managerial finance

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets 2014 Cash and securities $ 2,500 Accounts receivable 11,500 Inventories 16,000 Total current assets $30,000 Net plant and equipment $20,000 Total assets $50,000 Liabilities and Equity Accounts payable $ 9,500 Accruals 5,500 Notes payable 7,000 Total current liabilities $22,000 Long-term bonds $15,000 Total liabilities $37,000 Common stock $ 2,000 Retained earnings 11,000 Total common equity $13,000 Total liabilities and equity $50,000 Income Statement (Millions of $) 2014 Net sales $87,500 Operating costs except depreciation 81,813 Depreciation 1,531 Earnings bef interest and taxes (EBIT) $ 4,156 Less interest 1,375 Earnings before taxes (EBT) $ 2,781 Taxes 973 Net income $ 1,808 Other data: Shares outstanding (millions) 500.00 Common dividends $632.73 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate35% Year-end stock price$43.39 Refer to Exhibit 4.1. What is the firm's EPS? a.$3.26 b.$3.43 c.$3.62 d.$3.80 e.$3.99

$3.62

Refer to Exhibit 4.1. What is the firm's P/E ratio? a.12.0 b.12.6 c.13.2 d.13.9 e.14.6

?

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."

??

A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds? a. 35.29% b. 37.06% c. 38.91% d. 40.86% e. 42.90%

A 35.29% 0.085(1-T)= .055

Refer to Exhibit 4.1. What is the firm's inventory turnover ratio? a.5.47 b.5.74 c.6.03 d.6.33 e.6.65

A 5.47

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? a. This is an example of a direct transfer of capital. b.This is an example of a primary market transaction. c.This is an example of an exchange of physical assets. d.This is an example of a money market transaction. e.This is an example of a derivatives market transaction.

A this is an example of a direct transfer of capital

Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio? a. 1.34 b. 1.41 c. 1.48 d. 1.55 e. 1.63

A. 1.34

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket? a. 13.85% b. 14.54% c. 15.27% d. 16.03% e. 16.83%

A. 13.85% RATIONALE: Municipal bond yield 9.00% Tax rate 35.00% Municipal yield = After-tax bond yield 9.00% = BT yield × (1 − T) 9.00% = BT yield × 65.00% BT yield = 13.85%

A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? a. 27.78% b. 29.17% c. 30.63% d. 32.16% e. 33.76%

A. 27.78%

Refer to Exhibit 4.1. What is the firm's ROA? a. 3.62% b. 3.98% c. 4.37% d. 4.81% e. 5.29%

A. 3.62%

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action? a. The company's current ratio increased. b. The company's times interest earned ratio decreased. c. The company's basic earning power ratio increased. d. The company's equity multiplier increased. e. The company's total debt to total capital ratio increased.

A. The company's current ratio increased.

Brown Fashions Inc.'s December 31, 2012, balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2013, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/13, assuming no common stock was either issued or retired during 2013? a. $20.90 b. $22.00 c. $23.10 d. $24.26 e. $25.47

B $22.00

Brown Office Supplies recently reported $15,500 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)? a.$4,627 b.$4,870 c.$5,114 d.$5,369 e.$5,638

B $4,870

Refer to Exhibit 4.1. What is the firm's quick ratio? a.0.51 b.0.64 c.0.76 d.0.92 e.1.10

B 0.64

Refer to Exhibit 4.1. What is the firm's dividends per share? a. $1.14 b. $1.27 c. $1.39 d. $1.53 e. $1.68

B. $1.27

Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital? a. $2,874 b. $3,025 c. $3,176 d. $3,335 e. $3,502

B. $3,025 RATIONALE: NOWC = Current assets − (Current liabilities − Notes payable) NOWC = $4,250 − ($1,825 − $600) NOWC = $3,025

Hartzell Inc. had the following data for 2012, in millions: Net income = $600; after-tax operating income [EBIT(1 − T)] = $700; and Total assets = $2,000. Information for 2013 is as follows: Net income = $825; after-tax operating income [EBIT(1 − T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2013? a. $383 b. $425 c. $468 d. $514 e. $566

B. $425

Refer to Exhibit 4.1. What is the firm's ROE? a.13.21% b.13.91% c.14.60% d.15.33% e.16.10%

B. 13.91%

Song Corp's stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio? a. 17.17 b. 18.08 c. 18.98 d. 19.93 e. 20.93

B. 18.08

Which of the following statements is CORRECT? a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant. b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure. c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE. d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm's ability to pay current interest is affected by taxes. e. All else equal, increasing the total debt to total capital ratio will increase the ROA.

B. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.

Which of the following statements is CORRECT? a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." d. Using some of the firm's cash to reduce long-term debt is an example of "window dressing." e. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value.

B. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger? a. Increase accounts receivable while holding sales constant. b. Increase EBIT while holding sales and assets constant. c. Increase accounts payable while holding sales constant. d. Increase notes payable while holding sales constant. e. Increase inventories while holding sales constant.

B. Increase EBIT while holding sales and assets constant.

Which of the following statements is CORRECT? a. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. b. Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2013 could go up to 39.6%, but qualified dividends received were taxed at a maximum tax rate of 15% for individuals earning less than $400,000 and married taxpayers filing jointly earning less than $450,000. c. The maximum federal tax rate on corporate income in 2013 was 50%. d. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes. e. The maximum federal tax rate on personal income in 2013 was 50%.

B. Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2013 could go up to 39.6%, but qualified dividends received were taxed at a maximum tax rate of 15% for individuals earning less than $400,000 and married taxpayers filing jointly earning less than $450,000.

Which of the following statements is CORRECT? a. Actions that increase reported net income will always increase cash flow. b. One way to increase EVA is to generate the same level of operating income but with less total invested capital. c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. d. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. e. If a firm reports positive net income, its EVA must also be positive.

B. One way to increase EVA is to generate the same level of operating income but with less total invested capital.

Which of the following statements is CORRECT? a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. c. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity. e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information: audited financial statements.

B. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

False

Garner Grocers began operations in 2010. Garner has reported the following levels of taxable income (EBT) over the past several years. The corporate tax rate was 34% each year. Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions, and assume that the current provisions were applicable in 2010. What is the amount of taxes the company paid in 2013? Year Taxable Income 2010=−$3,200,000 2011= $ 200,000 2012= $ 500,000 2013= $2,800,000 a. $ 92,055 b. $ 96,900 c. $102,000 d. $107,100 e. $112,455

C $102,000

Appalachian Airlines began operating in 2009. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT) for its first five years is listed below. Each year the company's corporate tax rate has been 40%. Year Taxable Income 2009= −$4,000,000 2010= $1,000,000 2011= $2,000,000 2012= $3,000,000 2013= $5,000,000 Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2009. How much did the company pay in taxes in 2012? a. $ 688,500 b. $ 765,000 c. $ 800,000 d. $ 930,000 e. $1,023,000

C. $800,000

Refer to Exhibit 4.1. What is the firm's total assets turnover? a. 1.12 b. 1.40 c. 1.75 d. 2.10 e. 2.52

C. 1.75

Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE? a. 15.23% b. 16.03% c. 16.88% d. 17.72% e. 18.60%

C. 16.88%

Last year Kruse Corp had $305,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total invested capital to $252,500. The firm finances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same capital structure (but with less total debt). By how much would the reduction in assets improve the ROE? a. 2.85% b. 3.00% c. 3.16% d. 3.31% e. 3.48%

C. 3.16%

Which of the following statements is most correct? a. Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders. b. 70% of the interest received by corporations is excluded from taxable income. c. 70% of the dividends received by corporations is excluded from taxable income. d. Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain. e. The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.

C. 70% of the dividends received by corporations is excluded from taxable income.

Which of the following items is NOT normally considered to be a current asset? a. Accounts receivable. b. Inventory. c. Bonds. d. Cash. e. Short-term, highly-liquid, marketable securities.

C. Bonds

Which of the following statements is CORRECT? a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b.An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. c. Capital market instruments include both long-term debt and common stocks. d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

C. Capital market instruments include both long-term debt and common stocks.

Which of the following is CORRECT? a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. b. Changes in working capital have no effect on free cash flow. c. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Depreciation Capital expenditures required to sustain operations Required changes in net operating working capital. d. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Capital expenditures. e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors, both creditors and stockholders.

C. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Depreciation Capital expenditures required to sustain operations Required changes in net operating working capital.

Which of the following is a primary market transaction? a. You sell 200 shares of IBM stock on the NYSE through your broker. b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

C. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

Which of the following statements is CORRECT? a. A reduction in inventories would have no effect on the current ratio. b. An increase in inventories would have no effect on the current ratio. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline.

C. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT? a. The lower the company's inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm. b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge. c. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge. d. The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge. e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

C. Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.

Which of the following statements is CORRECT? a. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits. b. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income. d. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation's income and stockholders were taxed again on this income when it was paid to them as dividends. e. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.

C. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income.

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? a. The company had a sharp increase in its inventories. b. The company had a sharp increase in its accrued liabilities. c. The company sold a new issue of common stock. d. The company made a large capital investment early in the year. e. The company had a sharp increase in depreciation expenses.

C. The company sold a new issue of common stock.

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? a. The firm's operating income (EBIT) would increase. b. The firm's taxable income would increase. c. The firm's cash flow would increase. d. The firm's tax payments would increase. e. The firm's reported net income would increase.

C. The firm's cash flow would increase

Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant? a. The TIE declines. b. The DSO increases. c. The quick ratio increases. d. The current ratio declines. e. The total assets turnover decreases.

C. The quick ratio increases

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? a. The company repurchases common stock. b. The company pays a dividend. c. The company issues new common stock. d. The company gives customers more time to pay their bills. e. The company purchases a new piece of equipment.

C. the company issues new common stock

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

True

Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy- to-use estimates of a firm's liquidity position.

True

Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions? a. $1.93 b. $2.03 c. $2.14 d. $2.25 e. $2.36

D. $2.25 Free Cash Flow= [EBIT(1-tax) + deprecation] - [capital exprediture- change in net capital]

Refer to Exhibit 4.1. What is the firm's current ratio? a. 0.99 b. 1.10 c. 1.23 d. 1.36 e. 1.50

D. 1.36

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. a. 12.94 b. 13.62 c. 14.33 d. 15.09 e. 15.84

D. 15.09

Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE? a. 14.82% b. 15.60% c. 16.42% d. 17.28% e. 18.15%

D. 17.28%

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to Exhibit 4.1. What is the firm's profit margin? a.1.51% b.1.67% c.1.86% d.2.07% e.2.27%

D. 2.07%

Companies HD and LD are both profitable, and they have the same total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). Both firms finance using only debt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following statements is CORRECT? a. Company HD has a lower total assets turnover than Company LD. b. Company HD has a lower equity multiplier than Company LD. c. Company HD has a higher fixed assets turnover than Company LD. d. Company HD has a higher ROE than Company LD. e. Company HD has a lower operating income (EBIT) than Company LD.

D. Companies' cash positions would decline.

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 are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes. a. Companies' after-tax operating profits would decline. b. Companies' physical stocks of fixed assets would increase. c. Companies' cash flows would increase. d. Companies' cash positions would decline. e. Companies' reported net incomes would decline.

D. Companies' cash positions would decline.

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

D. Cost of goods sold

Which of the following statements is CORRECT? a. The more depreciation a firm reports, the higher its tax bill, other things held constant. b. People sometimes talk about the firm's cash flow, which is shown as the lowest entry on the income statement, hence it is often called "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.

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.

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.

True

Money markets are markets for a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper.

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

Brookman Inc's latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding, and its debt/total invested capital ratio was 44%. The firm finances using only debt and common equity and its total assets equal total invested capital. How much debt was outstanding? a. $4,586,179 b. $4,827,557 c. $5,081,639 d. $5,349,094 e $5,630,625

E. $5,630,625

Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? a. $41,234 b. $43,405 c. $45,689 d. $48,094 e. $50,625

E. $50,625 Assets = Equity= $375,000 Target ROE= 13.5%Required net income = Target ROE × Equity = $50,625

Refer to Exhibit 4.1. What is the firm's market-to-book ratio? a. 0.87 b. 1.02 c. 1.21 d. 1.42 e. 1.67

E. 1.67

Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio? a. 4.72 b. 4.97 c. 5.23 d. 5.51 e. 5.80

E. 5.80

Which of the following would indicate an improvement in a company's financial position, holding other things constant? a. The inventory and total assets turnover ratios both decline. b. The total debt to total capital ratio increases. c. The profit margin declines. d. The times-interest-earned ratio declines. e. The current and quick ratios both increase.

E. The current and quick ratios both increase.

Which of the following statements is CORRECT? a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. d. An increase in the DSO, other things held constant, could be expected to increase the ROE. e.An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

E. An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

Which of the following statements is CORRECT? a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. c. The NYSE is an example of an over-the-counter market. d. Only institutions, and not individuals, can engage in derivative market transactions. e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

E. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT? a. Company E probably has fewer growth opportunities. b. Company E is probably judged by investors to be riskier. c. Company E must have a higher market-to-book ratio. d. Company E must pay a lower dividend. e. Company E trades at a higher P/E ratio.

E. Company E trades at a higher P/E ratio.

Which of the following statements is CORRECT? a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. Hedge funds have more in common with commercial banks than with any other type of financial institution. e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated investors" (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

E. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated investors" (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

Which of the following statements is CORRECT? a. Dividends paid reduce the net income that is reported on a company's income statement. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. c. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year. d. Accounts receivable are reported as a current liability on the balance sheet. e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

E. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

Which of the following statements is CORRECT? a. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength. b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm's DSO with the firm's credit terms. c. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio. e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

E. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes. a. The provision will reduce the company's cash flow. b. The provision will increase the company's tax payments. c. The provision will increase the firm's operating income (EBIT). d. The provision will increase the company's net income. e. Net fixed assets on the balance sheet will decrease.

E. Net fixed assets on the balance sheet will decrease

EBIT stands for earnings before interest and taxes, and it is often called "operating income."

True

Which of the following statements is CORRECT? a. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." b. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP). c. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). d. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow. e. The income statement for a given year is designed to give us an idea of how much the firm earned during that year.

E. The income statement for a given year is designed to give us an idea of how much the firm earned during that year.

The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

False

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.

False

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

False

Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

False

EBITDA stands for earnings before interest, taxes, debt, and assets.

False

High current and quick ratios always indicate that the firm is managing its liquidity position well.

False

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

False

If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.

False

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.

False

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

False

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.

False

Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

False

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin.

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

The NYSE is defined as a "spot" market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location.

False

The amount shown on the December 31, 2013, balance sheet as "retained earnings" is equal to the firm's net income for 2013 minus any dividends it paid.

False

The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.

False

The more conservative a firm's management is, the higher its total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

False

The operating margin measures operating income per dollar of assets.

False

Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities and adding them to its inventory or selling from its inventory. The NASDAQ, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.

False

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

Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.

True

Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

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

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.

True

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

True

If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

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

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

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

True

On the balance sheet, total assets must always equal the sum of total liabilities and equity.

True

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.

True

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength.

True

Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.

True

The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.

True

The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.

True

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

True

The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.

True

The current and quick ratios both 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

The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.

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

The profit margin measures net income per dollar of sales.

True

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.

True

The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.

True

The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.

True

The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

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

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 up 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, and will result in a substantial amount of retained earnings shown on the balance sheet.

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