Exam 1 (Chapter 2 and 3)

A company is obligated to pay its creditors $6,595 at the end of the year. If the value of the company's assets equal $6,783 at that time, what is the value of shareholders' equity? A. $188 B. -$188 C. $0 D. $13,378 E-$94

A. $188 Equity= Max[($6,783-6,505),0]=$188

Which one of the following accurately describes the three parts of the DuPont identity? A. equity multiplier, profit margin, and total asset turnover B. debt-equity ratio, capital intensity ratio, and profit margin C. Operating efficiency, equity multiplier, and profitability ratio D. Return on assets, profit margin, and equity multiplier E. Financial leverage, operating efficiency, and profitability ratio

A. equity multiplier, profit margin, and total asset turnover

The book value of a firm is: A. Equivalent to the firm's market value provided that the firm has some fixed assets B. Based on historical cost. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation E. Adjusted to the market value whenever the market value exceeds the stated book value

B. Based on historical cost

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Real estate investment B. Good reputation of the company C. Equipment owned by the firm D. Money due from a customer E. An item held by the firm for future sale

B. Good reputation of the company

Which one of the following statements related to liquidity is correct? A. liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid Assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold is considered liquid.

B. Liquid assets are valuable to a firm

Adison Winery had beginning long-term debt of $38,496 and ending long-term debt of $43,871. The beginning and ending total debt balances were $47,611 and $52,592, respectively. The company paid interest of $4,255 during the year. What was the company's cash flow to creditors? A. $9,236 B. $726 C. -$1,120 D. -$726 E. $5,375

C. -$1,120 Cash flow to creditors= $4,255- ($43,871-38,496)= -$1,120

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio? A. Accounts payable B. Cash C. Inventory D. Accounts receivable E. Fixed assets

D. Accounts receivable

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _______ ratios. A. asset management B. Long- term solvency C. Short- term solvency D. Profitability E. turnover

D. profitability

Your firm has net income of $351 on total sales of $1,440. Costs are $790 and depreciation is $110. The tax rate is 35 percent. The firm does not have interest expenses. What is the operating cash flow? A. $650 B. $540 C. $891 D. $351 E. $461

E. $461 EBIT= $1,440-790-110=$540 (Sales - Costs - Depreciation) Taxes= .35 * $540 = $189 (Tax rate * EBIT) OCF= $540 + 110 - 189= $461 (EBIT + Depreciation - Taxes)

A firm has common stock of $93, paid-in surplus of $300, total liabilities of $425, current assets of $420, and net fixed assets of %630. What is the amount of the shareholders' equity? A. $818 B. $205 C. $1,050 D. $545 E. $625

E. $625 Shareholders' equity= Current assets+ Net fixed assets- Total liabilities. Shareholders' equity= $420 + 630 - 425= $625

A firm has sales of $4,780, costs of $2,580, interest paid of $173, and depreciation of $481. The tax rate is 34 percent. What is the cash coverage ratio? A. 5.90 times B. 8.68 times C. 9.94 times D. 16.84 times E. 12.72 times

E. 12.72 times EBIT= $4,780- 2,580-481= $1,719 Cash coverage ratio= ($1,719+481)/$173= 12.72 times

Shareholders' equity: A. is referred to as a firm's financial leverage. B. is equal to total assets plus total liabilities. C. Decreases whenever new shares of stock are issued. D. includes patents, preferred stock, and common stock. E. Represents the residual value of a firm.

E. Represents the residual value of a firm

As the degree of financial leverage increases, the: A. Probability a firm will encounter financial distress increases. B. Amount of a firm's total debt decreases. C. Less deb a firm has per dollar of total assets. D. number of outstanding shares of stock increases. E. accounts payable balance decreases.

probability a firm will encounter financial distress increases

Ivan's, Inc., paid $478 in dividends and $584 in interest this past year. Common stock increased by $194 and retained earnings decreased by $120. What is the net income for the year? A. $358 B. $478 C. $778 D. $584 E. $942

A. $358 Net income= Dividends paid + Change in retained earnings Net income= $478 +(-$120)= $358 In this case, the change in retained earnings was a negative value.

Recently, the owner of Martha's Wares encountered severe legal problems and is trying to sell her business. The company built a building at a cost of $1,140,000 that is currently appraised at $1,340,000. The equipment originally cost $620,000 and is currently valued at $367,000. The inventory is valued on the balance sheet at $310,000 but has a market value of only one-half of that amount. The owner expects to collect 98 percent of the $176,200 in accounts receivable. The firm has $11,700 in cash and owes a total of $1,340,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm? A. $705,396 B. $860,396 C. $1,035,596 D. $522,000 E. $1,345,596

A. $705,396 Market value = $1,340,000 (building) + 367,000 (equipment) + (.5 * 310,000) (inventory) + (.98*175,200)(accounts receivable) +11,700 (cash)- 1,340,000 (amount owed) Market value= $705,396

The Primus Corp. began the year with $7,046 in its long-term debt account and ended the year with $8,550 in long-term debt. The company paid $843 in interest during the year and issued $2,210 in new long-term debt. How much in long-term debt must the company have paid off during the year? A. $706 B -$661 C. $1,504 D. $-$1,504 E. $469

A. $706 Net new borrowing= $8,550- 7,046= $1,504 Debt retired= $2,210- 1,504= $706

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 9,350 Cost of goods sold 7,330 Depreciation 435 Earnings before interest and taxes $ 1,585 Interest paid 86 Taxable income $ 1,499 Taxes 525 Net income $ 974 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 Cash $ 140 $ 170 Accounts payable $ 1,060 $ 1,175 Accounts rec. 840 740 Long-term debt 990 1,270 Inventory 1,570 1,555 Common stock 3,230 2,920 Total $ 2,550 $ 2,465 Retained earnings 560 810 Net fixed assets 3,290 3,710 Total assets $ 5,840 $ 6,175 Total liab. & equity $ 5,840 $ 6,175 What is the fixed asset turnover for 2017? A. 2.52 times B. 3.79 times C. 1.51 times D. 2.23 times E. .40 times

A. 2.52 times Fixed asset turnover= $9,350/ $3,710= 2.52 times

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0 B. .5 C. 1.0 D. 1.5 E. 2.0

B .5

HiWay Furniture has sales of $316,000, depreciation of $47,200, interest expense of $41,400, cost of $148,200, and taxes of $16,632. The firm has net capital spending of $36,400 and a decrease in net working capital of $14,300. What is the cash flow from assets for the year? A. $145,985 B. $129,068 C. $119,655 D. $120,810 E. $ 134,585

B. $129,068 OCF= $316,000-148,200-16,632 OCF= $151,168 CFA= $151,168- 36,400- (-$14,300) CFA= $129,068

A firm has sales of $1,210, net income of $225, net fixed assets of $542, and current assets of $298. The firm has $100 in inventory. What is the common-size balance sheet value of inventory? A. 18.45% B. 11.90% C. 44.44% D. 8.26% E. 33.56%

B. 11.90% Total assets= $542 + 298= $840 Common- size value of inventory= $100/$840= .1190 or 11.90%

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 10,500 Cost of goods sold 8,200 Depreciation 435 Earnings before interest and taxes $ 1,865 Interest paid 110 Taxable income $ 1,755 Taxes 614 Net income $ 1,141 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 Cash $ 320 $ 350 Accounts payable $ 1,780 $2,037 Accounts rec. 1,210 1,110 Long-term debt 1,120 1,433 Inventory 1,880 1,830 Common stock 3,460 3,080 Total $ 3,410 $ 3,290 Retained earnings 700 950 Net fixed assets 3,650 4,210 Total assets $ 7,060 $ 7,500 Total liab. & equity $ 7,060 $ 7,500 What is the cash coverage ratio for 2017? A. 4.54 times B. 20.91 times C. 16.95 times D. 3.18 times E. 6.57 times

B. 20.91 times Cash coverage ratio= ( $1,865 + 435)/ $110= 20.91 times

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,850 Cost of goods sold 7,300 Depreciation 355 Earnings before interest and taxes $ 1,195 Interest paid 85 Taxable income $ 1,110 Taxes 389 Net income $ 721 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 Cash $ 150 $ 180 Accounts payable $ 1,110 $ 1,297 Accounts rec. 820 730 Long-term debt 990 1,223 Inventory 1,540 1,550 Common stock 3,170 2,900 Total $ 2,510 $ 2,460 Retained earnings 460 710 Net fixed assets 3,220 3,670 Total assets $ 5,730 $ 6,130 Total liab. & equity $ 5,730 $ 6,130 What is the equity multiplier for 2017? A. 2.45 times B. 3.05 times C. 1.70 times D. 2.11 times E. 1.27 times

C. 1.70 times Equity multiplier= $6,130/ ($2,900+ 710)= 1.70 times

Muffy's Muffins had net income of $2,850. The firm retains 60 percent of net income. During the year, the company sold %745 in common stock. What was the cash flow to shareholders? A. $1,885 B. $1,140 C. $965 D. $395 E. $2,455

D. $395 Cash flow to stockholders= (1-.60) * $2,850 - 745= $395

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 9,990 Cost of goods sold 8,190 Depreciation 495 Earnings before interest and taxes $ 1,305 Interest paid 122 Taxable income $ 1,183 Taxes 414 Net income $ 769 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 Cash $310 $340 Accounts rec. 2,060 Long-term debt 1,140 1,340 Inventory 1,930 1,755 Common stock 3,420 3,370 Total $3,280 $3,035 Retained earnings 680 930 Net fixed assets 3,490 4,090 Total assets 6,770 $ 7,125 Total liab. & equity 6,770 $ 7,125 What is the quick ratio for 2017? A. .85 times B. 2.04 times C. 1.18 times D. .86 times E. 1.84 times

D. .86 times Quick ratio= ($3,035- 1,755)/$1,485= .86 times

Lee Sun's has sales of $3,950, total assets of $3,650, and a profit margin of 6 percent. The firm has a total debt ratio of 42 percent. What is the return on equity? A. 6.49 percent B. 8.93 percent C. 5.64 percent D. 11.20 percent E 6.00 percent

D. 11.20 percent Net income= $ 3,950 * .06 = $237.00 Total debt ratio= .42= ($3,650 - Total equity)/ $3,650 Total equity= $2,117.00 Return on equity= $237.00/2,117.00= .1120 or 11.20%

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 9,990 Cost of goods sold 8,190 Depreciation 495 Earnings before interest and taxes $ 1,305 Interest paid 122 Taxable income $ 1,183 Taxes 414 Net income $ 769 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 2016 2017 Cash $ 310 $ 340 Accounts payable $ 1,710 $ 1,985 Accounts rec. 1,160 1,060 Long-term debt 1,200 1,350 Inventory 2,060 1,805 Common stock 3,540 3,100 Total $ 3,530 $ 3,205 Retained earnings 690 940 Net fixed assets 3,610 4,170 Total assets $ 7,140 $ 7,375 Total liab. & equity $ 7,140 $7,375 What is the days' sales in receivable for 2017? A. 52.46 days B. 40.56 days C. 88.46 days D. 38.73 days E. 38.20 days

D. 38.73 days Receivables turnover= $ 9,990/ $1,060= 9.4245 times Days' sales in receivables= 365 days/ 9.4245= 38.73 days

Mario's Home Systems has sales of $2,770, costs of goods sold of $2,110, inventory of $494, and accounts receivable of $425. How many days, on average, does it take Mario's to sell its inventory? A. 84.28 days B. 56.00 days C. 73.52 days D. 85.45 days E. 65.09 days

D. 85.45 days

The Green Giant has a 6 percent profit margin and a 32 percent dividend payout ratio. The total asset turnover is 1.4 times and the equity multiplier is 1.5 times. What is the sustainable rate of growth? A. 11.20% B. 12.60% C. 2.10% D. 14.065 E. 9.37%

E. 9.37% Return on equity= .06 * 1.40 * 1.50= .126 Sustainable rate of growth= [.126 * (1-.32)]/{1-[.126* (1.32)]}=.0937 or 9.37 percent

Which one of the following will decrease the value of a firm's net working capital? A. Using cash to pay a supplier B. Depreciating an asset C. Collecting an accounts receivable. D. Purchasing inventory on credit E. Selling inventory at a loss

E. Selling inventory at a loss

A common-size income statement that expresses all of a firm's expenses as a percentage of: A. total assets B. total equity C. net income D. taxable income E. sales

E. sales