FI MT 2

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's times interest earned ratio for 2009 is A. 8.86. B. 7.17. C. 9.66. D. 6.86. E. None of the options are correct. $1,240,000/$140,000 = 8.86.

$1,240,000/$140,000 = 8.86.

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is A. 15.5%. B. 14.6%. C. 14.0%. D. 15.0%. E. 16.5%.

$1,240,000/$8,000,000 = 0.155, or 15.5%.

Crocket Motors has an account receivable balance of $682,400 and the average collection period is 38 days. What are the firm's credit sales per day?

$17,957.89 Daily credit sales = Accounts receivable / Average collection period Daily credit sales = $682,400 / 38 Daily credit sales = $17,957.89

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is A. 2.31. B.1.87. C. 2.22. D. 2.46.

$3,240,000/$1,400,000 = 2.31.

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's inventory turnover ratio for 2009 is A. 3.15. B. 3.63. C. 3.69. D. 2.58. E. 4.20.

$5,260,000/[($1,840,000 + $1,500,000)/2] = 3.15.

Jaxon Markets currently has credit terms of net 30, an average collection period of 29 days, and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30 that 45 percent of its customers would pay on day 10 with the remainder paying on average in 32 days. How much cash could the company free up from its accounts receivables if it switched its credit policy?

$50,301 Average daily sales = Accounts receivable / Average collection period Average daily sales = $211,410 / 29 Average daily sales = $7,290 New average collection period = .45 ×10 + .55 ×32 New average collection period = 22.10 days New accounts receivable = Average daily sales ×Average collection period New accounts receivable = $7,290 ×22.10 New accounts receivable = $161,109 Cash freed up = Old accounts receivable - New accounts receivable Cash freed up = $211,410 - 161,109 Cash freed up = $50,301

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's leverage ratio for 2009 is A. 1.65. B. 1.89. C. 2.64. D. 1.31. E. 1.56.

$6,440,000/$4,140,000 = 1.56.

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is A. 16.88%. B. 15.63%. C. 14.00%. D. 15.00%. E. 16.24%

$660,000/[($4,140,000 + $3,680,000)/2] = .1688.

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's fixed asset turnover ratio for 2009 is A. 2.04. B. 2.58. C. 2.97. D. 1.58. E. None of the options are correct

$8,000,000/[($3,200,000 + $3,000,000)/2] = 2.58.

A firm in financial distress that reorganizes through the bankruptcy process:

(a) will continue to operate as a going concern throughout the entire process.

You are a risk manager who must deternine how much money the bank should reserve against its corporate bond portoflio. The banks just loaned the woibbly corporate company $100 million. You examine the latest default studies and ou see that there is a 4% chance the company will default in the upcoming year. Sine the loan is unsecured, you estimate the Loss Given Default will be 45%. HOw much money shoud the bank hold in reserves agains tthis loan?

.04 x 0.45 = 0.018 1.8% x 100m = 1.8m

The ABC Banking Corp provides loans to corporations of every size. They are review a loan application for the ACME Products Corporation. ACME wants to borrow $10 million. The risk management department informs the line manager that they expect the probability of default to be 1.25% and the loss given default to be 37.5%. What is the expected credit loss on the loan?

10,000,000 x 0.0125 x 0.375 = $46,875 Correct answer is Option B

A firm has a (net profit/pretax profit ratio) of 0.625, a leverage ratio of 1.2, a (pretax profit/EBIT) of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is ________.

3.3 17.82% = 0.625 × 0.9 × 8% × asset turnover × 1.2; asset turnover = 3.3.

A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is

4% −2% = (1) [ROA + (ROA − 10%) 1] = 4%

For a taxpayer in the 15% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of:

7.29%.

An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 25% marginal tax bracket, his or her after tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

7.5% and 7.73%

Floating-rate bonds are designed to ________, while convertible bonds are designed to ________. A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B. maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C. minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes D. maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company E. None of the options

A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm's average collection period for 2009 is A. 59.31. B. 55.05. C. 61.31. D. 49.05. E. None of the options are correct.

AR turnover = $8,000,000/[($1,200,000 + $950,000)/2] = 7.44; ACP = 365/7.44 = 49.05 days.

Bond market indexes can be difficult to construct because Select one: a. they cannot be based on firms' market values. b. bonds tend to trade infrequently, making price information difficult to obtain. c. there are so many different kinds of bonds. d. prices cannot be obtained for companies that operate in emerging markets. e. corporations are not required to disclose the details of their bond issues.

B

A measure of asset utilization is _______. A. sales divided by working capital B. return on total assets C. return on equity capital D. operating profit divided by sales E. None of these is correct.

B, The return on total assets measures how efficiently the firm is utilizing assets to generate returns.

Which of the following is the best measure of credit risk?

Expected Loss

The ABC Banking Corp provides loans to corporations of every size. They are review a loan application for the ACME Products Corporation. ACME wants to borrow $10 million. The risk management department informs the line manager that they expect the probability of default to be 1.25% and the loss given default to be 37.5%. The bank plans on funding 90% of the loan with with deposits that cost the banks 1% and 10% of the loan will be funded with the banks equity. It costs the bank 2.25% of the loans value to run the bank and sucure funding. What interest rate should the bank charge the AMCE corporation it it want to ear 10% on its capital investment?

Expected Loss = 0.0125 x 0.375 = 0.0047 Cost of debt = 0.90 x 0.01 = 0.009 Cost of Equity = 0.10 x 0.10 = 0.01 Interest Rate = 0.0047 + 0.009 + 0.010 + 0.0225 = 0.0462 or 4.62%

Which of the following statement(s) is(are) true regarding municipal bonds? I) A municipal bond is a debt obligation issued by state or local governments. II) A municipal bond is a debt obligation issued by the federal government. III) The interest income from a municipal bond is exempt from federal income taxation. IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

I, III, and IV

AJ's Markets is being liquidated. The mortgage holder is owed $830,000, the other secured creditors are owed $128,000, and the unsecured creditors are owed $329,000. Administrative costs of liquidation, wage and benefit payments, and consumer claims amount to $330,000. The firm owes no taxes. The building, which is mortgaged, just netted $794,000 after sale costs. The remaining assets have yielded $467,000 in net proceeds. How much will the unsecured creditors receive per each dollar they are owed?

Mortgage unsecured = $830,000 - 794,000 = $36,000 Funds available after expenses = $467,000 - 330,000 = $137,000 Funds available after secured claims = $137,000 - 128,000 = $9,000 Total unsecured claims = $36,000 + 329,000 = $365,000 Percent unsecured claims paid = $9,000 / $365,000 = .025, or 2.5% For each $1 claim, the unsecured creditors will receive $.025.

Which one of the following statements about preferred stock is true?

Preferred stock usually has a stated liquidating value.

A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is A. 4.2%. B. 5.2%. C. 6.2%. D. 7.2%. E. None of the options are correct.

ROE = 0.6 × 0.6 × 4% × 2.5 × 2 = 7.2%.

What best explains why a firm's ratio of long-term debt/total capital is lower than the industry average, while the ratio of income before interest and taxes/debt interest charges is higher than the industry average?

The firm has more short-term debt than average. The firm is using more short-term debt, possibly to finance fixed assets, than the average firm. The coverage ratio includes only interest on long-term debt.

Which one of these is a positive covenant?

The firm must maintain a current ratio of 1.2 or better.

Financial economists prefer to use market values rather than book values when measuring debt ratios because market values are:

a better reflection of current information

If 34 percent of customers pay on Day 10 and the remainder pay in an average of 28 days, what is the average collection period?

a. 19.72 days b. 20.08 days c. 21.88 days d. 18.47 days e. 22.09 days C Average collection period = .34 × 10 + .66 × 28 Average collection period = 21.88 days

When credit is granted to another firm this gives rise to a(n):

accounts receivable and is called trade credit.

Firms are least apt to deal with financial distress by:

acquiring a competitor.

A corporation is adjudged bankrupt under Chapter 7. Based on APR, shareholders receive payment, if funds are remaining, after the:

after all other parties have been paid.

Flow-based insolvency is defined as:

an insufficient operating cash flow to meet current obligations.

Selling goods and services on credit is:

an investment in a customer.

A bond that can be retired prior to maturity by the issuer is a(n) ________ bond.

callable

Credit analysis is best described as the process of:

determining the probability that a customer will not pay.

Unsecured bonds are called ____________.

either debentures or subordinated debentures

FOX Company has a ratio of (total debt/total assets) that is above the industry average, and a ratio of (long term debt/equity) that is below the industry average. These ratios suggest that the firm

has relatively high current liabilities, Total debt includes both current and long term debt; the above relationships could occur only if FOX Company has a higher than average level of current liabilities.

The written agreement between a corporation and its bondholders is called the:

indenture

The difference between liquidation and reorganization is that a:

liquidation terminates all operations and a reorganization maintains the option of the firm as a going concern.

If a debt is subordinated, it:

must give preference to the secured creditors in the event of default.

A ________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date.

put

Most firms in financial distress do not fail or cease to exist. In fact, many firms can actually benefit from financial distress by: A) filing for Chapter 7 bankruptcy. B) increasing their debt load. C) selectively ceasing payment on some of their outstanding debts. D) liquidating. E) reevaluating their core operations and restructuring their assets

reevaluating their core operations and restructuring their assets.

Which one of these is not included in the indenture?

registered owner

A firm has several options available to it in times of financial distress. The firm may:

take any or all of the other actions.

3 key duties of a bond trustee

the registration, transfer, and payment of bonds.

Under which circumstance is a subordinated bondholder most likely to recover some value in a Chapter 11 bankruptcy without a senior creditor getting paid in full? When:

the various clamants agree to it.

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of high inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income. A. understate; overstate B. understate; understate C. overstate; understate D. overstate; overstate E. There is no discernible pattern.

understate; overstate; Depreciation is based on historic costs; thus during periods of inflation depreciation is understated, which results in the overstatement of income. In periods of inflation, interest rates are high, and thus result in the understatement of the firm's long term earning capacity.