Finance 2400 midterm review

You borrow $6,630 to buy a car. The terms of the loan call for monthly payments for 7 years a rate of interest of 8 percent. What is the amount of each payment?

$103.34

Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?

$139,931.08 Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($235,000)(0.39) + ($411,562 - $335,000)(0.34) = $139,931.08

The Medicine Shoppe has a return on equity of 19.2 percent, a profit margin of 11.6 percent, and total equity of $738,000. What is the net income?

$141,696 Net income = 0.192 × $738,000 = $141,696

You just paid $357,000 for a policy that will pay you and your heirs $12,900 a year forever. What rate of return are you earning on this policy?

3.61 percent r = $12,900 / $357,000 = 3.61 percent

Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income did the firm earn for the period?

35,612 Net income = ($581,600 - $479,700 - $32,100 - $8,400)(1 - 0.42) = $35,612

A firm has inventory of $11,400, accounts payable of $9,800, cash of $850, net fixed assets of $12,150, long-term debt of $9,500, accounts receivable of $6,600, and total equity of $11,700. What is the common-size percentage for the net fixed assets?

39.19 percent NFA common-size percentage = $12,150/($850 + $6,600 + $11,400 + $12,150) = 39.19 percent

Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases?

42.19 days Accounts receivable turnover = $923,000/$106,700 = 8.65042; Days' sales in receivables = 365/8.65042 = 42.19 days

The After Life has sales of $428,300, total assets of $389,100, and a profit margin of 7.2 percent. What is the return on assets?

7.93 percent Return on assets = (0.072 × $428,300)/$389,100 = 7.93 percent

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?

9.09 Times interest earned ratio = $21,680/{$21,680 - [$12,542/(1 - 0.35)]} = 9.09

Lee Sun's has sales of $3,900, total assets of $3,600, and a profit margin of 5 percent. The firm has a total debt ratio of 41 percent. What is the return on equity?

9.18 percent Net income = $3,900 × 0.05 = $195.00 Total debt ratio = 0.41 = ($3,600 - Total equity) / $3,600; Total equity = $2,124.00 Return on equity = $195.00 / $2,124.00 = 9.18 percent

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

A firm has net working capital of $560, net fixed assets of $2,306, sales of $6,700, and current liabilities of $870. How many dollars worth of sales are generated from every $1 in total assets?

$1.79 Current assets = $560 + $870 = $1,430 Total asset turnover = $6,700 / ($1,430 + $2,306) = 1.79 Sales generated by $1 in total assets = $1 x 1.79 = $1.79

George Jefferson established a trust fund that provides $179,500 in scholarships each year for worthy students. The trust fund earns a 4 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

$4,487,500 PV = $179,500 / 0.04 = $4,487,500

The Rainbow Company has total sales of $713,200 and a profit margin of 8.5 percent. Currently, the firm has 12,500 shares outstanding. What are the earnings per share?

$4.85 Earnings per share = (0.085 × $713,200)/12,500 = $4.85

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 34 percent. The firm paid out $16,500 in dividends. What is the addition to retained earnings?

$42,438 Addition to retained earnings = [($318,400 - $199,400 - $28,600 - $1,100)(1 - 0.34)] - $16,500 = $42,438

What is the future value of $1,120 a year for 5 years at a 7 percent rate of interest?

$6,440.83 AFV = $1,120 × [(1.075 - 1) / 0.07] = $6,440.83

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Blooming Gardens has an inventory turnover of 16. This means the firm:

sells its inventory an average of 16 times each year.

Common-size financial statements present all balance sheet account values as a percentage of:

total assets.

Your parents are giving you $260 a month for 4 years while you are in college. At a 7 percent discount rate, what are these payments worth to you when you first start college?

$10,857.65

Which one of the following best matches the primary goal of financial management?

Increasing the market value of the firm

In 2012, an Action Comics No. 1, featuring the first appearance of Superman, was sold at auction for $985,000. The comic book was originally sold in 1944 for $.05. For this to have been true, what was the annual increase in the value of the comic book?

pv = -.05 fv = 985,000 n = 68 cpt i/y iy = 28.02

Assume that in 2009, a Morgan silver dollar minted in 1890 sold for $7,050. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2051, assuming they appreciate at an annual rate of 5.5 percent?

pv = -1 fv = 7050 n = 119 cpt i/y i/y = 7.73%

Assume that in 2009, a Morgan silver dollar minted in 1890 sold for $7,050. What was the rate of return on this investment?

pv = -1 fv = 7050 n = 119 cpt i/y i/y = 7.73%

You are scheduled to receive $17,000 in two years. When you receive it, you will invest it for six more years at 9.75 percent per year. How much will you have in eight years?

pv = -17,000 i/y = 9.75 6 = n cpt fv fv = 29,708.18

You're trying to save to buy a new $230,000 Ferrari. You have $39,000 today that can be invested at your bank. The bank pays 4.6 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

pv = -39,000 fv = 230,000 i/y = 4.6% cpt n n = 39.46

Assume the total cost of a college education will be $400,000 when your child enters college in 17 years. You presently have $66,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

pv = -66,000 fv = 400,000 n = 17 cpt i/y i/y = 11.18%

Delivery trucks are classified as:

tangible fixed assets.

A firm has an equity multiplier of 1.5. This means that the firm has a:

total debt ratio of 0.33.

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

working capital.

The primary goal of financial management is to maximize which one of the following for a corporation?

Market value of existing stock

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25,100,000 be paid to the president upon the completion of her first 7 years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6 percent on these funds. How much must the company set aside each year for this purpose?

$2,990,288.95 AFV = $25,100,000 = C × [(1.067 -1) / 0.06]; C = $2,990,288.95

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

$21,883.25 Net income = ($83,490 - $68,407 - $8,200 - $478) × (1 - 0.35) = $4,163.25; Ending retained earnings = $18,670 + $4,163.25 - $950 = $21,883.25

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $4,900, $9,900, and $16,100 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 10 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

$24,732.53 PV = $4,900 / (1 + 0.10) + $9,900 / (1 + 0.10)2 + $16,100 / (1 + 0.10)3 = $24,732.53

A firm has a return on equity of 25 percent. The total asset turnover is 2.4 and the profit margin is 8 percent. The total equity is $4,100. What is the amount of the net income?

$328 Net income = 0.25 × $4,100 = $1,025

The Good Life Insurance Co. wants to sell you an annuity which will pay you $670 per quarter for 25 years. You want to earn a minimum rate of return of 5.2 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

$37,374.43

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

$5,400 Long-term debt = $36,400 - $18,800 - $12,200 = $5,400

A firm has total debt of $1,430 and a debt-equity ratio of 0.28. What is the value of the total assets?

$6,537.14 $1,430 / Total equity = 0.28; Total equity = $5,107.14 Total assets = $1,430 + $5,107.14 = $6,537.14

Baugh and Essary reports the following account balances: inventory of $17,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets?

$61,400 Current assets = $17,600 + $11,900 + $31,900 = $61,400

A firm has common stock of $93, paid-in surplus of $300, total liabilities of $425, current assets of $420, and net fixed assets of $630. What is the amount of the shareholders' equity?

$625 Shareholders' equity = Current assets + Net fixed assets - Total liabilities. Shareholders' equity = $420 + $630 - $425 = $625

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

$7,600 Dividends paid = $31,800 - $24,200 = $7,600

You are scheduled to receive annual payments of $10,000 for each of the next 24 years. Your discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

$8,423 APV = $10,000 × {1 - [1 / (1 + 0.08)24]} / 0.08 = $105,287.58 ADUEPV = $105,287.58 × (1 + 0.08) = $113,710.59 Difference = $113,710.59 - $105,287.58 = $8,423.01 = $8,423 (rounded)

You are analyzing a company that has cash of $11,200, accounts receivable of $27,800, fixed assets of $124,600, accounts payable of $31,300, and inventory of $56,900. What is the quick ratio?

1.25 Quick ratio = ($11,200 + $27,800)/$31,300 = 1.25

Peter's Motor Works has total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800, and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?

1.67 Current ratio = ($689,400 - $497,800)/($689,400 - $299,500 - $275,000) = 1.67

The common stock of The Burger Hut is selling for $16.25 a share. The company has earnings per share of $0.42 and a book value per share of $9.28. What is the market-to-book ratio?

1.75 Market-to-book ratio = $16.25/$9.28 = 1.75

A firm has sales of $1,170, net income of $221, net fixed assets of $534, and current assets of $290. The firm has $96 in inventory. What is the common-size statement value of inventory?

11.65 percent Total assets = $534 + $290 = $824 Common-size value of inventory = $96 / $824 = 11.65 percent

Underwood Homes Sales has total assets of $589,900 and total debt of $318,000. What is the equity multiplier?

2.17 Equity multiplier = $589,900/($589,900 - $318,000) = 2.17

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.7, and a profit margin of 2.4 percent. What is the equity multiplier?

2.70 Equity multiplier = 1 + 1.7 = 2.70

The tax rates are as shown. 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 $128,513?

25.97% Taxes paid = 0.15($50,000) + 0.25($75,000 - 50,000) + 0.34($100,000 - 75,000) + 0.39($128,513 - 100,000) = $33,370.07 Average tax rate = $33,370.07 / $128,513 = 25.97%

Jupiter Explorers has $9,400 in sales. The profit margin is 4 percent. There are 5,400 shares of stock outstanding. The market price per share is $2.00. What is the price-earnings ratio?

28.72 Earnings per share = ($9,400 × 0.04) / 5,400 = $0.06963 Price-earnings ratio = $2.00 / $0.06963 = 28.72

Which one of the following statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Which one of the following is an intangible fixed asset?

Copyright

The Sarbanes-Oxley Act in 2002 was prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

The DuPont identity can be totally defined by which one of the following?

Equity multiplier and return on assets

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

I, II, and IV only

Depreciation does which one of the following for a profitable firm?

Lowers taxes

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

Marginal tax rate

Which one of the following statements correctly applies to a sole proprietorship?

Obtaining additional equity is dependent on the owner's personal finances.

Which one of the following is an equity account?

Paid-in surplus

All else constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?

Price-sales ratio

You have $9,100 to deposit. Regency Bank offers 9 percent per year compounded monthly (.75 percent per month), while King Bank offers 9 percent but will only compound annually. How much will your investment be worth in 19 years at each bank?

Regency Bank pv = -9,100 i/y = .75% n = 228 cpt fv fv = 49,993.54 King Bank pv = -9,100 n = 19 i/y = 9% cpt fv fv = 47,782.12

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Which one of the following statements concerning market and book values is correct?

The market value tends to provide a better guide to the actual worth of an asset than does the book value.

Kelso's Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?

Total asset turnover

Suppose you are committed to owning a $245,000 Ferrari. If you believe your mutual fund can achieve a 11.1 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must you invest today?

fv = 245,000 i/y = 11.10 n = 10 cpt pv pv = -85,511.69

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

Highly liquid assets:

can be sold quickly at close to full value.

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of:

capital budgeting.

Imprudential, Inc., has an unfunded pension liability of $765 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 8 percent, what is the present value of this liability?

fv = 765,000,000 n = 25 i/y = 8% cpt pv pv = -111,703,697.26

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:

has positive net working capital.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement.

A corporation:

is a legal entity separate from its owners.

The Sarbanes-Oxley Act of 2002 has:

made officers of publicly traded firms personally responsible for the firm's financial statements.

You have just received notification that you have won the $2.15 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 65 years from now. What is the present value of your windfall if the appropriate discount rate is 12 percent?

n = 65 i/y = 12% fv = 2,150,000 cpt pv pv = -1,359.15

In October 2012, the average house price in the United States was $246,300. In October 2003, the average price was $289,700. What was the annual change in the average selling price?

n = 9 pv = -289,700 fv = 246,300 cpt i/y i/y = -1.79

Shareholders' equity is equal to:

net fixed assets minus long-term debt plus net working capital.

A limited liability company:

prefers its profits be taxed as personal income to its owners.

Limited liability companies are primarily designed to:

provide limited liability while avoiding double taxation.