FI 320 EXAM1 CH1-5

A business owned by a solitary individual who has unlimited liability for its debt is called a: limited liability company. limited partnership. corporation. general partnership. sole proprietorship.

sole proprietorship.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? balance sheet dividend statement creditor's statement income statement statement of cash flows

balance sheet

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? 0.0 1.5 1.0 0.5 2.0

0.5

The formula which breaks down the return on equity into three component parts is referred to as which one of the following? equity performance formula equity equation SIC formula Du Pont identity profitability determinant

Du Pont identity

Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $402,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death? $1,909.92 $2,688.77 $2,219.46 $2,147.78 $2,416.08

$2,688.77

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent? $26,311.16 $24,890.88 $27,677.34 $29,333.33 $28,909.29

$27,677.34

Long-term liability equals A. Total assets + Total Stockholder's Equity B. Total assets - Stockholder's Equity - Current liability C. Total assets- current liability D. Stockholder's equity - current liability E. None of the above

B.

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? $710 $990 $2,640 $780 $2,430

Current assets = $520 + $190 + $70 = $780

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? $2,050 $2,690 $4,130 $5,860 $5,590

Current assets = $6,230 − $3,910 = $2,320 Current liabilities = $2,320 − $640 = $1,680 Total liabilities = $1,680 + $4,180 = $5,860

ABC company had additions to retained earnings before distribution of any dividend for the year just ended of $250,000. The firm paid out $50,000 in cash dividends for preferred stocks. Assuming ABC currently has 200,000 shares of common stock outstanding and the stock sells for $80/share. What is the EPS? A. 2.5 B. 3.5 C. 1.5 D. 1.0 E. 2.0

D. EPS = (NI-preferred stock dividend)/Shares outstanding = (250,000-50,000)/200,000 = 1.0

Louis Co. has net working capital of 120, total asset of 1000, noncurrent asset of 400, account receivable of 240, accounts payable of 300, Property Plant and Equipment of 230. What is the current ratio of Louis Co.? A. 0.78 B. 1.30 C. 1.35 D. 1.37 E. 1.25

E. CA = 1000-400=600 CL=CA-NWC = 600-120=480 Current Ratio = CA/CL = 600/480 = 1.25

The Bike Shop paid $1,990 in interest and $1,850 in dividends last year. The times interest earned ratio is 2.2 and the depreciation expense is $520. What is the value of the cash coverage ratio? 2.52 2.46 2.21 1.67 1.80

EBIT = 2.2 × $1,990 = $4,378; Cash coverage ratio = ($4,378 + $520)/$1,990 = 2.46

Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? $309,076 $281,417 $171,852 $129,152 $179,924

Earnings before interest and taxes = $1,349,800 − $903,500 − $42,700 = $403,600 Tax = $403,600 × .34 = $137,224 Operating cash flow = $403,600 + $42,700 − $137,224 = $309,076

You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent? $689,509 $417,137 $1,189,576 $1,050,423 $1,818,342

Future value = $225,000 × (1 + .105)25 = $2,730,483 Future value = $225,000 × (1 + .08)25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent? $59,122.08 $59,360.45 $55,032.54 $57,414.06 $58,235.24

Future value = $36,000 × (1 + .036)12 = $55,032.54

What is the future value of $6,200 invested for 23 years at 9.25 percent compounded annually? $47,433.47 $27,890.87 $41,009.13 $22,483.60 $38,991.07

Future value = $6,200 × (1 + .0925)23 = $47,433.47

Chevelle, Inc., has sales of $47,000, costs of $25,700, depreciation expense of $1,700, and interest expense of $1,700. If the tax rate is 35 percent, what is the operating cash flow, or OCF? Income Statement Sales $ 47,000 Costs 25,700 Depreciation 1,700 EBIT $ 19,600 Interest 1,700 Taxable income $ 17,900 Taxes (35%) 6,265 Net income $ 11,635

OCF = EBIT + Depreciation - Taxes = $19,600 + 1,700 - 6,265 = $15,035

The financial goal of a corporation is to: A. Maximize sales B. Maximize assets C. Maximize manager bonuses D. Maximize liquidity E. Maximize value of firm to shareholder

E.

You are given the following information for Calvani Pizza Co.: sales = $52,000; costs = $27,300; addition to retained earnings = $5,300; dividends paid = $1,800; interest expense = $4,900; tax rate = 35 percent. Calculate the depreciation expense The solution to this question works the income statement backwards. Starting at the bottom:

EXPLANATION: Net income = Dividends + Addition to retained earnings = $1,800 + 5,300 = $7,100 Now, looking at the income statement: EBT − EBT × Tax rate = Net income Recognize that EBT × Tax rate is simply the calculation for taxes. Solving this for EBT yields: EBT = NI / (1 − Tax rate) = $7,100 / (1 − 0.35) = $10,923 Now you can calculate: EBIT = EBT + Interest = $10,923 + 4,900 = $15,823 The last step is to use: EBIT = Sales − Costs − Depreciation $15,823 = $52,000 − 27,300 − Depreciation Solving for depreciation, we find that depreciation = $8,877

The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $22. What is the price-earnings ratio? 14.27 13.15 8.98 5.39 11.42

Earnings per share = (.041 × $747,000)/7,500 = 4.0836 Price-earnings ratio = $22/4.0836 = 5.39

Gerold invested $5,600 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years? $9,099 $8,678 $8,400 $8,000 $7,710

Ending value = $5,600 + ($5,600 × .05 × 10) = $8,400

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? $1,949.46 $1,269.46 $589.46 $1,331.54 $1,951.54

Net income = $75 + $418 = $493 Taxable income = $493/(1 − .35) = $758.46 Earnings before interest and taxes = $758.46 + $511 = $1,269.46

Which one of the following is defined as a firm's short-term assets and its short-term liabilities? capital structure investment capital working capital net capital debt

working capital

Your firm currently has taxable income of $80,400. How much additional tax will you owe if you increase your taxable income by $21,600? $7,344 $7,054 $7,064 $7,444 $8,424

Taxes on $80,400 income = 0.15($50,000) + 0.25($75,000 - 50,000) + 0.34($80,400 - 75,000) = $15,586 New taxable income = $80,400 + $21,600 = $102,000 Taxes on $102,000 income = 0.15($50,000) + 0.25($75,000 - 50,000) + 0.34($100,000 - 75,000) + 0.39($102,000 - 100,000) = $23,030 Additional tax = $23,030 - $15,586 = $7,444

SDJ, Inc., has net working capital of $1,530, current liabilities of $4,360, and inventory of $1,935. Required: (a) What is the current ratio? (b) What is the quick ratio?

(a) Using the formula for NWC, we get: NWC = CA - CL CA = CL + NWC = $4,360 + $1,530 = $5,890 So, the current ratio is: Current ratio = CA / CL = $5,890/$4,360 = 1.35 times (b) The quick ratio is: Quick ratio = (CA - Inventory) / CL = ($5,890 - 1,935) / $4,360 = .91 times

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner. I and IV only I only II and III only II only I and III only

I and III only

Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit? 121.07 days 151.21 days 84.76 days 74.19 days 138.46 days

Inventory turnover = $628,300/$208,400 = 3.014875 Days in inventory = 365/3.014875 = 121.07 days

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? corporate breakdown legal liability agency problem articles of incorporation bylaws

agency problem

Common stock = $4,814,000 - 1,255,000 - 2,280,000 = $1,279,000 Which of the following are current assets? I. patent II. inventory III. accounts payable IV. cash I and III only II and IV only I, II, and IV only I, II and IV only II, III, and IV only

II and IV only

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year? $245 use of cash $95 use of cash $165 source of cash $165 use of cash $95 source of cash

130+45-75=95

Karla's Yoga has cash of $38, accounts receivable of $64, accounts payable of $200, and inventory of $125. What is the value of the quick ratio? A. .51 B. 1.24 C. 1.73 D. .75 E. .35

A. Quick ratio = (CA - Inventory)/CL = (38+64)/200 = 0.51

Carlson, Inc. has total current assets of $1,000,000; total current liabilities of $600,000; long-term assets of $800,000; and long-term debt of $400,000. How much is the firm's total equity? A. $1,200,000 B. $800,000 C. $400,000 D. $2,000,000

B. Total asset=1,000,000+800,000 = 1,800,000 Total liability = 600,000 + 400,000 = 1000,000 Stockholders equity = 1800,000-1000,000 = 800,000

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? $17,500.00 $17,444.86 $15,929.47 $17,999.45 $16,500.00

Present value = $51,480.79 × [1/(1 + .0425)26] = $17,444.86

Which one of the following accounts is the most liquid? accounts receivable land equipment inventory building

accounts receivable

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? income statement balance sheet statement of cash flows tax reconciliation statement market value report

income statement

The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years? $81,068.18 $81,333.33 $80,760.79 $81,548.20 $80,459.07

$80,760.79

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? $990 $1,610 $1,910 -$210 $2,190

Net income = $1,300 + (-$310) = $990

You deposit $1,000 at the end of each year into an account paying 9.1 percent interest. Required: (a) How much money will you have in the account in 24 years? (b) How much will you have if you make deposits for 48 years?

a) Here we need to find the FVA. The equation to find the FVA is: FVA = C{[(1 + r)t - 1] / r} FVA for 24 years = $1,000[(1.091024 - 1) / .0910] = $77,880.47 (b) FVA = C{[(1 + r)t - 1] / r} FVA for 48 years = $1,000[(1.091048 - 1) / .0910] = $707,709.32 Notice that because of exponential growth, doubling the number of periods does not merely double the FVA.

Which one of the following best states the primary goal of financial management? maximize current dividends per share maximize the current value per share minimize operational costs while maximizing firm efficiency maintain steady growth while increasing current profits increase cash flow and avoid financial distress

maximize the current value per share

Which term relates to the cash flow which results from a firm's ongoing, normal business activities? operating cash flow capital spending net working capital cash flow from assets cash flow to creditors

operating cash flow

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios. asset management long-term solvency short-term solvency profitability turnover

profitability

Shareholders' equity: includes long-term debt, preferred stock, and common stock. increases in value anytime total assets increases. decreases whenever new shares of stock are issued. represents the residual value of a firm. is equal to total assets plus total liabilities.

represents the residual value of a firm.