FIN 3123: Chapter 1-4 MC Homework Q+A

The tax rates are as shown below: Taxable Income Tax Rate $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% Your firm currently has taxable income of $80,500. How much additional tax will you owe if you increase your taxable income by $21,700? A. $7488 B. $8463 C. $7378 D. $7098 E. $7108

A. $7488

During the past year, a company had cash flow to creditors, an operating cash flow, and net capital spending of $29,348, $65,239, and $26,720, respectively. The net working capital at the beginning of the year was $11,395 and it was $13,000 at the end of the year. What was the company's cash flow to stockholders during the year? A. $7566 B. $1605 C. $5820 D. $9171 E. $10,776

A. $7566

Cross Town Express has sales of $137,000, net income of $14,000, total assets of $98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire? A. $8,852 B. $6,311 C. $6,989 D. $0 E. $7,207

A. $8,852

(See other side for question) ANSWER: C. $986 million EXPLANATION: Retention ratio = ($770 million - 520 million)/$1236 million = 0.202 Dividends paid = (1 - 0.202) × $1236 million = $986 million

A. $921 million B. $455 million C. $986 million D. $250 million E. $645 million

(See other side for question) ANSWER: D. 23.57% EXPLANATION: Return on equity = $1030/($3260 + 1110) = 0.2357, or 23.57%

A. 33.66% B. 24.47% C. 16.09% D. 23.57% E. 25.37%

Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest? A. Both general partners and sole proprietors B. Only general partners C. Only sole proprietors D. All stockholders E. Both limited and general partners

A. Both general partners and sole proprietors

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Good reputation of the company B. Money due from a customer C. Real estate investment D. Equipment owned by the firm E. An item held by the firm for future sale

A. Good reputation of the company

Financial planning includes the: I. determination of asset requirements. II. development of contingency plans. III. establishment of priorities. IV. analysis of funding options. A. I, II, III, and IV B. I, III, and IV only C.I and III only D. I, II, and III only E. II and IV only

A. I, II, III, and IV

Which one of the following statements related to liquidity is correct? A. Liquid assets are valuable to a firm. B. Inventory is more liquid than accounts receivable because inventory is tangible. C. Liquid assets tend to earn a high rate of return. D. Any asset that can be sold is considered liquid. E. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.

A. Liquid assets are valuable to a firm.

Which one of the following parties has ultimate control of a corporation? A. Shareholders B. Chairman of the board C. Chief executive officer D. Chief operating officer E. Board of directors

A. Shareholders

Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio? A. 1.35 B. .89 C. .53 D. 2.25 E. .71

B. .89

Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio? A. 1.21 B. 1.15 C. .87 D. 1.06 E. .94

B. 1.15

Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity? A. 14.21 percent B. 9.15 percent C. 13.31 percent D. 11.08 percent E. 6.85 percent

B. 9.15 percent

The decision to issue additional shares of stock is an example of: A. A net working capital decision. B. A capital structure decision. C. Working capital management. D. Capital budgeting. E. A controller's duties.

B. A capital structure decision.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. Dividend statement B. Balance sheet C. Statement of cash flows D. Creditor's statement E. Income statement

B. Balance sheet

You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value? A. Improvements to the surrounding area by other store owners B. Construction of a new restricted access highway located between the store and the surrounding residential areas C. A sudden and unexpected increase in inflation D. Addition of a stop light at the main entrance to the store's parking lot E. The replacement of old inventory items with more desirable products

B. Construction of a new restricted access highway located between the store and the surrounding residential areas

The maximum rate of growth a corporation can achieve can be increased by: A. Increasing the sales forecast B. Increasing the retention ratio C. Avoiding new external equity financing D. Increasing the dividend payout ratio E. Increasing the corporate tax rate

B. Increasing the retention ratio

Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow? A. Sustainable growth rate (1 − .30) B. Internal growth rate C. Internal growth rate (1 − .30) D. Sustainable growth rate E. Zero percent

B. Internal growth rate

A limited liability company: A. Is taxed similar to a C corporation. B. Is taxed similar to a partnership. C. Can only have a single owner. D. Generates totally tax-free income. E. Is comprised of limited partners only.

B. Is taxed similar to a partnership.

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. Sole proprietor. B. Limited partner. C. General partner. D. Corporate shareholder. E. Zero partner.

B. Limited partner.

Which one of the following represents a cash outflow from a corporation? A. New loan proceeds B. Payment of dividends C. Issuance of new securities D. Receipt of tax refund E. Initial sale of common stock

B. Payment of dividends

Financial managers should primarily focus on the interests of: A. The vice president of finance. B. Shareholders. C. Their immediate supervisor. D. The board of directors. E. Stakeholders.

B. Shareholders

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

B. Total debt > $0

An example of capital budget decision is deciding: A. How many shares of stock to issue B. Whether or not to purchase a new machine for the production line C. How much money should be kept in the checking account D. How to refinance a debt issue that is maturing E. How much inventory to keep on hand

B. Whether or not to purchase a new machine for the production line

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

C. Acquisition of debt

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: A. Cash flow to stockholders. B. Net capital spending. C. Cash flow from assets. D. Operating cash flow. E. Net working capital.

C. Cash flow from assets.

Financial planning: A. Is a process that firms undergo once every five years B. Is a process that firms employ only when major changes to a firm's operations are anticipated C. Considers multiple options and scenarios D. Provides minimal benefits for firms that are highly responsive to economic changes E. Focuses solely on the short-term outlook for a firm

C. Considers multiple options and scenarios.

One disadvantage of the corporate form of business ownership is the: A. Firm's potential for an unlimited life. B. Firm's greater ability to raise capital than other forms of ownership. C. Double taxation of distributed profits. D. Firm's ability to issue additional shares of stock. E. Limited liability of its shareholders for the firm's debts.

C. Double taxation of distributed profits.

Which one of the following is an agency cost? A. Increasing the quarterly dividend B. Accepting an investment opportunity that will add value to the firm C. Hiring outside accountants to audit the company's financial statements D. Investing in a new project that creates firm value E. Closing a division of the firm that is operating at a loss

C. Hiring outside accountants to audit the company's financial statements

Which one of the following questions is a working capital management decision? A. How much should the company borrow to buy a new building? B. Should the company update or replace its older equipment? C. How much inventory should be on hand for immediate sale? D. Should the company close one of its current stores? E. Should the company issue new shares of stock or borrow money?

C. How much inventory should be on hand for immediate sale?

Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. A. Compensation based on the value of the stock B. Stock option plans C. Increasing managers' base salaries D. Threat of a company takeover E. Threat of a proxy fight

C. Increasing managers' base salaries

The Sarbanes-Oxley Act of 2002 is a governmental response to: A. The terrorist attacks on 9/11/2001. B. Deregulation of the stock exchanges. C. Management greed and abuses. D. Decreasing corporate profits. E. A weakening economy.

C. Management greed and abuses

A business owned by a solitary individual who has unlimited liability for the firm's debt is called a: A. Limited liability company. B. Corporation. C. Sole proprietorship. D. General partnership. E. Limited partnership.

C. Sole proprietorship

A company has total equity of $2160, net working capital of $240, long-term debt of $1070, and current liabilities of $4500. What is the company's net fixed assets? A. $5590 B. $3230 C. $7730 D. $2990 E. $4740

D. $2990

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? A. $47,700 B. $31,400 C. $249,400 D. $35,900 E. $253,900

D. $35,900

Red Barchetta Co. paid $27,680 in dividends and $28,563 in interest over the past year. During the year, net working capital increased from $13,602 to $18,319. The company purchased $42,440 in fixed assets and had a depreciation expense of $16,985. During the year, the company issued $25,100 in new equity and paid off $21,140 in long-term debt. What was the company's cash flow from assets? A. $45,999 B. $53,631 C. $52,680 D. $52,283 E. $51,304

D. $52,283

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 2.0 B. 1.5 C. 0 D. .5 E. 1.0

D. .5

Nielsen's has annual sales of $352,400 and a profit margin of 5.2 percent. The firm has beginning owners' equity of $136,400 and ending owners' equity of $139,900. The firm neither sold nor repurchased shares during the year. What is the firm's retention ratio? A. 36.67 percent B. 26.87 percent C. 23.33 percent D. 19.10 percent E. 40.00 percent

D. 19.10 percent

A firm has 160,000 shares of stock outstanding sales of $1.94 million, net income of $126,400, a price-earning ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio? A. 1.39 B. 2.45 C. 2.69 D. 2.12 E. 1.84

D. 2.12

All else constant, a(n) ________ will increase the internal rate of growth. A. Decrease in net income B. Decrease in the retention ratio C. Increase in cost of goods sold D. Increase in the dividend payout ratio D. Decrease in total assets

D. Decrease in total assets

Which one of the following accurately describes the three parts of the DuPont identity? A. Return on assets, profit margin, and equity multiplier B. Operating efficiency, equity multiplier, and profitability ratio C. Debt-equity ratio, capital intensity ratio, and profit margin D. Equity multiplier, profit margin, and total asset turnover E. Financial leverage, operating efficiency, and profitability ratio

D. Equity multiplier, profit margin, and total asset turnover

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

D. Has an equity multiplier of 1.0.

Which one of the following actions by a financial manager is most apt to create an agency problem? A. Refusing to expand the company if doing so will lower the value of the equity B. Refusing to lower selling prices if doing so will reduce the net profits C. Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales D. Increasing current profits when doing so lowers the value of the company's equity E. Refusing to borrow money when doing so will create losses for the firm

D. Increasing current profits when doing so lowers the value of the company's equity

The percentage of the next dollar you earn that must be paid in taxes is referred to as the ________ tax rate. A. Total B. Average C. Residual D. Marginal E. Mean

D. Marginal

Which one of the following best states the primary goal of financial management? A. Minimize operational costs while maximizing firm efficiency B. Maximize current dividends per share C. Maintain steady growth while increasing current profits D. Maximize the current value per share E. Increase cash flow and avoid financial distress

D. Maximize the current value per share

The internal growth rate of a firm is best described as the ________ growth rate achievable ________. A. Maximum; excluding any external equity financing while maintaining a constant debt-equity ratio B. Minimum; if the firm maintains constant equity multiplier C. Maximum; with unlimited debt financing D. Maximum; excluding external financing of any kind E. Minimum; assuming a retention ratio of 100 percent

D. Maximum; excluding external financing of any kind

Which one of the following will decrease if a firm can decrease its operating costs, all else constant? A. Return on equity B. Total asset turnover C. Profit margin D. Price-earnings ratio E. Return on assets

D. Price-earnings ratio

Which one of the following is a primary market transaction? A. Stock ownership transfer from one shareholder to another shareholder B. Gift of stock by a shareholder to a family member C. Sale of currently outstanding stock by a dealer to an individual investor D. Sale of a new share of stock to an individual investor E. Gift of stock from one shareholder to another shareholder

D. Sale of a new share of stock to an individual investor

The Harrisburg Store has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars' worth of sales are generated from every $1 in total assets? A. $93 B. $84 C. $1.19 D. $1.14 E. $1.08

E. $1.08

Smashed Pumpkins Co. paid $232 in dividends and $652 in interest over the past year. The company increased retained earnings by $546 and had accounts payable of $738. Sales for the year were $16,685 and depreciation was $768. The tax rate was 40 percent. What was the company's EBIT? A. $1297 B. $1562 C. $6674 D. $2220 E. $1949

E. $1949

You find the following financial information about a company: net working capital = $1059; fixed assets = $6153; total assets = $8574; and long-term debt = $4593. What are the company's total liabilities? A. $7362 B. $5652 C. $8274 D. $1971 E. $5995

E. $5995

What is the average tax rate for a firm with taxable income of $129,013? A. 28.51% B. 20.00% C. 36.92% D. 39.00% E. 26.02%

E. 26.02%

Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio? A. 4.32 B. 3.98 C. 3.51 D. 4.27 E. 3.58

E. 3.58

Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent. The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300. What is the return on equity? A. 24.26 percent B. 15.38 percent C. 29.96 percent D. 17.06 percent E. 38.96 percent

E. 38.96 percent

Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared? A. Cash flow identity B. Financial Accounting Reporting Principles C. Standard Accounting Value Guidelines D. Matching principle E. Generally Accepted Accounting Principles

E. Generally Accepted Accounting Principles

Capital structure decisions include determining: A. The amount of funds needed to finance customer purchases of a new product B. How much inventory will be needed to support a project. C. Which one of two projects to accept D. How to allocate investment funds to multiple projects. E. How much debt should be assumed to fund a project

E. How much debt should be assumed to fund a project

Which one of the following questions is least likely to be addressed by financial managers? A. How much cash should the firm keep on hand? B. Should customers be given 30 or 45 days to pay for their credit purchases? C. Should the firm borrow more money? D. Should the firm acquire new equipment? E. How should a product be marketed?

E. How should a product be marketed?

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, II, III, and IV B. II, III and IV only C. II and IV only D. I and III only E. I, II, and III only

E. I, II, and III only

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. Occurred in a dealer market. B. Took place in the primary market. C. Involved a proxy. D. As a private placement. E. Was facilitated in the secondary market.

E. Was facilitated in the secondary market.