FIN 311 Exam 1

Zero Corp's total common equity at the end of last year was $370,000 and its net income was $70,000. What was its ROE? 17.59% 18.92% 23.27% 22.89% 18.35%

18.92%

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

False

Garcia Industries has sales of $167,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant? Assume all sales to be on credit. Do not round your intermediate calculations. $386.13 $601.18 $488.77 $562.08 $537.64

$488.77

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. exhibit 4.1 (screenshot) Refer to Exhibit 4.1. What is the firm's current ratio? Do not round your intermediate calculations. 1.46 1.65 1.58 1.38 1.72

1.38

Chang 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 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations. 11.03% 8.76% 10.82% 11.14% 12.98%

10.82%

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to Exhibit 4.1. What is the firm's profit margin? Do not round your intermediate calculations. 2.41% 1.99% 1.76% 2.17% 2.56%

2.17%

Ryngard Corp's sales last year were $42,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)? 2.68 2.36 2.31 3.15 2.63

2.63

Exhibit 4.1The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to Exhibit 4.1. What is the firm's inventory turnover ratio? Do not round your intermediate calculations. 4.69 5.30 5.58 5.77 5.53

4.69

Use the "Warm-up - Fill in the Blanks #2". What is the value of Free Cash Flow (FCF) in year 1? Hint: FCF = ((EBIT (1-Tax Rate) + Depreciation) - (CAPEX + Change in NOWC)). Tax Rate is 40%. Ignore the Current portion of the long term debt (i.e. Current Liabilities in Year 1 = 22,000)

49,000

Exhibit 4.1The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Refer to Exhibit 4.1. What is the firm's days sales outstanding? Assume a 365-day year for this calculation. Do not round your intermediate calculations. 47.57 68.84 69.96 50.93 55.97

55.97

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? 6.28% 5.73% 6.82% 6.48% 7.71%

6.82%

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

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

Which of the following statements is CORRECT? a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management. b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. c. The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. d. In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development. e. Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

A. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.

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.

B - 20,050

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

B - An increase in accounts receivable.

Which of the following statements is CORRECT?

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

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?

B - This is an example of a direct transfer of capital.

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

C - $72,000

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)

C - 10x

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?

C - 21.60%

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% ?

C - 94,800

Use the "Warm up - Fill in the Blanks #2". What is the value of "Change in Accounts Payable" and "Change in Long-Term Debt". Hint: Do not forget to include Current Portion Long Term Debt

C - Change in Accounts Payable = 7,000 and Change in Long-Term Debt = 0

Which of the following is a primary market transaction?

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

Which of the following statements is CORRECT?

C - 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 is an example of a capital market instrument?

D - Corporate bonds (>1year)

Money markets are markets for

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

With which of the following statements would most people in business agree? A. A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. B. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. C. "Whistleblowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. D. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. E. 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.

E. 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.

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. True False

False

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 False

False

Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's. True False

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. True False

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. True False

False

In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS. True False

False

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. True False

False

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE. True False

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. True False

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

False

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)? Note: Current Portion of LTD is not equal to Notes Payable

NWC = 93,500 NOWC= 93,500

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

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 False

True

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

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 False

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 False

True

In most corporations, the CFO ranks under the CEO. True False

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

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 False

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 False

True

One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests. True False

True

Partnerships and proprietorships generally have a tax advantage over corporations. True False

True

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 False

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 False

True

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? a. 24,688 b. 23,700 c. 19,256 d. 26,663 e. 19,750

a. 24,688

Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders? a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders). b. Compensating managers with more stock options and less cash income. c. The passage of laws that make it harder for hostile takeovers to succeed. d. A government regulation that banned the use of convertible bonds. e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year.

a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).

Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations. b. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. c. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. e. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.

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

Which of the following statements is CORRECT? a. 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. b. To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue. c. 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 discourage the use of debt financing by corporations

a. 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.

Which of the following statements is NOT CORRECT? a. When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held." b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market. e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.

Which of the following statements is CORRECT? a. A hostile takeover is the main method of transferring ownership interest in a corporation. b. 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. c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. d. Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. e.Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.

b. 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. An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase, then when they are collected cash will come into the firm. b. 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. c. 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 add to or subtract from 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. d. 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." e. Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.

b. 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.

Which of the following statements is CORRECT? a. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. b. Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2015 could go up to 39.6%, but qualified dividends received were taxed at a maximum rate of 15% for individuals earning less than $411,500 and married taxpayers filing jointly earning less than $464,850. c. The maximum federal tax rate on corporate income in 2015 was 50%. d. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes. e. The maximum federal tax rate on personal income in 2015 was 50%

b. Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2015 could go up to 39.6%, but qualified dividends received were taxed at a maximum rate of 15% for individuals earning less than $411,500 and married taxpayers filing jointly earning less than $464,850.

Which of the following is an example of a capital market instrument? a. Commercial paper. b. Preferred stock. c. U.S. Treasury bills. d. Banker's acceptances. e. Money market mutual funds.

b. Preferred stock.

Which of the following statements is CORRECT? a. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. c. One advantage of operating a business as a corporation is that stockholders can deduct their pro-rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. e.Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.

Which of the following statements is CORRECT? a. 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. b. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. c. 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. d. Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. e. 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 funds using long-term debt, 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 not be a good move, as it would decrease the ROE from 7.5% to 6.5%.

b. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

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

c. Bonds.

Vasudevan Inc. recently reported operating income of $5.35 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions? a. $3.54 b. $3.05 c. $3.81 d. $3.39 e. $4.57

c. $3.81

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? a. $6,436 b. $5,507 c. $6,188 d. $6,497 e. $6,250

c. $6,188

Which of the following statements is CORRECT? a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. c. 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. d. Large corporations are taxed more favorably than proprietorships. e. Corporate stockholders are exposed to unlimited liability.

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

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

Which of the following statements is CORRECT? a. Capital markets deal only with common stocks and other equity securities. b. Home mortgage loans are traded in the money market. c. The New York Stock Exchange is an auction market, and it has a physical location. d. If an investor sells shares of stock through a broker, then it would be a primary market transaction. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

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

Which of the following statements is CORRECT? a. Typically, a firm's DPS should exceed its EPS. b. Typically, a firm's net income should exceed its EBIT. c.If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share. d. 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. e.The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

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

C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have? Sales $2,700.00 Costs 1,850.00 Depreciation 192.00 EBIT $658.00 Interest expense 285.00 EBT $373.00 Taxes (35%) 130.55 Net income $242.45 ​ a. $440.53 b. $517.52 c. $376.38 d. $427.70 e. $504.69

d. $427.70

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes. a. Companies' after-tax operating profits would decline. b. Companies' physical stocks of fixed assets would increase. c. Companies' cash flows would increase. d. Companies' cash positions would decline. e. Companies' reported net incomes would decline.

d. Companies' cash positions would decline

Assume that Besley Golf Equipment commenced operations on January 1, 2015, 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 2015 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2015 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements? a. The firm's reported net fixed assets would increase. b. The firm's EBIT would increase. c. The firm's reported 2015 earnings per share would increase. d. The firm's cash position in 2015 and 2016 would increase. e. The provision will increase the company's tax payments.

d. The firm's cash position in 2015 and 2016 would increase.

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Financing risky projects with additional debt. c. The threat of hostile takeovers. d. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. e. Abolishing the Security and Exchange Commission.

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

Prezas Company's balance sheet showed total current assets of $3,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital? $1,620 $1,701 $2,309 $1,721 $2,025

e. $2,025

On its 12/31/15 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? a. If the company lost money in 2015, it must have paid dividends. b. The company must have had zero net income in 2015. c. The company must have paid out half of its 2015 earnings as dividends. d. The company must have paid no dividends in 2015. e. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

e. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

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

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

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. Both firms finance using only debt and common equity and total assets equal total invested capital. However, company HD has a higher total debt to total capital ratio. Which of the following statements is CORRECT? a. Given this information, LD must have the higher ROE. b. Company LD has a higher basic earning power ratio (BEP). c. Company HD has a higher basic earning power ratio (BEP). d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE. e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

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

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

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

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

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date. true false

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. True False

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. true false

false

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

false

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary. True False

true

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 False

true

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 False

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 False

true

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

true

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

true

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions. True False

true

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

true

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

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 False

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. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question. True False

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 False

true

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

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 False

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 False

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 False

true