Finance 320 Final Quiz Questions First 2 chapters

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate? - $1,770.00 - $1,951.43 -$2,151.45 - $1,858.50 - $2,049.00

- $1,770.00

Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure? - 2.86% -3.14% - 2.57% -2.32% - 2.08%

- 2.86%

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? -Company Heidee has a lower equity multiplier. - Company Heidee has a lower times interest earned (TIE) ratio. -Company Heidee has more net income. -Company Heidee pays more in taxes. -Company Heidee has a lower ROE.

- Company Heidee has a lower times interest earned (TIE) ratio.

Which of the following statements is CORRECT? - If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease. -A reduction in inventories held would have no effect on the current ratio. -A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. - If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. -An increase in inventories would have no effect on the current ratio.

- If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year? -Pay workers more frequently to decrease the accrued wages balance. - Increase the number of years over which fixed assets are depreciated for tax purposes. -Reduce the inventory turnover ratio without affecting sales or operating costs. -Pay down the accounts payables. - Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.

- Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.

Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? - The tax bill will increase. - Net income will decrease. -The ROA will decline. - The times interest earned ratio will decrease. - Taxable income will decrease.

- The tax bill will increase.

Danielle's Sushi Shop last year had (1) a negative net 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 had a sharp increase in its depreciation and amortization expenses. -The company had a sharp increase in its inventories. - The company had a sharp increase in its accrued liabilities. -The company sold a new issue of common stock. -The company made a large capital investment early in the year.

-The company sold a new issue of common stock.

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance? - The company's cost of goods sold increased. -The company's depreciation and amortization expenses declined. -The company's interest expense increased. -The company's expenditures on fixed assets declined. -The company's operating income decline

-The company's depreciation and amortization expenses declined.

Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? -The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. -The transaction would have no effect on the firm' financial strength as measured by their current ratios. -The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. -The transaction would improve both firms' financial strength as measured by their current ratios. - The transaction would lower both firm' financial strength as measured by their current ratios.

-The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio.

Which of the following statements is CORRECT? - The balance sheet for a given year tells us how much money the company earned during that year. -The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. -For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet. - The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). -A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

Considered alone, which of the following would increase a company's current ratio? -An increase in accounts payable. -An increase in accrued liabilities. -An increase in notes payable. - An increase in net fixed assets. -An increase in accounts receivable.

An increase in accounts receivable

Which of the following items cannot be found on a firm's balance sheet under current liabilities? -Accounts payable. -Cost of goods sold. - Accrued payroll taxes. - Short-term notes payable to the bank. -Accrued wages.

COGS.

On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? -The company must have paid out half of its earnings as dividends. - Dividends could have been paid in 2015, but they would have had to equal the earnings for the year. -The company must have had zero net income in 2015. -The company must have paid no dividends in 2015. -If the company lost money in 2015, they must have paid dividends.

Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

Which of the following statements is CORRECT? - If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. - The more depreciation a firm has in a given year, the higher its EPS, other things held constant. -Typically, a firm's DPS should exceed its EPS. -If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. -Typically, a firm's EBIT should exceed its EBITDA.

If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT? - Its total assets turnover must equal the industry average. -Its return on assets must equal the industry average. -Its TIE ratio must be below the industry average. - Its total assets turnover must be above the industry average. - Its total assets turnover must be below the industry average.

Its total assets turnover must be above the industry average.

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? -The company's interest expense would remain constant. - The company would have to pay less taxes. -The company's taxable income would fall. -The company would have less common equity than before. -The company's net income would increase.

The company's net income would increase.