FIN 301 Exam
Net Working Capital
=Current Assets - Current Liabilities Used to measure the short-term liquidity of a business Positive when cash that will be received over the next 12 months exceeds the cash that will be paid out (usually positive in a healthy firm)
Return on Assets
=Net Income / Total Assets How efficient it is at using its assets to generate earnings
Return on Equity
=Net Income / Total Equity Amount of income returned as a percentage of shareholders' equity
Sole Proprietorship
Advantages: Easy to start, least regulated, single owner keeps all the profits, taxes once as personal income Disadvantages: limited to life of owner, unlimited liability, difficult to sell ownership interest, equity capital limited to owner's personal wealth
Book Value versus Market Value
Balance sheet provides the book value Market value is the price at which assets, liabilities, or equity can actually be bought to sold
The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:
cash flow from assets.
The Outlet started the year with $650,000 in the common stock account and $1,318,407 in the additional paid-in surplus account. The end-of-year balance sheet showed $720,000 and $1,299,310 in the same two accounts, respectively. What is the cash flow to stockholders if the firm paid $68,500 in dividends?
CFS = $68,500 − [($720,000 + 1,299,310) − ($650,000 + 1,318,407)] CFS = $17,597
On the statement of cash flows, which one of the following is considered an operating activity?
Decrease in accounts payable
Cash Flow to Stockholders
Dividends + Addition to RE - New equity raised Cash flow to the corporation's stockholders
Operating Cash Flow
EBIT + depreciation - taxes
Which of the following parties are considered stakeholders of a firm?
Employees and the government
Net Capital Spending
Ending Fixed Assets - Beginning Net Fixed Assets + Depreciation Amount a firm spends on acquiring fixes assets during the year
Jensen's Shipping has total assets of $694,800 at year's end. The beginning owners' equity was $362,400. During the year, the company had sales of $711,000, a profit margin of 5.2 percent, a tax rate of 21 percent, and paid $12,500 in dividends. What is the equity multiplier at year-end?
Equity multiplier at year's end = $694,800/[$362,400 + .052($711,500) − 12,500)] Equity multiplier at year's end = 1.80
Which one of the following questions is least likely to be addressed by financial managers?
How should a product be marketed?
Operating Activities
Includes NI and changes in most current accounts
Income Statement
Like a video of the firm's operations for a specified period of time Generally, report revenue first then deducts an expense Matching Principal: GAAP says to show revenue when it accrues and match the expenses required to generate the revenue
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
Cash flow from assets:
Operating Cash Flow - Net Capital Spending - Change in net working capital
Which one of the following is a cash flow from a corporation into the financial markets?
Payment on loan interest
Financial Planning Process.
Planning Horizon: divide decisions into short run decision ang long run decisions Aggregation: combine capital budgeting into one large project Assumptions and Scenarios: • Make realistic assumptions about important variables • Run several scenarios where you vary the assumptions by reasonable amounts • Determine, at a minimum, worst case, normal case, and best-case scenarios
Lassiter Industries has annual sales of $328,000 with 8,000 shares of stock outstanding. The firm has a profit margin of 4.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?
Price per share = 1.20($328,000/8,000) Price per share = $49.20 EPS = [.045($328,000)]/8,000 EPS = $1.845 PE ratio = $49.20/$1.845 PE ratio = 26.7
External Financing Needed
Projected Equity - Current Equity -Addition to RE
Which one of the following ratios is a measure of a firm's liquidity?
Quick Ratio
Which one of the following statements concerning corporate income taxes is correct for 2018?
The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income.
Which one of the following statements concerning a sole proprietorship is correct?
The life of a sole proprietorship is limited.
Which one of the following statements related to corporate taxes is correct?
The marginal tax rate for a company can be either higher than or equal to the average tax rate.
Marginal Tax Rates
The percentage paid on the next dollar earned
Average Tax Rates
The tax bill / taxable income Vary widely across different companies and industries
CFO
The top financial manager within a firm is usually the chief financial officer (FCO)
Common Size Statements
Used to compare financial information as the company grows and good for comparing companies of different sizes within the same industry
One disadvantage of the corporate form of business ownership is the:
double taxation of distributed profits.
A limited partnership:
has at least one partner who has unlimited liability for all of the partnership's debts.
Net capital spending:
is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
The treasurer of a corporation generally reports directly to the:
vice president of finance
Capital Budgeting:
what long-term investments or projects should the business take on?
An example of a capital budgeting decision is deciding:
whether or not to purchase a new machine for the production line.
The River Side Stop has a current market value of $26,400 and owes its creditors $31,300. What is the market value of the shareholders' equity?
$0 Shareholders' equity = Max [($26,400 − 31,300), 0] Shareholders' equity = 0 Since the market value of equity cannot be negative, the answer is zero.
Which one of the following represents the most liquid asset?
$100 of inventory that is sold today for $100 cash
RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?
$109,085 EBIT = $911,400 − 787,300 − 52,600 EBIT = $71,500 Tax = $71,500(.21) Tax = $15,015 OCF = $71,500 + 52,600 − 15,015 OCF = $109,085
Ernie's Home Repair had beginning long-term debt of $51,207 and ending long-term debt of $36,714. The beginning and ending total debt balances were $59,513 and $42,612, respectively. The interest paid was $2,808. What is the amount of the cash flow to creditors?
$17301 CFC = $2,808 − ($36,714 − 51,207) CFC = $17,301
Williamsburg Markets has an operating cash flow of $4,267 and depreciation of $1,611. Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed assets decreased by $382 during the year. What is free cash flow for the year?
$1732 Change in NWC = −$1,356 − (−$2,662) Change in NWC = $1,306 NCS = −$382 + 1,611 NCS = $1,229 FCF = CFA = $4,267 − 1,306 − 1,229 FCF = $1,732
Keisler's has cost of goods sold of $11,518, interest expense of $315, dividends of $420, depreciation of $811, and a change in retained earnings of $296. What is the taxable income given a tax rate of 21 percent?
$906.33 Net income = $296 + 420 Net income = $716 Taxable income = $716/(1 − .21) Taxable income = $906.33
Internal Growth Rate
(ROA * Retention/Plowback) / (1- ROA * Retention/Plowback)
Sustainable Growth Rate
(ROE * Retention/Plowback) / (1- ROE * Retention/Plowback)
Retention Ratio / Plowback Ratio
1- Dividend payout Ratio
Current Ratio
= Current Assets / Current Liabilities Ability to pay short-term and long-term debt obligations
Quick Ratio
=(Current Assets - Inventory) / Current Liabilities Companies' ability to meets its short-term obligations with its most liquid assets)
Cash Coverage Ratio
=(EBIT + Depreciation) / Interest Ability to meet its interest payments
Receivables Turnover Ratio
=Sales / Accounts Receivable Measure how efficiently a firm uses its assets
Balance Sheet
A snapshot of the firm's assets and liabilities at a given point in time, Assets = Liabilities + Stockholder's Equity
Liquidity
Ability to convert to cash quickly without a significant loss in value Liquid firms are less likely to experience financial distress But liquid assets typically earn a lower return Trade-off to fine balance between liquid and illiquid assets
Which one of the following accounts is the most liquid?
Accounts Receivable
Corporation
Advantages: limited liability, unlimited life, separation of ownership and management, transfer of ownership is easy, easier to raise capital Disadvantages: double taxation (income taxed at the corporate rate and then dividends taxes at the personal rate
Partnership
Advantages: two or more owners, more capital available, relatively easy to start, income taxes once as personal income Disadvantages: unlimited liability (general partnership, limited partnership), partnership dissolves when one partner dies or wishes to sell, difficult to transfer ownership
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
An increase in the market value per share
An increase in the depreciation expense will not affect the cash coverage ratio.
CORRECT
Russell's has annual sales of $649,200, cost of goods sold of $389,400, interest of $23,650, depreciation of $121,000, and a tax rate of 21 percent. What is the cash coverage ratio for the year?
Cash coverage ratio = ($649,200 − 389,400)/$23,650 Cash coverage ratio = 10.99
Sources of Cash
Cash inflow occurs when we "sell" something Decrease in asset accounts (AR, Inventory, net fixed Assets) Increase in liability or equity account (AP, current liabilities, current stock)
Uses of Cash
Cash outflow occurs when we "buy" something Increase in asset account (cash and other current assets) Decrease in liability or equity account (Note Payable and long-term debt)
For the year, B&K United increased current liabilities by $1,400, decreased cash by $1,200, increased net fixed assets by $340, increased accounts receivable by $200, and decreased inventory by $150. What is the annual change in net working capital?
Change in NWC = −$1,400 − 1,200 + 200 − 150 Change in NWC = −$2,550
Common-Size Balance Sheets:
Compute all accounts as a percent of total assets
Common Size Income Statements:
Compute all line items as a percent of sales
Total Assets
Current Assets + Net Fixed Assets
Net Working Capital
Current Assets - Current Liabilities
Total Debt
Current Liabilities + Long Term Debt
Gem Jewelers has current assets of $687,600, total assets of $1,711,000, net working capital of $223,700, and long-term debt of $450,000. What is the debt-equity ratio?
Current liabilities = $687,600 − 223,700 Current liabilities = $463,900 Total equity = $1,711,000 − 463,900 − 450,000 Total equity = $797,100 Debt-equity ratio = ($463,900 + 450,000)/$797,100 Debt-equity ratio= 1.15
Role of Financial Planning
Examine interactions - help management see the interactions between decisions Explore options - give management a systematic framework or exploring its opportunities Avoid surprises - help management identify possible outcomes and plan accordingly Ensure feasibility and internal consistency - help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another
Net Fixed Assets
Fixed Assets - Depreciation
Capital Structure:
How should we pay for our assets? Or Should we use debt or equity?
Investment Activities
Includes changes in fixed assets
Financing Activities
Includes changes in notes payable, long-term debt, equity accounts, and dividends
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
Income statement
Which one of the following actions by a financial manager is most apt to create an agency problem?
Increasing current profits when doing so lowers the value of the company's equity
Pro Forma Financial Statement
Initial Assumptions • Revenues will grow at 15% • All items are tied directly to sales and the current relationships are optimal • All other things will also grow at 15%
Cash Flow to Creditors
Interest Paid - Net new borrowings Cash flow to the corporation's creditors
Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?
Interest expense
Elements of Financial Process
Investment in new assets - determined by capital budgeting decisions Degree of financial leverage - determined by capital structure decisions Cash paid to shareholders - determined by dividend policy decisions Liquidity requirements - determined by net working capital decisions
Assets =
Liabilities + Equity
Williamsburg Market is an all-equity firm that has net income of $96,200, depreciation expense of $6,300, and an increase in net working capital of $2,800. What is the amount of the net cash from operating activity?
Net cash from operating activity = $96,200 + 6,300 − 2,800 Net cash from operating activity = $99,700
At the beginning of the year, Trees Galore had current liabilities of $15,932 and total debt of $68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the amount of net new borrowing for the year?
Net new borrowing = ($72,415 − 13,870) − ($68,847 − 15,932) Net new borrowing = $5,630
Hungry Lunch has net income of $73,402, a price-earnings ratio of 13.7, and earnings per share of $.43. How many shares of stock are outstanding?
Number of shares = $73,402/$.43 Number of shares = 170,702
High Mountain Foods has an equity multiplier of 1.72, a total asset turnover of 1.16, and a profit margin of 4.5 percent. What is the return on assets?
ROA = .045(1.16) ROA = .0522, or 5.22%
Drive-Up has sales of $31.4 million, total assets of $27.6 million, and total debt of $14.9 million. The profit margin is 3.7 percent. What is the return on equity?
ROE = [.037($31.4m)]/($27.6m − 14.9m) ROE = .0915, or 9.15%
components or ingredients that go into Financial Planning
Sales Forecast - many cash flows depend directly on the level of sales (often estimated using sales growth rate) Pro Forma Statements - setting up the plan using projected financial statements allows for consistency and ease of interpretation Asset Requirements - the additional assets that will be required to meet sales projections Financial Requirements - the amount of financing needed to pay for the required assets Plug Variable - determined by management deciding what type of financing will be used to make the balance sheet balance Economic Assumptions - explicit assumptions about the coming economic environment
Financial managers should primarily focus on the interests of:
Shareholders
Which one of the following parties has ultimate control of a corporation?
Shareholders
The U.S. government coding system that classifies a company by the nature of its business operations is known as the:
Standard Industrial Classification codes.
Statement of Cash Flows
Will look at how cash is generated from utilizing assets and how it is paid to those that finance the purchase of assets
Operating Cash Flow:
a measure of the amount of cash generated by a company's normal business operations
All of the following issues represent problems encountered when comparing the financial statements of two separate entities except the issue of the companies:
being conglomerates with unrelated lines of business. having geographically varying operations. using differing accounting methods. differing seasonal peaks. *****having the same fiscal year.
Financial managers should strive to maximize the current value per share of the existing stock to:
best represent the interests of the current shareholders.
Agency Problem:
conflict of interest between principal and agent
Capital structure decisions include determining:
how much debt should be assumed to fund a project.
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses. The SOX Act of 2002, also known as the Corporate Responsibility Act of 2002, mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.
A partnership with four general partners:
must distribute 25 percent of the profits to each partner.
Treasurer
oversees cash management, credit management, capital expenditure, and financial planning
Controller
oversees taxes, cost accounting, financial accounting, and data processing
As the degree of financial leverage increases, the:
probability a firm will encounter financial distress increases.
The most acceptable method of evaluating the financial statements is to compare the company's current financial:
ratios to the company's historical ratios.
management's primary financial objective is.
• Maximize profit • Minimize costs • Maximize market share • Maximize the current value of the company's stock