Business Finance - Exam 1

Which one of the following is a capital structure decision?

Determining how much debt should be assumed to fund a project.

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

Limited Partner

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.

Marginal

Which of the following apply to a partnership that consists solely of general partners? I. Double taxation of partnership profits. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts.

II, III, and IV only.

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?

$720 (Net working capital = $680 + 210 + 80 - 250 = $720)

Which one of the following statements concerning net working capital is correct?

Net working capital may be a negative value.

TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets?

8.02% Return on assets = (.0563 × $813,200) / ($176,000 + 395,000) = .0802, or 8.02 percent

The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?

-$26,360 Cash flow to stockholders = .40($121,600) - $75,000 = -$26,360

A firm has a debt-equity ratio of .57. What is the total debt ratio?

0.36 The debt-equity ratio is .57. Let the total equity be $100. Then, since total debt/total equity = 0.57, total debt must be $57 (0.57* 100). Then total assets are $157 (100 + 57). Total debt ratio = $57 / $157 = .36.

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?

0.89 Quick ratio = ($68 + 142) / $235 = .89

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency problem

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?

$1,269.46 Net income = $75 + 418 = $493 Taxable income = $493 / (1 - .35) = $758.46 Earnings before interest and taxes = $758.46 + 511 = $1,269.46

17. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

$18,700 Shareholders' equity = $5,900 + 21,200 - 8,400 = $18,700 (Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?

$20,680 Cash flow from assets = $48,450 - (-$1,330) - 24,000 = $25,780 Cash flow to creditors = $2,480 - (-$2,620) = $5,100 Cash flow to stockholders = $25,780 - 5,100 = $20,680

A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities?

$6,890 Current assets = $7,390 - 3,910 = $3,480 Current liabilities = $3,480 - 560 = $2,920 Total liabilities = $2,920 + 3,970 = $6,890

A firm's balance sheet showed beginning net fixed assets of $3.6 million, and ending net fixed assets of $3.4 million. The depreciation expense is $900,000. What was the net capital spending for the year?

$700,000 Net capital spending = $3,400,000 - 3,600,000 + 900,000 = $700,000

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

$990 Net income = $1,300 + (-$310) = $990

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

0.5 Let Total Debt = $100; Then Total Equity = $100. This means Total Asset = $200. Total Debt Ratio = Total Debt/Total Asset = 100/200 = 0.50.

Taylor's Men's Wear has a debt-equity ratio of 56 percent, sales of $829,000, net income of $38,300, and total debt of $206,300. What is the return on equity?

10.40% Return on equity = $38,300 / ($206,300 / .56) = .1040, or 10.40 percent

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Decrease in the quick ratio

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

Maximum loss limited to the capital invested.

A business owned by a solitary individual who has unlimited liability for its debt is called a:

Sole Proprietorship

Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate?

32.83% Earnings before taxes = $843,800 - 609,900 - 76,400 - 38,200 = $119,300 Net income = $18,000 + 62,138 = $80,138 Taxes = $119,300 - 80,138 = $39,162 Tax rate = $39,162 / $119,300 = .3283, or 32.83 percent

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $289,740? (100,000 - 335,000; 39%)

33.22% Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($189,740) = $96,248.60 Average tax rate = $96,248.60 / $289,740 = .3322, or 33.22 percent

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

Balance sheet

Why should financial managers strive to maximize the current value per share of the existing stock?

Because they have been hired to represent the interests of the current shareholders.

Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover.

Which one of the following statements related to an income statement is correct?

Taxes reduce both net income and operating cash flow.

Which one of the following statements is correct?

Corporations can raise large amounts of capital generally easier than partnerships can.

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the:

Cash flow from assets.