Finance 331 - Exam 1 - Chapters 1, 2, & 3

A firm has net working capital of $8,200 and current assets of $37,500. What is the current ratio?

Current ratio = $37,500/($37,500 − 8,200) = 1.28

Which one of the following will increase the profit margin of a firm, all else held constant?

Decrease in the tax rate

Working capital management includes which one of the following?

Determining which customers will be granted credit

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

Dividends paid = $31,800 − 24,200 = $7,600

Kahlil's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

$1,400

Which of the following is least likely an indicator of a firm's liquidity?

Amount of credit sales - No inferences about liquidity are warranted based on this measure. A firm may have higher credit sales than another simply because it has more sales overall. Cash as a proportion of sales and inventory turnover are indicators of liquidity.

Trinity Industries has sales of $179,600, depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400. The tax rate is 21 percent. What is the net income?

-$1,900

It takes Leila's Boutique an average of 53 days to sell its inventory and an average of 16.8 days to collect its accounts receivable. The firm has sales of $942,300 and costs of goods sold of $692,800. What is the accounts receivable turnover rate? Assume a 365-day year.

Accounts receivable turnover = 365/16.8 = 21.73

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

Agency

The DuPont identity can be used to help a financial manager determine the: 1. degree of financial leverage used by a firm. 2. operating efficiency of a firm. 3. utilization rate of a firm's assets. 4. rate of return on a firm's assets.

All of the above

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

Balance sheet - the balance sheet is a snapshot

Which one of the following has nearly the same meaning as free cash flow?

Cash flow from assets

The Riverside Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows:

Cash flow from assets = $83,770 − ($597,913 − 599,608 + 43,514) − [($129,204 − 139,827) − ($138,590 − 143,215)] = $47,949

The DuPont identity can be accurately defined as:

Equity multiplier x Return on assets

When conducting a financial analysis of a firm, financial analysts:

Frequently use accounting information

Cash flow to creditors increases when:

Long-term debt is repaid

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

Which one of these transactions will increase the liquidity of a firm?

Credit sale of inventory at cost

Net working capital is defined as:

Current assets minus current liabilities

McHenry Sales has sales of $938,300, cost of goods sold of $688,050, and inventory of $98,880. How long, on average, does it take the firm to sell its inventory?

Days' sales in inventory = 365/($688,050/$98,880) = 52.45 days

Steamboat Bike Shoppe has total assets of $536,712 and an equity multiplier of 1.36. What is the debt-equity ratio?

Debt-equity ratio = 1.36 − 1 = .36

Cash flow to stockholders is defined as:

Dividends paid minus net new equity raised

Saki Kale Farms has net income of $96,320, total assets of $975,200, total equity of $555,280, and total sales of $1,141,275. What is the common-size percentage for the net income?

Net income common-size percentage = $96,320/$1,141,275 = .0844, or 8.44%

Which one of these statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

One advantage of the corporate form of organization is the:

Ability to raise larger sums of equity capital than other organizational forms

Which of the following is not a basic area of finance as described by the text?

Accounting

The Milwaukee Printing Company has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the net new equity raised during the year?

$142,430 - $55,000 - $11,200 − ($48,420 + $26,310 − $32,500) = $34,000

Lopez Bakery had $236,400 in net fixed assets at the beginning of the year. During the year, the company purchased $53,200 in new equipment. It also sold, at a price of $22,000, some old equipment that had a book value of $5,900. The depreciation expense for the year was $13,400. What is the net fixed asset balance at the end of the year?

$236,400 + 53,200 − 5,900 − 13,400 = $270,300

Earley Construction has beginning retained earnings of $284,300. For the year, the company earned net income of $13,700 and paid dividends of $9,000. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

$284,300 + $13,700 - $9,000 = $289,000

Preston Financial has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900. During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in depreciation expense. How much did the company spend to buy new fixed assets?

$36,800

In 2021, what was the maximum average tax rate for corporations?

21%

Zhang's fixed assets were purchased three years ago for $1.8 million. These assets can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is ____.

Book value = $121,000 + 348,000 + 960,000 = $1,429,000 Market value = $518,000 + 1,200,000 = $1,718,000

The concept of marginal taxation is best exemplified by which one of the following?

Burke's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

Capital Structure

Which one of the following functions is generally a responsibility assigned to the corporate treasurer?

Capital expenditures

Which one of the following is a measure of long-term solvency?

Cash coverage ratio

During the past year, Rend Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors?

Cash flow to creditors = $36,800 − 16,000 + 18,400 = $39,200

Which of the following stakeholders are most likely to benefit from a company's growth and excellent financial performance?

Governments - Governments receive greater tax revenues when financial performance is excellent and profits are higher. Creditors do not receive extra returns for performance better than that is adequate to repay debt. Customers seek company stability and ongoing relationships with the company.

A sole proprietorship:

Has its profits taxed as personal income

A firm has a current ratio of 1.4 and a quick ratio of .9. Given this, you know for certain that the firm:

Has positive net working capital

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

Interest = $27,130 − 16,220 − 5,450 = $5,460 Cash flow to creditors = $5,460 + 31,600 − 42,000 = −$4,940

Prisqua Rentals has inventory of $147,500, equity of $320,000, total assets of $658,800, and sales of $800,780. What is the common-size percentage for the inventory account?

Inventory common-size percentage = $147,500/$658,800 = .2239, or 22.39%

Firefly, Incorporated, has sales of $1,366,400, cost of goods sold of $897,575, and inventory of $148,630. What is the inventory turnover rate?

Inventory turnover = $897,575/$148,630 = 6.04 times

SRC, Incorporated, sells its inventory in an average of 52 days and collects its receivables in 3.6 days, on average. What is the inventory turnover rate? Assume a 365-day year.

Inventory turnover = 365/52 = 7.02 times

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

The cash ratio is used to evaluate the:

Length of time that a firm can pay its bills if no additional cash becomes available.

The equity multiplier is equal to:

One plus the debt-equity ratio.

Cash flow from assets is defined as:

Operating cash flow - change in networking capital - net capital spending

All else held constant, which one of the following will decrease if a firm increases its net income?

Price earnings ratio

Financial statement analysis:

Provides useful information that can serve as a basis for forecasting future performance.

You are analyzing a company that has cash of $11,880, accounts receivable of $17,380, fixed assets of $100,000, accounts payable of $54,405, and inventory of $51,590. What is the quick ratio?

Quick ratio = ($11,880 + 17,380)/$54,405 = .54

The Sarbanes-Oxley Act:

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

Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets?

Return on assets = (.043 × $680,300)/$589,100 = .0497, or 4.97%

Net income increases when:

Revenue increases

One example of a primary market transaction would be the:

Sale of 1,000 shares of newly issued stock by Alt Company to Miguel

If a firm has an inventory turnover of 15, the firm:

Sells its entire inventory an average of 15 times each year.

Operating cash flow is defined as:

The cash that a firm generates from its normal business activities

Which one of the following correctly defines a common chain of command within a corporation?

The controller reports directly to the chief financial officer

The primary goal of financial management is to maximize:

The market value of existing stock

Tribeca 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 21 percent. What is the times interest earned ratio?

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

Scranton Paper Company generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset turnover

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

Total assets

Khalid Warehouse has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio?

Total debt ratio = ($23,456 + 148,000)/$485,390 = .35

Net working capital decreases when:

A dividend is paid to current shareholders.

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Varya's Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier?

Equity multiplier = $550,000/($550,000 − 295,000) = 2.16

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

Net capital spending = $371,920 − 348,200 + 46,080 = $69,800

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

Working Capital Management