Finance 170
2) Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. Amount due from a customer in 30 days III. Account payable to a supplier that is due next week IV. Loan payable to the bank in sixteen months A. I and III only B. II and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV
A. I and III only
Is issued once a year by a corporation and contains basic financial statements and an analysis of past performance and future prospects.
Annual report
You bought 1,000 shares of Tund Corp. stock for $75.00 per share and sold it for $77.25 per share within the same year. How will your gain or loss be treated when you file your taxes?
As a capital gain taxed at the current ordinary-income tax rate
You bought 1,000 shares of Tund Corp. stock for $60.59 per share and sold it for $82.35 per share after a few years. How will your gain or loss be treated when you file your taxes?
As a capital gain taxed at the long-term tax rate
You bought 1,000 shares of Tund Corp. stock for $68.12 per share and sold it for $90.03 per share after a few years. How will your gain or loss be treated when you file your taxes?
As a capital gain taxed at the long-term tax rate
Can the firm meet all its short-term obligations using its current assets?
Balance Sheet
How much debt and equity has the firm issued to finance its assets?
Balance Sheet
Indigo Inc. is going public and issuing 150,000 shares of common stock. The capital raised in the IPO will fund the company's proposed expansion. A Dutch auction is used to allocate shares in the Indigo IPO. The following table shows the number of shares requested by potential investors in each row. Bidder # 2 ($62)
Bidder # 2 ($62)
Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply. The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time. Blue Hamster Manufacturing Inc.'s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.20 to 0.25. An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management. The market value of Blue Hamster Manufacturing Inc.'s common shares declined over the three years.
Blue Hamster Manufacturing Inc.'s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.20 to 0.25. An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management.
To offset taxable income in a given year, ordinary corporate operating losses can be:
Carried back for 2 years and carried forward for 20 years
A liquid asset can be converted to cash quickly without significantly impacting the asset's value. Which of the following asset classes is generally considered to be the most liquid?
Cash
Issued by corporations, these unsecured debt instruments are used to fund corporate short-term financing requirements. If issued by a financially strong company, they have less risk.
Commercial paper
Entrepreneurs often start businesses by seeking financial help from family and friends.
Direct Transfers
The Yum chain of restaurants conducts an initial public offering to raise funds for expansion.
Financing Activity
Yum Brands distributes dividends to its common stockholders for the first time.
Financing Activity
How profitable has the firm been?
Income Statement
xEdu.com is an early-stage start-up company that plans to issue its first public common stock—called an initial public offering (IPO)—in six months. It hires an investment bank to underwrite the issue.
Indirect Transfers through Investment Banks
A company buys some common stock in its supplier's firm with its extra cash.
Investing Activity
Vision Tech's stock price is currently trading at $42 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $32 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?
Less likely
Abbey allocates 80% of her portfolio for investments in short-term US Treasury bills.
Money markets
Sheila saves $10,000 and buys a certificate of deposit (CD) that will mature in six months.
Money markets
You go to an auto dealer and buy a new car. You drive the car home immediately after making the payment.
Physical asset markets
Gives details about the company's cash at the beginning of the year and what is left at the end of the year, including some details about where cash was generated and where it was used during the course of the year.
Statement of cash flows
Current market prices reflect all relevant information, whether it is known publicly or privately.
Strong form efficiency
Executives are often compensated above and beyond their salary and benefits. Which of the following perquisites would not encourage managers to maximize long-run shareholder wealth? -The use of a private jet -A percentage of the company's profits -Stock options
The use of a private jet
Over the past two years, Cute Camel Woodcraft Company has relied more on the use of short-term debt than on long-term debt financing.
This statement is incorrect , because: Cute Camel's total current liabilities increased by $312 million, while its use of long-term debt increased by $938 million
Can a company have negative free cash flow?
Yes
Has three segments that when analyzed together give an idea of what the company owns and what it owes.
Balance sheet
Provides a quantitative summary of a company's assets, liabilities, and net worth at a specific point in time.
Balance sheet
Summarizes a company's assets, liabilities, and stockholders' equity at a specific point in time.
Balance sheet
Your existing business generates $147,000 in EBIT.•The corporate tax rate applicable to your business is 35%.•The depreciation expense reported in the financial statements is $28,000.•You don't need to spend any money for new equipment in your existing cafés; however, you do need $22,050 of additional cash.•You also need to purchase $11,760 in additional supplies—such as cloth, tableclothes and napkins, and more formal tableware—on credit.•It is also estimated that your accruals, including taxes and wages payable, will increase by $7,350.
Based on your evaluation you have$108,850 in free cash flow.
Your existing business generates $111,000 in EBIT. •The corporate tax rate applicable to your business is 35%. •The depreciation expense reported in the financial statements is $21,143. •You don't need to spend any money for new equipment in your existing cafés; however, you do need $16,650 of additional cash .•You also need to purchase $8,880 in additional supplies—such as cloth, tableclothes and napkins, and more formal tableware—on credit .•It is also estimated that your accruals, including taxes and wages payable, will increase by $5,550.
Based on your evaluation you have$82,193 in free cash flow. FCF=[EBIT x (1 - Tax rate)] + Depreciation - Capital Expenditures - Increase in Net Working Capital =[EBIT x (1 - Tax rate) + Depreciation] - Additional Capital Expenditures - [(Increase in Cash + Increase in Supplies) - (Increase in Accounts payable + Increase in Accruals)] FCF=[$111,000 x (1 - 0.35)] + $21,143 - $0 - [$16,650 + $8,880) - ($8,880 + $5,550)] =[$72,150 + $21,143] + $0 - ($16,650 - $5,550) =[$72,150 + $21,143] + $0 - $11,100 =$82,193
Cole, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Abigail, is willing to sell 1,500 shares of the same stock. Unfortunately, Cole and Abigail don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $27.65 per share and purchase additional shares for $26.50 per share. Select the most appropriate values in the following table: If the market maker is willing to purchase the entire block of 1,500 shares from Abigail and, from that block, resell 1,000 shares to Cole, then the market maker's net profit from Cole's transaction—excluding any inventory effects—will be [$1,150.00] .
Bid price $26.50 Ask price $27.65 Bid-ask spread $1.15 [$1,150.00]
Jorge, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Adele, is willing to sell 1,500 shares of the same stock. Unfortunately, Jorge and Adele don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $27.80 per share and purchase additional shares for $26.50 per share. Select the most appropriate values in the following table: If the market maker is willing to purchase the entire block of 1,500 shares from Adele and, from that block, resell 1,000 shares to Jorge, then the market maker's net profit from Jorge's transaction—excluding any inventory effects—will be [$1,300.00] .
Bid price $26.50 Ask price $27.80 Bid-ask spread $1.30 [$1,300.00]
Brent, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Amara, is willing to sell 1,500 shares of the same stock. Unfortunately, Brent and Amara don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $32.50 per share and purchase additional shares for $31.50 per share. Select the most appropriate values in the following table: If the market maker is willing to purchase the entire block of 1,500 shares from Amara and, from that block, resell 1,000 shares to Brent, then the market maker's net profit from Brent's transaction—excluding any inventory effects—will be [$1,000.00].
Bid price $31.50 Ask price $32.50 Bid-ask spread $1.00 [$1,000.00]
Long-term mortgage-backed securities are traded between investors and issuers.
Capital markets
Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.
Certificates of deposit
They accept deposits from savers and make loans to people who need it. They provide various services, such as checking accounts and money market transactions, to facilitate capital exchange between savers and people who need it.
Commercial banks
Which of the following are money market instruments? Check all that apply. Commercial paper Long-term bank loans Certificates of deposit Preferred stocks Treasury bills
Commercial paper Certificates of deposit Treasury bills
Referring to these data, which of the following conclusions will be true about the companies' ROEs? The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debt financing.
Company C has an equity multiplier of 3.60, which is greater than the equity multiplier of the other companies. An increase in an equity multiplier can be due to two factors: an increase in the firm's total assets or an increase in its use of debt financing. Company C's increased use of financial leverage (borrowed financial capital) leads to a reduced reliance on equity financing. Since Company C's profit margin and total asset turnover ratio are very close to those of Companies A and B, then it is reasonable to conclude that all three companies are performing at the same general level of operational efficiency. Therefore, Company C's significantly higher ROE is the result of its increased use of financial leverage when purchasing its assets.
Issued by corporations, these instruments can have maturities from 1-40 years. The risk depends on the financial strength of the issuing corporation.
Corporate bonds
Which of the following instruments are traded in the capital markets? Check all that apply. -Treasury bills -Corporate bonds -Commercial paper -Certificates of deposit -Long-term bank loans
Corporate bonds Long-term bank loans
Which of the following instruments are traded in the capital markets? Check all that apply. -Corporate bonds -Long-term bank loans -Common stocks -Preferred stocks -Certificates of deposit
Corporate bonds Long-term bank loans Common stocks Preferred stocks
They are owned by members so that members can share funds among themselves. Members who save deposit the funds. These funds are then loaned to members who need the funds.
Credit unions
Alphabet Inc. has net working capital of $360, and current liabilities of $190. What is the current ratio?
Current Ratio = Current Asset/Current Liabilities Net Working Capital = Current Asset - Current Liabilities -> Current Asset = 360 + 190 = 550 -> Current Ratio = 550/190 = 2.895
During the last year, Lucky Corp. generated $1,170.00 million in cash flow from operating activities and had negative cash flow generated from investing activities (-640.00 million). At the end of the first year, Lucky Corp. had $200 million in cash on its balance sheet, and the firm had $330 million in cash at the end of the second year. What was the firm's cash flow (CF) due to financing activities in the second year?
$-400.00 million The firm's cash balance changed by $330 million - $200 million = $130.00 million in the second year. That means the sum of operating, investing, and financing activities must equal the change in cash of $130.00 million during the year: Change in Cash=CF from Operating Activities + CF from Investing Activities + CF from Financing Activities$130.00 million=$1,170.00 million + ($-640.00 million) + CF from Financing Activities Calculate the cash flow from financing activities as follows: CF from Financing Activities=($130.00 - $530.00) million=-400.00 million
Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 100 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $32.50 per share.
$3,250.00
WAC Inc. is going public and issuing 500,000 shares of common stock. The capital raised in the IPO will fund the company's proposed expansion. A Dutch auction is used to allocate shares in the WAC IPO. The following table shows the number of shares requested by potential investors in each row. $55 bidder #4
$55 biddier #4
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $136 million. Last year, the company reported a retained earnings balance of $459 million, whereas this year it increased to $540 million. How much was paid out in dividends this year?
$55 million Dividends Paid=Net Income - (Ending Retained Earnings - Beginning Retained Earnings)=$136 - ($540 - $459) million=$55 million
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year's accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?
$583.00 million
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year's accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?
$583.00 million Actual Cash Collected=Net Sales - Increase in Accounts Receivable
Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 175 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $35.00 per share.
$6,125.00
Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 225 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $37.50 per share.
$8,437.50
Adams Furniture has a quick ratio of 2.00x, $37,575 in cash, $20,875 in accounts receivable, some inventory, total current assets of $83,500, and total current liabilities of $29,225. The company reported annual sales of $100,000 in the most recent annual report. Over the past year, how often did Adams Furniture sell and replace its inventory?
3.99x Quick Ratio = (Current Assets - Inventories)/Current Liabilities Inventories = Current Assets - (Quick Ratio × Current Liabilities) = $83,500 - (2.00 × $29,225) = $25,050 Inventories = Current Assets - (Cash + Accounts Receivable) = $83,500 − ($37,575 + $20,875) = $25,050 Inventory Turnover Ratio = Sales/Inventories That is: Inventory Turnover RatioInventory Turnover Ratio = $100,000/$25,050 = 3.99x
Indigo Inc. is going public and issuing 150,000 shares of common stock. The capital raised in the IPO will fund the company's proposed expansion. A Dutch auction is used to allocate shares in the Indigo IPO. The following table shows the number of shares requested by potential investors in each row.Bids 56 (bidder #2)
56 (bidder #2)
Which of the following compensation proposals is most likely to be in the best interest of the company's shareholders? -A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months -A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years -A base salary of $500,000 plus perquisites worth $250,000
A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years
Which of the following statements best describes a marginal investor? -A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change. -A marginal investor thinks that the firm's stock is priced too high, and she would only buy more stock if the price dropped sharply. -A marginal investor thinks that the firm's stock at the current price is a good deal, and she would buy more stock if she had more money to invest.
A marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change.
Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply. A plausible reason why Cold Goose Metal Works Inc.'s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors. A decline in the inventory turnover ratio can be explained by the new inventory management system that the company recently adopted, which led to more efficient inventory management. Cold Goose Metal Works Inc.'s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.70 to 0.45.
A plausible reason why Cold Goose Metal Works Inc.'s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors. Cold Goose Metal Works Inc.'s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.70 to 0.45.
Stay Swift Corp. recently raised capital through an initial public offering (IPO). Its stock can now be purchased on the NYSE. This company is referred to as: A closely held corporation A publicly owned corporation
A publicly owned corporation
Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow?
Acquiring operating assets
The inventory turnover ratio across companies in the furniture industry is 4.389x. Based on this information, which of the following statements is true for Adams Furniture?
Adams Furniture is holding more inventory per dollar of sales compared with the industry average. (Adams Furniture's inventory turnover ratio (3.99x) is lower than the industry average (4.389x). This means that Adams Furniture is either holding more average inventory per dollar of sales than the industry average or turning (selling and replacing) its inventory more slowly (or fewer times per year) than the average firm in the industry—everything else remaining constant—or both. Remember, in general, holding excess inventory is unhealthy because the company's resources are invested in inventories with a zero rate of return. A low inventory turnover ratio could mean that sales are poor or that too much inventory is building up due to ineffective inventory management.)
Which of the following characteristics accurately describes the stock market? An active market that determines the price of a firm's shares A fixed-income market where participants buy and sell debt securities
An active market that determines the price of a firm's shares
Consulting firms and human resource departments have spent innumerable hours attempting to develop executive compensation programs that will align the goals of a firm's managers with those of the firm's shareholders. Which of the following compensation packages is most likely to accomplish this task? -An annual salary of $500,000 and a stock option bonus package that provides 100,000 shares after one year -An annual salary of $500,000 and a stock option bonus package for a total of 250,000 shares, with 50,000 shares vesting at the end of each of the next five years -An annual salary of $250,000 and a stock option bonus package that provides 250,000 shares after five years An annual salary of $800,000
An annual salary of $500,000 and a stock option bonus package for a total of 250,000 shares, with 50,000 shares vesting at the end of each of the next five years
Is published once a year and provides stockholders with details about the company's performance and financial condition.
Annual report
Is required by the SEC and includes the audited document that shows the company's financial results for the past year and management's discussion about the future outlook and plans.
Annual report
You are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) 1.Alow days of sales outstanding represents an efficient credit and collection policy. Between the two companies,Like Games is collecting cash from its customers faster thanOur Play , but both companies are collecting their receivables less quickly than the industry average.2.Our Play's fixed assets turnover ratio islower than that of Like Games. This could be because Our Play is a relatively new company, so the acquisition cost of its fixed assets ishigher than the recorded cost of Like Games's net fixed assets.3.Like Games's total assets turnover ratio is1.05x , which islower than the industry's average total assets turnover ratio. In general, a higher total assets turnover ratio indicates greater efficiency.
Days of Sales Outstanding=Receivables/Average Sales per Day = 9.86 days 14.24 days 5.51 days Fixed Assets Turnover Ratio=Sales/Net Fixed Assets = 1.82x 1.25x 1.18x Total Assets Turnover Ratio=Sales/Total Assets = 1.05x 0.80x 1.09x
From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing?
Debt financing
A small startup firm has each of the partners contribute $50,000 in capital to help the company make payroll for the next three months.
Direct Transfers
Based in Grass Valley, California, L & M Seeds Co. is a small company that manufactures organic seeds. To raise capital, the company sells stocks directly to savers in Grass Valley without involving any bank or financial intermediary.
Direct Transfers
Erin borrows money from her uncle to buy a new laptop.
Direct Transfers
Shylock, a moneylender in Shakespeare's play The Merchant of Venice, lends his own money to Antonio, who needs 3,000 ducats to help his friend.
Direct Transfers
Steve's grandfather loans him $30,000 to start a small coffee shop in the East Village in Manhattan.
Direct Transfers
Which source of investor income is susceptible to double taxation?
Dividends
Which of the following cash outflows cannot be deducted from the operating income to derive the taxable income?
Dividends paid
Which of the following best describes shareholders' equity?
Equity is the difference between the company's assets and liabilities.
Which of the following best describes shareholders' equity?
Equity is the sum of shareholders' capital provided by shareholders and retained earnings.
Which of the following best describes shareholders' equity?
Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. Shareholders' Equity=Paid-in Capital + Retained Earnings Shareholders' Equity=Total Assets - Total Liabilities
What is Acme's FCF for 2013? Assume 35% tax rate and cash on balance sheet is NOT excess cash.
FCF = [Ebit(1-T) + Depreciation] - [Capital Expenditure + ΔNOWC] *Capital Expenditure(2013) = Fixed Assets(2013) - Fixed Assets(2012) = 27107 - 27489 = -382 *ΔNOWC = NOWC(2013) - NOWC(2012) NOWC = (Current Assets - Excess Cash) - (Current Liabilities - Notes Payable) Current Assets = Cash + AR + Inventory NOWC13 = (12171-0) - (4932 - 0) = 7239 NOWC12 = (11113 - 0) - (7194 - 2500) = 6419 ΔNOWC = 820 -> FCF = [Ebit(1-T) + Depreciation] - [Capital Expenditure + ΔNOWC]
The efficient markets hypothesis holds only if all investors are rational.
False
Karl spends $1,500 to buy Google stock options through his online brokerage account.
Financial asset markets
These financial conglomerates provide a range of services, such as investment banking, commercial banking, and financial advising.
Financial services corporations
Yum Co. uses cash to repurchase 10% of its common stock.
Financing Activity
Which of the following statements are true? Check all that apply. Fitcom Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Zebra Paper Corporation. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if the difference between the two ratios is large, then the company depends heavily on the sale of its inventory to meet its short-term obligations. Fitcom Corporation has a better ability to meet its short-term liabilities than Zebra Paper Corporation. An increase in the current ratio over time always means that the company's liquidity position is improving.
Fitcom Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Zebra Paper Corporation. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if the difference between the two ratios is large, then the company depends heavily on the sale of its inventory to meet its short-term obligations.
A company agrees to buy copper from a seller in Chile at a certain price at the beginning of next year. Both companies sign a contract that locks in a future price at which the trade will take place.
Futures markets
A farmer agrees to sell 10,000 bushels of wheat at the rate of $4.50 per bushel to a buyer in three months. A regulated exchange, such as the Chicago Board of Trade, completes the transaction.
Futures markets
With the use of advanced investment techniques, these largely unregulated portfolios are invested in securities. The investment objective is to offset potential losses by investing in counterbalancing securities. They are open to only a select class of investors.
Hedge funds
Accounts for all revenues and expenses over an accounting period.
Income statement
Gives details about the firm's sales, costs, and profits for the past accounting period.
Income statement
Is divided into two important parts: operating and nonoperating sections; also known as the profit and loss statement.
Income statement
California Public Employees' Retirement System (CalPERS) manages pension and health benefits of California public employees and retirees. CalPERS collects money from its participants and creates a pool of assets. It manages these assets by making investments across domestic and international markets.
Indirect Transfers through Financial Intermediaries
Citibank issues a loan to Jennifer for the expansion of her flower delivery business.
Indirect Transfers through Financial Intermediaries
Elliot invests $25,000 by purchasing 1,000 shares of an emerging markets mutual fund. This mutual fund invests in companies in Brazil, India, and China. He bought the mutual fund from the mutual fund company.
Indirect Transfers through Financial Intermediaries
Israel launched a 10-year global bond issue of $1.5 billion in early 2009. Leading investment banks such as Citigroup, Deutsche Bank, and Goldman Sachs managed the deal. (Source: Reuters.com, Mar. 18, 2009.)
Indirect Transfers through Investment Banks
W2 Corp. needs capital to finance a new product line. It borrows money in the form of long-term bonds underwritten by an investment bank.
Indirect Transfers through Investment Banks
A pharmaceutical company buys marketing rights to sell a drug exclusively in East Asian markets.
Investing Activity
DigiInk Printing Co. buys new machinery to ramp up its production capacity.
Investing Activity
Which of the following is true for the statement of cash flows?
It reflects cash generated and used during the reporting period.
These financial instruments are contractual agreements that give one party a long-term agreement to use an asset by providing regular payments.
Leases
Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute their positions and sell off their stake in Vision Tech's stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm's management?
Less likely
In addition to well-designed executive compensation packages, two other motivational forces can align the interests of managers with those of their shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm's managers will pursue the long-term wealth interests of their shareholders?
Let the manager know that a takeover is possible if he or she doesn't perform well.
If Acme's stock was selling for $150 per share and the firm has 200 million shares, what is its MVA in 2013?
MVA (Market Value Added) = (Price per share x No. of shares) - Book value of common equity Book value of common equity = common stock + retained earnings = (150 x 200m) - (17500m + 5196m) = $7304m
These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.
Money market mutual funds
Vision Tech is a software company based out of San Francisco. Its stockholders are mostly individual investors and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Vision Tech's stock, would direct shareholder intervention be more or less likely to motivate the firm's management?
More likely
Vision Tech's stock price is currently trading at $26 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $34 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?
More likely
Vision Tech's stock price is currently trading at $27 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $33 per share. Is Vision Tech more or less likely to receive a hostile takeover bid?
More likely
How much did the firm pay out in dividends in 2013?
Net Income = Retained Earnings + Dividends -> Dividends = NI - RE RE(2013) = RE(2013) - RE(2012) = 5196 - 4128 = 1068 -> Div(2013) = 22516 - 1068 = 21448
What is the most commonly used base item for a common size income statement? Total liabilities Net sales Stockholders' equity Total assets
Net sales
A firm has $100 million in revenues. Does that mean it has generated a cash flow of $100 million?
No
If a firm has a lot of net cash flow, does that mean the firm's balance sheet cash account must be high?
No
Alexander owns Alexander's Tantalizing Tees, a T-shirt shop in a small college town in Georgia. With a staff of three part-time employees, Alexander operates the business in accordance with his personal goals, dreams, and capabilities. Does Alexander have an agency conflict to deal with? -Yes; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has created the necessary agency relationship through which an agency conflict can exist. -No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through which an agency conflict can exist. -Yes; there is always an inherent conflict of interest between owners and operators (managers). -No; by having part-time, as opposed to full-time, employees, Alexander is prevented from experiencing an agency conflict.
No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through which an agency conflict can exist.
A company records a decrease in its total raw materials inventory from the previous year.
Operating Activity
A company records a loss of $70,000 on the sale of its outdated inventory.
Operating Activity
A company reports a 10% increase in its accounts payable from the last month.
Operating Activity
D and W Co. sells its last season's inventory to a discount store.
Operating Activity
Fitzi Chemical Co. earns revenue from its cash receipts from royalties.
Operating Activity
Ruth Enterprises distributes a holiday bonus to all its employees.
Operating Activity
When the demand for an initial public offering (IPO) of securities exceeds the number of securities issued, the offering is deemed to be: Oversubscribed Undersubscribed
Oversubscribed
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $55.78 per share, but Mandalays Inc.'s stock is trading at $69.54 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:
Overvalued
Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth? -Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth. -Pay the manager a large base salary with a huge stock option package that matures on a single date.
Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.
They are established by an employer to facilitate and organize employee retirement funds. They are asset pools that invest in securities that have a potential to give stable returns.
Pension funds
A student sells his old computer at a computer hardware store and gets $150 for it. He uses this cash to buy computer accessories.
Physical asset markets
Issued by corporations, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership.
Preferred stocks
Google filed its initial public offering worth $2.7 billion in 2004. Source: CNNmoney.com, Apr. 30, 2004.
Primary markets
These are organizations that invest in equity capital that is not traded in public exchanges.
Private equity companies
Vezio Corp. decides to sell shares worth $15 million directly to a small group of US institutional investors.
Private markets
In general, is the U.S. federal tax system progressive or regressive?
Progressive
The state of California issues new bonds to the public with an investment bank serving as the underwriter to raise capital.
Public markets
What is the ACME's ROE for 2013? Break it down into its components using the DuPont Formula. If its ROE is above industry average but its TAT and Equity Multiplier are below industry averages how can this outcome be explained?
ROE = Net Income / Total common Equity = Net Income / (Common Stock + Retained Earnings) = 22516/(17500+5196) = 99.21% ROE = Profit Margin X Total assets turnover X Equity multiplier ROE = (NI/Sales) X (Sales/TA) X (TA/Equity) ROE = (22516/85723) x (85723/39278) x (39278/22696) ROE = 99.22% If ROE is above average but TAT(total assets turnover) and Equity Multiplier are below industry average, then the only way for this to happen is if profit margin is above industry average.
Check all that apply. -Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin. -Use more equity financing in its capital structure, which will increase the equity multiplier. -Use more debt financing in its capital structure and increase the equity multiplier. -Decrease the company's use of debt capital because it will decrease the equity multiplier.
Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin. Use more debt financing in its capital structure and increase the equity multiplier.
Which of the following statements best describes free cash flow?
Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures
Current market prices reflect all relevant publicly available information.
Semistrong form efficiency
Carlos is an immigrant from Mexico to the United States. He sends $200 to Mexico on June 15 at the exchange rate on that day.
Spot markets
Issued by nonfederal government entities, these financial instruments are debt securities that fund their capital expenditures. They are exempt from most taxes imposed in the area where the securities are issued.
State and local government bonds
Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised?
Statement of Cash Flows
How much cash is a firm generating through operating, investing, and financing activities?
Statement of Cash Flows
How much of the firm's earnings are left as balance after the firm pays out dividends to its shareholders?
Statement of Retained Earnings
Aggregates all cash inflows, which the company receives from its ongoing activities and investment sources, and all cash outflows.
Statement of cash flows
Provides details about the flow of funds from operating, investing, and financing activities.
Statement of cash flows
Details changes in the capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings.
Statement of retained earnings
Explains the changes in a company's retained earnings over the accounting year.
Statement of retained earnings
Reconciles (1) the amount of retained earnings recorded at the beginning of the reporting period, (2) changes during that period, and (3) the amount of retained earnings at the end of the reporting period.
Statement of retained earnings
The applicable tax rate for S corporations is based on the:
Stockholders' individual tax rates
Which of the following statements best describes free cash flow?
The amount of a firm's available cash that can be used without harming operations or the ability to produce future cash flows FCF=EBIT(1 - Tax) + Depreciation - [(Capital Expenditures + Increase in Net Working Capital)]
In a dealer market, some dealers hold a certain inventory of specific securities and create a liquid market by purchasing and selling their inventories. These dealers make a market and are thus called market makers. Agents in the market bring investors to the dealers through a network of terminals and electronic systems. Where do dealer profits come from in a dealer market? -Dividend payments -Interest charges -The bid-ask spread
The bid-ask spread
Which of the following statements best describes free cash flow?
The cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm's ongoing operations
Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Cute Camel Woodcraft Company's balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?
The company's assets should be listed in the order in which they are to be converted into cash.
Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Blue Hamster Manufacturing Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?
The company's debts are listed in the order in which they are to be repaid.
The bid-ask spread in a dealer market represents the profit that a dealer would make on a transaction involving a security. Which of the following statements best describes the bid-ask spread?
The difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it.
Consider that there is a semistrong form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
The stock price will increase and settle at a new equilibrium level.
A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report?
The stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.
Consider that there is a weak form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
There will be some volatility in the stock price when the earnings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement.
One way to interpret the change in Cute Camel's accounts receivable balance from Year 1 to Year 2 is that more customers purchased new items on credit rather than paying off existing credit accounts.
This statement is correct , because: The $338 increase in accounts receivable means either that Year 1's existing credit customers are not paying off their owed balances and new or existing customers are making additional purchases on credit, or that Year 1's credit customers have repaid their owed balances and Year 2 credit sales have exceeded Year 1's credit sales
The book value per share of Blue Hamster's stock in Year 2 was $656.26.
This statement is correct , because: The per-share book value is calculated by dividing the company's total common equity by the number of outstanding shares of common stock
Blue Hamster's net collection of inventory items increased by more than the firm sold between Years 1 and 2.
This statement is correct , because: Total inventories of raw materials, work-in-process, and final goods increased from $6,930 million to $8,662 million between Year 1 and Year 2
Statement #1:Green Caterpillar's accumulated owed financial obligations decreased from Year 1 to Year 2.
This statement is false , because: Accruals actually increased from $0 in Year 1 to $410 million at the end of Year 2
Cute Camel's pool of relatively liquid assets, which are available to support the company's current and future sales, decreased from Year 1 to Year 2.
This statement is false , because: Cute Camel's total current asset balance actually increased from $9,000 million to $11,250 million between Year 1 and Year 2
If Green Caterpillar ever goes bankrupt, its common stockholders will be paid off first, then its debtholders and preferred stockholders.
This statement is incorrect , because: Common shareholders are treated as residual investors
In Year 2, Blue Hamster Manufacturing Inc. was profitable.
This statement is true , because: Blue Hamster's retained earnings account increased between the end of Years 1 and 2
On December 31 of Year 2, Green Caterpillar Garden Supplies Inc. had $8,072 million of actual money that it could have spent immediately.
This statement is true , because: The funds recorded in Green Caterpillar's cash and equivalents account represents funds that are either cash or can be converted into cash almost immediately
Sterling Rope has Net Working Capital of 640, long term debt of 4,180, total assets of 6,230, and fixed assets of 3,910. What are its total liabilities?
Total Assets = Current Asset + Fixed Asset 6230 = CA + 3910 -> CA = 2320 Net Working Capital = Current Asset - Current Liabilities 640 = 2320 - CL -> CL = 2320 - 640 = 1680 Total liabilities = Current Liabilities + Long term debt = 1680 + 4180
A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.
True
As long as the information reported follows the generally accepted accounting principles (GAAP) guidelines, accountants in a firm have the liberty to use personal judgment to report transactions in the firm's financial statements. False
True
Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.
U.S. Treasury bills
Backed by the U.S. government, these financial instruments are fixed-rate debt securities with a maturity of more than one year. They are considered default free but are subject to interest rate risk.
U.S. Treasury notes and bonds
When the demand for an initial public offering (IPO) of securities is less than the number of securities issued, the offering is deemed to be: Oversubscribed Undersubscribed
Undersubscribed
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $115.24 per share, but Mandalays Inc.'s stock is trading at $89.57 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:
Undervalued
An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $8.79 per share, but Mandalays Inc.'s stock is trading at $1.59 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently:
Undervalued
Current market prices reflect all information contained in past price movements.
Weak form efficiency
Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. (CSI). CSI is the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CSI's CFO and the company's shareholders? -No; professionals, such as doctors and professional money managers, would not participate in unethical activities. -Yes; the shares should not have been sold at a 75% discount, which is price discrimination. -Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus. -No; in general, shareholders are satisfied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater dividend payments.
Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.
Jacob and Kayla equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Jacob is responsible for ANB's back-office activities, and Kayla staffs the store and makes deliveries to customers. Both have equal decision-making authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. Jacob, without Kayla's knowledge, used the company's bank account recently to purchase a new sports car. Jacob has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Jacob and Kayla? -No; Since Jacob acknowledged that the car would not be used to support the business, no agency conflict can arise. -Yes; Jacob is misappropriating some of Kayla's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. -No; Jacob and Kayla are both authorized to spend ANB's money, so no conflict of interest can occur. -No; Jacob and Kayla co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist.
Yes; Jacob is misappropriating some of Kayla's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds.
Coca-Cola Inc. had earnings in 2012 of $512 million on sales of $9.13 billion. The company's balance sheet also listed Current assets of $300 million, and Fixed assets of $5.5 billion. a.What is the firms ROA? b. If the firm has 100 million public shares, what is its EPS?
a) ROA = Net Income/Total Assets Total Assets = Fixed Asset + Current Assets = 300m + 5.5b = 5.9b -> ROA = 512m/5.8b = 0.0883 = 8.33% b) EPS = Net Income / #Shares = 512m/100m = $5.12
When a company issues stock or shares to the public for the first time, it is referred to as[an initial public offering .]
an initial public offering
The annual report is very important for investors, because the information contained in the annual report:
helps investors forecast expected earnings and dividends.
Based on your understanding of the different items reported on the balance sheet and the information they provide, if everything else remains the same, then the cash and equivalents item on the current balance sheet is likely to increase if the firm issues $3 million of new common stock.
increase
If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to:
overstate its earnings.
ROE = Profit Margin × Total Assets Turnover × Equity Multiplier ----------=(Net Income/Sales) x (Sales/total assets) x (Total assets/Total common Equity)
•The first term, the company's net profit margin, or earnings after taxes, tells you about the firm's operational efficiency, which means how much after-tax income a firm is making on each dollar of sales earned. It is calculated by dividing net income by the corresponding year's net sales.•The second term, the firm's total assets turnover, tells you how efficiently the company is using its total assets to generate sales. Remember, this ratio is calculated by dividing the company's net sales by its corresponding total assets.•The third term, the equity multiplier, reflects the company's financial leverage. Also called the adjustment factor, this ratio is calculated by dividing the company's total assets by its total common equity.