FIN3403 Exam 1 Bliss

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?

Borrowing using short-term notes payable and use the proceeds to reduce long-term debt

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

FALSE

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. TRUE OR FALSE

FALSE

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

FALSE

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. TRUE OR FALSE

FALSE

Primary markets are large and important, while secondary markets are smaller and less important. TRUE OR FALSE

FALSE

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.

FALSE

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation? Group of answer choices

22,100

Which of the following statements is CORRECT? A. A hostile takeover is the main method of transferring ownership interest in a corporation. B. A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers. C. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. D. Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. E. Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.

A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

A secondary market transaction.

CH 3: Q4 Rao Construction recently reported $30.00 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 25%. What was Rao's operating income, or EBIT, in millions?

Answer on IPAD

Ch 3: Question 3 Brown Fashions Inc.'s December 31, 2018 balance sheet showed total common equity of $4,050,000 and 165,000 shares of stock outstanding. During 2019, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/19, assuming no common stock was either issued or retired during 2019? (Round your final answer to two decimal places.)

Answer on IPAD

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates were not affected, and assume that the same depreciation method was used for tax and stockholder reporting purposes.

Companies cash positions would decline

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Cost of goods sold

If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index. TRUE OR FALSE

TRUE

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

TRUE

Which of the following statements is CORRECT? A. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. B. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. C. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. D. Large corporations are taxed more favorably than proprietorships. E. Corporate stockholders are exposed to unlimited liability.

Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment D pays $2,500 at the end of 10 years (just one payment).

You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is CORRECT?

It's total assets turnover must be above the industry average

The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Nantell's operating income (EBIT) will increase

CH3: Q10 Vasudevan Inc. recently reported operating income of $2.3 million, depreciation of $1.20 million, and had a tax rate of 25%. The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million. How much was its free cash flow, in millions?

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CH3: Q11 Hartzell Inc. had the following data for 2018, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2019 is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $1,450; and Total assets = $2,500. Assume the firm had no excess cash. How much free cash flow did the firm generate during 2019?

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CH3: Q7: Emery Mining Inc. recently reported $147,500 of sales, $75,500 of operating costs other than depreciation, and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate, and its federal-plus-state income tax rate was 25%. How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes. (Round your intermediate and final answers to two decimal places.)

ON IPAD

If a firm's fixed assets turnover ratio is significantly higher than the average for its industry, then it could be that the firm uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. TRUE OR FALSE

TRUE

Which of the following statements is CORRECT? A. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. B. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. C. It is generally easier to transfer one's ownership interest in a partnership than in a corporation. D. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. E. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

Which of the following statements is CORRECT? A. The more depreciation a firm reports, the higher its tax bill, other things held constant. B. Because a firm's cash flow is shown as the lowest entry on the income statement, people often call it "the bottom line." C. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow. D. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes. E. Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.

Operating income is derived from the firm's regular core business. Operating income is calculated as revenues less operating costs. Operating costs do not include interest or taxes

Which of the following statements is CORRECT? A. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. B. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. C. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. D. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. E. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

Which of the following is an example of a capital market instrument?

Preferred Stock

Money markets are markets for

Short-term debt securities such as Treasury bills and commercial paper.

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary. TRUE OR FALSE

TRUE

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock. TRUE OR FALSE

TRUE

An increase in accounts payable represents an increase in net cash provided by operating activities, an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities. TRUE OR FALSE

TRUE

EBIT, often referred to as operating income, stands for "earnings before interest and taxes." TRUE OR FALSE

TRUE

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions TRUE OR FALSE

TRUE

Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%. TRUE OR FALSE

TRUE

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

TRUE

The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. TRUE OR FALSE

TRUE

The balance sheet represents a snapshot in time, whereas the income statement reports on operations over a period of time. TRUE OR FALSE

TRUE

The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. TRUE OR FALSE

TRUE

The current and quick ratios help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories. TRUE OR FALSE

TRUE

The income statement shows the difference between a firm's income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period. TRUE OR FALSE

TRUE

The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. TRUE OR FALSE

TRUE

The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance. TRUE OR FALSE

TRUE

Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet. TRUE OR FALSE

TRUE

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held. TRUE OR FALSE

TRUE

​If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction TRUE OR FALSE

TRUE

Which of the following statements is CORRECT? A. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. B. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. C. The cash flows for an annuity due must all occur at the ends of the periods. D. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. E. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

The company issues new common stock

Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

The company sold a new issue of common stock

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

The company's depreciation expense declined

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? A. Congress passes a law that severely restricts hostile takeovers. B. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. C. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. D. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. E. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

beginning of chapter 5 You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

The discount rate decreases.

The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2018. As of the end of 2019, none of the principal on this debt had been repaid. Assume that the company's sales in 2018 and 2019 were the same. Which of the following statements must be CORRECT?

The firm issued new common stock in 2019

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

The present value would be greater if the lump sum were discounted back for more periods.

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

Which of the following would generally indicate an improvement in a company's financial position, holding other things constant?

The quick ratio increases

You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?

This is an example of a direct transfer of capital.

A new firm is developing its business plan. It will require $715,000 of assets (which equals total invested capital), and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. The firm will use only debt and common equity for financing. What is the maximum debt to capital ratio (measured as debt/total invested capital) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt to capital ratio.) Do not round your intermediate calculations.

ipad

Ajax Corp's sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?

ipad

Beginning of chapter 4 Royce Corp's sales last year were $280,000, and its net income was $23,000. What was its profit margin?

ipad

Beranek Corp has $625,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

ipad

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $550,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations.

ipad

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $300,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations.

ipad

Garcia Industries has sales of $207,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed up by this change, how would that affect its net income, assuming other things are held constant? Assume all sales to be on credit. Do not round your intermediate calculations.

ipad

Han Corp's sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO. Assume all sales to be on credit. Do not round your intermediate calculations.

ipad

Herring Corporation has operating income of $275,000 and a 25% tax rate. The firm has short-term debt of $143,000, long-term debt of $323,000, and common equity of $466,000. What is its return on invested capital?

ipad

Last year Ann Arbor Corp had $240,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $33,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost reduction improve the ROE? Do not round your intermediate calculations. Group of answer choices

ipad

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $285,000 and its net income was $10,600. The firm finances using only debt and common equity, and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed? Do not round your intermediate calculations.

ipad

Precision Aviation had a profit margin of 7.00%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

ipad

River Corp's total assets at the end of last year were $320,000 and its net income was $32,750. What was its return on total assets?

ipad

Song Corp's stock price at the end of last year was $28.50 and its earnings per share for the year were $1.30. What was its P/E ratio?

ipad

Zero Corp's total common equity at the end of last year was $510,000 and its net income was $70,000. What was its ROE?

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