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BNAD 304 Exam 1

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Use the Income Statement you created from the Self Assessment Quiz . What is the value of Net Income?

$72,000

hayes corporation has $300 m of common equity, with 6 m shares of common stock outstanding. if hayes market value added is $198 m what is the company's stock price

$83.00

Quick ratio =

(CA − Inventory)/CL = (30,000 - 16,000) / 22,000 = 0.64

T/F? An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

False

T/F? Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

False

T/F? Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.

False

T/F? For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

False

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

False

T/F? 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

T/F? If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

False

T/F? If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.

False

T/F? It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

False

T/F? It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

False

T/F? Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

False

Trend analysis is one method of examining changes in a firm's performance over time, which the analysis of only one year's ratios will not show. a. True b. False

You are looking at two firms in the same industry. High Performance Tire Co. has a profit margin of 10% and All-Year Tires has a profit margin of 8%. High Performance Tire Co.'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 All-Year Tires. 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 High Performance Tire Co.'s higher profit margin. a. True b. False

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

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

True

T/F? Other things held constant, the more debt a firm uses, the lower its operating margin will be.

False

T/F? Primary markets are large and important, while secondary markets are smaller and less important.

False

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

False

T/F? 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

T/F? The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

False

T/F? 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

T/F? The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.

False

T/F? There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

False

T/F? 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

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, 2015, balance sheet as "retained earnings" is equal to the firm's net income for 2015 minus any dividends it paid.

False

The balance sheet is a financial statement that 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

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

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

False

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

The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock

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 debt ratio is likely to be.

False

The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line."

False

The operating margin measures operating income per dollar of assets.

False

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

False

The term IPO stands for "individual purchase order," and when an individual (as opposed to an institution) places an order to buy a stock.

False

The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.

False

Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.

False

What is the relationship between economics, finance and accounting?

Finance grew out of economics and accounting and people working in finance need to know something about economics and accounting.

Which of the following statements is CORRECT?

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 statements is CORRECT?

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.

The term "additional funds needed" is generally defined as follows:

Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.

Spontaneous funds are generally defined as follows:

Funds that arise out of normal business operations from its suppliers, employees, and the government. They include immediate increases in accounts payable, accrued wages, and accrued taxes.

Is maximizing shareholder value inconsistent with being socially responsible?

Most managers recognize that being socially responsible is not inconsistent with maximizing shareholder value.

If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?

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

What is the firm's P/E ratio?

P/E ratio = Stock price/Earnings per share = $43.39/$3.62 = 12.0

Which of the following statements is CORRECT?

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

Sarbanes-Oxley Act

Passed due to corporate scandals. Requires the CEO and CFO to certify that their firm's financial statements are accurate. To impose sanctions on executives who sign financial statements later found to be false.

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

Preferred stock Corporate bonds

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

Preferred stock.

Which of the following statements are correct? - P

Proprietorships and partnerships generally have a tax advantage over corporations.

Which of the following statements is CORRECT?

Proprietorships and partnerships generally have a tax advantage over corporations.

International Appliances Inc. has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? a. Sell some of the existing inventory at cost. b. Purchase additional inventory on credit (accounts payable). c. Use cash to pay off current liabilities. d. Collect some of the current accounts receivable. e. Use cash to pay off some long-term debt.

Purchase additional inventory on credit (accounts payable).

What is the firm's ROE?

ROE = Net income/Common equity = 1,808/13,000 = 13.91%

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

Relaxant's shareholders (the ex-partners) will now be exposed to less liability.

A new public issue of securities is regulated by the

SEC.

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

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 inventory turnover 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 inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

True

which of the following actions do not reduce potential conflicts of interest between stockholders and bondholders

compensate managers with stock options instead of cash

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

Trading is carried out on the floor of the New York Stock Exchange by

the auction process.

which of the following factors could explain why michigan energy's cash balance increased even though it had a negative cash flow from operations last year?

the company sold a new issue of bonds

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

the current ratio and quick ratio both increase

common equity section of timeless technology

the firm issued common stock in 2015

Which of the following statements is CORRECT?

Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.

Which of the following statements is CORRECT? - NYSE

Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.

Which of the following statements is CORRECT?

Both Nasdaq dealers and "specialists" on the NYSE hold inventories of stock.

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. $4,827,557 b. $5,081,639 c. $5,630,625 d. $5,349,094 e. $4,586,179

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 15.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations. a. 11.09% b. 8.85% c. 8.94% d. 7.42% e. 9.03%

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

Use the Balance Sheet you created from the Self Assessment Quiz . What is the value of Net Working Capital (NWC) and Net Operating Working Capital (NOWC)?

C - NWC = 93,500 NOWC= 93,500

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength. T or F

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

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

True

T/F? A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.

True

T/F? 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

T/F? 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 weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

True

T/F? 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

T/F? 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

T/F? If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

True

T/F? If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

True

scranton shipyards has $11 m in total invested operating capital and its WACC is 10%.

$1,300,000

Which one of the following is NOT one of the mistakes to avoid when calculating WACC?

Using target capital structure to obtain value for weights

Which of the following statements is CORRECT?

When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

Which of the following statements is CORRECT?

Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

Which of the following items is NOT included in current assets?

Bonds

Which of the following items is NOT normally considered to be a current asset?

Bonds.

which of the following is a weakness of using ratio analysis to evaluate a firm?

all of the above except d no set standard on ratios, ratios implicitly assume linearity, management may engage in window dressing

which of the following statements is correct?

c. it is usually easier to transfer ownership in a corporation than in a partnership

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. a. True b. False

F - The FA turnover is Sales/FA, and it gives an indication of how effectively the firm utilizes its FA. The proportion of FA to TA is not relevant to this usage.

The equity multiplier can be found as ROE/ROA. a. True b. False

F ROE/ROA = NI/E NI/A = NI/E × A/NI = A/E = Equity multiplier.

Which of the following is a primary market transaction?

Facebook issues 12,000,000 shares of new stock and sells them to the public through an investment banker (such as Goldman Sachs).

A critical assumption of AFN is that a firm's ratios are likely to change over time.

False

A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

False

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

False

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

False

An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

False

Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

False

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

False

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.

False

Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

False

One advantage of the corporate form of organization is that it avoids double taxation.

False

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.

False

Other things held constant, the higher a firm's debt ratio, the higher its TIE ratio will be.

False

Other things held constant, the more debt a firm uses, the lower its operating margin will be.

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

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

False

Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's debt ratio 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

T/F? A decline in a firm's inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.

False

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

False

Which of the following statements is CORRECT?

In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.

Which of the following statements is CORRECT?

In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.

If the current ratio is high and the inventory turnover ratio is low, relative to industry norms, then the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

The basic earning power ratio (BEP) is a better means of judging a company's operating efficiency than the return on total assets because the BEP does not reflect the effects of debt and taxes. a. True b. False

Which of the following statements is CORRECT?

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

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

True

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $500,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

$11,050

kwok enterprises has the following income statement. how much after tax operating incoming-- also referred to as ebit (1-tau) -- does the firm have?

$120 (ebit * tax rate)

Brown Fashions Inc.'s December 31, 2014 balance sheet showed total common equity of $4,050,000 and 290,000 shares of stock outstanding. During 2015, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/15, assuming no common stock was either issued or retired during 2015? (Round your final answer to two decimal places.)

$15.17

Refer to Exhibit 4.1. What is the firm's EPS? Do not round your intermediate calculations.

$2.54

Helmuth Inc's latest net income was $1,410,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare? Do not round your intermediate calculations.

$2.82

vasudevan inc recently reported earnings before interest and taxes (ebit) of $5.35 m and depreciation expense of $1.2 m . the firm reports a tax rate of 40%. the firm's cash spending on fixed assets and net operating working capital together totaled $0.6 m . how much was its free cash flow in millions?

$3.81

Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $975. By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes. Do not round the intermediate calculations.

-$633.75; $341.25

Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $49 million of common equity on its balance sheet, what is the company's Market Value Added (MVA)? Answer options are provided in whole dollar.

-15,000,000

What three trends affect business management in general and financial management in particular?

1. Increased mobilization of business 2. Forever improving technology - effects financial management. 3. Corporate governance, the way the top managers operate and interface with stockholders.

hoagland corps stock price at the end of last year was $48.50 and its book value per share was $25.00. what was its market to book ratio?

1.94

X-1 Corp's total assets at the end of last year were $490,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?

10.71%

Cielo Corp's sales last year were 3,000,000, its operating costs were $1,400,000, and its interest charges were $160,000. What was the firm's times-interest-earned (TIE) ratio? (Hint: TIE=EBIT/Interest Expense)

10x

change corp. has $375,000 of assets and it uses only common equity capital (zero debt). its sales for the last year were $520,000 and its net income was $25,000. stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. what profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

11.03% 25,000 / 375,000

song corps stock price at the end of last year was $16.75 and its earnings per share for the year were $1.30. what was its P/E ratio?

12.88

Herring Corporation has operating income of $235,000 and a 40% tax rate. The firm has short-term debt of $115,000, long-term debt of $321,000, and common equity of $436,000. What is its return on invested capital?

16.17%

Use the "Warm up - Fill in the Blanks #2". What is the value of Economic Value Added (EVA) in Year 1. Assume that WACC is 10% and Total Invested Capital is equal to Long-Term Debt + Common Stock + Retained Earnings. Ignore Current Portion - Long Term Debt item.

20,050

Tucson Airways had a profit margin of 8.00%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

21.60%

precision aviation had a profit margin of 8%, a total assets turnover of 1.5 and an equity multiplier of 1.8. what was the firm's ROE

21.60%

Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?

23.80%

Houston Pumps recently reported $207,500 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 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 future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?

24,688

Use the Balance Sheet you created from the Self Assessment Quiz . What is the value of Net Property, Plant and Equipment?

300,000

prezas companys balance sheet showed total assets of $3,250.its current liabilities of $1825 consisted of $925 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

3250-1825+600=2025

rao construction recently reported $20 million of sales and $12.6 million of operating expenses. Operating expenses are calculated before depreciation and interest expense. rao had $3 million of depreciation. it also had $8.5 million of bonds outstanding that carry a 7.0% interest rate, its federal-plus-state income tax rate was 40%. what was rao's pre-tax operating income or earnings before interest and taxes in millions?

4.4

Last year Rennie Industries had sales of $395,000, assets of $175,000 (which equals total invested capital), a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. The firm finances using only debt and common equity. Had it reduced its assets by this amount, and had the debt/total invested capital ratio, sales, and costs remained constant, how much would the ROE have changed? Do not round your intermediate calculations.

5.90%

Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,800,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

6,188

river corp's total assets at the end of last year were $480,000 and its net income was $32,750. what was its return on total assets?

6.82% 32,750/480,000

Last year Kruse Corp had $410,000 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? Do not round your intermediate calculations.

7.05%

Which of the following statements is most correct?

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

Use the Income Statement you created from the Self Assessment Quiz . With the passage of the Tax Cuts and Jobs Act (TCJA), many tax brackets, thresholds, and rates changed in 2018. Accordingly, the corporate tax rate will decline from 40% to 21%. What is the value of Net Income if tax rate is 21% ?

94,800

Cutler Enterprises has current assets equal to $4.5 million. The company's current ratio is 1.25. What is the firm's level of current liabilities (in millions)? a. $3.6 b. $0.8 c. $2.9 d. $2.4 e. $1.8 Hide Feedback

Southeast Jewelers Inc. sells only on credit. Its days sales outstanding is 73 days, and its average accounts receivable balance is $500,000. What are its sales for the year? Assume a 365-day year. a. $2,500,000 b. $2,750,000 c. $1,500,000 d. $2,000,000 e. $3,000,000

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

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

A secondary market transaction.

Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?

A sharp increase in its forecasted sales.

Which of the following statements is CORRECT?

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."

Which of the following is NOT normally regarded as being the barrier to hostile takeovers?

Abnormally high executive compensation

Which of the following statements is CORRECT?

Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.

Which of the following is NOT a type of risk inherent in individual projects?

All of the above are types of risk that can be identified (stand-alone, corporate, market, within-firm)

What are the factors affecting WACC that the firms CAN control?

All of the above, except a. (Tax rates)

With which of the following statements would most people in business agree?

Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.

Intrinsic value

An estimate of a stock's "true" value based on accurate risk and return data. It can be estimated but not measured precisely.

Considered alone, which of the following would increase a company's current ratio? (hint: Current Ratio= Current Assets / Current Liabilities)

An increase in accounts receivable.

Corporate raider

An individual who targets a corporation for takeover because it is undervalued.

Marginal Investor

An investor whose views determine the actual stock price.

Which of the following statements is CORRECT?

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

A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40%, and a profit margin of 6%. What is the firm's times-interest-earned ratio? a. 13 b. 11 c. 12 d. 10 e. 14

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? a. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. b. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. c. Use cash to increase inventory holdings. d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. e. Use cash to repurchase some of the company's own stock.

Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations. a. 18.13 b. 22.38 c. 17.46 d. 26.86 e. 17.01

Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's total debt to total capital ratio? a. 42.75% b. 37.50% c. 25.00% d. 45.00% e. 30.33%

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? A) Pay managers large cash salaries and give them no stock options. B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. C) Beef up the restrictive covenants in the firm's debt agreements. D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

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

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

True

A loss incurred by a corporation

Can be carried back 2 years, then carried forward up to 20 years following the loss.

The _________ is created by a number of institutions and arrangements that allow the suppliers and demanders of long-term funds to make transactions.

Capital market

Which of the following statements is CORRECT?

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

Who is the CFO, where does this individual fit into the corporate hierarchy, and what are some of his or her responsibilities?

Chief Financial Officer CFO - Usually senior vice president & third ranking officer in charge of accounting, financing, credit policy, decisions regarding asset acquisitions and investor relations that involve communications with stock holders and the press.

On its 12/31/14 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Dividends could have been paid in 2014, but they would have had to equal the earnings for the year.

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

Companies' cash positions would decline.

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.

Which of the following statements is most correct?

Corporations are allowed to exclude 70% of their dividend income from corporate taxes

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

Corporations generally find it easier to raise large amounts of capital.

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

Cost of goods sold

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

Cost of goods sold.

Lewis Inc. has sales of $2 million per year, all of which are credit sales. Its days sales outstanding is 42 days. What is its average accounts receivable balance? Assume a 365-day year. a. $266,667 b. $366,750 c. $333,333 d. $230,137 e. $350,000

Which of the following statements is CORRECT?

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

Which of the following statements about ratio analysis is CORRECT? a. 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 an example of "window dressing." b. 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." c. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. d. 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." e. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Which of the following statements is CORRECT? a. 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. b. 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. c. The use of debt financing will tend to lower the basic earning power ratio, other things held constant. d. 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. e. All else equal, increasing the total debt to total capital ratio will increase the ROA.

Which of the following statements is CORRECT? a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be. b. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio is 70% versus 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. c. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. d. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operati

What is the firm's dividends per share?

DPS = Common dividends paid/Shares outstanding =$632.73/500 = $1.27

What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

DSO = Accounts receivable/(Sales/365) = 11,500/(87,500/365) = 47.97

What is the firm's debt/assets ratio?

Debt ratio = Total debt/Total assets =37,000/50,000 = 74.0%

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? a. 10.94% b. 9.93% c. 10.42% d. 11.49% e. 9.45%

Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's equity multiplier? a. 1.00 b. 0.50 c. 0.75 d. 1.50 e. 2.00

Jericho Motors has $4 billion in total assets. The other side of its balance sheet consists of $0.4 billion in current liabilities, $1.2 billion in long-term debt, and $2.4 billion in common equity. The company has 500 million shares of common stock outstanding, and its stock price is $25 per share. What is Jericho's market-to-book ratio? a. 2.00 b. 4.27 c. 3.57 d. 1.42 e. 5.21

Which of the following statements is CORRECT? A) Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships. B) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers. C) Bond covenants are an effective way to resolve conflicts between shareholders and managers. D) Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations. E) One advantage to forming a corporation is that the owners of the firm have limited liability.

E) One advantage to forming a corporation is that the owners of the firm have limited liability.

What is the firm's EPS (earnings per share)?

EPS = Net income/Shares outstanding = $1,808/500 = $3.62

Which of the following statements is CORRECT?

EVA stands for economic value added, and it is defined as follows: EVA = NOPAT − (Total invested capital)(AT cost of capital %)

The self-supporting growth rate is basically the growth rate that produces an AFN _____________.

Equal to zero

A high current ratio is always a good indication of a well-managed liquidity position. a. True b. False

Companies with high P/E and high M/B ratios generally are regarded as being relatively risky and/or having relatively poor growth prospects, according to investors. a. True b. False

Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

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

Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows

False

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

False

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

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

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

False

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

False

In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

False

Which of the following statements is CORRECT?

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 are advantages of the LLC (limited liability company) form of business ownership? I. limited liability for firm debt II. no corporate income taxes III. easy to raise capital IV. unlimited firm life

I and II only

which of the following is a primary transaction?

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?

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?

If a company's tax rate increases, then, all else equal, WACC will decline.

Which of the following statements is CORRECT?

If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share

Which of the following statements is CORRECT?

If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.

Which of the following statements is CORRECT?

In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.

Which of the following statements is CORRECT?

In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows.

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

Increase EBIT while holding sales and assets constant.

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

It is in the company's best interest that if a company can ________ it spontaneously generated liabilities, this will _________ its need for external financing.

Increase; reduce

It would be beneficial if a company could _________ its additional retained earnings, thus ____________.

Increase; reduce

Which of the following statements is CORRECT?

Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2014 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 is NOT considered on of the uses of free cash flows?

Investment in property and plant

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 be above the industry average.

Should managers estimate intrinsic values or leave that to outside security analysts? Explain

Managers have the best information about a firm's future prospects, so their estimates are better than outside investors. However their estimates can be wrong.

The _________ is created by a financial relationship between suppliers and demanders of short-term funds.

Money market

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

Nantell's operating income (EBIT) will increase

Nantell's operating income (EBIT) will increase.

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.

Net fixed assets on the balance sheet will decrease

Do stocks have known and "provable" intrinsic values, or might different people reach different conclusions about intrinsic values? Explain.

No, Intrinsic values are estimates and different analysts with different data have different views.

Which of the following statements is CORRECT?

One drawback of forming a corporation is that it generally subjects the firm to additional regulations.

Which of the following statements is CORRECT?

One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.

Which of the following statements is CORRECT?

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?

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.

Money markets are markets for

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

Equilibrium

Situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock.

Which of the following statements is CORRECT?

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.

Which of the following is NOT considered a source of agency conflict in a company?

Stockholders and members of the independent, with outside directors, non-interlocked board

Which of the following statements is CORRECT?

Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

If a firm could maximize either its current market price or its intrinsic value, what would stockholders (as a group) want managers to do? Explain.

Stockholders would want firms to maximize the intrinsic value not the current market value.

Analyzing financial statements to help appraise a firm's financial position and strength is called "ratio analysis." a. True b. False

Days sales outstanding (DSO) can be used to determine how long it takes, on average, to collect payment 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. a. True b. False

Due to significant variations in accounting methods among firms, meaningful ratio comparisons between firms is more difficult than it would be if all firms used the same or similar accounting methods. a. True b. False

Which of the following statements is CORRECT?

The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.

Which of the following statements is CORRECT?

The New York Stock Exchange is an auction market, and it has a physical location.

Hostile takeover

The acquisition of a company over the opposition of its management.

Which of the following statements is CORRECT?

The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.

Which of the following statements is CORRECT?

The balance sheet gives us a picture of the firm's financial position at a point in time

Which of the following statements is CORRECT?

The balance sheet gives us a picture of the firms financial position at a point in time.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT? - Directors

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

The company issues new common stock.

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

The company made large investments in fixed assets.

Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?

The company sold a new issue of bonds.

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

The company sold a new issue of common stock.

Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)?

The company sold some of its fixed assets.

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

The company's depreciation expense declined.

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. 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 net income would increase.

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

If a company's free cash flows are expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium

The company's value of operations one year from now is expected to be 5% above current price

If the CEO of a large, diversified firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

The division's basic earning power ratio is above the average of other firms in its industry.

Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets: 2014 2013 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

The firm issued common stock in 2014.

The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company's sales in 2014 and 2015 were the same. Which of the following statements must be CORRECT?

The firm issued new common stock in 2015.

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?

The firm's cash flow would increase.

Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

The firm's cash position in 2014 and 2015 would increase

Which of the following statements is NOT CORRECT?

The free cash flow valuation model discounts free cash flows by required rate of return on equity.

What's the difference between a stock's current market price and its intrinsic value?

The intrinsic value is an estimate of the stock's "true" value as calculated by analysts with the best data. The market price is the actual market price based on perceived but possibly incorrect data determined by a marginal investor (who determines the actual price).

Which of the following statements is CORRECT?

The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%

Shareholder Wealth Maximization

The primary goal of managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firms common stock.

Which of the following statements is CORRECT?

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.

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

The quick ratio increases.

For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?

The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.

Which of the following statements is CORRECT?

The statement of cash flows shows how much the firm's cash, the total of currency, bank deposits, and short-term liquid securities (or cash equivalents), increased or decreased during a given year.

Market Price

The stock value based on perceived but possibly incorrect information as seen by the marginal investor.

Which of the following statements is CORRECT?

The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

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

The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.

Identify the true statement about sales promotions.

They are short-term efforts directed to the consumer or retailer to achieve such specific objectives as consumer product trials.

Jason recently sold 1,000 shares of Apple stock to his sister at a family reunion. At the reunion his sister gave him a check for the stock and Jason gave his sister the stock certificates. Which of the following best describes this transaction?

This is an example of a direct transfer of capital.

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

This is an example of a direct transfer of capital.

Use the Balance Sheet you created from the Self Assessment Quiz . What is the value of Total Assets? End-of- year (EOY) Retained Earnings?

Total Assets = 417,000; Retained Earnings = $152,000

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

As a firms sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

True

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

Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

True

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

True

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

True

Globalization of business has been facilitated by improvements in information technology.

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

In a "Dutch auction" for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.

True

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

True

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

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

True

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no "excess" cash.

True

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

True

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

True

Other things held constant, the more debt a firm uses, the lower its profit margin will be.

True

Other things held constant, the more debt a firm uses, the lower its return on total assets will be.

True

Partnerships and proprietorships generally have a tax advantage over corporations.

True

Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

True

T/F? If someone deliberately understates costs and thereby increases profits, this can cause the stock price to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized.

True

T/F? 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

T/F? In most corporations, the CFO ranks under the CEO.

True

T/F? In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

True

T/F? Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

T/F? It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

True

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

True

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

True

T/F? Partnerships and proprietorships generally have a tax advantage over corporations.

True

T/F? Suppose Firms A and B have the same amount of assets, total assets are equal to total invested capital, pay the same interest rate on their debt, have the same basic earning power (BEP), finance with only debt and common equity, and have the same tax rate. However, Firm A has a higher debt to capital ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

True

T/F? The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

True

T/F? 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

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

True

T/F? The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

True

T/F? The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.

True

T/F? The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the "marginal investor" who determines the actual stock price.

True

T/F? 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

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 then sell them by literally passing them over the counter to the buyer.

True

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

True

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

True

The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

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 days sales outstanding ratio 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 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 firm's additional funds needed must be obtained through external financing as opposed to retained earnings.

True

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

True

The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

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 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. a. True b. False

True

The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.

True

The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.

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 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. This implies that retained earnings are in fact stockholders' reinvested earnings.

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 term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the "marginal investor" who determines the actual stock price.

True

The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.

True

The time dimension is important in the financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

True

The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

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

To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.

True

Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.

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

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0 then its debt to ratio must be 0.667.

Ture

Which of the following statements is CORRECT?

Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

Should a firm's mangers help investors improve their estimates of the firm's intrinsic value? Explain.

Yes, they should provide information to investors to help them make better estimates of the firm's intrinsic value, to help keep stock prices closer to equilibrium.

which of the following statements is correct

a time line used for cash-flow analysis is not meaningful unless all cash flows occur annually

select the correct tern

all are incorrect

useful types of financial ration analysis include

all are useful industry comparison analysis, benchmark analysis trend analysis

which of the following statements is correct

bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders

which of the following items are not normally considered to be a current asset?

bonds

to maximize the shareholders value, a firm's management must attempt to maximize the expected earnings per share in the current year

All of the following are functions of security exchanges EXCEPT

holding demand deposits.

hazel inc had the following data for 2014: net income $600. after tax operating income (ebit (1-tau)=$700 and total assets $2000.)

idk

which of the following statements is correct, all else held constant?

if a firm increases its sales while holding its inventories constant, then its inventory turnover ratio (i.e. sales/inventories) will increase

which of the following statements is correct

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

which one of the following mechanisms would be the most likely to help motivate managers to act in the best interest of the shareholders?

increase the proportion of excutive compensation that comes from stock options relative to the proportion that is paid as cash salaries

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

issue new common stock

the primary operating goal of a publicly-owned firm interested in serving its stockholders should be

maximize the stock price per share over the long run, which is the stock's intrinsic value

which of the following actions would increase a firm's quick ratio?

offer price reduction and generous credit terms that would 1 enable the firm to sell some of its excuses inventory and 2 lead to an increase in accounts receivable

which of the following statements is correct

one drawback of forming a corporation is that it generally subjects the firm to additional regulations

What is management's primary goal?

shareholder wealth maximization.

S Corporation

special designation that allows businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.

The major securities traded in the capital markets are

stocks and bonds.

a stock markets price would equal its intrinsic value if all investors had all the information that is available about the stock. in this case the stock's market price would equal its intrinsic value

in finance, we are generally more interested in cash flows than in accounting profits. free cash flow is calculated as after tax operating income (ebit x (1-tau)) plus depreciation expense less the sun of capital expenditures and changes in net operating working capital

other things held constant, the more debt a firm uses, the lower its return on total assets will be

proprietorship, limited liability corporations, and c-corporations are business structures that are essentially legal classifications for doing business in a state

starting to invest early for retirement increases the benefits of compound interest

the advantage of the basic earning power ratio over the return on total assets for focusing on a company operating efficiency is that the BEP is designed so as to exclude the effects debt and taxes have on returns

the more capital a firm is likely to require, the greater the probability that it will be organized as a c-corporation

which of the following statements about the statements of cash flows is correct

the statement of cash flows shows (among other things) how much the firm's cash-- the total of currency, bank deposits, and short term liquid securities (or cash equivalents)-- increased or decreased during a given year

Business ethics

thought of as a company's attitude and conduct toward its employees, customers, community, and stockholders.

Dodd-Frank Act

to implement an aggressive overhaul of the U.S. financial regulatory system aimed at preventing reckless actions that would cause another financial crisis and business schools trying to inform students about proper versus improper business actions.

which of the following statements is correct

~ conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers

Which of the following statements is CORRECT? - Money Market

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

Which of the following is a primary market transaction?

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

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