Finance Final Exam Prep I

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?

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

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?

$300 Net working capital = $4,900 - 3,200 - 1,400 = $300

As of 2015, which one of the following statements concerning corporate income taxes is correct?

A firm's tax is computed on an incremental basis.

Which one of the following accounts is the most liquid?

Accounts Receivable.

A stakeholder is:

Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

The book value of a firm is:

Based on historical cost.

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

Good reputation of the company.

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

$11,129 Cash flow to creditors = $6,430 - ($68,219 - 72,918) = $11,129

The following information pertains to Galaxy Interiors: Picture Picture What is the operating cash flow for 2015?

$4,267 Operating cash flow = $3,396 + 1,611 - 740 = $4,267

Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense?

$7,000 Net income = $469 + 4,221 = $4,690 Earnings before taxes = $4,690 / (1 - .30) = $6,700 Earnings before interest and taxes = $6,700 + 1,300 = $8,000 Depreciation = $30,000 - 15,000 - 8,000 = $7,000

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

Capital budgeting.

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder

I and III only.

Which of the following are cash flows from a corporation into the financial markets? I. Repayment of long-term debt. II. Payment of government taxes. III. Payment of loan interest. IV. Payment of quarterly dividend.

I, III, and IV only.

A general partner:

Is personally responsible for all the partnership debts.

Which one of the following statements concerning a sole proprietorship is correct?

It is easy to create a sole proprietorship.

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.

Limited liability company.

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?

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

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

Agency problem.

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

$21,903 Change in net working capital = ($122,418 - 103,718) - ($121,306 - 124,509) = $21,903

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

$33,763 Net capital spending = $209,411 - 218,470 + 42,822 = $33,763

Depreciation for a tax-paying firm:

Increases expenses and lowers taxes.

The growth of both sole proprietorships and partnerships is frequently limited by their:

Inability to raise cash.

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?

$17,301 Cash flow to creditors = $2,808 - ($36,714 - 51,207) = $17,301

The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How much additional tax will the firm owe if taxable income increases by $21,000? Picture

$8,080 Additional tax = .34($100,000 - 97,800) + .39($97,800 + 21,000 - 100,000) = $8,080

You have gathered this information on JJ Enterprises: Picture What is the net capital spending for 2015?

$826 Net capital spending = $7,330 - 7,700 + 1,196 = $826

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

$93,500 Current liabilities = .40 × $141,000 = $56,400 Total assets = $218,700 + 141,000 = $359,700 Current assets = $359,700 - 209,800 = $149,900 Net working capital = $149,900 - 56,400 = $93,500

You have gathered this information on JJ Enterprises: Picture What is the cash flow to creditors for 2015?

$954 Cash flow to creditors = $277 - ($4,103 - 4,780) = $954

The following information pertains to Galaxy Interiors: Picture Picture What is the amount of dividends paid for 2015?

800 Dividends paid = $1,374 - ($2,696 - 2,122) = $800

Which one of the following statements related to the cash flow to creditors is correct?

A positive cash flow to creditors represents a net cash outflow from the firm.

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

Cash flow from assets.

Which one of the following is a capital budgeting decision?

Deciding whether or not to purchase a new machine for the production line.

Corporate bylaws:

Determine how a corporation regulates itself.

Which one of these is a working capital management decision?

Determining the minimum level of cash to be kept in a checking account.

Which one of the following is a working capital management decision?

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

Cash flow to stockholders is defined as:

Dividend payments less net new equity raised.

Which one of the following statements is correct?

Income from both sole proprietorships and partnerships is taxed as individual income.

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

Taxes reduce both net income and operating cash flow.

Use the below information to answer the following question. Picture What is the operating cash flow given the above information?

$40,825.00 Net income = $14,308 + 3,200 = $17,508 Taxable income = $17,508 / (1 - .35) = $26,935.38 Earnings before interest and taxes = $26,935.38 + 4,608 = $31,543.38 Operating cash flow = $31,543.38 + 18,709 - .35($26,935.38) = $40,825.00

Which one of the following statements related to liquidity is correct?

Liquid assets are valuable to a firm.

The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.

$4,600,000; $3,900,000 Book value = ($725,000 + 1,375,000) + 2,500,000 = $4,600,000 Market value = $1,900,000 + 2,000,000 = $3,900,000

The cash flow related to interest payments less any net new borrowing is called the:

Cash flow to creditors.

You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?

Construction of a new restricted access highway located between the store and the surrounding residential areas.

A business created as a distinct legal entity and treated as a legal "person" is called a:

Corporation.

Which form of business structure is most associated with agency problems?

Corporation.

Which one of the following business types is best suited to raising large amounts of capital?

Corporation.

An increase in the depreciation expense will do which of the following for a firm with taxable income of $80,000? I. Increase net income. II. Decrease net income. III. Increase the cash flow from assets. IV. Decrease the cash flow from assets.

II and III only.

Which of the following represent cash outflows from a corporation? I. Issuance of securities. II. Payment of dividends. III. New loan proceeds. IV. Payment of government taxes.

II and IV only.

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

II, III, and IV only.

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

Income tax returns

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

Increase in the market value per share

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.

The Sarbanes-Oxley Act of 2002 is a governmental response to:

Management greed and abuses.

Decisions made by financial managers should primarily focus on increasing which one of the following?

Market value per share of outstanding stock.

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

Maximize the current value per share.

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

Net working capital may be a negative value.

Which one of the following is a means by which shareholders can replace company management?

Proxy fight.

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor.

Financial managers should primarily focus on the interests of:

Shareholders.

Which one of the following statements concerning stock exchanges is correct?

Some large companies are listed on NASDAQ.

Which one of the following statements is correct concerning the NYSE?

The listing requirements for the NYSE are more stringent than those of NASDAQ.