FINANCE EXAM 1

Calculating marginal & average tax rate

-->table 2.3 & 2.4 Page 32-33

*LONG-TERM SOLVENCY FINANCIAL LEVERAGE* EQUITY MULTIPLIER

= ASSETS / EQUITY

Tax liability

?

CHAP 2 Balance Sheet

A snapshot of the firm. convenient means of organizing and summarizing what a firm owns (assets), what a firm owns (liabilities), and the difference between the two (firm's equity) at a given point in time.

Average tax rate

Average tax paid divided by total taxable income. *In other words, the percentage of your income that goes to pay taxes*

CHAP 3 6. The percentage of a firm's net income that is distributed to shareholders is called the: A. profit margin. B. dividend payout ratio. C. equity multiplier. D. retention ratio. E. return on equity.

B) DIVIDEND PAYOUT RATIO

CHAP 2 6. The book value of an asset is equal to the: A. initial cost less depreciation plus interest earned. B. initial cost plus depreciation minus the interest charges. C. initial cost minus the depreciation to date. D. higher of the original cost or the current market value. E. lower of the original cost or the current market value.

C) INTIAL COST MINUS THE DEPRECIATION TO DATE.

CHAP 3 3. Ratios which analyze a firm's ability to meet its long-term obligations are called: A. profitability ratios. B. asset utilization ratios. C. leverage ratios. D. market value ratios. E. liquidity ratios.

C) LEVERAGE RATIOS

CHAP 1 7. Which of the following does NOT offer the protection of limited liability? A) corporation B) limited liability company C) sole proprietorship D) limited partnership E) S corporation

C) SOLE PROPRIETORSHIP

Net working capital (NWC)

Current assets - Current liabilities -NWC is positive when current assets exceed current liabilities. -Also means that the cash that will become available over the next 12 months exceeds the cash that must be paid over that same period.

CHAP 3 7. The U.S. government coding system that classifies firms by their specific type of business operations is known as the: A. gross domestic classification system. B. Standard Bar Code Industrial System (SBCIS). C. governmental ID system. D. Standard Industrial Classification (SIC) system. E. Governmental Industrial Enterprise (GIE) system.

D) STANDARD INDIVIDUAL CLASSIFICATION SYSTEM

CHAP 1 6. Agency costs A) The total dividends paid to shareholders over the lifetime of the firm. B) The costs that result from default and bankruptcy of the firm. C) Corporate income subject to double taxation. D) The costs of the conflict of interest between stockholders and management. E) The total interest paid to creditors over the lifetime of the firm.

D) THE COSTS OF THE CONFLICT OF INTEREST BETWEEN STOCKHOLDERS AND MANAGEMENT

Balance sheet example

Figure 2.1 page 24-25

Changes in NWC Change in NWC = Ending NWC - Beginning NWC

The change in NWC is the amount spent on net working capital. Page 35-36

Partnership Advantages

-2 or more owners -More available capital -Easy to form -Income taxed at personals level

Sole Proprietorship Advantages

-Easy to form -Least regulations -Single owner -Taxed only once at personal level

Corporation Advantages

-Limited liability -Unlimited life -Separation of ownership & management -Transfer of ownership is easy -Easier to raise capital

Sole Proprietorship Disadvantages

-Limited to life owner -Difficult to raise equity -Difficult to sell -Unlimited liability -Can sue you personally because it is solely you

Corporation Disadvantages

-Separation of ownership & management - Double taxation

Partnership Disadvantages

-Unlimited liability: general partner/ limited partner -Partnership dissolves when one owner dies or wants to sell -Difficult to sell

*SHORT-TERM SOLVENCY LIQUIDITY* CASH RATIO

= CASH / CURRENT LIABILITY

*SHORT-TERM SOLVENCY LIQUIDITY* QUICK RATIO

= COMMON ASSETS - INV / CURRENT LIABILITY

*SHORT-TERM SOLVENCY LIQUIDITY* CURRENT RATIO

= CURRENT ASSETS / CURRENT LIABILITY

*LONG-TERM SOLVENCY FINANCIAL LEVERAGE* TOAL DEBT RATIO

= DEBT / ASSETS

*LONG-TERM SOLVENCY FINANCIAL LEVERAGE* DEBT EQUITY RATIO

= DEBT / EQUITY

*LONG-TERM SOLVENCY FINANCIAL LEVERAGE* CASH COVERAGE

= EBIT + DEP. / INT,

*LONG-TERM SOLVENCY FINANCIAL LEVERAGE* TIMES INTEREST EARNED

= EBIT / INT.

CHAP 2 8. Paulette's Clutter has sales of $67,300. The costs of goods sold are $41,000 and the other costs are $13,000. Depreciation is $8,500 and the tax rate is 34%. What is the net income of the firm? A. $3,168 B. $3,319 C. $5,632 D. $13,629 E. $14,388

A) $3, 168

CHAP 1 3. A business created as a distinct legal entity composed of one or more individuals or entities is called a(n): A) Corporation. B) Sole proprietorship. C) Partnership. D) Closed receivership. E) Open structure.

A) CORPORATION

CHAP 1 8. Which of the following does NOT address the question: "What are the duties of a financial manager?" I. Deciding how much interest to pay the holders of the corporation's bonds. II. Deciding the mix of long-term debt and equity. III. Deciding which projects a firm should undertake. IV. Deciding how much short-term debt to use. A) I only B) III only C) II and III only D) II, III, and IV only E) I, II, III, and IV

A) I ONLY

CHAP 2 3. An intangible asset is a: A. valuable fixed asset that has no physical existence. B. physical fixed asset that loses value over time, such as equipment. C. fully-depreciated fixed asset which has no remaining market value. D. current asset with a negligible book value but considerable market value. E. current asset with minimal market value and no physical existence.

A) VALUABLE FIXED ASSET THAT HAS NO PHYSICAL EXISTENCE.

Marginal tax rate

Amount of tax payable on the next dollar earned

Agency Problem

An agent (owner) hires a principal (manager) to work for them. THE PROBLEM EXISTS WHEN MANAGERS ACT IN THEIR OWN BEST INTEREST RATHER THAN DOING THE BEST THING FOR THE OWNERS.

CHAP 2 9. Holbotton, Inc., owes a total of $11,354 in taxes for this year. Their taxable income is $51,609. If Holbotton earns $100 more in income, they will owe an additional $34 in taxes. What is Holbotton's average tax rate on income of $51,709? A. 21 percent B. 22 percent C. 34 percent D. 35 percent E. 39 percent

B) 22% AVG. TAX RATE = TAXES PAID/TAXABLE INCOME 22% = $11, 354 + 34 / $51, 709

CHAP 1 4. The primary goal of financial management is to: A) Maximize current sales. B) Maximize the current value per share of the existing stock. C) Avoid financial distress. D) Minimize operational costs. E) Maintain steady earnings growth.

B) MAXIMIZE THE CURRENT VALUE PER SHARE OF THE EXISTING STOCK

CHAP 3 4. The ratio related to the amount of profit a firm earns for every $1 in sales is called the: A. net income. B. profit margin. C. return on equity. D. return on assets. E. price-earnings ratio.

B) PROFIT MARGIN

CHAP 2 1. A balance sheet is a financial statement that: A. reports the cash flows of a firm as of a specified date. B. reflects a firm's accounting value on a particular date. C. records the revenues and expenses for a firm over a period of time. D. reflects the market value of a firm as of the statement date. E. reports the net income for a designated period of time based on the Generally Accepted Accounting Principles.

B) REFLECTS A FIRM'S ACCOUNTING VALUE ON A PARTICULAR DATE.

CHAP 1 2. A business owned by a single individual is called a(n): A) Corporation. B) Sole proprietorship. C) Partnership. D) Closed receivership. E) Open structure.

B) SOLE PROPRIETORSHIP

CHAP 2 *SIMILAR QUESTION ON EXAM* 10. Use the following tax table to answer this question: 15% 25% 34% Theresa's Boutique, Inc., has taxable income of $82,348. How much does Theresa's owe in taxes? A. $13,750 B. $14,689 C. $16,248 D. $20,587 E. $27,998

C) $16, 248 PAY TAXES ON DIFFERENCE FROM $82, 348 TAXES OWE = $50, 000(0.15) + $25,000(0.25) + ($82, 348 - $75,000) (0.34) $16, 248 = $7, 500 + $6, 259 + $2, 498.32

CHAP 3 12. Jefferson and Sons has total assets of $807,200, total equity of $509,500, total sales of $945,300, and net income of $25,600. What is the profit margin? A. 1.17 percent B. 1.86 percent C. 2.71 percent D. 3.17 percent E. 5.02 percent

C) 2.71% PROFIT MARGIN = NET INCOME/ SALES

CHAP 3 1. A statement which presents all items in percentage terms is called a(n): A. balance sheet. B. ratio statement. C. common-size statement. D. income statement. E. time-trend analysis.

C) COMMON- SIZE STATEMENT

CHAP 2 5. Which of these accounts are included in net working capital? I. accounts payable II. bonds payable III. equipment IV. cash A. IV only B. II and III only C. I and IV only D. III and IV only E. I, III, and IV only

C) I AND IV ONLY

CHAP 2 2. A current asset is defined as an asset that: A. was purchased after the last financial statement date. B. was purchased within the past twelve months. C. normally converts to cash within one year. D. was manufactured within the past year and has yet to be sold. E. is highly illiquid.

C) NORMALLY COVERTS TO CASH WITHIN 1 YEAR.

CHAP 3 9. If a manager notices that the firm's receivables turnover rate is declining, he or she should assume that: A. the average amount of merchandise each customer is buying is declining. B. the firm is making less profit on each item sold. C. on average, it is taking each customer longer to pay for their purchases. D. the current ratio of the firm is also declining. E. the days' sales in receivables is also declining.

C) ON AVERAGE, IT IS TAKING EACH CUSTOMER LONGER TO PAY FOR THEIR PURCHASES.

CHAP 1 5. The possibility of conflict of interest between the stockholders and management of the firm is called: A) The shareholders' conundrum. B) Corporate breakdown. C) The agency problem. D) Corporate activism. E) Legal liability.

C) THE AGENCY PROBLEM

CHAP 3 2. Short-term solvency ratios are also referred to as: A. leverage ratios. B. turnover rates. C. utilization ratios. D. profitability ratios. E. liquidity measures.

C) UTILIZATION RATIOS

CHAP 2 7. Le Son, Inc., has current liabilities of $11,700 and accounts receivable of $15,200. The firm has total assets of $43,400 and net fixed assets of $24,800. The owners' equity has a book value of $21,000. What is the amount of the net working capital? A. -$8,300 B. -$3,800 C. $3,500 D. $6,900 E. $10,700

D) $6,900 NWC = CA - CL $6,900= $18, 600 - $11, 700 CA= TA - NFA $18, 600= $43,400 - $24,800

CHAP 1 9. Why does the double taxation problem exist for corporations? A) Corporations earn taxable income, pay taxes on that income, and then pay interest to the bondholders, who also have net taxable income. B) Corporations earn taxable income and pay taxes on that income. C) Firms with depreciation expense must repay the tax deduction over time, in addition to their normal tax liability on taxable corporate income. D) Corporations earn taxable income, pay taxes on that income, and then pay dividends to the stockholders, who also have net taxable income. E) Stockholders are paid a dividend and they have net taxable income.

D) CORPORATIONS EARN TAXABLE INCOME, PAY TAXES ON THAT INCOME, AND THEN PAY DIVIDENDS TO THE STOCKHOLDERS, WHO ALSO HAVE NET TAXABLE INCOME.

CHAP 3 10. Which one of the following will increase the profit margin of a firm? A. increasing the cost of goods sold B. increasing the depreciation expense C. increasing the fixed costs D. decreasing the tax rate E. increasing the interest paid

D) DECREASING THE TAX RATE

CHAP 2 4. Net working capital is defined as the: A. change in current assets over a stated period of time. B. amount of money used to acquire new fixed assets minus any asset sales. C. net change in the cash flow related to the current assets of a firm. D. difference between a firm's current assets and its current liabilities. E. amount of cash generated by the daily operations that is reinvested in the firm.

D) DIFFERENCE BETWEEN A FIRM'S CURRENT ASSESTS AND IT'S CURRENT LIABILITIES.

CHAP 1 10. A type of small corporation that is taxed like a partnership and thus avoids double taxation is called a ________________. A) limited partnership B) sole proprietorship C) S corporation D) limited liability company E) general partnership

D) LIMITED LIABILITY COMPANY

CHAP 3 11. Roy's Upholstery Shop has sales of $639,320, total assets of $527,200, a debt-equity ratio of .75, and a profit margin of 5 percent. What is the equity multiplier? A. 1.21 B. 1.38 C. 1.44 D. 1.61 E. 1.75

E) 1.75 EM= TA/TE DEBT EQUITY RATO= TD/TE PM= NI/ SALES

CHAP 1 1. The mixture of debt and equity used by the firm to finance its operations is called: A) working capital management. B) financial depreciation. C) agency cost analysis. D) capital budgeting. E) capital structure.

E) CAPITAL STRUCTURE

CHAP 3 5. The relationship between a firm's earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the: A. financial leverage ratio. B. debt-equity ratio. C. capital intensity ratio. D. market-to-book ratio. E. price-earnings ratio.

E) PRICE-EARNINGS RATIOS

CHAP 3 8. Which one of the following transactions will increase the liquidity of a firm? A. using cash to purchase new equipment B. increasing short-term debt while decreasing long-term debt by an equivalent amount C. issuing long-term debt to repurchase shares of outstanding stock D. increasing the sales on credit while reducing cash sales by the same amount E. selling inventory on credit

E) SELL INVENTORY ON CREDIT

Income statement example

Figure 2.2 page 28

Income statement

Financial statement summarizing a firm's performance over a period of time.

ROE=

ROA x EM = ROA x ( 1 + DEBT-EQUITY RATIO)

Cash Flow Measures

Table 2.5 Page 36

DU POINT IDENTITY

Used for breaking ROE into 3 parts: operating efficiency, asset use efficiency, and financial leverage.