Corporate Finance Chapter 1-3 Study Guide

Steamboat Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio? - .68 - .24 - 1.24 - .36 - 1.36

.36 Debt-equity ratio = 1.36 − 1 = .36

Computer Geeks has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity? - 18.91% - 12.67% - 18.28% - 22.11% - 21.55%

21.55% Return on equity = .132 × 1.54 × 1.06 = .2155, or 21.55%

Coopers. Inc reports an operating income of $150,000 in 2022. The firm paid $33,812 in dividends and retained earnings were $53,000. a. What is the net income in 2022? Net income is b. Assuming the firm's earnings are taxed at 21%, how much income taxes does the firm pay in 2022? Income tax is c. How much does the firm pay in interest payment, and what is the times interest earned ratio? The interest payment is The times interest earned ratio is

a) $86,812 summing up retained earnings and dividends b) $23,077 You get taxable income = 86,812/0.79 = $109,889 Income tax = 109,889 - 86,812 = 23,077 c) $40,111 and 3.74 Interest = $150,000 - $109,889 = 40,111 Times interest earned = EBIT/Interest = 150,000/40,111 = 3.74

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is less than 1.0. - Cash purchase of inventory - Cash payment on an account receivable - Cash payment of an account payable - Credit sale of inventory

Credit Sale of Inventory

Porter Jewelers, a sole proprietorship has a marginal tax rate of 32 percent and an average tax rate of 20.9 percent. If the firm owes $34,330 in taxes, how much taxable income did it earn? - $127,584 - $116,649 - $164,258 - $157,500 - $168,500

$164,258 Taxable income = $34,330 ÷ .209 = $164,258

Element Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share? - $2.92 - $2.97 - $2.86 - $2.58 - $2.89

$2.89 Earnings per share = (.0587 × $911,300) ÷ 18,500 = $2.89

For the year, Bethalto Furniture had sales of $818,790, the cost of goods sold is $748,330, and the interest paid of $24,450. The depreciation expense was $56,100 and the tax rate was 21 percent. At the beginning of the year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year, retained earnings were $158,713 and common stock was $280,000. Any tax losses can be used. What is the amount of the dividends paid for the year? - $5,586 - $6,466 - $7,566 - $7,066 - $6,898

$5,586 Net income = [($818,790 − 748,330 − 56,100 − 24,450) × (1 − .21)] = −$7,971 Dividends paid = −$7,971 − ($158,713 − 172,270) = $5,586

At the beginning of the year, long-term debt of a firm is $286 and total debt is $328. At the end of the year, long-term debt is $258 and total debt is $338. The interest paid is $24. What is the amount of the cash flow to creditors? $28 $24 −$28 −$52 $52

$52 CFC = $24 − ($258 − 286) = $52

A firm has common stock of $89, paid-in capital of $260, total liabilities of $405, current assets of $380, and net fixed assets of $590. What is the amount of the shareholders' equity? - $970 - $525 - $565 - $754 - $185

$565 Shareholders' equity = Current assets + Net fixed assets − Total liabilities

For the past year, Momsen Limited had sales of $44,432, interest expense of $3,074, cost of goods sold of $14,909, selling and administrative expense of $10,816, and depreciation of $4,965. If the tax rate was 24 percent, what was the company's net income? - $8,108 - $10,668 - $7,370 - $7,468 - $16,328

$8,108 EBT = $44,432 − 14,909 − 10,816 − 4,965 − 3,074 = $10,668 Taxes = $10,668(.24) = $2,560 Net income = $10,668 − 2,560 = $8,108

Mader's Camping Supply reduced its general and administrative costs this year. This cost improvement will increase which of the following ratios? 1) Profit margin 2) Return on assets 3) Total asset turnover 4) Return on equity -------------------------------------------------------------------------------------- - 1 and 2 only - 1 and 3 only - 2, 3, and 4 only - 1, 2, and 4 only - 1, 2, 3, and 4

1, 2, and 4 only

A firm has sales of $1,040, net income of $208, net fixed assets of $508, and current assets of $264. The firm has $83 in inventory. What is the value of inventory in a common-size balance sheet? - 31.44% - 10.75% - 16.34% - 39.90% - 7.98%

10.75% Total assets = $508 + 264 = $772 Common-size value of inventory = $83/$772 = .1075, or 10.75%

Samuelson's has a debt-equity ratio of 30 percent, sales of $12,000, net income of $700, and total debt of $3,700. What is the return on equity? - 3.00% - 5.83% - 4.37% - 18.92% - 5.68%

5.68% Debt-equity ratio = .30 = $3,700 ÷ Total equity Total equity = $12,333.33 Return on equity = $700 ÷ $12,333.33 = .0568, or 5.68%

McHenry Sales has sales of $938,300, cost of goods sold of $688,050, and inventory of $98,880. How long, on average, does it take the firm to sell its inventory? - 6.40 days - 52.45 days - 48.68 days - 59.01 days - 61.10 days

52.45 days Days' sales in inventory = 365 ÷ ($688,050 ÷ $98,880) = 52.45 days

A firm has net income of $4,238 and interest expense of $898. The tax rate is 21 percent. What is the firm's times interest earned ratio? - 7.33 - 7.26 - 6.97 - 8.26 - 9.33

6.97 Times interest earned ratio = {[$4,238 ÷ (1 − .21)] + $898} ÷ $898 = 6.97

Nishaa has been promoted and is now in charge of all external financing. In other words, she is in charge of: - capital structure management. - asset allocation. - risk management. - capital budgeting. - working capital management.

Capital Structure Management

Which one of the following will increase the profit margin of a firm, all else held constant? - Increase in interest paid - Increase in fixed costs - Increase in depreciation expense - Decrease in the tax rate - Decrease in sales

Decrease in Tax Rate

A company with negative net income will also have negative operating cash flow.

False

An income statement reports a​ firm's cumulative revenues and expenses from the inception of the firm through the income statement date.

False

If company A has a higher current ratio than company B, it means company A must also have a higher quick ratio than company B.

False

When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry, it is called trend analysis.

False

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow? - Increase in depreciation - Increase in accounts receivable - Increase in accounts payable - Decrease in cost of goods sold - Increase in sales

Increase in Accounts Payable

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? - Sole proprietorship - General partnership - Limited partnership - Limited liability company - Corporation

Limited Partnership

Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts? - Sole proprietorship - Limited partnership - Corporation - Joint stock company - General partnership

Sole Proprietorship

According to accrual accounting, revenues are recognized when earned, and expenses are recognized when incurred.

True

Borrowing money causes a​ corporation's return on assets to decrease because of the interest that must be paid.

True

If company A has lower days in inventory than company​ B, then company A will have a higher inventory turnover.

True

Suppose two companies have the same operating income. In that case, their net incomes will still differ if one company finances its assets with more debt and the other with more equity.

True

Quincy Real Estate pays out a fixed percentage of its net income to its shareholders in the form of annual dividends. Given this, the percentage shown on a common-size income statement for the dividend account will: - remain constant over time. - be equal to the dividend amount divided by the net income. - vary in direct relation to the net profit percentage. - vary in direct relation to changes in the sales level. - vary but not in direct relation to any other variable.

Vary in Direct Relation to the Net Profit Percentage

A firm has total debt of $1,420 and a debt-equity ratio of .27. What is the value of the total assets? - $6,679.26 - $2,700.00 - $1,803.40 - $3,834.00 - $5,259.26

$6,679.29 $1,420 ÷ Total equity = .27 Total equity = $5,259.26 Total assets = $1,420 + 5,259.26 = $6,679.26

Peterboro Supply has a current accounts receivable balance of $391,648. Credit sales for the year just ended were $5,338,411. How long did it take on average for credit customers to pay off their accounts during the past year? Assume a 365-day year. - 24.78 days - 26.78 days - 29.09 days - 31.15 days - 33.33 days

26.78 Days Days' sales in receivables = 365 ÷ ($5,338,411 ÷ $391,648) = 26.78 days