exam 1

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

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?

cash flow from assets

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

common stock and retained earnings

Which of these are elements of stockholder's equity?

equity multiplier

= TA/TE = 1 +(D/E)

CF (stockholders)

= dividends paid - proceeds from shares sold

OCF

=EBIT+Dep-taxes

net working capital may be a negative value

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

corporations can raise large amounts of capital generally easier than partnerships

Which one of the following statements is correct?

taxes reduce both net income and operating cash flow

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

Debt/Equity

=TD/TE

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

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?

unlimited liability

The owner is personally and fully responsible for all losses and debts of the business

marginal

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

marginal tax rate

the extra taxes paid on an additional dollar of income

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

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $289,740?

TD/TE = 0.68/1 TE = 1 TD = 0.68 1.68 Total debt ratio= TD/ TA = .68/1.68 = 0.4 E.M. = TA/TE =1.68/1 = 1.68

Given: Debt equity ratio = 0.68 Calculate a. Total debt ratio b. Equity multiplier

0.27 = 0.08 * TAT * 2/3 TAT = .27/(.08*2.3) = 1.467 Sales/TA = 1.467 .08 = 4000/sales Sales = 4000/.08 = $50000 50000/TA = 1.467 TA = 50000/1.467 = $34,083

Given: ROE = 27%, PM = 8%; EM = 2.3; NI = $4.00 Find TA.

TD/TA = 0.47/1 Find TD/TE. TE = 1- 0.47 = 0.53 So, debt equity Ratio= 0.47/0.53 = 0.89

Total Debt Ratio = 0.47 Calculate debt equity ratio.

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange

Quick Ratio

= (CA-Inv)/CL

TBR

= (TA-TE)/TA

NWC

= CA - CL

Current Ratio

= CA/CL

CF (assets)

= CF (Creditors) + CF (stockholders)

Cash Ratio

= Cash/CL

NI

= Dividends paid out + amount added to RE

Times Interest Earned

= EBIT / Interest

ROE

= NI/TE = (NI/Sales) * (sales/TA) * (TA/TE) = PM * TAT * EM

CF (Asset)

= OCF - NWC - NCS

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

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?

OCF = sales - COGS - exp - taxes OCF = EBIT + Dep - Taxes Sales 2000000 COGS - 600000 Exp - 100000 Dep - 500000 EBIT 800,000 Int - 50000 taxable income 750,000 Taxes (21%) - 157500 NI $592,500 OCF = 800000 + 500000 - 157500 = $1,142,500

Given: Sales = 2,000,000; COGS = 600,000; dep = 500000; exp= 100,000; interest= 50000; tax rate = 21% Find OCF.

PM= NI/Sales = NI/4000000 = 0.12 So, NI = 480000 ROA = NI/TA = 480000/(7000000 + 4500000) = 4.17%

Given: Sales = 4000000; PM = 12%; TE = 7000000; TD = 4500000. Find ROA.

current liabilities and current assets

How do we manage the day-to-day finances of the firm?

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

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?

Sole Proprietorship

a business owned and managed by a single individual

sole proprietorship

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

Limited Liability Company (LLC)

a form of business ownership that offers both limited liability to its owners and flexible tax treatment

secondary financial market

a market in which existing financial assets such as stocks and bonds are bought and sold between current owners

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.

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

Average tax rate

= Total tax paid / taxable income

OCF

= [sales - COGS - exp] - taxes

TCA

= cash + AR +Inv + other CA

TCL

= notes payable + AP + other short term liabilities

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

limited partner

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

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

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?

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.)

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?

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 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?

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

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?

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

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

Total assets = CA + FA = $2M + $6M = $8M TAT = Sales / TA = $8M / $8M = 1 NWC = CA - CL; CL = CA - NWC = $2M - $1M = $1M Total liabilities = CL + LTD = $1M + $3M = $4M Total equity = total assets - total liabilities = $8M - $4M = $4M EM = assets / equity = $8M / $4M = 2 ROE = PM × TAT × EM = 8% × 1 × 2 = 16%

Sales: $8M, PM = 8%, CA = $2M, FA = $6M, NWC = $1M, LTD = $3M Compute the ROE using the DuPont Analysis

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

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?

Average Tax Rate (ATR)

Tax liability divided by taxable income. It is the percentage of income paid in taxes.

decrease in the quick ratio

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

Calculate Quick Ratio: (CA - Inventory)/CL = Q.R. = (9,000-2,000)/5,000 = 1.4 OR Q.R. = (4,000 + 3,000)/5,000 = 1.4

Quick Ratio example: Cash is $4,000 A/R $3,000 Inventory 2,000 CL 5,000

Agency Problem

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

4000+2700+1400= $8,100

Cash = $4,000 AR= $2700 NFA= $6000 Inv= $1400 Calc the total current assets

Working Capital Management

How will we manage the everyday financial activities of the firm?

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

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?

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

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?

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

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?

Capital Structure

Where will we get the long-term financing to pay for the investment?

||, |||, and |V only

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.

Equity multiplier, profit margin, and total asset turnover

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

maximum loss limited to the capital invested

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

determining how much debt should be assumed to fund a project

Which one of the following is a capital structure decision?

Balance Sheet

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

Capital Budgeting

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

because they have been hired to represent the interests of the current stockholders

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

primary financial market

a market in which new financial assets such as stocks and bonds are sold for the first time