FINA HW QUESTIONS FOR TEST 1
Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account?
$23,902 = $8,000[(1 + r)^12] r = .0955, or 9.55%
Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What rate of interest must you earn to cover the cost of your child's college education?
$245,000 = $108,000[(1 + r)^15] r = .0561, or 5.61%
Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money?
$278,592 = $125,000[(1 + r)10] r = .0834, or 8.34%
Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment?
$31,406 = $23,000[(1 + r)^3] r = .1094, or 10.94%
Assume the average vehicle selling price in the United States last year was $36,420. The average price five years earlier was $31,208. What was the annual increase in the selling price over this time period?
$36,420 = $31,208[(1 + r)^5] r = .0314, or 3.14%
What is the average tax rate for a firm with taxable income of $118,740 in 2017? Taxable Income Tax Rate $0-50,000 15% 50,001-75,000 25 75,001-100,000 34 100,001-335,000 39
24.89 percent
According to the Rule of 72, you can do which one of the following?
Approximately double your money in 11 years at 6.55 percent interest
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance sheet
Which of the following individuals have unlimited liability for a firm's debts based on their ownership interest?
Both general partners and sole proprietors
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
The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?
CFS = .28($272,600) − $75,000 CFS = $1,328
Which one of the following terms is defined as the management of a firm's long-term investments?
Capital budgeting
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
Capital structure
A supplier, who requires payment within 10 days, should be most concerned with which one of the following ratios when granting credit?
Cash
Pittsburgh Motors has sales of $4,300, net income of $320, total assets of $4,800, and total equity of $2,950. Interest expense is $65. What is the common-size statement value of the interest expense?
Common-size interest = $65/$4,300 Common-size interest = .0151, or 1.51%
Oil Creek Auto has sales of $3,340, net income of $274, net fixed assets of $2,600, and current assets of $920. The firm has $430 in inventory. What is the common-size statement value of inventory?
Common-size inventory = $430/($2,600 + 920) Common-size inventory = .1222, or 12.22%
Which business form is best suited to raising large amounts of capital?
Corporation
Which one of the following statements is correct?
Corporations can have an unlimited life.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
Corporations delisting from major exchanges
Billings Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?
Credit sales = .66($161,000/.076) Credit sales = $1,398,158 Days' sales in receivables = 365/($1,398,158/$127,100) Days' sales in receivables = 33.18 days
Nielsen's has inventory of $29,406, accounts receivable of $46,215, net working capital of $4,507, and accounts payable of $48,919. What is the quick ratio?
Current Assets = Current Liabilities + Net Working Capital Current Assets = 48,919 + 4,507 = 53,426 Quick ratio = ($53,426 − 29,406)/$48,919 Quick ratio = .49
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?
Current assets = $7,390 − 3,910 Current assets = $3,480 Current liabilities = $3,480 − 560 Current liabilities = $2,920 Total liabilities = $2,920 + 3,970 Total liabilities = $6,890
BL Industries has ending inventory of $302,800, annual sales of $2.33 million, and annual cost of goods sold of $1.41 million. On average, how long did a unit of inventory sit on the shelf before it was sold?
Day's sales in inventory = 365/($1,410,000/$302,800) Days' sales in inventory = 78.38 days
Corner Supply has a current accounts receivable balance of $246,000. Credit sales for the year just ended were $2,430,000. How many days on average did it take for credit customers to pay off their accounts during this past year?
Days' sales in receivables = 365/($2,430,000/$246,000) Days' sales in receivables = 36.95 days
The Strong Box has sales of $859,700, cost of goods sold of $648,200, net income of $93,100, and accounts receivable of $102,300. How many days of sales are in receivables?
Days' sales in receivables = 365/($859,700/$102,300) Days' sales in receivables = 43.43
Coulter Supply has a total debt ratio of .46. What is the equity multiplier?
Debt-equity ratio = .46/(1 − .46) Debt-equity ratio = .85 Equity multiplier = 1 + .85 Equity multiplier = 1.85
Which one of the following is a use of cash?
Decrease in accounts payable
Which one of the following is a source of cash?
Decrease in inventory
The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways?
Decrease in the day's sales in inventory
Which one of these will increase the present value of a set amount to be received sometime in the future?
Decrease in the interest rate
On the statement of cash flows, which one of the following is considered a financing activity?
Dividends paid
Which one of these identifies the relationship between the return on assets and the return on equity?
DuPont identity
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?
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
A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 21.3, and a book value per share of $7.92. What is the market-to-book ratio?
EPS = $126,400/160,000 EPS = $.79 Price per share = $.79(21.3) Price per share = $16.827 Market-to-book ratio = $16.827/$7.92 Market-to-book ratio = 2.12
The Tech Store has annual sales of $416,000, a price-earnings ratio of 18, and a profit margin of 3.7 percent. There are 12,000 shares of stock outstanding. What is the price-sales ratio?
EPS = [.037($416,000)]/12,000 EPS = $1.28 Price-sales ratio = [18 ($1.28)]/($416,000/12,000) Price-sales ratio = .67
Which of the following parties are considered stakeholders of a firm?
Employees and the government
Which one of the following accurately describes the three parts of the DuPont identity?
Equity multiplier, profit margin, and total asset turnover
What is the future value of $11,600 invested for 17 years at 7.25 percent compounded annually?
FV = $11,600(1 + .0725)^17 FV = $38,125.20
Duane and Thad plan on retiring 27 years from today and plan to have the same amount saved at that time. In preparation for this, Duane is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Thad's deposit amount vary from Duane's if Thad also makes a deposit today but earns an annual interest rate of 6.2 percent?
FV = $15,000(1.052^27) FV = $58,954.40 PV = $58,954.40/1.062^27 PV = $11,618.61 Difference = $11,618.61 − 15,000 Difference = −$3,381.39
Alex invested $2,550 in an account that pays 5 percent simple interest. How much money will he have at the end of four years?
FV = $2,550 + ($2,550)(.05)(4) FV = $3,060
This morning, DJ's invested $225,000 to help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4 percent rather than 3.5 percent?
FV = $225,000(1.04^3) FV = $253,094.40 FV = $225,000(1.035^3) FV = $249,461.52 Difference = $253,094.40 − 249,461.52 Difference = $3,632.88
Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years?
FV = $3,630 + ($3,630)(.06)(5) FV = $4,719
You are depositing $4,500 today at an annual interest rate of 7.2 percent. How much additional interest will you earn if you leave the money invested for 45 years instead of 40 years?
FV = $4,500(1.072^45) FV = $102,796.39 FV = $4,500(1.072^40) FV = $72,611.25 Difference = $102,796.39 − 72,611.25 Difference = $30,185.14
You just received a $5,000 gift from your grandmother which you have decided to save and then gift to your grandchildren 50 years from now. How much additional money will you gift if you earn 7.5 percent interest rather than 7 percent interest over the next 50 years?
FV = $5,000(1.075^50) FV = $185,948.73 FV = $5,000(1.07^50) FV = $147,285.13 Difference = $185,948.73 − 147,285.13 Difference = $38,663.60
Marti's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much will the collection be worth in 2025?
FV = $50(1.076^77) FV = $14,077.16
You hope to buy your dream car five years from now. Today, that car costs $62,500. You expect the price to increase by an average of 2.9 percent per year. How much will your dream car cost by the time you are ready to buy it?
FV = $62,500(1.029^5) FV = $72,103.59
You own a classic car currently valued at $64,000. If the value increases by 2.5 percent annually, how much will the car be worth 15 years from now?
FV = $64,000(1.025^15) FV = $92,691.08
Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared?
Generally Accepted Accounting Principles
Which one of the following is an agency cost?
Hiring outside accountants to audit the company's financial statements
Which one of the following questions is a working capital management decision?
How much inventory should be on hand for immediate sale?
Andre's Bakery has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?
Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − .21) Net income = $123,240
Which one of the following statements concerning net working capital is correct?
Net working capital increases when inventory is sold for cash at a profit.
Nu Furniture has sales of $241,000, depreciation of $32,200, interest expense of $35,700, costs of $103,400, and taxes of $14,637. What is the operating cash flow for the year?
OCF = $241,000 − 103,400 − 14,637 OCF = $122,963
Which term relates to the cash flow that results from a company's ongoing, normal business activities?
Operating cash flow
Bernice's has $823,000 in sales. The profit margin is 4.2 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $16.50. What is the price-earnings ratio?
PE = $16.50/{[.042 ($823,000)]/7,500} PE = 3.58
When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit?
PV = $1,250,000/1.07645 PV = $46,276.21 PV = $1,250,000/1.07640 PV = $66,745.06 Difference = $66,745.06 − 46,276.21 Difference = $20,468.85
Twenty years from now, you want to spend $175,000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent?
PV = $175,000/1.066^20 PV = $48,740.95
You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
PV = $30,000/1.035^5 PV = $25,259.20 PV = $30,000/1.025^5 PV = $26,515.63 Difference = $26,515.63 − 25,259.20 Difference = $1,256.43
Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954?
PV = $310,000/1.22^63 PV = $1.12
Friendly Companies has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent?
PV = $327,000,000/1.0624^16 PV = $124,147,723.50
What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?
PV = $45,000/1.08^50 PV = $959.46
Your father invested a lump sum 28 years ago at 4.05 percent annual interest. Today, he gave you the proceeds of that investment, totalling $48,613.24. How much did your father originally invest?
PV = $48,613.24/1.0405^28 PV = $15,994.70
Which one of the following represents a cash outflow from a corporation?
Payment of dividends
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
Which one of the following is classified as a tangible fixed asset?
Production equipment
Which one of the following grants an individual the right to vote on behalf of a shareholder?
Proxy
Which one of the following is a means by which shareholders can replace company management?
Proxy fight
Which one of the following ratios is a measure of a firm's liquidity?
Quick ratio
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?
Quick ratio = ($68 + 142)/$235Quick ratio = .89
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%
TJ's has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a profit margin of 5.78 percent. What is the return on assets?
ROA = [.0578 ($813,200)]/($171,000 + 396,000) ROA = .0829, or 8.29%
Which one of the following is a correct formula for computing the return on equity?
ROA × Equity multiplier
Taylor's Men's Wear has a debt-equity ratio of 48 percent, sales of $829,000, net income of $47,300, and total debt of $206,300. What is the return on equity?
ROE = $47,300/($206,300/.48) ROE = .1101, or 11.01%
A firm has a debt-equity ratio of .62, a total asset turnover of 1.24, and a profit margin of 5.1 percent. The total equity is $489,600. What is the amount of the net income?
ROE = .051(1.24)(1.62) ROE = .1024 Net income = .1024($489,600) Net income = $50,159
Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity?
ROE = 12.5%(1.49) ROE = 18.63%
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%
Frank's Used Cars has sales of $807,200, total assets of $768,100, and a profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
ROE = [.0668 ($807,200)]/[$768,100 (1 − .54)] ROE = .1526, or 15.26%
Which one of the following is a primary market transaction?
Sale of a new share of stock to an individual investor
One year ago, you invested $1,750. Today it is worth $1,815.48. What rate of interest did you earn?
$1,815.48 = $1,750(1 + r) r = .0374, or 3.74%
Up Towne Cleaners has taxable income of $48,900 and a tax rate of 21 percent. What is the change in retained earnings if the firm pays $20,200 in dividends for the year?
$18,431 Change in retained earnings = ($48,900)(1 − .21) − $20,200
Four years ago, Saul invested $500. Three years ago, Trek invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return. Which one of the following statements is correct concerning these investments?
Saul: $800 = $500[(1 + r)^4] r = .1247, or 12.47% Trek: $800 = $600[(1 + r)^3] r = .1006, or 10.06% Since both accounts have equal value today and Saul earns the higher rate of return, his account had to be worth less than Trek's account one year ago.
Public offerings of debt and equity must be registered with the:
Securities and Exchange Commission.
Which one of the following parties has ultimate control of a corporation?
Shareholders
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?
Shareholders' equity = $5,900 + 21,200 − 8,400Shareholders' equity = $18,700
Which one of the following is a working capital management decision?
Should the firm pay cash for a purchase or use the credit offered by the supplier?
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
CBC Industries has sales of $21,415, interest paid of $1,282, costs of $9,740, and depreciation of $1,480. What is the operating cash flow if the tax rate is 22 percent?
Tax = ($21,415 − 9,740 − 1,480 − 1,282)(.22) Tax = $1,960.86 OCF = $21,415 − 9,740 − 1,960.86 OCF = $9,714.14
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 is correct concerning the NYSE?
The listing requirements for the NYSE are more stringent than those of NASDAQ.
Which one of the following statements concerning a sole proprietorship is correct?
The owner of a sole proprietorship is personally responsible for all of the company's debts.
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
The present value of this investment is equal to $1,000.
Western Gear has net income of $12,400, a tax rate of 21 percent, and interest expense of $1,600. What is the times interest earned ratio for the year?
Times interest earned = [$12,400/(1 − .21) + $1,600]/$1,600 Times interest earned = 10.81
An increase in which of the following must increase the return on equity, all else constant?
Total asset turnover and debt-equity ratio
SS Stores has total debt of $4,910 and a debt-equity ratio of 0.52. What is the value of the total assets?
Total equity = $4,910/.52 Total equity = $9,442.31 Total assets = $4,910 + 9,442.31 Total assets = $14,352.31
The decision to issue additional shares of stock is an example of:
a capital structure decision.
The _____ tax rate is equal to total taxes divided by total taxable income.
average
The book value of a firm is: The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent? Multiple Choice
based on historical cost.
Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:
compounding.
A _____ has all the respective rights and privileges of a legal person.
corporation
A business created as a distinct legal entity and treated as a legal "person" is called a(n):
corporation.
Agency problems are most associated with:
corporations.
A general partner:
is personally responsible for all partnership debts.
A limited liability company:
is taxed similar to a partnership.
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:
limited partner.
Mortgage lenders probably have the most interest in the ______ ratios.
long-term debt and times interest earned
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses.
The Sarbanes-Oxley Act of 2002 holds a public company's _____ responsible for the accuracy of the company's financial statements.
managers
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate
marginal
Decisions made by financial managers should primarily focus on increasing the:
market value per share of outstanding stock.
As the degree of financial leverage increases, the:
probability a firm will encounter financial distress increases.
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
profitability
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
sales.
Financial managers should primarily focus on the interests of:
shareholders.
Ratios that measure a firm's liquidity are known as _____ ratios.
short-term solvency
A business owned by a solitary individual who has unlimited liability for the firm's debt is called a:
sole proprietorship.
Corporate dividends are:
taxable income of the recipient even though that income was previously taxed.
The primary advantage of being a limited partner is:
the partner's maximum loss is limited to their capital investment.
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
was facilitated in the secondary market.
An example of a capital budgeting decision is deciding:
whether or not to purchase a new machine for the production line.
A firm's short-term assets and its short-term liabilities are referred to as the firm's:
working capital.
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
Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?
$430,065.11 = $4,500[(1 + r)60] r = .0790, or 7.90%
You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annual interest. How many years will it be before you purchase the car, assuming the price of the car remains constant?
$68,000 = $36,840(1.049^t) t = 12.81 years
On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?
$756 = $300(1.045^t) t = 21 years Age today = 10 + 21 Age today = 31 years
A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?
(Total assets - Total equity)/Total assets = .61Total equity = .39 Total assets Net income = .114 Total assets OE = .114 Total assets/.39 Total assets ROE = .2923, or 29.23%
If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
.5
Which one of the following is a current liability?
Account payable to a supplier that is due next week
Which one of the following accounts is the most liquid?
Accounts Receivable
An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?
Accounts receivable
Which one of the following is a current asset?
Accounts receivable
Which one of the following is a source of cash?
Acquisition of debt
Stone Walls has a long-term debt ratio of .6 and a current ratio of 1.2. Current liabilities are $800, sales are $7,800, the profit margin is 6.5 percent, and return on equity is 15.5 percent. What is the amount of the firm's net fixed assets?
Current assets = 1.2($800) Current assets = $960 Net income = .065($7,800) Net income = $507 Total equity = $507/.155 Total equity = $3,270.97 6 = Long term debt/(Long-term debt + $3,270.97) Long-term debt = $4,906.46 Total debt = $800 + 4,906.46 Total debt = $5,706.46 Total assets = $5,706.46 + 3,270.97 Total assets = $8,977.43 Net fixed assets = $8,977.43 − 960 Net fixed assets = $8,017.43
Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 4.7, and a current ratio of 2.9. What is the cost of goods sold?
Current assets = 2.9($350,000) Current assets = $1,015,000 ($1,015,000 − Inventory)/$350,000 = 1.65 Inventory = $437,500 COGS = 4.7($437,500) COGS = $2,056,250
The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generating per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner?
I, II, and III only
Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?
In today's dollars, Chang Lee's money is worth more than Soo Lee's.
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 is a source of cash for a tax-exempt firm?
Increase in common stock
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
Sally and Alicia are equal general partners in a business. They are content with their current management and tax situation but are uncomfortable with their unlimited liability. Which form of business entity should they consider as a replacement to their current arrangement assuming they wish to remain the only two owners of the business?
Limited liability company
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?
Limited partnership
Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding and a book value per share of $2.09. What is the market-to-book ratio?
MV of assets = .96($225,000) MV of assets = $216,000 MV of equity = $216,000 − 101,000 MV of equity = $115,000 MV per share = $115,000/20,000 MV per share = $5.75 Market-to-book ratio = $5.75/$2.09 Market-to-book ratio = 2.75 times
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?
NWC = $4,900 − 3,200 − 1,400 NWC = $300
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?
NWC = $680 + 210 + 80 − 250 NWC = $720
Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct?
Nan will have more money than Neal at any age
Webster's has beginning net fixed assets of $684,218, ending net fixed assets of $679,426, and depreciation expense of $48,859. What is the net capital spending for the year if the tax rate is 25 percent?
Net capital spending = $679,426 − 684,218 + 48,859 Net capital spending = $44,067
Hayes Bakery has sales of $30,600, costs of $15,350, an addition to retained earnings of $4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent. What is the amount of the depreciation expense?
Net income = $4,221 + 469 Net income = $4,690 EBT = $4,690/(1 − .21) EBT = $5,936.71 EBIT = $5,936.71 + 1,300 EBIT = $7,236.71 Depreciation = $30,600 − 15,350 − 7,236.71 Depreciation = $8,013.29
Lawn Care, Inc., has sales of $367,400, costs of $183,600, depreciation of $48,600, interest of $39,200, and a tax rate of 25 percent. The firm has total assets of $422,100, long-term debt of $102,000, net fixed assets of $264,500, and net working capital of $22,300. What is the return on equity?
Net income = ($367,400 − 183,600 − 48,600 − 39,200) (1 − .25) Net income = $72,000 Current liabilities = $422,100 − 264,500 − 22,300 Current liabilities = $135,300 Total equity = $422,100 − 135,300 − 102,000 Total equity = $184,800 ROE = $72,000/$184,800 ROE = .3896, or 38.96%
Net working capital is defined as:
current assets minus current liabilities.
According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities.
decrease; operating
According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities.
decrease; operating
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
discounting.
One disadvantage of the corporate form of business ownership is the:
double taxation of distributed profits.
Noncash items refer to:
expenses that do not directly affect cash flows.
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:
general partnership.
A limited partnership:
has at least one partner who has unlimited liability for all of the partnership's debts.
Capital structure decisions include determining:
how much debt should be assumed to fund a project.
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:
increase.