Business Finance Test 1

The financial planning process tends to place the least emphasis on a firm's: A. growth limitations. B. capacity utilization. C. market value. D. capital structure. E.dividend policy.

C. market value.

Wood Products is operating at 87 percent capacity and earning a substantial profit. A sales increase is least apt to increase the firm's: A. accounts receivable. B. cost of goods sold. C. accounts payable. D. fixed assets. E. inventory.

D. fixed assets.

Which term relates to the cash flow that results from a company's ongoing, normal business activities? A. Operating cash flow B. Capital spending C. Net working capital D. Cash flow from assets E. Cash flow to creditors

A. Operating cash flow

As the degree of financial leverage increases, the: A. probability a firm will encounter financial distress increases. B. amount of a firm's total debt decreases. C. less debt a firm has per dollar of total assets. D. number of outstanding shares of stock increases. E. accounts payable balance decreases.

A. probability a firm will encounter financial distress increases.

Kerch Co. had beginning net fixed assets of $216,454, ending net fixed assets of $211,631, and depreciation of $40,393. During the year, the company sold fixed assets with a book value of $7,882. How much did the company purchase in new fixed assets? A. $32,511 B. $43,452 C. $41,289 D. $34,106 E. $35,570

B. $43,452 Net capital spending = $211,631 − 216,454 + 40,393 = $35,570 Fixed assets bought = $35,570 + 7,882 = $43,452

Mario's Home Systems has sales of $2,720, costs of goods sold of $2,060, inventory of $484, and accounts receivable of $420. How many days, on average, does it take Mario's to sell its inventory? A. 64.95 days B. 85.76 days C. 74.42 days D. 84.58 days E. 56.36 days

B. 85.76 days Inventory turnover = $2,060/$484 = 4.2562 Days' sales in inventory = 365 days/4.2562 = 85.76 days

Which one of the following is a source of cash? A. Repurchase of Common stock B. Acquisition of debt C. Purchase of inventory D. Payment to a supplier E. Granting credit to a customer

B. Acquisition of debt

A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit? A. Current B. Cash C. Debt-equity D. Quick E. Total debt

B. Cash

Which one of the following is a correct formula for computing the return on equity? A. Profit margin × ROA B. ROA × Equity multiplier C. Profit margin × Total asset turnover × Debt-equity ratio D. Net income/Total assets E. Debt-equity ratio × ROA

B. ROA × Equity multiplier

Which one of these is a requirement if the sustainable growth rate is to exceed the internal growth rate? A. Net working capital > $0 B. Total debt > $0 C. Dividend ratio = 0 D. Retention ratio = 0 E. Sales > Total assets

B. Total debt > $0

For the past year, Kayla, Inc., has sales of $44,627, interest expense of $3,152, cost of goods sold of $15,084, selling and administrative expense of $10,911, and depreciation of $5,110. If the tax rate is 35 percent, what is the operating cash flow? A. $11,851 B. $13,630 C. $15,003 D. $6,741 E. $10,370

C. $15,003 EBIT = $44,627 − 15,084 − 10,911 − 5,110 = $13,522 EBT = $13,522 − 3,152 = $10,370 Taxes = $10,370(.35) = $3,630 OCF = $13,522 + 5,110 − 3,630 = $15,003

A firm has total debt of $1,520 and a debt-equity ratio of .37. What is the value of the total assets? A. $3,700.00 B. $2,082.40 C. $5,628.11 D. $5,624.00 E. $4,108.11

C. $5,628.11 $1,520/Total equity = .37 Total equity = $4,108.11 Total assets = $1,520 + 4,108.11 = $5,628.11

The financial planning process is least apt to: A. involve internal negotiations among divisions. B. quantify senior manager's goals. C. consider the development of future technologies. D. reconcile a company's activities across divisions E. consider factors that currently provide a negative rate of growth.

C. consider the development of future technologies.

The value of which one of the following is included in the market value of a firm but is excluded from the firm's book value? A. Office equipment B. Copyright C. Distribution warehouse D. Employee's experience E. Land acquired over 25 years ago

D. Employee's experience

A company has $565 in inventory, $1,840 in net fixed assets, $246 in accounts receivable, $105 in cash, and $282 in accounts payable. What are the company's total current assets? A. $670 B. $2,756 C. $952 D. $1,198 E. $916

E. $916 Current assets = $105 + 246 + 565 = $916

A firm has sales of $1,230, net income of $227, net fixed assets of $546, and current assets of $302. The firm has $102 in inventory. What is the common-size balance sheet value of inventory? A. 8.29% B. 44.93% C. 12.03% D. 33.77% E. 18.68%

E. 18.68% Total assets = $546 + 302 = $848 Common-size value of inventory = $102/$848 = .1203, or 12.03%

Which one of these is the least important factor to consider when comparing the financial situations of utility companies that generate electric power and have the same SIC code? A. Type of ownership B. Government regulations affecting the firm C. Fiscal year end D. Methods of power generation E. Number of part-time employees

E. Number of part-time employees

Cash flow to stockholders is defined as: A. the total amount of interest and dividends paid during the past year. B. the change in total equity over the past year. C. cash flow from assets plus the cash flow to creditors. D. operating cash flow minus the cash flow to creditors. E. dividend payments less net new equity raised.

E. dividend payments less net new equity raised.

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0.

E. has an equity multiplier of 1.0.

Rousey, Inc., had a cash flow to creditors of $16,380 and a cash flow to stockholders of $6,740 over the past year. The company also had net fixed assets of $49,380 at the beginning of the year and $56,740 at the end of the year. Additionally, the company had a depreciation expense of $11,940 and an operating cash flow of $50,265. What was the change in net working capital during the year? A. $7,120 B. $6,413 C. $7,845 D. $7,360 E. $9,640

C. $7,845 Cash flow from assets = $16,380 + 6,740 = $23,120 Net capital spending = $56,740 − 49,380 + 11,940 = $19,300 Change in net working capital = $50,265 − 19,300 − 23,120 = $7,845

Hurricane Industries had a net income of $130,800 and paid 45 percent of this amount to shareholders in dividends. During the year, the company sold $81,000 in new common stock. What was the company's cash flow to stockholders? A. $49,800 B. $22,140 C. ($22,140) D. ($58,860) E. $58,860

C. ($22,140) Cash flow to stockholders = $130,800(.45) − 81,000 = −$22,140

A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent. The capital intensity ratio is 1.2 and the debt-equity ratio is .64. What is the profit margin? A. 6.28% B. 7.67% C. 9.49% D. 12.38% E. 14.63%

C. 9.49% .062 = [ROE (.45)]/[1 − ROE (.45)] ROE = .1297, or 12.97% .1297 = PM (1/1.2) (1.64) PM = .0949, or 9.49%

The plowback ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future growth. C. equal to one minus the retention ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales.

B. the percentage of net income available to the firm to fund future growth.

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner? A. I and III only B. II and IV only C. I, II, and III only D. II, III and IV only E. I, II, III, and IV

C. I, II, and III only

Which one of the following statements concerning corporate income taxes is correct for 2018? A. All corporations are exempt from federal taxation. B. Corporations pay no tax on their first $50,000 of income. C. The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income. D. The marginal tax rate will always be lower than the average tax rate. E. The first 25 percent of corporate income is exempt from taxation.

C. The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income.

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year? A. The pro forma profit margin is equal to the current profit margin. B. Retained earnings will increase at the same rate as sales. C. Total assets will increase at the same rate as sales. D. Long-term debt will increase in direct relation to sales. E. Owners' equity will remain constant.

C. Total assets will increase at the same rate as sales.

A firm has net working capital of $440, net fixed assets of $2,186, sales of $5,500, and current liabilities of $750. How many dollars worth of sales are generated from every $1 in total assets? A. $2.09 B. $1.87 C. $1.70 D. $1.63 E. $2.52

D. $1.63 Current assets = $440 + 750 = $1,190 Total asset turnover = $5,500/($1,190 + 2,186) = 1.63 Sales generated by $1 in total assets = $1 × 1.63 = $1.63

Which one of the following is excluded from the cash flow from assets? A. Accounts payable B. Inventory C. Sales D. Interest expense E. Cost of goods sold

D. Interest expense

Which one of the following statements related to corporate taxes is correct? A. A company's marginal tax rate must be equal to or lower than its average tax rate. B. The tax for a company is computed by multiplying the marginal tax rate times the taxable income. C. Additional income is taxed at a firm's average tax rate. D. The marginal tax rate will always exceed a company's average tax rate. E. The marginal tax rate for a company can be either higher than or equal to the average tax rate.

E. The marginal tax rate for a company can be either higher than or equal to the average tax rate.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: A. total assets. B. total equity. C. net income. D. taxable income. E. sales.

E. sales.