FINA Ch. 1

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

3.50 Book value per share = $1,750,000/500,000 shares = $3.50 per share

Which of the following statements concerning the cash flow production cycle is true?

A. The profits reported in a given time period equal the cash flows generated.

Which of the following tends to cause differences between market values and book values? I. Accounting often creates a dichotomy between realized and unrealized income. II. Accountants allocate goodwill when a firm is acquired for more than book value. III. Many accounting values are transactions-based and hence backward-looking. IV. The use of fair-value accounting. V. Accountants refuse to assign a cost to equity capital.

I,III, and V

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income statement

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share? Stock price per share = $5 million/500,000 shares = $10 per share

Stock price per share = $5 million/500,000 shares = $10 per share

The book value of a firm is:

based on historical cost.

Which one of the following is a source of cash?

decrease in accounts receivable

Which one of the following is a source of cash?

increase in accounts payable

Which one of the following is a use of cash?

increase in inventory

Depreciation expense:

reduces both taxes and net income.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

balance sheet

Noncash items refer to:

expenses, like depreciation, which do not directly affect cash flows.

Assuming the company neither sold nor salvaged any assets during the year, what were the company's capital expenditures during 2011?

139 Net fixed assets rose $78 million, depreciation reduced net fixed assets by $61 million, so capital expenditures must have been $139 million (ignoring asset sales or write-offs). Letting bop stand for beginning of period, and eop for end of period, the equation is Net fixed assetseop = Net fixed assetsbop + Capital Expenditures - Depreciation Capital Expenditures = Change in net fixed assets + Depreciation $139 = $78 + $61

During 2011, what was the cost of goods (in $ millions) produced by the company? During 2011, the company sold $223 million of merchandise at cost, but finished goods inventory fell $5 million, indicating that the company only produced $218 million of merchandise. Letting bop stand for beginning of period, and eop for end of period, the equation is Inventoryeop = Inventorybop + Production - Cost of sales Production = Cost of sales - Change in Inventory $218 = $223 - $5

218

During 2011, how much cash (in $ millions) did South collect from sales? In 2011, sales were $364 million, but account receivable rose $40 million, indicating that the company only received $324 million in cash. (This ignores possible changes in bad debt reserves.) Letting bop stand for beginning of period, and eop for end of period, the equation is (where AR = accounts receivable) AReop = ARbop + Credit sales - Collections Collections = Credit sales - Change in AR $324 = $364 - $40

324

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same, what should the market value of the firm be after the repurchase?

4,000,000 Since nothing else has changed, the market value should fall by exactly the amount of the cash paid in the transaction. The new market value will be $4 million. Another way to think about this is to note that repurchase of the shares will reduce cash by $1 million (or increase liabilities by the same amount if financed with debt), and thus the firm is worth $1 million less to the owners after the repurchase, or $4 million. After repurchasing 100,000 shares (= 0.20* 500,000), 400,000 shares will be outstanding, and the price per share remains $10 ($4 million/400,000).

. JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

750,000 JM Case will pay $10 per share for the 100,000 shares (= 0.20* 500,000) it repurchases. This reduces the book value by $1 million. Assuming all else remains the same, the new book value should be $750,000.

Assuming that there were no financing cash flows during 2011 and basing your answer solely on the information provided, what were the cash flows from operations (in $ millions) for 2011? Cash flow from operations can be calculated directly from items in the table. Start with net income, remove any noncash items (such as depreciation), and add any cash transactions that are not captured by the income statement (such as changes to working capital accounts).

76 CF from ops = NI - Increase in AR + Decrease in inventory + increase in AP + depreciation CF from ops + 45-40+5+5+61 - 76M

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

The sources and uses of cash over a stated period of time are reflected on the:

Cash Flow Statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

Cash Flow Statement