Fin Exam 1 (testbanks)

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Two years ago, you invested $3,300. Today, it is worth $4,050. What rate of interest did you earn?

FV = $4,050 = $3,300 × (1 + r)2 r = 0.1078 or 10.78%

The market value:

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Paid-in surplus is classified as:

owners' equity.

A limited liability company (LLC):

prefers its profits be taxed as personal income to its owners.

The issuer of a security must be involved in all _____ transactions involving that security.

primary market

Market values:

reflect expected selling prices given the current economic situation.

Net income increases when:

revenue increases.

A firm has $864 in inventory, $1,790 in fixed assets, $694 in accounts receivable, $438 in net working capital, and $243 in cash. What is the amount of current liabilities?

$1,363

You are due to receive a lump-sum payment of $1,650 in five years. Assuming a discount rate of 3.5 percent interest, what would be the value of the payment in Year 3?

$1,540.29

You have $13,000 and will invest the money at an interest rate of .37 percent per month until the account is worth $19,600. How many years do you have to wait until you reach your target account value?

$19,600 = $13,000(1.0037)tt = 111.17 months Years to wait = 111.17/12 = 9.26 years

Last year, Bad Tattoo Co. had additions to retained earnings of $5,375 on sales of $97,275. The company had costs of $76,875, dividends of $3,400, and interest expense of $2,600. If the tax rate was 40 percent, what the depreciation expense?

$3,175

Thornton, Inc., had taxable income of $127,682 for the year. The company's marginal tax rate was 34 percent and its average tax rate was 23.7 percent. How much did the company have to pay in taxes for the year?

$30,261

Ivan's, Inc., paid $474 in dividends and $582 in interest this past year. Common stock increased by $192 and retained earnings decreased by $118. What is the net income for the year?

$356

Rick deposited $2,600 into an account 8 years ago for an emergency fund. Today, that account is worth $4,025. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals?

$4,025 = $2,600(1 + r)8 r = ($4,025/$2,600)1/8 − 1 r = .0561, or 5.61%

For the past year, Momsen, Ltd., had sales of $47,162, interest expense of $4,166, cost of goods sold of $17,359, selling and administrative expense of $12,146, and depreciation of $6,995. If the tax rate was 38 percent, what was the company's net income?

$4,028

You have been told that you need $15,000 today for every $50,000 you want when you retire 30 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually.

$50,000 = $15,000 × (1 + r)30r = 4.09 percent

A firm has common stock of $89, paid-in surplus of $260, total liabilities of $405, current assets of $380, and net fixed assets of $590. What is the amount of the shareholders' equity?

$565

You find the following financial information about a company: net working capital = $924; fixed assets = $5,833; total assets = $8,414; and long-term debt = $4,463. What are the company's total liabilities?

$6,120

Recently, the owner of Martha's Wares encountered severe legal problems and is trying to sell her business. The company built a building at a cost of $1,230,000 that is currently appraised at $1,430,000. The equipment originally cost $710,000 and is currently valued at $457,000. The inventory is valued on the balance sheet at $400,000 but has a market value of only one-half of that amount. The owner expects to collect 99 percent of the $220,200 in accounts receivable. The firm has $10,400 in cash and owes a total of $1,430,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm?

$885,398

Which one of the following statements about a limited partnership is correct? Multiple Choice -All partners have their losses limited to their capital investment in the partnership. -All partners are treated equally. -There must be at least one general partner. -Equity financing is easy to obtain and unlimited.

-There must be at least one general partner.

Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

1.94

A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

Debt-equity ratio = $348,092 / ($638,727 − 348,092) = 1.20

Samuelson's has a debt-equity ratio of 21 percent, sales of $5,500, net income of $900, and total debt of $4,700. What is the return on equity?

Debt-equity ratio = .21 = $4,700/Total equity Total equity = $22,380.95 Return on equity = $900/$22,380.95 = 0.0402, or 4.02%

Picture... Windswept, Inc., has 520 million shares of stock outstanding. Its price-earnings ratio for 2017 is 20. What is the market price per share of stock?

Earnings per share = $1,051/520 = $2.021154 Price = $2.021154 × 20 = $40.42

Jupiter Explorers has $9,400 in sales. The profit margin is 4 percent. There are 5,400 shares of stock outstanding, with a price of $2.00 per share. What is the company's price-earnings ratio?

Earnings per share = ($9,400 × .04)/5,400 = $.06963 Price-earnings ratio = $2.00/$.06963 = 28.72 times

You Save Bank has a unique account. If you deposit $7,250 today, the bank will pay you an annual interest rate of 4 percent for 5 years, 4.6 percent for 4 years, and 5.3 percent for 8 years. How much will you have in your account in 17 years?

FV = $7,250 × 1.0405 = $8,820.73 FV = $8,820.73 × 1.0464 = $10,559.21 FV = $10,559.21 × 1.0538 = $15,960.94

Ten years ago, you deposited $5,500 into an account. Five years ago, you added an additional $2,500 to this account. You earned 6.5 percent, compounded annually, for the first 5 years and 5.0 percent, compounded annually, for the last 5 years. How much money do you have in your account today?

Future value = {[$5,500 ×(1 + .065)5] + $2,500} ×(1 + .05)5= $12,808.09

Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000 in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?

Future value Western = $6,000 + ($6,000 × .05 × 3) = $6,900Future value Eastern = $6,000 × (1 + .05)3 = $6,945.75Difference = $6,945.75 − 6,900 = $45.75

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

Investments

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

You need to have $33,250 in 11 years. You can earn an annual interest rate of 4 percent for the first 6 years, and 4.6 percent for the next 5 years. How much do you have to deposit today?

PV = $33,250/1.0465 = $26,554.20 PV = $26,554.20/1.0406 = $20,986.17

Dellf's has a profit margin of 3.8 percent on sales of $287,200. The firm currently has 5,000 shares of stock outstanding at a market price of $7.11 per share. What is the price-earnings ratio?

Price-earnings ratio = $7.11/[(.038 × $287,200)/5,000] = 3.26

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Gorilla Movers has sales of $645,560, cost of goods sold of $425,890, depreciation of $32,450, and interest expense of $12,500. The tax rate is 30 percent. What is the times interest earned ratio?

Times interest earned ratio = ($645,560 − 425,890 − 32,450) / $12,500 = 14.98

A firm has sales of $1,210, net income of $225, net fixed assets of $542, and current assets of $298. The firm has $100 in inventory. What is the common-size balance sheet value of inventory?

Total assets = $542 + 298 = $840 Common-size value of inventory = $100/$840 = .1190, or 11.90%

Your bank will pay you an interest rate of .117 percent per week. You want to have $24,000 in 7 years. How much will you have to deposit today? Assume 52 weeks per year.

calc... PV = $24,000/1.001177×52 = $15,680.58

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of:

capital structure management.

The Sarbanes-Oxley Act: Multiple Choice a. require the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results. b. requires all corporations to fully disclose its financial dealings to the general public. c. places the responsibility for a firm's financial statements solely on the chief financial officer. d. requires that the board of directors be solely responsible for the firm's financial dealings. e. places total responsibility for the financial statements of a firm on the auditor who certifies the statements.

a. require the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results

One advantage of the corporate form of organization is the:

ability to raise larger sums of equity capital than other organizational forms.

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:

an agency conflict.

The Conference Center has cash of $7,800, accounts receivable of $15,600, inventory of $48,850, and net working capital of $5,000. What is the cash ratio?

ash ratio = $7800 / ($7800 + 15600 + 48,850 − 5,000) = .12

Probably the least effective means of aligning management goals with shareholder interests is:

automatically increasing management salaries on an annual basis.

Which one of the following applies to a general partnership? Multiple Choice a. The firm's operations must be controlled by a single partner. b. Any one of the partners can be held solely liable for all of the partnership's debt. c. The profits of the firm are taxed as a separate entity. d. Each partner's liability for the firm's debts is limited to each partner's investment in the firm. e. The profits of a general partnership are taxed the same as those of a corporation.

b. Any one of the partners can be held solely liable for all of the partnership's debt.

Which one of the following is most apt to align management's priorities with shareholders' interests? Multiple Choice a. Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers b. Compensating managers with shares of stock that must be held for a minimum of three years c. Paying a special management bonus on every fifth year of employment d. Increasing the number of paid holidays that long-term employees are entitled to receive e. Allowing employees to retire early with full retirement benefits

b. Compensating managers with shares of stock that must be held for a minimum of three years

Which one of the following is a capital structure decision? Multiple Choice A. Determining the optimal inventory level b. Establishing the preferred debt-equity level c. Selecting new equipment to purchase d.Setting the terms of sale for credit sales e. Determining when suppliers should be paid

b. Establishing the preferred debt-equity level

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

Security dealers:

buy and sell from their own inventory.

Which one of the following statements concerning the balance sheet is correct? Multiple Choice a. Total assets equal total liabilities minus total equity. b. Net working capital is equal total assets minus total liabilities. c. Assets are listed in descending order of liquidity. d. Current assets are equal to total assets minus net working capital. e. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

c. Assets are listed in descending order of liquidity.

Which one of the following is an advantage of being a limited partner? Multiple Choice a. Nontaxable share of any profits b. Control over the daily operations of the firm c. Losses limited to capital invested d. Unlimited profits without risk of incurring a loss e. Active market for ownership interest

c. Losses limited to capital invested

All else held constant, the book value of owners' equity will decrease when:

dividends exceed net income for a period.

A firm's liquidity level decreases when:

inventory is purchased with cash.

Net working capital increases when:

inventory is sold at a profit.

A corporation:

is a legal entity separate from its owners. Correct

Given a profitable firm, depreciation:

lowers taxes.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate.

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n):

stakeholder.

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.