Business Finance Exam 1

Suppose the tax table for single individuals is given below:Taxable incomeTax on base of bracketRate on amount above base$0 - 10,000$010%$10,000 - 40,000$1,00012%$40,000 - 85,000$4,60022%$85,000 - 160,000$14,50024%$160,000 - 200,000$32,50032%$200,000 - 500,000$45,30035%$500,000 and up$150,30037%Suppose Omar's taxable income this year is $89,000. What is his marginal tax rate? Selected Answer:d. 24%Answers:a. 17.37%b. 1.08%c. 19.71%d. 24%e. 40.29%

d. 24%

Consider the following balance sheet data for Jeff's Pet Stores: Cash & equivalents$80,500 Accounts payable$61,500Accounts receivable 198,000 Notes payable 163,500Inventories 259,500 Accrued wages and taxes 67,000 Total current assets$538,000 Total short-term liab.$292,000 Long-term debt 367,500 Common stock 220,000Net plant & equip. 543,000 Retained earnings 201,500Total assets$1,081,000 Total liabilities & equity$1,081,000 What are the company's total liabilities? Selected Answer:a. $659,500Answers:a. $659,500b. $1,081,000 c. $292,000 d. $367,500 e. $61,500

a. $659,500

In 2012, Eastman Sound Co. had net income of $40,000. If accounts payable and accruals decreased by $50,000, receivables and inventories rose by $130,000, and depreciation and amortization totaled $15,000, what was the firm's cash flow from operating activities? a. $-155,000 b. $105,000 c. $235,000 d. $-125,000 e. $205,000

d. $-125,000

Investors expect a company to announce a 7 percent decrease in earnings, but instead the company announces a 1 percent decrease. If the market is semistrong-form efficient, which of the following should happen? a. The stock's price rises because the earnings decrease was less than expected. b. The stock's price stays the same because earnings announcements have no effect if the market is semistrong-form efficient. c. The stock's price decreases slightly because the company had a slight decrease in earnings.

a. The stock's price rises because the earnings decrease was less than expected.

Suppose that a person earning $21,000 this year would pay $5,250 in taxes, while a person earning $119,000 would pay $29,750 in taxes. Based solely on this information, it appears that tax rates are... a. flat. b. regressive. c. progressive.

a. flat.

Consider the following financial data for Guerrero Enterprises: Statement of Financial Position as of December 31, 2019 Cash & equivalents$186,500 Accounts payable$41,500Receivables 160,000 Short-term bank note 346,000Inventories 219,500 Accruals 58,000 Total current assets$566,000 Total current liabilities$445,500 Long-term debt 100,000Net fixed assets 510,000 Common equity 530,500Total assets$1,076,000 Total liab. & equity$1,076,000 Profit & Loss Statement for 2019 Industry Average Ratios Sales$1,119,000 Current ratio1.0×Cost of sales 705,000 Quick ratio0.5×Gross profit$414,000 Days sales outstanding57 daysOperating expenses 302,000 Inventory turnover8.0× EBIT$112,000 Total asset turnover0.8×Interest expense 39,000 Net profit margin2.5% Pre-tax income$73,000 Return on assets2.0%Income taxes (35%) 25,550 Return on equity3.8%Net earnings$47,450 Debt-to-capital ratio34% Compared to other firms in the same industry, Guerrero... Selected Answer:c. keeps a lower percentage of its sales as profit. Answers:a. is less likely to have trouble paying its short-term debts. b. uses less financial leverage. c. keeps a lower percentage of its sales as profit. d. generates less profit per dollar of shareholders' equity. e. has a longer average collection period for accounts receivable.

a. is less likely to have trouble paying its short-term debts.

The primary goal behind all corporate decisions should be to... a. maximize the intrinsic value of the stock over the long run. b. minimize the chance of losses. c. maximize net income. d. maximize the stock price on a specific future date. e. maximize earnings per share (EPS).

a. maximize the intrinsic value of the stock over the long run.

Consider the following financial data for Ben's Computer Stores:Statement of Financial Position as of December 31, 2012Cash$50,000 Accounts payable$79,000Accounts receivable 192,500 Notes payable 164,000Inventories 313,500 Accruals 99,500 Total current assets$556,000 Total current liabilities$342,500 Long-term debt 428,000Net fixed assets 395,500 Common equity 181,000Total assets$951,500 Total liabilities & equity$951,500Statement of Earnings for the Year Ended December 31, 2012Sales revenue$852,500Cost of merchandise sold 561,500Gross profit$291,000Operating expenses 131,000 Earnings before interest and taxes (EBIT)$160,000Interest expense 77,000 Earnings before taxes (EBT)$83,000Federal and state income taxes (45 percent) 37,350Net profit$45,650Calculate Ben's total asset turnover. Selected Answer:b. 0.90Answers:a. 2.08b. 0.90c. 14.56d. 2.72e. 4.80

b. 0.90

Which of the following could explain why a business might choose to operate as a corporation rather than a sole proprietorship or partnership? a. Corporations generally face fewer regulations. b. Corporations generally find it easier to raise capital. c. Less of a corporation's income is generally subject to taxes. d. Corporate investors enjoy unlimited liability.

b. Corporations generally find it easier to raise capital.

__________ form efficiency suggests that stock prices fully reflect all publicly available information about a firm, but not "insider" information. a. Weak b. Semi-strong c. Semi-weak d. Strong

b. Semi-strong

Which of the following assets are traded in financial markets? a. Automobiles b. Stocks and bonds c. Household furniture d. All of the above

b. Stocks and bonds

PharmCo Industries, a large prescription drug manufacturer, has recently increased its research and development activities. While this will not affect short-run performance much, it should greatly increase future revenues. This investment is likely to _______ next quarter's earnings per share and ________ the intrinsic value of PharmCo's stock. a. increase ... decrease b. decrease ... increase c. decrease ... decrease d. increase ... increase

b. decrease ... increase

Consider the following financial data for Shields Enterprises:Statement of Financial Position as of December 31, 2019 Cash & equivalents$232,000 Accounts payable$99,500Accts. receivable 249,500 Short-term bank note 247,500Inventories 204,000 Accrued wages & taxes 66,000 Total current assets$685,500 Total current liabilities$413,000 Long-term debt 311,000Net plant & equip. 848,500 Common equity 810,000Total assets$1,534,000 Total liab. & equity$1,534,000 Profit & Loss Statement for 2019 Industry Average Ratios Sales$1,610,500 Current ratio1.4´Cost of sales 1,095,000 Quick ratio0.9´Gross profit$515,500 Days sales outstanding63 daysOperating expenses 350,500 Inventory turnover5.3´ EBIT$165,000 Total asset turnover0.7´Interest expense 42,500 Net profit margin11.2% Pre-tax earnings$122,500 Return on assets7.6%Income taxes (35%) 42,875 Return on equity12.2%Net income$79,625 Debt-to-capital ratio24%Compared to its peers, Shields... Selected Answer:d. has lower current and quick ratios.Answers:a. has a higher return on assets.b. has a higher inventory turnover ratio.c. has lower total expenses per dollar of sales.d. has lower current and quick ratios.e. uses less financial leverage.

b. has a higher inventory turnover ratio.

Corporations can raise funds by issuing new securities (e.g. stocks, bonds) in the _________ market. a. money b. primary c. tertiary d. options e. secondary

b. primary

Smith and Associates had $55,000 in cash at year-end 2012 and $35,000 in cash at year-end 2013. Cash flow from long-term investing activities totaled $-240,000, and cash flow from financing activities totaled $30,000. What was the cash flow from operating activities? a. $-120,000 b. $230,000 c. $-230,000 d. $-190,000 e. $190,000

e. $190,000

Consider the following balance sheet data for Steve's Music Stores:Cash & equivalents$60,000 Accounts payable$146,000Accounts receivable 133,000 Notes payable 179,500Inventories 379,000 Accrued wages and taxes 92,000 Total current assets$572,000 Total short-term liab.$417,500 Long-term debt 293,500 Common stock 150,000Net plant & equip. 557,000 Retained earnings 268,000Total assets$1,129,000 Total liabilities & equity$1,129,000How much of the company's profits have been reinvested over the years? Selected Answer:e. $268,000Answers:a. $150,000b. $60,000c. $418,000d. $1,129,000e. $268,000

e. $268,000

Braswell & Associates has a DSO of 41 days, and its annual sales are $8,100,000. What is its accounts receivable balance? Assume it uses a 365-day year. a. $553,712 b. $197,561 c. $332,100,000 d. $541 e. $909,863

e. $909,863

Which of the following is true about the quick ratio? a. It is a liquidity ratio. b. It cannot exceed the current ratio. c. It is also called the acid-test ratio. d. It measures the ability of the firm to pay off its short-term obligations without relying on inventory. e. All of the above answers are correct.

e. All of the above answers are correct.

If people were to lose faith in the safety of our financial institutions... a. it would become more difficult for firms to raise capital. b. capital investment would slow down. c. unemployment would rise. d. the output of goods and services would fall. e. All of the above are correct.

e. All of the above are correct.

Which of the following financial statements is best described as a "snapshot" of a firm's financial position at a particular point in time? a. Income Statement b. Statement of Cash Flows c. Statement of Retained Earnings d. Statement of Financial Assets e. Balance Sheet

e. Balance Sheet

Why is ratio analysis useful? a. Unlike "raw" accounting data, ratios cannot be distorted by inflation. b. It eliminates the need to consider "qualitative" factors when evaluating a firm's financial condition. c. It's not useful; nobody in the real world ever uses this stuff. d. It provides an easy, objective way of telling whether a company is, on balance, in a strong or weak position. e. It is a way of standardizing numbers and can facilitate comparisons between firms.

e. It is a way of standardizing numbers and can facilitate comparisons between firms.

What is the term for a market where investors trade pre-existing securities among themselves (i.e. no new securities are created), and where the firm issuing the securities is not involved in transactions? a. Primary market b. Money market c. Capital market d. Direct market e. Secondary market

e. Secondary market

Which of the following is NOT one of the four financial statements contained in most annual reports? a. Balance Sheet b. Statement of Cash Flows c. Income Statements d. Statement of Stockholders' Equity e. Statement of Financial Assets

e. Statement of Financial Assets

Hansen's Auto Supply has $1,346,500 in current assets and $505,000 in current liabilities. Its initial inventory level is $715,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.3? a. $230,435 b. $407,692 c. $142,308 d. $185,000 e. $80,435

c. $142,308

Randell Corporation's income statement for the year 2012 is given below:Sales$16,000,000Operating costs excludingdepreciation8,500,000EBITDA$ 7,500,000Depreciation2,000,000EBIT$ 5,500,000Interest1,000,000EBT$ 4,500,000Taxes (45%)2,025,000Net income$ 2,475,000Calculate Randell's free cash flow for 2012 if it spent $2,100,000 on new fixed assets and net operating working capital increased by $200,000. Selected Answer:c. $2,725,000Answers:a. $5,200,000b. $3,125,000c. $2,725,000d. $-1,275,000e. $2,175,000

c. $2,725,000

The Venetian Corporation recently reported net income of $2,000,000. It has 1,000,000 shares of common stock, which currently trades at $50 a share. Venetian continues to expand and expects that 1 year from now its net income will be $3,000,000. Over the next year it also anticipates issuing an additional 200,000 shares of stock, so that 1 year from now it will have 1,200,000 shares of common stock. Assuming its price/earnings ratio remains at its current level, what will be its stock price 1 year from now? a. $50.00 b. $41.67 c. $62.50 d. $75.00 e. $40.00

c. $62.50

In its most recent financial statements, Westhouse Corp. reported $86 million of net income and $598 million of retained earnings. The previous retained earnings were $595 million. How much dividends were paid to shareholders during the year? a. $21 million b. $89 million c. $83 million d. $3 million e. $0

c. $83 million

The inventory turnover ratio would be most important when analyzing a(n)... a. insurance company. b. medical clinic. c. consulting firm. d. commercial bank. e. grocery store.

e. grocery store.

Consider the following financial data for Shannon's Pool Supply:Balance Sheet as of December 31, 2012Cash & equivalents$72,000 Accounts payable$141,000Accounts receivable 103,000 Short-term bank note 188,500Inventories 360,000 Accruals 62,500 Total current assets$535,000 Total short-term liab.$392,000 Long-term debt 261,500Net fixed assets 470,500 Common equity 352,000Total assets$1,005,500 Total liabilities & equity$1,005,500Income Statement for the Year Ended December 31, 2012Sales revenue$646,500Cost of sales 418,000Gross profit$228,500Operating expenses 126,500 Earnings before interest and taxes (EBIT)$102,000Interest expense 27,000 Earnings before taxes (EBT)$75,000Federal and state income taxes (45 percent) 33,750Net income$41,250Calculate Shannon's quick ratio. Selected Answer:a. 0.45Answers:a. 0.45b. 0.82c. 1.36d. 2.05e. 1.10

a. 0.45

A firm has a profit margin of 2.5 percent and an equity multiplier of 2. Its sales are $100 million and it has total assets of $35 million. What is its return on equity (ROE)? a. 14.29% b. 7.14% c. 22.86% d. 1.75% e. 3.57%

a. 14.29%

Raleigh Racers has $20 billion in total assets. Its balance sheet shows $3 billion in current liabilities, $5 billion in long-term debt, and $12 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $34 per share. What is Raleigh's market-to-book ratio? a. 2.27 b. 1.36 c. 1.50 d. 2.83 e. 1.70

a. 2.27

Which of the following instruments could be traded in a money market transaction? a. Dealer commercial paper b. Preferred stocks c. Long-term corporate bonds d. Common stocks

a. Dealer commercial paper

Which of the following would NOT help to ensure that management's and stockholders' interests are aligned? a. Eliminating stock-based compensation and paying the CEO a large fixed salary instead b. Having a board of directors that will fire the CEO for poor performance c. Direct intervention by institutional shareholders (such as TIAA-CREF) who are unhappy with the firm's performance d. The threat of a hostile takeover

a. Eliminating stock-based compensation and paying the CEO a large fixed salary instead

Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? a. It reduces the dividends paid on its common stock. b. It reports a large loss for the year. (Assume the loss is not due to a large depreciation expense.) c. It buys new plant and equipment at a cost of $6 million. d. It repurchases $3 million of its own common stock.

a. It reduces the dividends paid on its common stock.

________ is an example of a dealer market, where stocks are traded _____ a centralized trading floor. a. NASDAQ ... without b. The New York Stock Exchange (NYSE) ... on c. The New York Stock Exchange (NYSE) ... without d. NASDAQ ... on

a. NASDAQ ... without

Which of the following is correct? a. The New York Stock Exchange is an example of a stock exchange that has a physical location. b. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns. c. A larger bid-ask spread means that the dealer will realize a lower profit. d. The efficient market hypothesis assumes that all investors are rational. e. Hedge funds have traditionally been highly regulated.

a. The New York Stock Exchange is an example of a stock exchange that has a physical location.

Consider the following financial data for Steve's Home Accessories:Statement of Financial Position as of December 31, 2012Cash & equivalents$102,000 Accounts payable$102,000Accounts receivable 115,000 Notes payable 148,500Inventories 310,500 Accruals 58,500 Total current assets$527,500 Total current liabilities$309,000 Long-term debt 408,500Net fixed assets 469,000 Common equity 279,000Total assets$996,500 Total liabilities & equity$996,500Statement of Earnings for the Year Ended December 31, 2012Net sales$732,500Cost of merchandise sold 419,500Gross profit$313,000Operating expenses 149,000 Earnings before interest and taxes (EBIT)$164,000Interest expense 72,500 Earnings before taxes (EBT)$91,500Federal and state income taxes (35 percent) 32,025Net profit$59,475Calculate Steve's return on equity (ROE). Selected Answer:c. 21.32%Answers:a. 5.97%b. 8.12%c. 21.32%d. 19.00%e. 11.27%

c. 21.32%

Derivative securities are used for... a. hedging (reducing risk). b. speculating (increasing risk). c. Both a and b d. Neither a nor b

c. Both a and b

All other things being equal, which of the following would increase the current ratio? a. Equipment is purchased with short-term notes. b. A fully depreciated asset is retired. c. Cash is acquired through the issuance of additional common stock. d. Current operating expenses are paid. e. The estimated taxes payable are increased.

c. Cash is acquired through the issuance of additional common stock.

Suppose Congress changes the tax laws so that a firm's depreciation expense doubles. (The firm's percentage tax rate does not change, however.) Assuming there are no changes in sales, other operating costs, or interest charges, the firm's net income will ________, and its cash flow will ________. a. increase ... increase b. decrease ... decrease c. decrease ... increase d. increase ... decrease

c. decrease ... increase

Sharon is a big believer in "charting." Every day, she spends time analyzing patterns of upward and downward movements in stock prices, aiming to time her buying and selling strategically to earn superior rates of return. From this, it is clear that Sharon... a. believes the stock market is semistrong-form efficient. b. believes the stock market is weak-form efficient. c. does not believe the stock market is efficient (even in the weak form). d. believes the stock market is strong-form efficient.

c. does not believe the stock market is efficient (even in the weak form).

Santora Industries is forecasting the following income statement:Sales$15,000,000Operating costs excludingdepreciation6,750,000EBITDA$ 8,250,000Depreciation1,500,000EBIT$ 6,750,000Interest1,500,000EBT$ 5,250,000Taxes (40%)2,100,000Net income$ 3,150,000The CEO would like to see higher sales and a forecasted net income of $7,500,000. Assume that operating costs (excluding depreciation) are 45% of sales and that depreciation and interest expenses will increase by 15%. The tax rate will remain at 40%. What level of sales would generate $7,500,000 in net income? Selected Answer:b. $19,800,000Answers:a. $33,181,818b. $19,800,000c. $27,062,087d. $29,000,000e. $19,350,000

d. $29,000,000

Assume you are given the following relationships for the Warner Corporation: Sales / Total assets 1.7× Return on assets (ROA) 3.95% Return on equity (ROE) 6.95%Calculate Warner's debt-to-capital ratio, assuming it uses only debt and common equity financing. a. 56.83% b. 30.97% c. 75.95% d. 43.17% e. 175.95%

d. 43.17%

Ware's Autos has an equity multiplier of 2.2, and its assets are financed with only long-term debt and common equity. What is its debt-to-capital ratio? a. 45.5% b. 31.3% c. 83.3% d. 54.5% e. 22.0%

d. 54.5%

Which of the following must be true in order for the Balance Sheet to properly "balance"? a. Equity = Assets + Liabilities b. Assets = Equity * Liabilities c. Equity = Assets / Liabilities d. Assets = Liabilities + Equity e. Liabilities = Assets + Equity

d. Assets = Liabilities + Equity

Which of the following is an example of a direct transfer of capital? a. You invest $5,000 in a mutual fund, which in turn purchases stocks in several different companies. b. You instruct your broker to sell all of your shares of Google, Inc. c. Merrill Lynch, an investment banking house, underwrites a new issue of bonds for General Electric. d. Your uncle writes you a check for $10,000 as a loan for you to start a new business.

d. Your uncle writes you a check for $10,000 as a loan for you to start a new business.

When we say that shareholder wealth maximization should be the primary goal of a corporation, we are assuming that... a. the firm must also minimize the risk of bankruptcy. b. the firm must also maximize sales. c. gains to stockholders occur at the expense of overall societal welfare. d. management is not purposely concealing important information from investors.

d. management is not purposely concealing important information from investors.