Business Reporting Exam 1

Ch. 2. A company has $558 in inventory, $1,831 in net fixed assets, $240 in accounts receivable, $101 in cash, and $274 in accounts payable. What are the company's total current assets? $933 $1,173 $899 $2,730 $659

$899 Current assets = $101 + 240 + 558 = $899

Ch. 3. Leo's Markets has sales of $684,000, costs of $437,000, interest paid of $13,800, total assets of $712,000, and depreciation of $109,400. The tax rate is 21 percent and the equity multiplier is 1.6. What is the return on equity? 21.30 percent 23.92 percent 20.06 percent 19.48 percent 21.98 percent

21.98 percent Net income = ($684,000 − 437,000 − 109,400 − 13,800)(1 − .21) Net income = $97,802 Equity = $712,000/1.6 Equity = $445,000 ROE = $97,802/$445,000 ROE = .2198, or 21.98%

Ch. 2. The tax rates for a particular year are 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 % What is the average tax rate for a firm with taxable income of $131,513? 28.75% 20.00% 26.26% 39.00% 37.16%

26.26% Taxes paid = .15($50,000) + .25($75,000 - 50,000) + .34($100,000 - 75,000) + .39($131,513 - 100,000) Taxes paid = $34,540.07 Average tax rate = $34,540.07/$131,513 Average tax rate = .2626, or 26.26%

Ch. 1 The corporate controller is generally responsible for which one of these functions? Capital expenditures Cash management Tax reporting Financial planning Credit management

Tax reporting

Ch. 1. Accounting profits and cash flows are generally: the same since they reflect current laws and accounting standards. the same since accounting profits reflect the timing of cash flows. different because of GAAP rules regarding the recognition of income. different because cash inflows must occur before revenue recognition. the same due to the requirements of GAAP.

different because of GAAP rules regarding the recognition of income.

Ch. 4. An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the _____ rate. stated interest compound interest effective annual periodic interest daily interest

effective annual

Ch. 1 Corporate bylaws: establish the name of the corporation. establish the rights granted to its shareholders. set forth the purpose of the firm. establish the rules by which the corporation regulates its existence. set forth the number of members of the initial board of directors.

establish the rules by which the corporation regulates its existence.

Ch. 3. The higher the inventory turnover, the: less time inventory items remain on the shelf. higher the inventory as a percentage of total assets. longer it takes a firm to sell its inventory. greater the amount of inventory held by a firm. greater the selection of goods available for sale.

less time inventory items remain on the shelf.

Ch. 1 A business entity that provides each owner with limited liability while the firm is operated and taxed like a partnership is called a: limited liability company. general partnership. limited proprietorship. limited partnership. corporation.

limited liability company.

Ch. 1. In a limited partnership, each limited partner's liability for the partnership's debts is: limited to his or her personal net worth. limited to the amount he or she invested into the partnership. limited to his or her total earnings received from the partnership. unlimited. limited to the total amount invested by all partners.

limited to the amount he or she invested into the partnership.

Ch. 1 The Sarbanes-Oxley Act requires public corporations to: assess the company's internal control structure at least quarterly. distribute at least 90 percent of their profits in dividends on an annual basis. list any deficiencies in internal controls. file annual audit reports if the firm has "gone dark". disclose all personal loans to corporate officers or directors made after 2002.

list any deficiencies in internal controls.

Ch. 1. The Sarbanes-Oxley Act requires public corporations to: assess the company's internal control structure at least quarterly. distribute at least 90 percent of their profits in dividends on an annual basis. list any deficiencies in internal controls. file annual audit reports if the firm has "gone dark". disclose all personal loans to corporate officers or directors made after 2002.

list any deficiencies in internal controls.

Ch. 1 The decisions made by financial managers should all be ones which increase the: size of the firm. growth rate of the firm. marketability of the managers. market value of the existing owners' equity. firm's current sales.

market value of the existing owners' equity.

Ch. 1. The primary goal of financial management is to: maximize current dividends per share of the existing stock. maximize the current value per share of the existing stock. avoid financial distress. minimize operational costs and maximize firm efficiency. maintain steady growth in both sales and net earnings.

maximize the current value per share of the existing stock.

Ch. 3. The long-term debt ratio is probably of most interest to a firm's: credit customers. employees. suppliers. mortgage holder. stockholders.

mortgage holder.

Ch. 4. Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period. ordinary annuities; early annuities late annuities; straight annuities straight annuities; late annuities annuities due; ordinary annuities ordinary annuities; annuities due

ordinary annuities; annuities due

Ch. 1 A stakeholder is any person or entity: owning shares of stock of a corporation. owning bonds or other long-term debt issued by a corporation. that initially started a firm and currently has management control over that firm. to whom the firm currently owes money. other than a stockholder or creditor who potentially has a financial interest in a firm.

other than a stockholder or creditor who potentially has a financial interest in a firm.

Ch. 1. A stakeholder is any person or entity: owning shares of stock of a corporation. owning bonds or other long-term debt issued by a corporation. that initially started a firm and currently has management control over that firm. to whom the firm currently owes money. other than a stockholder or creditor who potentially has a financial interest in a firm.

other than a stockholder or creditor who potentially has a financial interest in a firm.

Ch. 1 The understanding of the work and cash to be contributed to a partnership by each member of that partnership is formalized in the: indemnity clause. indenture contract. statement of purpose. partnership agreement. group charter.

partnership agreement.

Ch. 1 A firm creates value by: having a greater cash inflow from its stockholders than its outflow to them. paying more cash to its creditors and stockholders than the amount it received from them. borrowing long-term debt. generating sales whether or not payment is received for all of those sales. purchasing assets that create cash inflows equal to the cost of those assets.

paying more cash to its creditors and stockholders than the amount it received from them.

Ch. 1. A firm creates value by: having a greater cash inflow from its stockholders than its outflow to them. paying more cash to its creditors and stockholders than the amount it received from them. borrowing long-term debt. generating sales whether or not payment is received for all of those sales. purchasing assets that create cash inflows equal to the cost of those assets.

paying more cash to its creditors and stockholders than the amount it received from them.

Ch. 1 A firm's capital structure refers to the firm's: mixture of various types of production equipment. investment selections for its excess cash reserves. combination of cash and cash equivalents. combination of accounts appearing on the left side of its balance sheet. proportions of financing from current and long-term debt and equity.

proportions of financing from current and long-term debt and equity.

Ch. 1. A firm's capital structure refers to the firm's: mixture of various types of production equipment. investment selections for its excess cash reserves. combination of cash and cash equivalents. combination of accounts appearing on the left side of its balance sheet. proportions of financing from current and long-term debt and equity.

proportions of financing from current and long-term debt and equity.

Ch. 1. The ultimate control of a corporation lies in the hands of the corporate: board of directors. stockholders. president. chief executive officer. chairman of the board.

stockholders.

Ch. 1. The Securities Act of 1933 focuses on: all stock transactions. the sales of existing securities. the issuance of new securities. insider trading. Federal Deposit Insurance Corporation (FDIC) insurance.

the issuance of new securities.

Ch. 3 HW. Synovec Company has a debt-equity ratio of .85. Return on assets is 9.2 percent, and total equity is $745,000. a. What is the equity multiplier? b. What is the return on equity? c. What is the net income?

a. The equity multiplier is: EM = 1 + D/E EM = 1 + .85 EM = 1.85 b. One formula to calculate return on equity is: ROE = (ROA)(EM) ROE = .092(1.85) ROE = .1702, or 17.02% ROE can also be calculated as: ROE = NI/TE c. So, net income is: NI = ROE(TE) NI = (.1702)($745,000) NI = $126,799

Ch. 5. What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent. −$287.22 −$1,195.12 −$1,350.49 $204.36 $797.22

−$1,195.12 NPV = −$36,900 + $13,400/1.13 + $21,600/1.13^2 + $10,000/1.13^3 NPV = −$1,195.12

Ch. 5. Sun Lee's is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $79,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. What is the incremental IRR? −15.40 percent −11.23 percent 4.08 percent 7.83 percent 13.89 percent

−15.40 percent 0 = [−$79,400 − (−$54,500)] + ($0 − 16,400)/(1 + IRR) + ($48,300 − 28,900)/(1 + IRR)^2 + ($42,100 − 31,700)/(1 + IRR)^3 IRR = −15.40%

Ch. 5. The discounted payback method: considers the time value of money. discounts the cutoff point. discounts the initial cost. is preferred to the NPV method. ignores project risks.

considers the time value of money.

Ch. 5. Proposed projects should be accepted when those projects: create value for the owners of the firm. have a positive rate of return. return the initial cash outlay within the life of the project. have required cash inflows that exceed the actual cash inflows. have an initial cost that exceeds the present value of the future cash flows.

create value for the owners of the firm.

Ch. 1 One disadvantage of the corporate form of business ownership is the: limited liability protection provided for all owners. firm's ability to raise cash. unlimited life of the firm. difficulties encountered when changing ownership. double taxation of profits.

double taxation of profits.

Ch. 1. One disadvantage of the corporate form of business ownership is the: limited liability protection provided for all owners. firm's ability to raise cash. unlimited life of the firm. difficulties encountered when changing ownership. double taxation of profits.

double taxation of profits.

Ch. 2. A company has $1,329 in inventory, $4,764 in net fixed assets, $622 in accounts receivable, $270 in cash, $570 in accounts payable, and $5,359 in equity. What is the company's long-term debt? $1,235 $1,574 $1,626 $1,056 $1,093

$1,056 Total assets = $270 + 622 + 1,329 + 4,764 = $6,985 Long-term debt = $6,985 − 570 − 5,359 = $1,056

Ch. 4. Angela borrowed $5,000 for five years at an APR of 6.2 percent. The loan calls for equal, annual principal payments. Interest will also be paid annually. What will be her loan payment in Year 2? $1,248 $1,310 $1,016 $1,274 $1,157

$1,248 Year 2 loan payment = $5,000/5 + ($5,000 − 1,000)(.062) Year 2 loan payment = $1,248

Ch. 4. Olivia is willing to pay $185 a month for four years for a car payment. If the interest rate is 4.9 percent, compounded monthly, and she has a cash down payment of $2,500, what price car can she afford to purchase? $10,961.36 $10,549.07 $8,533.84 $8,686.82 $8,342.05

$10,549.07 PV = $2,500 + $185{[1 − 1/(1 + .049/12)^(4*12)]/(.049/12)} PV = $10,549.07

Ch. 2. At the beginning of the year, Vendors, Inc., had owners' equity of $48,875. During the year, net income was $5,275 and the company paid dividends of $3,775. The company also repurchased $7,625 in equity. What was the cash flow to stockholders for the year? $3,850 −$11,400 $9,125 −$3,850 $11,400

$11,400 Cash flow to stockholders = $3,775 + 7,625 = $11,400

Ch. 4. What is the future value of investing $5,650 for 14 years at a continuously compounded rate of 8.6 percent? $17,933.54 $16,685.44 $19,369.83 $18,833.85 $13,183.85

$18,833.85 FV = $5,650e^(.086*14) FV = $18,833.85

Ch. 4. Benson's established a trust fund that provides $125,000 in college scholarships each year. The trust fund earns 6.15 percent and distributes only its annual income. How much money did Benson's contribute to establish this fund? $2,291,613 $2,032,520 $2,150,000 $2,018,970 $1,987,408

$2,032,520 PV = $125,000/.0615 PV = $2,032,520

Ch. 4. A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next three years, respectively. After three years, the project will be worthless. What is the net present value of this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500? −$1,201.76 $2,309.09 −$3,457.96 $1,808.17 $3,132.48

$2,309.09 NPV = −$78,500 + $48,000/1.1525 + $39,000/1.1525^2 + $15,000/1.1525^3 NPV = $2,309.09

Ch. 4. Wilt has a consulting contract that calls for annual payments of $50,000 a year for five years with the first payment due today. What is the current value of this contract if the discount rate is 8.4 percent? $214,142.50 $201,867.47 $195,618.19 $197,548.43 $224,267.10

$214,142.50 APVADue = $50,000[(1 − 1/1.084^5)/.084](1.084) APVADue = $214,142.50

Ch. 2. A company is obligated to pay its creditors $6,685 at the end of the year. If the value of the company's assets equals $6,909 at that time, what is the value of shareholders' equity? $13,594 −$224 $0 −$112 $224

$224 Equity = Max[($6,909 − 6,685) , 0] = $224

Ch. 4. You have been awarded an insurance settlement of $250,000 that is payable one year from today. What is the minimum amount you should accept today in exchange for this settlement if you can earn 6.7 percent on your investments? $232,866.67 $234,301.78 $242,408.19 $250,000.00 $238,079.19

$234,301.78 PV = $250,000/1.067 PV = $234,301.78

Ch. 4. You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for five years at an interest rate of 4.65 percent, compounded monthly. What is the amount of each payment? $253.22 $243.73 $230.62 $235.76 $233.04

$235.76 $12,600 = C{[1 − 1/(1 + .0465/12)^(5*12)]/(.0465/12)} C = $235.76

Ch. 3. Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the value of the total assets? $18,889 $24,480 $23,520 $25,689 $25,360

$25,689 Total equity = $6,800/.36 Total equity = $18,889 Total assets = $6,800 + 18,889 Total assets = $25,689

Ch. 4. Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. What will his investment be worth after five years? $2,997.04 $3,288.00 $3,321.32 $3,093.16 $2,857.59

$3,093.16 FV5 = $2,500(1.0435^5) FV5 = $3,093.16

Ch. 2. A company has net working capital of $1,834. If all its current assets were liquidated, the company would receive $5,767. What are the company's current liabilities? $3,933 $3,801 $7,601 $4,850 $7,256

$3,933 NWC = Current assets − Current liabilities $1,834 = $5,767 − CL CL = $3,933

Ch. 2. HUD, Co. had a beginning retained earnings of $29,825. For the year, the company had net income of $6,540 and paid dividends of $2,550. The company also issued $4,450 in new stock during the year. What is the ending retained earnings balance? $38,265 $29,365 $32,375 $34,275 $33,815

$33,815 Retained earnings = $29,825 + (6,540 − 2,550) = $33,815

Ch. 2. Red Barchetta Co. paid $28,265 in dividends and $29,382 in interest over the past year. During the year, net working capital increased from $13,914 to $18,644. The company purchased $43,870 in fixed assets and had a depreciation expense of $17,570. During the year, the company issued $25,425 in new equity and paid off $21,595 in long-term debt. What was the company's cash flow from assets? $55,165 $52,838 $54,214 $46,909 $53,817

$53,817 Cash flow from assets = ($29,382 + 21,595) + ($28,265 − 25,425) = $53,817

Ch. 4. You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over the next four years, respectively. What is this investment worth to you today if you desire a rate of return of 16.5 percent? $64,253.91 $58,700.89 $63,732.41 $55,153.57 $59,928.16

$55,153.57 PV = $11,300/1.165 + $14,600/1.165^2 + $21,900/1.165^3 + $38,400/1.165^4 PV = $55,153.57

Ch. 4. You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years? $7,280.00 $7,311.62 $7,250.00 $6,924.32 $6,760.00

$7,280.00 ValueYear 3 = $6,500 + $6,500(.04)(3) ValueYear 3 = $7,280.00

Ch. 2. The Primus Corp. began the year with $7,406 in its long-term debt account and ended the year with $9,054 in long-term debt. The company paid $1,035 in interest during the year and issued $2,410 in new long-term debt. How much in long-term debt must the company have paid off during the year? −$613 $762 −$1,648 $525 $1,648

$762 Net new borrowing = $9,054 − 7,406 = $1,648 Debt retired = $2,410 − 1,648 = $762

Ch. 4. Your parents plan to give you $200 a month for four years while you are in college. At a discount rate of 6 percent, compounded monthly, what are these payments worth to you when you first start college? $8,797.40 $8,409.56 $8,198.79 $8,516.06 $8,279.32

$8,516.06 APV = $200{[1 − 1/(1 + .06/12)^(4*12)]/(.06/12)} APV = $8,516.06

Ch. 3. Browning's has a debt-equity ratio of .47. What is the equity multiplier? 1.47 .53 2.13 1.13 1.53

1.47 EM = Total assets/Total equity EM = Total equity/Total equity + Total debt/Total equity EM = 1 + .47 EM = 1.47

Ch. 3. Jessica's Boutique has cash of $218, accounts receivable of $457, accounts payable of $398, and inventory of $647. What is the value of the quick ratio? .55 1.05 1.70 1.32 1.52

1.70 Quick ratio = ($218 + 457)/$398 Quick ratio = 1.70

Ch. 4. What is the effective annual rate if your credit card charges you 10.64 percent compounded daily? (Assume a 365-day year.) 10.79 percent 11.22 percent 11.95 percent 11.48 percent 12.01 percent

11.22 percent EAR = (1 + .1064/365)^365 − 1 EAR = .1122, or 11.22%

Ch. 5. An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years. At what discount rate will the project's IRR equal its discount rate? 15.24 percent 27.22 percent 0 percent 16.67 percent 21.08 percent

15.24 percent 0 = −$10,000 + $3,000{[1 − 1/(1 + IRR)^5]/IRR} IRR = 15.24%

Ch. 5. A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless. What is the payback period for this cart? 2.83 years 3.14 years 2.78 years 2.57 years

2.57 years PB = $4,500/$1,750 PB = 2.57 years

Ch. 3. Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are 32,500 shares of stock outstanding at a market price per share of $21.60. What is the price-earnings ratio? 23.40 22.60 19.21 21.08 18.47

21.08 PE ratio = $21.60/{[.038($876,400)]/32,500} PE ratio = 21.08

Ch. 4. Several years ago, Sara invested $4,208. Today, that investment is worth $28,406 and has earned an average annual rate of return of 7.38 percent. How long ago did Sara make her investment? 31.09 years 26.82 years 18.98 years 14.97 years 23.03 years

26.82 years $28,406 = $4,208(1.0738)^T T = 26.82 years

Ch. 5. An investment project has an initial cost of $382 and cash flows $105, $130, $150, and $150 for Years 1 to 4, respectively. The cost of capital is 9 percent. What is the discounted payback period? 2.76 years 3.57 years 3.42 years 3.68 years 2.92 years

3.57 years DPB = 3 + ($382 - $105/1.09 + $130/1.09^2 + $150/1.09^3)/($150/1.09^4) DPB = 3.57 years

Ch. 3. Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm to sell its inventory? 93.08 74.92 85.14 56.77 80.46

56.77 Days' sales in inventory = 365/($393,500/$61,200) Days' sales in inventory = 56.77

Ch. 3. A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin of 8.2 percent, a tax rate of 21 percent, a price-earnings ratio of 11.3, and a book value per share of $7.98. What is the market-to-book ratio? 6.08 5.42 5.16 6.17 6.90

6.17 Market-to-book ratio = {11.3[.082($638,100)]/12,000}/$7.98 Market-to-book ratio = 6.17

Ch. 3. Flo's Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23 percent, a debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the return on assets? 6.93 percent 9.50 percent 11.08 percent 7.13 percent 13.13 percent

6.93 percent ROA = [.051($418,000)]/[(1 + .37)($224,400)] ROA = .0693, or 6.93%

Ch. 4. If you invest $2,500 today, an investment guarantees you will have $3,600 four years from today. What rate of interest will you earn? 8.72 percent 9.03 percent 8.68 percent 9.39 percent 9.54 percent

9.54 percent $3,600 = $2,500(1 + r)^4 r = .0954, or 9.54%

Ch. 5. Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of return? 10.00 percent 9.82 percent 10.04 percent 9.69 percent 9.97 percent

9.82 percent 0 = [−$128,600 + (−$15,500/1.10^3)] + $64,500/(1 + IRR) + $98,300/(1 + IRR)^2 IRR = 9.82%

Ch. 5. Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A financing project should be accepted if, and only if, the NPV is exactly equal to zero. An investment project should be accepted only if the NPV is equal to the initial cash flow. Any type of project should be accepted if the NPV is positive and rejected if it is negative. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. An investment project that has positive cash flows for every time period after the initial investment should be accepted.

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Ch. 3. Which statement expresses all relative account values as a percentage of total assets? Pro forma balance sheet Common-size income statement Statement of cash flows Pro forma income statement Common-size balance sheet

Common-size balance sheet

Ch. 1 Which type of business organization has the respective rights and privileges of a legal person? Sole proprietorship General partnership Limited partnership Corporation Limited liability company

Corporation

Ch. 4. Which one of these statements is correct concerning the time value of money? Increasing the initial cost of a project increases the project's NPV. Increasing the discount rate, increases the PV of a project. Increasing the FV decreases the PV. Decreasing the PV decreases the FV. Decreasing the discount rate increases the FV.

Decreasing the PV decreases the FV.

Ch. 4 HW. Find the APR in each of the following cases. a. Semiannually. EAR = 10.6% b. Monthly. EAR = 11.5% c. Weekly. EAR = 9.2% d. Infinite. EAR = 12.9%

Here, we are given the EAR and need to find the APR. Using the equation for discrete compounding: EAR = [1 + (APR/m)]^m − 1 We can now solve for the APR. Doing so, we get: APR = m[(1 + EAR)^(1/m) - 1] EAR = .106 = [1 + (APR/2)]^2 - 1 APR = 2[(1.106)^(1/2) - 1] = .1033, or 10.33% EAR = .115 = [1 + (APR/12)]^12 - 1 APR = 12[(1.115)^(1/12) - 1] = .1093, or 10.93% EAR = .092 = [1 + (APR/52)]^52 - 1 APR = 52[(1.092)^(1/52) - 1] = .0881, or 8.81% Solving the continuous compounding EAR equation: EAR = e^r − 1 We get: APR = ln(1 + EAR) APR = ln(1 + .129) APR = .1213, or 12.13%

Ch. 1 Which one of these accounts is included in net working capital? Copyright Manufacturing equipment Common stock Long-term debt Inventory

Inventory

Ch. 5. Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500, $15,600, and $22,700 for Years 1 to 3, respectively. Based on the profitability index rule, should the project be accepted if the discount rate is 9.5 percent? Why or why not? Yes; because the PI is 1.03 Yes; because the PI is .95 Yes; because the PI is negative No; because the PI is 1.03 No; because the PI is .95

No; because the PI is .95 PI = ($8,500/1.095 + $15,600/1.095^2 + $22,700/1.095^3)/$40,000 PI = .95

Ch. 5. Wilson's Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why? Project A; because its NPV is positive while Project B's NPV is negative Project A; because it has the higher required rate of return Project B; because it has the largest total cash inflow Project B; because it has a negative NPV which indicates acceptance Neither project; because neither has an NPV equal to or greater than its initial cost

Project A; because its NPV is positive while Project B's NPV is negative NPVA = −$54,500 + $16,400/1.139 + $28,900/1.139^2 + $31,700/1.139^3 NPVA= $3,628.27 NPVB = −$69,400 + $48,300/1.125^2 + $42,100/1.125^3 NPVB = −$1,668.86

Ch. 3. If Muenster, Inc., has an equity multiplier of 1.63, total asset turnover of 2.5, and a profit margin of 4.3 percent, what is its ROE?

ROE = (PM)(TAT)(EM) ROE = (.043)(2.50)(1.63) ROE = .1752, or 17.52%

Ch. 1 The basic regulatory framework for the public trading of securities in the United States was provided by the: New York Stock Exchange when it was founded. Securities Exchange Act of 1934. Federal Reserve Bank. Securities Act of 1933 and the Securities Exchange Act of 1934. Sarbanes-Oxley Act in 2002.

Securities Act of 1933 and the Securities Exchange Act of 1934.

Ch. 1 Which one of these is a cash outflow from a corporation? Sale of an asset Tax payment Sale of common stock Issuance of debt Profit retained by the firm

Tax payment

Ch. 5 HW. Compute the internal rate of return for the cash flows of the following two projects. Year Project A Project B 0 -$ 14,800 -$ 12,400 1 5,800 3,100 2 6,600 9,300 3 5,400 5,000

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this Project A is: 0 = C0 + C1/(1 + IRR) + C2/(1 + IRR)^2 + C3/(1 + IRR)^3 0 = -$14,800 + $5,800/(1 + IRR) + $6,600/(1 + IRR)^2 + $5,400/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 9.94% And the IRR for Project B is: 0 = C0 + C1/(1 + IRR) + C2/(1 + IRR)^2 + C3/(1 + IRR)^3 0 = -$12,400 + $3,100/(1 + IRR) + $9,300/(1 + IRR)^2 + $5,000/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 17.76%

Ch. 4. What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows? There will be no effect on the PV. The PV will change but the direction of the change is unknown. The PV will remain the same as the timing of the cash flows must change also. The PV will increase. The PV will decrease.

The PV will decrease.

Ch. 3. Which one of the following statements is correct if a firm has a receivables turnover of 10? It takes the firm 10 days to collect payment from its customers. It takes the firm 36.5 days to sell its inventory and collect the payment from the sale. It takes the firm an average of 36.5 days to sell its items. The firm collects its credit sales in an average of 36.5 days. The firm has ten times more in accounts receivable than it does in cash.

The firm collects its credit sales in an average of 36.5 days.

Ch. 5 HW. Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $465,000, to be paid immediately. Bill expects aftertax cash inflows of $100,000 annually for six years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 10 percent. What is the project's profitability index (PI)?

The profitability index is defined as the PV of the cash inflows divided by the initial investment. The cash flows from this project are an annuity, so the equation for the profitability index is: PI = C(PVIFAR,t)/C0 PI = $100,000(PVIFA10%,6)/$465,000 PI = .937

Ch. 4 HW. First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $74,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?

The simple interest per year is: $74,000 × .08 = $5,920 So, after 8 years, you will have: $5,920 × 8 = $47,360 in interest. The account balance will be: Account balance = $74,000 + 47,360 Account balance = $121,360 With compound interest, we use the future value formula: FV = PV(1 + r)^t FV = $74,000(1.08)^8 FV = $136,968.84 The difference is: Difference = $136,968.84 - 121,360 Difference = $15,608.84 Calculator Solution: Enter 8 = N 8% = I/Y $74,000 = PV Solve for $136,968.84 $136,968.84 - 121,360 = $15,608.84

Ch. 5 HW. An investment project provides cash inflows of $675 per year for eight years. a. What is the project payback period if the initial cost is $1,850? b. What is the project payback period if the initial cost is $3,600? c. What is the project payback period if the initial cost is $5,500?

To calculate the payback period, we need to find the time that the project has taken to recover its initial investment. The cash flows in this problem are an annuity, so the calculation is simpler. If the initial cost is $1,850, the payback period is: Payback = 2 + ($500/$675) Payback = 2.74 years There is a shortcut to calculate the payback period if the future cash flows are an annuity. Just divide the initial cost by the annual cash flow. For the $1,850 cost, the payback period is: Payback = $1,850/$675 Payback = 2.74 years For an initial cost of $3,600, the payback period is: Payback = $3,600/$675 Payback = 5.33 years The payback period for an initial cost of $5,500 is a little trickier. Notice that the total cash inflows after eight years will be: Total cash inflows = 8($675) Total cash inflows = $5,400 If the initial cost is $5,500, the project never pays back. Notice that if you use the shortcut for annuity cash flows, you get: Payback = $5,500/$675 Payback = 8.15 years This answer does not make sense since the cash flows stop after eight years, so there is no payback period.

Ch. 4 HW. Imprudential, Inc., has an unfunded pension liability of $566 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.9 percent, what is the present value of this liability?

To find the PV of a lump sum, we use: PV = FV/(1 + r)^t PV = $566,000,000/1.059^25 PV = $135,026,008.13 Enter 25 = N 5.9% = I/Y FV = $566,000,000 Solve for PV = $135,026,008.13

Ch. 4 HW. An investment offers $5,800 per year for 20 years, with the first payment occurring one year from now. a. If the required return is 7 percent, what is the value of the investment today? b. What would the value today be if the payments occurred for 45 years? c. What would the value today be if the payments occurred for 70 years? d. What would the value today be if the payments occurred forever?

To find the PVA, we use the equation: PVA = C({1 − [1/(1 + r)t]}/r ) a. PVA@20 yrs: PVA = $5,800{[1 − (1/1.0720)]/.07} = $61,445.28 b. PVA@45 yrs: PVA = $5,800{[1 − (1/1.0745)]/.07} = $78,912.03 c. PVA@70 yrs: PVA = $5,800{[1 − (1/1.0770)]/.07} = $82,130.26 To find the PV of a perpetuity, we use the equation: PV = C/r PV = $5,800/.07 PV = $82,857.14 Notice that as the length of the annuity payments increases, the present value of the annuity approaches the present value of the perpetuity. The present value of the 70-year annuity and the present value of the perpetuity imply that the value today of all perpetuity payments beyond 70 years is only $726.88.

Ch. 4 HW. Investment X offers to pay you $4,200 per year for nine years, whereas Investment Y offers to pay you $6,300 per year for five years. a. Calculate the present value for Investments X and Y if the discount rate is 6 percent. b. Calculate the present value for Investments X and Y if the discount rate is 16 percent.

To find the PVA, we use the equation: PVA = C({1 − [1/(1 + r)t]}/r ) At an interest rate of 6 percent: X@6%: PVA = $4,200{[1 − (1/1.069)]/.06 } = $28,567.11 Y@6%: PVA = $6,300{[1 − (1/1.065)]/.06 } = $26,537.89 And at an interest rate of 16 percent: X@16%: PVA = $4,200{[1 − (1/1.169)]/.16 } = $19,347.48 Y@16%: PVA = $6,300{[1 − (1/1.165)]/.16 } = $20,628.05 Notice that the PV of Investment X has a greater PV than Investment Y at a 6 percent interest rate, but a lower PV at a 16 percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger cash flows. At a higher interest rate, these bigger cash flows early are more important since the cost of waiting (the interest rate) is so much greater.

Ch. 4 HW. a. At 5.7 percent interest, how long does it take to double your money? b. At 5.7 percent interest, how long does it take to quadruple it?

To find the length of time for money to double, triple, etc., the present value and future value are irrelevant as long as the future value is twice the present value for doubling, three times as large for tripling, etc. We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)^t Solving for t, we get: t = ln(FV/PV)/ln(1 + r) FV = $2 = $1(1.057)^t t = ln 2/ln 1.057 t = 12.50 years FV = $4 = $1(1.057)^t t = ln 4/ln 1.057 t = 25.01 years Notice that the length of time to quadruple your money is twice as long as the time needed to double your money (any difference in these answers is due to rounding). This is an important concept of time value of money. Enter 5.7% = I/Y $1 = PV FV = -+2 Solve for 12.5 Enter 5.7% = I/Y $1 = PV FV = -+4 Solve for 25.01

Ch. 4 HW. Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2019, an auction house sold a painting, at auction for a price of $1,200,000. Unfortunately for the previous owner, he had purchased it three years earlier at a price of $1,780,000. What was his annual rate of return on this painting?

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV/PV)^(1/t) - 1 r = ($1,200,000/$1,780,000)^(1/3) - 1 r = -.1232 or -12.32% Notice that the interest rate is negative. This occurs when the FV is less than the PV. Enter N = 3 PV= -+1,780,000 FV = 1,200,000 Solve for I/Y = -12.32%

Ch. 4 HW. What is the present value of an annuity of $6,200 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent.

We can use the PVA annuity equation. The annuity has 23 payments, not 22 payments. Since there is a payment made in Year 3, the annuity actually begins in Year 2. So, the value of the annuity in Year 2 is: PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $6,200({1 - [1/(1 + .08)^23]}/.08) PVA = $64,300.57 This is the value of the annuity one period before the first payment, or Year 2. So, the value of the cash flows today is: PV = FV/(1 + r)^t PV = $64,300.57/(1 + .08)^2 PV = $55,127.37

Ch. 4 HW. You are planning to save for retirement over the next 35 years. To do this, you will invest $900 per month in a stock account and $500 per month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will earn 7 percent. When you retire, you will combine your money into an account with an annual return of 8 percent. Assume the returns are expressed as APRs. How much can you withdraw each month from your account assuming a 30-year withdrawal period?

We need to find the annuity payment in retirement. Our retirement savings ends at the same time the retirement withdrawals begin, so the PV of the retirement withdrawals will be the FV of the retirement savings. So, we find the FV of the stock account and the FV of the bond account and add the two FVs. Stock account: FVA = $900[{[1 + (.110/12)]^420 - 1}/(.110/12)] = $4,435,466.73 Bond account: FVA = $500[{[1 + (.070/12)]^420 - 1}/(.070/12)] = $900,527.30 So, the total amount saved at retirement is: Amount saved at retirement = $4,435,466.73 + 900,527.30 Amount saved at retirement = $5,335,994.03 Solving for the withdrawal amount in retirement using the PVA equation gives us: PVA = $5,335,994.03 = C[1 - {1/[1 + (.080/12)]^360}]/(.080/12) C = $5,335,994.03/136.2835 C = $39,153.63 withdrawal per month

Ch. 5 HW. An investment project has annual cash inflows of $3,400, $4,300, $5,500, and $4,700, and a discount rate of 13 percent. a. What is the discounted payback period for these cash flows if the initial cost is $6,100? b. What is the discounted payback period for these cash flows if the initial cost is $8,200? c. What is the discounted payback period for these cash flows if the initial cost is $11,200?

When we use discounted payback, we need to find the value of all cash flows today. The value today of the project cash flows for the first four years is: Value today of Year 1 cash flow = $3,400/1.13 = $3,008.85 Value today of Year 2 cash flow = $4,300/1.13^2 = $3,367.53 Value today of Year 3 cash flow = $5,500/1.13^3 = $3,811.78 Value today of Year 4 cash flow = $4,700/1.13^4 = $2,882.60 To find the discounted payback, we use these values to find the payback period. The discounted first year cash flow is $3,008.85, so the discounted payback for an initial cost of $6,100 is: Discounted payback = 1 + ($6,100 - 3,008.85)/$3,367.53 Discounted payback = 1.92 years For an initial cost of $8,200, the discounted payback is: Discounted payback = 2 + ($8,200 - 3,008.85 - 3,367.53)/$3,811.78 Discounted payback = 2.48 years Notice the calculation of discounted payback. We know the payback period is between two and three years, so we subtract the discounted values of the Year 1 and Year 2 cash flows from the initial cost. This is the numerator, which is the discounted amount we still need to make to recover our initial investment. We divide this amount by the discounted amount we will earn in Year 3 to get the fractional portion of the discounted payback. If the initial cost is $11,200, the discounted payback is: Discounted payback = 3 + ($11,200 - 3,008.85 - 3,367.53 - 3,811.78)/$2,882.60 Discounted payback = 3.35 years

Ch. 5. Which one of the following statements is true? You must know the discount rate to compute the NPV but not the IRR. You must have a discount rate to compute, NPV, IRR, PI, and discounted payback. Payback uses the same discount rate as that applied in the NPV calculation. Financing projects can only ever have one IRR. Financing projects are acceptable if the NPV is negative.

You must know the discount rate to compute the NPV but not the IRR.

Ch. 1 Any debt that must be repaid within the next year is recorded on the balance sheet as: a current liability. long-term debt. an intangible asset. accounts receivable. a current asset.

a current liability.

Ch. 5 HW. Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate is 8 percent. Year Board Game DVD 0 -$ 1,750 -$ 3,800 1 800 2,300 2 1,500 1,680 3 320 1,350 a. What is the payback period for each project? b. What is the NPV for each project? c. What is the IRR for each project? d. What is the incremental IRR?

a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. Board game: Cumulative cash flows Year 1 = $800 = $800 Cumulative cash flows Year 2 = $800 + 1,500 = $2,300 Payback period = 1 + ($1,500 - 800)/$1,500 Payback period = 1.63 years DVD: Cumulative cash flows Year 1 = $2,300 = $2,300 Cumulative cash flows Year 2 = $2,300 + 1,680 = $3,980 Payback period = 1 + ($3,800 - 2,300)/$1,680 Payback period = 1.89 years Since the board game has a shorter payback period than the DVD project, the company should choose the board game. b. The NPV is the sum of the present value of the cash flows from the project, so the NPV of each project will be: Board game: NPV = -$1,750 + $800/1.08 + $1,500/1.08^2 + $320/1.08^3 NPV = $530.78 DVD: NPV = -$3,800 + $2,300/1.08 + $1,680/1.08^2 + $1,350/1.08^3 NPV = $841.63 Since the NPV of the DVD is greater than the NPV of the board game, choose the DVD. c. The IRR is the interest rate that makes the NPV of a project equal to zero. So, the IRR of each project is: Board game: 0 = -$1,750 + $800/(1 + IRR) + $1,500/(1 + IRR)^2 + $320/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 25.57% DVD: 0 = -$3,800 + $2,300/(1 + IRR) + $1,680/(1 + IRR)^2 + $1,350/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 21.19% Since the IRR of the board game is greater than the IRR of the DVD, IRR implies we choose the board game. Note that this is the choice when evaluating only the IRR of each project. The IRR decision rule is flawed because there is a scale problem. That is, the DVD has a greater initial investment than does the board game. This problem is corrected by calculating the IRR of the incremental cash flows, or by evaluating the NPV of each project. d. To calculate the incremental IRR, we subtract the smaller project's cash flows from the larger project's cash flows. In this case, we subtract the board game cash flows from the DVD cash flows. The incremental IRR is the IRR of these incremental cash flows. So, the incremental cash flows of the DVD are: Year 0 Year 1 Year 2 Year 3 DVD -3,800 2,300 $1,680 $1,350 BG 1,750 800 1,500 320 DV/BG -2,050 1,500 $180 $1,030 Setting the present value of these incremental cash flows equal to zero, we find the incremental IRR is: 0 = C0 + C1/(1 + IRR) + C2/(1 + IRR)^2 + C3/(1 + IRR)^3 0 = -$2,050 + $1,500/(1 + IRR) + $180/(1 + IRR)^2 + $1,030/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: Incremental IRR = 17.22% For investing-type projects, accept the larger project when the incremental IRR is greater than the discount rate. Since the incremental incremental IRR, 17.22 percent, is greater than the required rate of return of 8 percent, choose the DVD project.

Ch. 5 HW. Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 12 percent. Mini-SUV Full-SUV 0 -$ 525,000 -$ 875,000 1 335,000 365,000 2 210,000 450,000 3 165,000 305,000 a. What is the payback period for each project? b. What is the NPV for each project? c. What is the IRR for each project?

a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. AZM Mini-SUV: Cumulative cash flows Year 1 = $335,000 = $335,000 Cumulative cash flows Year 2 = $335,000 + 210,000 = $545,000 Payback period = 1 + $190,000/$210,000 Payback period = 1.90 years AZF Full-SUV: Cumulative cash flows Year 1 = $365,000 = $365,000 Cumulative cash flows Year 2 = $365,000 + 450,000 = $815,000 Cumulative cash flows Year 2 = $365,000 + 450,000 + 305,000 = $1,120,000 Payback period = 2 + $60,000/$305,000 Payback period = 2.20 years Since the AZM has a shorter payback period than the AZF, the company should choose the AZM. Remember the payback period does not necessarily rank projects correctly. b. The NPV of each project is: NPVAZM = -$525,000 + $335,000/1.12 + $210,000/1.12^2 + $165,000/1.12^3 NPVAZM = $58,961.60 NPVAZF = -$875,000 + $365,000/1.12 + $450,000/1.12^2 + $305,000/1.12^3 NPVAZF = $26,723.08 The NPV criteria implies we accept the AZM because it has the highest NPV. c. The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR of the AZM is: 0 = -$525,000 + $335,000/(1 + IRR) + $210,000/(1 + IRR)^2 + $165,000/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRRAZM = 19.37% And the IRR of the AZF is: 0 = -$875,000 + $365,000/(1 + IRR) + $450,000/(1 + IRR)^2 + $305,000/(1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRRAZF = 13.81% The IRR criteria implies we accept the AZM because it has the highest IRR. Remember the IRR does not necessarily rank projects correctly.

Ch. 5 HW. Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the three independent projects available to the company. Assume the discount rate for all projects is 12 percent. Further, the company has only $26 million to invest in new projects this year. Cash Flows (in $ millions) Year CDMA G4 Wi-Fi 0 -$ 9 -$ 17 -$ 26 1 14 14 23 2 11.5 28 39 3 6.5 26 26 a. Calculate the profitability index for each investment. b. Calculate the NPV for each investment.

a. The profitability index is the PV of the future cash flows divided by the initial investment. The profitability index for each project is: PICDMA = [$14,000,000/1.12 + $11,500,000/1.12^2 + $6,500,000/1.12^3]/$9,000,000 PICDMA = 2.92 PIG4 = [$14,000,000/1.12 + $28,000,000/1.12^2 + $26,000,000/1.12^3]/$17,000,000 PIG4 = 3.14 PIWi-Fi = [$23,000,000/1.12 + $39,000,000/1.12^2 + $26,000,000/1.12^3]/$26,000,000 PIWi-Fi = 2.70 The profitability index implies we accept the G4 project. Remember this is not necessarily correct because the profitability index does not necessarily rank projects with different initial investments correctly. b. The NPV of each project is: NPVCDMA = -$9,000,000 + $14,000,000/1.12 + $11,500,000/1.12^2 + $6,500,000/1.12^3 NPVCDMA = $17,294,301.20 NPVG4 = -$17,000,000 + $14,000,000/1.12 + $28,000,000/1.12^2 + $26,000,000/1.12^3 NPVG4 = $36,327,715.01 NPVWi-Fi = -$26,000,000 + $23,000,000/1.12 + $39,000,000/1.12^2 + $26,000,000/1.12^3 NPVWi-Fi = $44,132,561.95 NPV implies we accept the Wi-Fi project since it has the highest NPV. This is the correct decision if the projects are mutually exclusive. c. We would like to invest in all three projects since each has a positive NPV. If the budget is limited to $26 million, we can only accept the CDMA project and the G4 project, or the Wi-Fi project. NPV is additive across projects and the company. The total NPV of the CDMA project and the G4 project is: NPVCDMA and G4 = $17,294,301.20 + 36,327,715.01 NPVCDMA and G4 = $53,622,016.22 This is greater than the Wi-Fi project, so we should accept the CDMA project and the G4 project.

Ch. 5 HW. Covell, Inc., has the following mutually exclusive projects. Year Project A Project B 0 -$27,000 -$30,000 1 15,500 16,500 2 12,000 10,500 3 3,600 12,000 a-1. Calculate the payback period for each project. a-2. If the company's payback period is two years, which, if either, of these projects should be chosen? Project A Project B Both projects Neither project b-1. What is the NPV for each project if the appropriate discount rate is 14 percent? b-2. Which, if either, of these projects should be chosen if the appropriate discount rate is 14 percent? Project A Project B Both projects Neither project

a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. Project A: Cumulative cash flows Year 1 = $15,500 = $15,500 Cumulative cash flows Year 2 = $15,500 + 12,000 = $27,500 Companies can calculate a more precise value using fractional years. To calculate the fractional payback period, find the fraction of Year 2's cash flows that is needed for the company to have cumulative undiscounted cash flows of $27,000. Divide the difference between the initial investment and the cumulative undiscounted cash flows as of Year 1 by the undiscounted cash flow of Year 2. Payback period = 1 + ($27,000 - 15,500)/$12,000 Payback period = 1.958 years Project B: Cumulative cash flows Year 1 = $16,500 = $16,500 Cumulative cash flows Year 2 = $16,500 + 10,500 = $27,000 Cumulative cash flows Year 3 = $16,500 + 10,500 + 12,000 = $39,000 To calculate the fractional payback period, find the fraction of Year 3's cash flows that is needed for the company to have cumulative undiscounted cash flows of $30,000. Divide the difference between the initial investment and the cumulative undiscounted cash flows as of year 2 by the undiscounted cash flow of Year 3. Payback period = 2 + ($30,000 - 16,500 - 10,500)/$12,000 Payback period = 2.250 years Since Project A has a shorter payback period than Project B has, the company should choose Project A. b. Discount each project's cash flows at 14 percent. Choose the project with the highest NPV. Project A: NPV = -$27,000 + $15,500/1.14 + $12,000/1.14^2 + $3,600/1.14^3 NPV = -$1,740.00 Project B: NPV = -$30,000 + $16,500/1.14 + $10,500/1.14^2 + $12,000/1.14^3 NPV = $652.75 The firm should choose Project B since it has a higher NPV than Project A has.

Ch. 4 HW. The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $11,500 per year forever. a. If the required return on this investment is 4.5 percent, how much will you pay for the policy? b. Suppose the Perpetual Life Insurance Co. told you the policy costs $250,000. At what discount rate would this be a fair deal?

a. This cash flow is a perpetuity. To find the PV of a perpetuity, we use the equation: PV = C/r PV = $11,500/.045 PV = $255,555.56 b. To find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation: PV = C/r $250,000 = $11,500/r We can now solve for the interest rate as follows: r = $11,500/$250,000 r = .0460, or 4.60%

Ch. 3. Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. asset management long-term solvency short-term solvency profitability market value

asset management

Ch. 1 The process of planning and managing a firm's long-term assets is called: working capital management. cash management. cost accounting management. capital budgeting. capital structure management.

capital budgeting.

Ch. 1. The treasurer and the controller of a corporation generally report to the: board of directors. chairman of the board. chief executive officer. president. chief financial officer.

chief financial officer.

Ch. 1 A partnership: is taxed the same as a corporation. terminates at the death of any limited partner. creates an unlimited liability for all general partners for the partnership's debts. has the same ability as a corporation to raise capital. allows for easy transfer of interest from one general partner to another.

creates an unlimited liability for all general partners for the partnership's debts.

Ch. 5. Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is: equal to, and only if it is equal to, the discount rate. equal to or greater than the discount rate. less than the discount rate. negative. positive.

equal to or greater than the discount rate.

Ch. 5. An independent investment is acceptable if the profitability index (PI) of the investment is: greater than 1.0. less than 1.0. greater than the internal rate of return. less than the internal rate of return. greater than a pre-specified rate of return.

greater than 1.0.

Ch. 5. The payback method of analysis: discounts cash flows. ignores the initial cost. considers all project cash flows. applies an industry-standard recoupment period. has a timing bias.

has a timing bias.

Ch. 3. If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm: has no debt of any kind. is using its assets as efficiently as possible. pays all its earnings out in dividends. also has a current ratio of 15. has an equity multiplier of 2.

has no debt of any kind.

Ch. 5. The modified internal rate of return: is used as the discount rate for all NPV calculations. applies only to profitability calculations. is used to make accept/reject decisions when no discount rate can be assigned. is computed by combining cash flows until only one change in sign remains. assumes all projects are financing projects.

is computed by combining cash flows until only one change in sign remains.

Ch. 5. An investment is acceptable if the payback period: is less than some pre-specified period of time. exceeds the life of the investment. is negative. is equal to or greater than some pre-specified period of time. is equal to, and only if it is equal to, the investment's life.

is less than some pre-specified period of time.

Ch. 3. The sustainable growth rate: assumes there is no external financing of any kind. is normally higher than the internal growth rate. assumes the debt-equity ratio is variable. is based on receiving additional external equity financing. assumes the dividend payout ratio is equal to zero.

is normally higher than the internal growth rate.

Ch. 5. Payback is frequently used to analyze independent projects because: it considers the time value of money. all relevant cash flows are included in the analysis. it is easy and quick to calculate. it is the most desirable of all the available analytical methods from a financial perspective. it produces better decisions than those made using either NPV or IRR.

it is easy and quick to calculate.

Ch. 3. Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as: asset management ratios. long-term solvency measures. liquidity measures. profitability ratios. market value ratios.

liquidity measures.

Ch. 1 Financial managers should primarily strive to: minimize costs while increasing current dividends. maximize the current profits of the firm. maximize the current value per share of existing stock. maximize current dividends even if doing so adds financial distress costs to the firm. maximize current market share in every market in which the firm participates.

maximize the current value per share of existing stock.

Ch. 5. A situation in which accepting one investment prevents the acceptance of another investment is called the: net present value profile. operational ambiguity decision. mutually exclusive investment decision. issues of scale problem. multiple rates of return decision.

mutually exclusive investment decision.

Ch. 5. The difference between the present value of an investment's future cash flows and its initial cost is the: net present value. internal rate of return. payback period. profitability index. discounted payback period.

net present value.

Ch. 5. The net present value method of capital budgeting analysis does all of the following except: incorporate risk into the analysis. consider all relevant cash flow information. discount all future cash flows to their current value. consider the initial cost of the project. provide a specific anticipated rate of return.

provide a specific anticipated rate of return.

Ch. 1 One advantage of a partnership is the: personal liability for all of the firm's debts. limited life of the entity. limited liability protection for all of the partners. relatively low formation cost. ease of transferring full ownership.

relatively low formation cost.

Ch. 3. The total asset turnover ratio measures the amount of: total assets needed for every $1 of sales. sales generated by every $1 in total assets. fixed assets required for every $1 of sales. net income generated by every $1 in total assets. net income that can be generated by every $1 of fixed assets.

sales generated by every $1 in total assets.

Ch. 1 The cheapest business entity to form is typically the: limited liability company. joint stock company. general partnership. limited partnership. sole proprietorship.

sole proprietorship.

Ch. 1 The ultimate control of a corporation lies in the hands of the corporate: board of directors. stockholders. president. chief executive officer. chairman of the board.

stockholders.

Ch. 5. The internal rate of return for a project will increase if: the initial cost of the project can be reduced. the total amount of the cash inflows is reduced. each cash inflow is moved such that it occurs one year later than originally projected. the required rate of return is reduced. the discount rate is increased.

the initial cost of the project can be reduced.

Ch. 5. All else constant, the net present value of a typical investment project increases when: the discount rate increases. each cash inflow is delayed by one year. the initial cost of a project increases. the required rate of return decreases. all cash inflows occur during the last year instead of periodically throughout the project's life.

the required rate of return decreases.

Ch. 1 Short-term finance deals with: the timing of cash flows. acquiring and selling fixed assets. financing long-term projects. capital budgeting. issuing additional shares of common stock.

the timing of cash flows.

Ch. 5. If a project is assigned a required rate of return of zero, then: the timing of the project's cash flows has no bearing on the value of the project. the project will always be accepted. the project will always be rejected. whether the project is accepted or rejected will depend on the timing of the cash flows. the project can never add value for the shareholders.

the timing of the project's cash flows has no bearing on the value of the project.

Ch. 1. In a general partnership, the general partners have _____ liability for the firm's debts and have _____ control over day-to-day operations. limited; no unlimited; total limited; total unlimited; no unlimited; limited

unlimited; total

Ch. 3. A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every: $1 in total equity. $.53 in total assets. $1 in current assets. $.53 in total equity. $1 in fixed assets.

$.53 in total equity.

Ch. 2. Smashed Pumpkins Co. paid $104 in dividends and $540 in interest over the past year. The company increased retained earnings by $450 and had accounts payable of $546. Sales for the year were $16,125 and depreciation was $704. The tax rate was 35 percent. What was the company's EBIT? $1,392 $852 $5,644 $1,663 $1,232

$1,392 Net income = $104 + 450 = $554 EBT = $554/( 1 − .35) = $852 EBIT = $852 + 540 = $1,392

Ch. 3. Two Sisters Dresses has net working capital of $43,800, net fixed assets of $232,400, net income of $43,900, and current liabilities of $51,300. The tax rate is 21 percent and the profit margin is 9.3 percent. How many dollars of sales are generated from every $1 in total assets? $1.44 $1.32 $1.73 $.97 $1.06

$1.44 Total asset turnover = ($43,900/.093)/($43,800 + 51,300 + 232,400) Total asset turnover = 1.44 Every $1 in total assets generates $1.44 in sales.

Ch. 4. At a discount rate of 5 percent, which one of the following is the correct formula for computing the PV of $1 to be received one year from today? $1/1.05 $1 $1 × 1.05 $1 × 1.052 $1/1.052

$1/1.05

Ch. 2. At the beginning of the year, a firm has current assets of $329 and current liabilities of $233. At the end of the year, the current assets are $495 and the current liabilities are $273. What is the change in net working capital? $0 $126 -$126 $166 $206

$126 Change in net working capital = ($495 - 273) - ($329 - 233) = $126

Ch. 2. Simon's Hot Chicken purchased its building seven years ago at a price of $140,290. The building could be sold for $180,050 today. The company spent $66,570 on other fixed assets that could be sold for $58,870. The company has accumulated depreciation of $80,650 on its fixed assets. Currently, the company has current liabilities of $37,260 and net working capital of $18,910. What is the ending book value of net fixed assets? $126,210 $169,600 $163,470 $158,270 $206,860

$126,210 Net fixed assets = $140,290 + 66,570 − 80,650 = $126,210

Ch. 2. For the past year, Kayla, Inc., has sales of $47,747, interest expense of $4,400, cost of goods sold of $17,884, selling and administrative expense of $12,431, and depreciation of $7,430. If the tax rate is 38 percent, what is the operating cash flow? $5,602 $3,473 $13,930 $10,903 $15,303

$15,303 EBIT = $47,747 − 17,884 − 12,431 − 7,430 = $10,002 EBT = $10,002 − 4,400 = $5,602 Taxes = $5,602(.38) = $2,129 OCF = $10,002 + 7,430 − 2,129 = $15,303

Ch. 2. A company has total equity of $2,175, net working capital of $245, long-term debt of $1,080, and current liabilities of $4,710. What is the company's net fixed assets? $4,955 $3,010 $5,805 $7,965 $3,255

$3,010 Total liabilities and equity = Total assets = $2,175 + 1,080 + 4,710 = $7,965 NWC = Current assets − Current liabilities $245 = CA − $4,710 Current assets = $4,955 Net fixed assets = $7,965 − 4,955 = $3,010

Ch. 2. During the past year, a company had cash flow to stockholders, an operating cash flow, and net capital spending of $16,158, $38,834, and $17,800, respectively. The net working capital at the beginning of the year was $6,822 and it was $8,480 at the end of the year. What was the company's cash flow to creditors during the year? $1,472 $3,218 $4,876 $1,658 $6,534

$3,218 Change in NWC = $8,480 − 6,822 = $1,658 CFA = $38,834 − 17,800 − 1,658 = $19,376 Cash flow to creditors = $19,376 − 16,158 = $3,218

Ch. 2. Evil Pop Co. began the year with net fixed assets of $17,348 and had $18,617 in the account at the end of the year. During the year, the company paid $4,246 in interest and expensed $3,740 in depreciation. The company purchased $8,500 in fixed assets during the year. How much in fixed assets did the company sell during the year? $3,921 $9,277 $3,491 $5,523 $763

$3,491 Net capital spending = $18,617 − 17,348 + 3,740 = $5,009 Fixed assets sold = $8,500 − 5,009 = $3,491

Ch. 2. A company has net working capital of $1,850, current assets of $6,300, equity of $21,900, and long-term debt of $10,430. What is the company's net fixed assets? $27,880 $38,630 $26,030 $23,750 $30,480

$30,480 Current liabilities = $6,300 − 1,850 = $4,450 Total liabilities and equity = Total assets = $21,900 + 10,430 + 4,450 = $36,780 Net fixed assets = $36,780 − 6,300 = $30,480

Ch. 2. Ivan's, Inc., paid $496 in dividends and $593 in interest this past year. Common stock increased by $203 and retained earnings decreased by $129. What is the net income for the year? $367 $496 $593 $796 $960

$367 Net income = Dividends paid + Change in retained earnings Net income = $496 + (- $129) = $367 In this case, the change in retained earnings was a negative value.

Ch. 2. At the beginning of the year, long-term debt of a firm is $276 and total debt is $323. At the end of the year, long-term debt is $253 and total debt is $333. The interest paid is $19. What is the amount of the cash flow to creditors? $42 $23 -$42 -$23 $19

$42 CFC = $19 - ($253 - 276) = $42

Ch. 2. Kerch Co. had beginning net fixed assets of $216,526, ending net fixed assets of $211,694, and depreciation of $40,447. During the year, the company sold fixed assets with a book value of $7,990. How much did the company purchase in new fixed assets? $32,457 $41,442 $35,615 $34,259 $43,605

$43,605 Net capital spending = $211,694 − 216,526 + 40,447 = $35,615 Fixed assets bought = $35,615 + 7,990 = $43,605

Ch. 2. At the beginning of the year, Shinedown, Corp., had a long-term debt balance of $47,880. During the year, the company repaid a long-term loan in the amount of $14,205. The company paid $5,650 in interest during the year, and opened a new long-term loan for $12,450. How much is the ending long-term debt account on the company's balance sheet? $54,680 $51,775 $7,405 $46,125 $49,635

$46,125. Ending long-term debt = $47,880 + 12,450 − 14,205 = $46,125

Ch. 2. You find the following financial information about a company: net working capital = $1,221; fixed assets = $6,537; total assets = $8,766; and long-term debt = $4,749. What are the company's total liabilities? $5,970 $1,851 $8,868 $5,757 $8,238

$5,757 Current assets = $8,766 − 6,537 = $2,229 $1,221 = $2,229 − CL CL = $1,008 Total liabilities = $1,008 + 4,749 = $5,757

Ch. 2. Rousey, Inc., had a cash flow to creditors of $17,280 and a cash flow to stockholders of $8,000 over the past year. The company also had net fixed assets of $49,880 at the beginning of the year and $57,340 at the end of the year. Additionally, the company had a depreciation expense of $12,420 and an operating cash flow of $51,605. What was the change in net working capital during the year? $9,280 $5,720 $5,013 $7,460 $6,445

$6,445 Cash flow from assets = $17,280 + 8,000 = $25,280 Net capital spending = $57,340 − 49,880 + 12,420 = $19,880 Change in net working capital = $51,605 − 19,880 − 25,280 = $6,445

Ch. 2. Peggy Grey's Cookies has net income of $470. The firm pays out 37 percent of the net income to its shareholders as dividends. During the year, the company sold $92 worth of common stock. What is the cash flow to stockholders? $265.90 $296.10 $173.90 $139.86 $81.90

$81.90 CFS = (0.37 × $470) - $92 = $81.90

Ch. 2. 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 $1,240,000 that is currently appraised at $1,440,000. The equipment originally cost $720,000 and is currently valued at $467,000. The inventory is valued on the balance sheet at $410,000 but has a market value of only one-half of that amount. The owner expects to collect 98 percent of the $225,200 in accounts receivable. The firm has $10,500 in cash and owes a total of $1,440,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm? $1,333,396 $903,196 $1,108,196 $672,000

$903,196 Market value = $1,440,000 (building) + 467,000 (equipment) + (.5 × 410,000) (inventory) + (.98 × 225,200) (accounts receivable) + 10,500 cash - 1,440,000 (amount owed) Market value = $903,196

Ch. 3 HW. The most recent financial statements for Williamson, Inc., are shown here (assuming no income taxes): Income Statement Balance Sheet Sales 6,900 Assets 15,950 Debt 6,350 Cost 4,360 Equity 9,600 Net income 2,540 Total 15,950 Total 15,950 Assets and costs are proportional to sales; debt and equity are not. No dividends are paid. Next year's sales are projected to be $8,418. What is the external financing needed?

An increase of sales to $8,418 is an increase of: Sales increase = ($8,418 - 6,900)/$6,900 Sales increase = .22, or 22% Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Pro forma income state. Pro forma balance sheet Sales 8,418 Assets 19,459 Debt 6,350 Cost 5,319 Equity 12,699 NI 3,099 Total 19,459 Total 19,049 If no dividends are paid, the equity account will increase by the net income, so: Equity = $9,600 + 3,099 Equity = $12,699 So the EFN is: EFN = Total assets - Total liabilities and equity EFN = $410

Ch.2 HW. The Stancil Corporation provided the following current information: Proceeds from long-term borrowing $ 17,400 Proceeds from the sale of common stock 4,400 Purchases of fixed assets 21,400 Purchases of inventories 2,300 Payment of dividends 14,900 Determine the cash flows from the firm and the cash flows to investors of the firm.

Cash flows from the firm: -23,700 Cash flows to investors of the firm: -69000 Cash flows from the firm Capital spending -$ 21,400 Additions to NWC - 2,300 Cash flows from the firm -$ 23,700 Cash flows to investors of the firm Sale of long-term debt -$ 17,400 Sale of common stock - 4,400 Dividends paid 14,900 Cash flows to investors of the firm -$ 6,900

Ch.2. HW Use the following information for Ingersoll, Inc. Assume the tax rate is 23 percent. 2018 2019 Sales $ 13,073 $ 13,836 Depreciation 1,691 1,766 Cost of goods sold 4,129 4,737 Other expenses 961 839 Interest 810 941 Cash 6,112 6,556 Accounts receivable 8,070 9,517 Short-term notes payable 1,200 1,177 Long-term debt 20,410 24,711 Net fixed assets 50,954 54,363 Accounts payable 4,432 4,734 Inventory 14,334 15,318 Dividends 1,100 1,648 Prepare a balance sheet for this company for 2018 and 2019.

Ch. 2 6A & B

Ch. 1 The corporate treasurer oversees which one of these areas? Financial planning Cost accounting Tax reporting Information systems Financial accounting

Financial planning

Ch. 3 HW. Firm A and Firm B have debt-total asset ratios of 31 percent and 21 percent, respectively, and returns on total assets of 7 percent and 13 percent, respectively. What is the return on equity for Firm A and Firm B?

Firm A Firm B D/TA = .31 D/TA = .21 (TA − E)/TA = .31 (TA − E)/TA = .21 (TA/TA) − (E/TA) = .31 (TA/TA) − (E/TA) = .21 1 − (E/TA) = .31 1 − (E/TA) = .21 E/TA = .69 E/TA = .79 E = .69(TA) E = .79 (TA) Rearranging ROA, we find: NI/TA = .07 NI/TA = .13 NI = .07(TA) NI = .13(TA) Since ROE = NI/E, we can substitute the above equations into the ROE formula, which yields: Firm A: ROE = .07(TA)/.69(TA) ROE = .07/.69 ROE = .1014, or 10.14% Firm B: ROE = .13(TA)/.79 (TA) ROE = .13/.79 ROE = .1646, or 16.46%

Ch. 1 Which one of these represents the best means of increasing current shareholder value? Maximizing the capital rate of the firm Increasing the current value of the overall firm Forsaking all new projects Minimizing the overall size of the firm Decreasing the number of employees

Increasing the current value of the overall firm

Ch.2 HW. During the year, the Senbet Discount Tire Company had gross sales of $1.22 million. The company's cost of goods sold and selling expenses were $591,000 and $244,000, respectively. The company also had notes payable of $830,000. These notes carried an interest rate of 7 percent. Depreciation was $121,000. The tax rate was 21 percent. a. What was the company's net income? b. What was the company's operating cash flow?

The interest expense for the company is the amount of debt times the interest rate on the debt. So, the income statement for the company is: Income Statement Sales $ 1,220,000 Cost of goods sold 591,000 Selling costs 244,000 Depreciation 121,000 EBIT $ 264,000 Interest 58,100 Taxable income $ 205,900 Taxes (21%) 43,239 Net income $ 162,661 b. The operating cash flow was: OCF = EBIT + Depreciation - Taxes OCF = $264,000 + 121,000 - 43,239 OCF = $341,761

Ch. 1 Which one of these best fits the description of an agency cost? The costs of increasing the dividend payment per share The benefits received from reducing production costs per unit The payment of corporate income taxes The payment required for an outside audit of the firm The payment of interest on a firm's debts

The payment required for an outside audit of the firm

Ch.2 HW. Given the following information for O'Hara Marine Co., calculate the depreciation expense: sales = $83,000; costs = $41,700; addition to retained earnings = $12,300; dividends paid = $3,120; interest expense = $3,450; tax rate = 24 percent.

The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to retained earnings Net income = $3,120 + 12,300 Net income = $15,420 Now, looking at the income statement: EBT - (EBT × Tax rate) = Net income Recognize that EBT × Tax rate is the calculation for taxes. Solving this for EBT yields: EBT = Net income/(1 - Tax rate) EBT = $15,420/(1 - .24) EBT = $20,289 Now we can calculate: EBIT = EBT + Interest EBIT = $20,289 + 3,450 EBIT = $23,739 The last step is to use: EBIT = Sales - Costs - Depreciation $23,739 = $83,000 - 41,700 - Depreciation Depreciation = $17,561

Ch. 3 HW. A company has net income of $190,000, a profit margin of 9.1 percent, and an accounts receivable balance of $129,370. Assuming 85 percent of sales are on credit, what is the company's days' sales in receivables?

This is a multi-step problem involving several ratios. It is often easier to look backward to determine where to start. We need receivables turnover to find days' sales in receivables. To calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given the profit margin and net income, we can use these to calculate total sales as: Profit margin = .091 = Net income/Sales .091 = $190,000/Sales Sales = $2,087,912 Credit sales are 85 percent of total sales, so: Credit sales = $2,087,912(.85) Credit sales = $1,774,725 Now we can find receivables turnover by: Receivables turnover = Credit sales/Accounts receivable Receivables turnover = $1,774,725/$129,370 Receivables turnover = 13.72 times Days' sales in receivables = 365 days/Receivables turnover Days' sales in receivables = 365/13.72 Days' sales in receivables = 26.61 days

Ch. 3 HW. Terrell, Inc.'s net income for the most recent year was $17,150. The tax rate was 25 percent. The firm paid $4,060 in total interest expense and deducted $5,480 in depreciation expense. What was the company's cash coverage ratio for the year?

This problem requires you to work backward through the income statement. First, recognize that net income = (1 − TC)EBT. Plugging in the numbers given and solving for EBT, we get: EBT = $17,150/(1 − .25) EBT = $22,866.67 Now, we can add interest to EBT to get EBIT as follows: EBIT = EBT + Interest paid EBIT = $22,866.67 + 4,060 EBIT = $26,926.67 To get EBITD (earnings before interest, taxes, and depreciation), the numerator in the cash coverage ratio, add depreciation to EBIT: EBITD = EBIT + Depreciation EBITD = $26,926.67 + 5,480 EBITD = $32,406.67 Now, we can plug the numbers into the cash coverage ratio and calculate: Cash coverage ratio = EBITD/Interest Cash coverage ratio = $32,406.67/$4,060 Cash coverage ratio = 7.98 times

Ch.2 HW. Schwert Corp. shows the following information on its 2019 income statement: sales = $235,000; costs = $147,000; other expenses = $7,900; depreciation expense = $17,500; interest expense = $13,500; taxes = $17,185; dividends = $10,500. In addition, you're told that the firm issued $5,000 in new equity during 2019 and redeemed $3,500 in outstanding long-term debt. a. What is the 2019 operating cash flow? b. What is the 2019 cash flow to creditors? c. What is the 2019 cash flow to stockholders? d. If net fixed assets increased by $20,000 during the year, what was the addition to net working capital (NWC)?

To find the OCF, we first calculate net income. Income Statement Sales $ 235,000 Costs 147,000 Other expenses 7,900 Depreciation 17,500 EBIT $ 62,600 Interest 13,500 Taxable income $ 49,100 Taxes 17,185 Net income $ 31,915 Dividends $ 10,500 Additions to RE $ 21,415 a. OCF = EBIT + Depreciation - Taxes OCF = $62,600 + 17,500 - 17,185 OCF = $62,915 b. CFC = Interest - Net new LTD CFC = $13,500 - (-$3,500) CFC = $17,000 Note that the net new long-term debt is negative because the company repaid part of its long-term debt. c. CFS = Dividends - Net new equity CFS = $10,500 - 5,000 CFS = $5,500 d. We know that CFA = CFC + CFS, so: CFA = $17,000 + 5,500 CFA = $22,500 CFA is also equal to OCF - Net capital spending - Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $20,000 + 17,500 Net capital spending = $37,500 Now we can use: CFA = OCF - Net capital spending - Change in NWC $22,500 = $62,915 - 37,500 - Change in NWC Solving for the change in NWC gives $2,915, meaning the company increased its NWC by $2,915.

Ch. 3 HW. Assume the following ratios are constant: Total asset turnover 2.80 Profit margin 5.7 % Equity multiplier 1.50 Payout ratio 22 % What is the sustainable growth rate?

We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. The ROE is: ROE = (PM)(TAT)(EM) ROE = (.057)(2.80)(1.50) ROE = .2394, or 23.94% The plowback ratio is one minus the dividend payout ratio, so: b = 1 - .22 b = .78 Now, we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b)/[1 - (ROE × b)] Sustainable growth rate = [.2394(.78)]/[1 - .2394(.78)] Sustainable growth rate = .2296, or 22.96%

Ch. 3. Puffy's Pastries generates five cents of net income for every $1 in equity. Thus, Puffy's has _______ of 5 percent. a return on assets a profit margin a return on equity an EV multiple a price-earnings ratio

a return on equity

Ch.2. HW Cusic Industries had the following operating results for 2019: sales = $33,914; cost of goods sold = $24,016; depreciation expense = $5,957; interest expense = $2,690; dividends paid = $1,960. At the beginning of the year, net fixed assets were $19,900, current assets were $7,026, and current liabilities were $3,968. At the end of the year, net fixed assets were $24,466, current assets were $8,660, and current liabilities were $4,637. The tax rate was 23 percent. a. What is net income for 2019? b. What is the operating cash flow for 2019? c. What is the cash flow from assets for 2019? d-1. If no new debt was issued during the year, what is the cash flow to creditors? d-2. If no new debt was issued during the year, what is the cash flow to stockholders?

a. Income Statement Sales $ 33,914 Cost of goods sold 24,016 Depreciation 5,957 EBIT $ 3,941 Interest 2,690 Taxable income $ 1,251 Taxes (23%) 288 Net income $ 963 b. OCF = EBIT + Depreciation − Taxes = $3,941 + 5,957 − 288 = $9,610 c. Change in NWC = NWCend − NWCbeg = (CAend − CLend) − (CAbeg − CLbeg) = ($8,660 − 4,637) − ($7,026 − 3,968) = $4,023 − 3,058 = $965 Net capital spending = NFAend − NFAbeg + Depreciation = $24,466 − 19,900 + 5,957 = $10,523 CFA = OCF − Change in NWC − Net capital spending = $9,610 − 965 − 10,523 = −$1,878 d. Cash flow to creditors = Interest - Net new LTD = $2,690 − 0 = $2,690 Cash flow to stockholders = Cash flow from assets − Cash flow to creditors = -$1,878 − 2,690 = −$4,568 We can also calculate the cash flow to stockholders as: Cash flow to stockholders = Dividends − Net new equity Solving for net new equity, we get: Net new equity = $1,960 − (−4,568) = $6,528 The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $965 in new net working capital and $10,523 in new fixed assets. The firm had to raise $1,878 from its stakeholders to support this new investment. It accomplished this by raising $6,528 in the form of new equity. After paying out $1,960 of this in the form of dividends to shareholders and $2,690 in the form of interest to creditors, $1,878 was left to meet the firm's cash flow needs for investment.