Chapter 2

Which one of the following accounts is the most liquid?

Accounts receivable

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.

Depreciation

Cash flow to stockholders is defined as:

Dividend payments less net new equity raised.

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

Good reputation of the company.

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

Net Working Capital = Current Assets - Current Liabilities (0.6*$141,000) + $218,700 - $209,800= $93,500

Shareholders' equity:

Represents the residual value of a firm.

The tax rates are as shown. Taxable Income Tax Rate $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% What is the average tax rate for a firm with taxable income of $122,513?

25.33%

A positive cash flow to stockholders indicates which one of the following with certainty?

The dividends paid exceeded the net new equity raised.

Net working capital is defined as:

current assets - current liabilities

Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term debt is $102,800. What is the book value of shareholders' equity?

Book value of shareholders' equity = $97,400 + 41,300 - 102,800 = $35,900

Webster World has sales of $13,800, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 32 percent?

Operating cash flow = EBIT + depreciation - taxes EBIT = 13,800 - 5,800 - 1,100 = 6,900 Taxable income = 6,900 - 700 = 6,200 Tax bill = 1,984 OCF = 6,900 + 1,100 - 1,984 = 6,016

Teddy's Pillows has beginning net fixed assets of $469 and ending net fixed assets of $546. Assets valued at $317 were sold during the year. Depreciation was $38. What is the amount of net capital spending?

Net capital spending = Ending net fixed assets - beginning net fixed assets + depreciation NCS = 546 - 469 + 38 = 115

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

Net working capital = current assets - current liabilities 141,000(0.6) + 218,700 - 209,800 = 93,500

Which one of the following statements concerning net working capital is correct?

Net working capital increases when inventory is sold for cash at a profit.

The book value of a firm is:

Based on historical cost.

The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.

Book value = balance sheet recordings for assets, liabilities, and equity Book value = 2,500,000 + 1,375,000 + 725,000 = 4,600,000 Market value = 2,000,000 + 1,900,000 = 3,900,000

The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?

Cash flow to stockholders = dividends paid - net new equity raised Dividends paid = 121,600(.40) = 48,640 48,640-75,000 = -26,360

Drew owns The What-Not Shop which he is trying to sell so that he can retire and travel. The shop owns the building in which it is located. This building was built at a cost of $647,000 and is currently appraised at $819,000. The counters and fixtures originally cost $148,000 and are currently valued at $65,000. The inventory is valued on the balance sheet at $319,000 and has a retail market value equal to 1.1 times its cost. Jake expects the store to collect 96 percent of the $21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of $414,700. What is the market value of the firm's equity?

Market value of firm = current assets - current liabilities MV of firm = 819,000 + 65,000 + 319,000(1.1) + 21,700(.96) + 26,800 - 414,700 = 867,832