Business Finance Exam Chapter 1-2

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

Theo's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as

working capital management.

For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

21500-38100 = -16600 + interest paid (2300) = -14300 (Net new borrowing)

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

Addition to retained earnings = ((Sales - Cogs - Dep exp - Int exp)(1- tax rate) - dividends

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Stakeholders

An employee has a claim on the cash flows of Martin's Machines. This claim is defined as a claim by one of the firm's:

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

Balance sheet

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for a minimum of three years

Mahalo Tours currently has $10,500 in cash. The company owes $26,900 to suppliers for merchandise and $47,500 to the bank for a long-term loan. Customers owe the company $33,000 for their purchases. The inventory has a book value of $62,400 and an estimated market value of $65,600. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

Current assets = $10,500 + 33,000 + 62,400 = $105,900

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

I, III, IV

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

Inventory + cash + accounts receivable

Capital structure management

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of:

Suzette's Market had long-term debt of $638,100 at the beginning of the year compared to $574,600 at year-end. If the interest expense was $42,300, what was the firm's cash flow to creditors?

Long term debt beginning of the year (638,100) - Year end (574,600) = 63500 + Interest expense (42,300) = 105,800 (Cash flow to creditors)

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

Benson, Inc., has sales of $43,080, costs of $13,920, depreciation expense of $3,070, and interest expense of $2,240. The tax rate is 23 percent. What is the operating cash flow?

To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: OCF = EBIT + Depreciation - Taxes OCF = $26,090 + 3,070 - 5,486 OCF = $23,675

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

Total assets (519,300) - net fixed assets (380,200) = current asset (139,100). Net working capital (42,400) = Current asset (139,100) - Current liabilities (X). Current liabilities = 96700

Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm's assets?

Total book value = $41,100 + 54,200 + 82,300 + 234,500 − 118,900 = $293,200

Capital Structure

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

3 Cash flow to creditors increases when:

long-term debt is repaid.

Duela Dent is single and had $183,200 in taxable income. Use the rates from Table 2.3. a. What is the average tax rate? b. What is the marginal tax rate?

Using Table 2.3, we can see the marginal tax schedule. The first $9,525 of income is taxed at 10 percent, the next $29,175 is taxed at 12 percent, the next $43,800 is taxed at 22 percent, the next $75,000 is taxed at 24 percent, and the last $25,700 is taxed at 32 percent. So, the total taxes will be: Taxes = .10($9,525) + .12($29,175) + .22($43,800) + .24($75,000) + .32($183,200 - 157,500) Taxes = $40,313.50 The average tax rate is the total taxes paid divided by taxable income, so: Average tax rate = Total tax/Taxable income Average tax rate = $40,313.50/$183,200 Average tax rate = .2201, or 22.01% The marginal tax rate is the tax rate on the next dollar of income. The person has net income of $183,200 and the 32 percent tax bracket is applicable to a net income up to $200,000, so the marginal tax rate is 32 percent.

Duela Dent is single and had $196,800 in taxable income. Use the rates from Table 2.3. Calculate her income taxes.

Using Table 2.3, we can see the marginal tax schedule. The first $9,525 of income is taxed at 10 percent, the next $29,175 is taxed at 12 percent, the next $43,800 is taxed at 22 percent, the next $75,000 is taxed at 24 percent, and the last $39,300 is taxed at 32 percent. So, the total taxes will be: Taxes = .10($9,525) + .12($29,175) + .22($43,800) + .24($75,000) + .32($196,800 - 157,500) Taxes = $44,665.50

The Sarbanes-Oxley Act of 2002 has:

essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

limited partnership

forms of business organization offers liability protection to some of its owners but not to all of its owners