FINN 3120 HW for Test #1

An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that

the firm's products are in inventory for fewer days before they are sold than is average for the industry

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years. The project should be accepted if

the present value of the project's cash inflows exceeds the present value of the project's cash outflows

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to

$1,100,000

Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's Total Liabilities & Equity?

$2,000,000

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $40,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is California Retailing's "Addition to Retained Earnings"?

$290,000

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing's net income?

$390,000

Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?

$390,000

A firm has after-tax cash flow from operations equal to $100,000. Operating working capital increased by $20,000, and the firm purchased $30,000 of fixed assets. The firm's free cash flow was

$50,000 Free Cash Flow = after-tax CF - Increase in operating working capital (+ decrease in operating working capital) - Increase in Fixed assets ( + decrease in fixed assets) =100,000 - 20,000 - 30,000 = 50,000 Formular from Textbook Page 95 (3-1A)

Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the acid-test ratio is

1.16

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, and assuming the company's stock price is $50 per share, the P/E ratio is

10.89

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the return on equity is

15.65%

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the current ratio is

2.35

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the inventory turnover ratio is

2.37 times

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to

25.67%

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the debt ratio is

45.69%

You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?

8.5%

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the times interest earned ratio is

8.65

Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the average collection period is

81 days

Which of the following statements about Generally Accepted Accounting Principles (GAAP) is NOT true? a. GAAP is a set of rule-based accounting standards established by the Financial Accounting Standards Board (FASB). b. All of the statements above are true. c. GAAP is complex, providing more than 150 "pronouncements" as to how to account for different types of transactions. d. GAAP sets out the standards, conventions, and rules that accountants must follow when preparing audited financial statements.

All of the statements above are true

Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from

Company A has lower selling and administrative expenses, resulting in a higher net profit margin. Operating return on assets (OROA)= operating profit margin * total asset turnover Thus the operating return on asset is same for both companies. Return on equity(ROE) = net income / total common equity There is a direct relationship between a firm's OROA and ROE. The higher the OROA, the higher will be the ROE. If company A has a higher ROE: Having lower cost of goods sold will result in a higher gross profit margin, not net profit margin. Having lower debt ratio has nothing to do with ROE. Company B having more common stock does not prove anything since we do not know whether A and B have same net income. If they have same net income, then this statement is true. Company A has a lower selling and admin expenses will lead to a higher net profit margin. This may be a reason why A has higher ROE when we exam the equation.

Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler's net income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million. Therefore

Ending Retained earning = Begin Retained earning + net income - dividend paid during the year Wheeler paid a dividend in 2011 of $2 million

Which of the following is an example of both a capital market and a primary market transaction?

Ford Motor Company sells a new issue of common stock to raise funds through a public offering

Which of the following best describes cash flow from financing activities?

Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid

Use the following information to calculate the change in the company's cash balance for the year. Credit Sales $800,000 Cash Sales $500,000 Operating Expenses on Credit $200,000 Cash Operating Expenses $700,000 Accounts Receivable (Beg. of Year) $50,000 Accounts Receivable (End of Year) $80,000 Accounts Payable (Beg. of Year) $50,000 Accounts Payable (End of Year) $100,000 Income Taxes Paid $160,000

Net Income = credit sales + cash sales - operating expenses on credit - cash operating expenses - income taxes = 800,000 + 500,000 -200,000 -700,000 - 160,000 = 240,000 Decrease in account receivable = ending AR - beginning AR = 30,000 Increase in account payable = ending AP - beginning AP = 50,000 Change in cash flow = Net income - decrease in AR + increase in AP = 260,000 $260,000

Company A has a higher days sales outstanding ratio than Company B. Therefore

Other things being equal, Company B has a cash flow advantage over Company A

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years. Therefore

Project B may be preferred to Project A if the opportunity cost of money is high enough

Racing Horse Corporation reported net income for 2010 of $200,000, sales of $540,000, expenses (excluding depreciation) of $180,000, and depreciation expense of $60,000. The company's accounts receivable balance increased by $40,000 during the year and its accounts payable balance remained the same. The company's change in cash for the year is estimated to be

Refer to updated Handout3, slides-32. Five steps how to convert accrual to cash basis: Change in cash = Net income + depreciation expense -increase in account receivables = 200,000 + 60,000 - 40,000 = 220,000 Here accounts payable remains the same thus not included in our calculation. $220,000

Common-sized income statements

assist in the comparison of companies of different sizes

The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because

both A and B (the preferred stock is more liquid & oil and gas exploration investments have a greater variability in possible returns)

All of the following securities are sold in money markets EXCEPT: a. 6-month certificates of deposit. b. common stock. Correct c. commercial paper. d. 3-month U.S. Treasury Bills.

common stock

If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods?

competitive bid purchase

The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore

the corporation's gross profit margin is greater than 20%

Executive compensation in the United States

is dominated by performance-based compensation designed to reduce agency problems

Shareholder wealth maximization means

maximizing the price of existing common stock

Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a

negotiated purchase

A basis point is equal to

one-hundredth of one percent

Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely

open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded

Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?

operating return on assets

Which of the following is NOT a valid theory that attempts to explain the shape of the term structure of interest rates?

the Fisher Effect theory

A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore

the corporate bonds are direct securities and the life insurance policies are indirect securities