate QUESTION 17 You work for ABC Bank and are reviewing the financial statements for one of the bank's customers under the terms of the line of credit facility. The credit facility requires the customer to maintain a debt-to-equity ratio of less than 1.0. During the year, the customer's debt-to-equity ratio increased from 0.8 to 1.1, so you asked the customer to explain the reason for this change. Which of the following is the most plausible explanation for this result? O 1. The company repurchased some of its own stock this year O2. The company refinanced a mortgage that came due during the year O 3. The company improved its cash collection practices 4. The company generated record profits this year QUESTION 18 A company has sales of $10 million and a gross profit margin of 65%. It has $1.2 million in current assets, its current ratio is 1.50 and its quick ratio is 1.10. What is its inventory turnover ratio based on end-of-year balances? 01.10.938 2.3.977 O 3.7.386 04.20.313 QUESTION 19 Which of the following calculations is correct if sales are $25,000, operating profit after tax is $1,000, the tax rate is 30%, there are no other comprehensive income items, operating liabilities (OL) are 55,000, the short-term borrowing rate (STBC) is 3% after tax, and the asset turnover ratio (ATO) IS 2? 1. RNOA - 0.066 2.RNOA - 0.092 3. Operating profit margin after tax = 0.046 4. Operating liability leverage (OLLEV) - 0.286 QUESTION 20 Which of the following statements relating to financial statement analysis is NOT true? 1. The common size Balance Sheet expresses items as a percentage of sales in order to measure the efficiency with which each item is being used i.e., its turnover ratio) 2. If the firm is profitable and its RNOA exceeds its net borrowing costs, then ROCE will be greater than RNOA 3.RNOA is an unlevered measure of profitability 4. An increase in the inventory ratio indicates that the firm is generating more sales per dollar invested in inventory than before