Financial Management Midterm Chapters 1-5

Assume the average price of a new vehicle 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 price over this time period?

$36,420 = $31,208[(1 + r)5]r = .0314, or 3.14%

The Music Alliance has a debt-equity ratio of .57. What is the total debt ratio? A. .36 B. .30 C. .44 D. 2.27

Given the debt-equity ratio of .57, if total debt is $.57 then total equity is $1.00 and total assets are $1.57. Total debt ratio = $.57/$1.57 Total debt ratio = .36

A firm owned by two or more people who each have unlimited liability for all of the firm's debts is called a: A) corporation B) sole proprietorship C) general partnership D) limited partnership E) limited liability company

general partnership

Which one of the following is an expense for accounting purposes, but is not an operating cash flow for financial purposes? A. Interest expense B. Taxes C. Cost of goods sold D. Labor costs

interest expense

A partner in a firm knows that the maximum financial loss he or she will experience is the amount he or she invested in the firm. The partner is called a ______ partner. A) general B) sole C) limited D) corporate

limited

Claire'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 is the collection expected to be worth in 2025?

FV = $50(1.076)77 FV = $14,077.16

The Scene Shop had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What was the amount of the cash flow to stockholders? A. $5,100 B. $7,830 C. $18,020 D. $20,680

CFA = $48,450 − (−$1,330) − 24,000 CFA = $25,780 CFC = $2,480 − (−$2,620) CFC = $5,100 CFS = $25,780 − 5,100 CFS = $20,680

The Scene Shop had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What was the amount of the cash flow to stockholders?

CFA = $48,450 − (−$1,330) − 24,000CFA = $25,780 CFC = $2,480 − (−$2,620)CFC = $5,100 CFS = $25,780 − 5,100CFS = $20,680

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? A. 44.29 days B. 55.01 days C. 55.50 days D. 36.95 days

Days' sales in receivables = 365/($2,430,000/$246,000) Days' sales in receivables = 36.95 days

Coulter Supply has a total debt ratio of .46. What is the equity multiplier? A. .89 B. 1.17 C. 1.47 D. 1.85

Debt-equity ratio = .46/(1 − .46) Debt-equity ratio = .85 Equity multiplier = 1 + .85 Equity multiplier = 1.85

Shen & Sanchez Engineering 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? A. $91,300 B. $99,700 C. $93,400 D. $105,300

Net cash from operating activity = $96,200 + 6,300 − 2,800 Net cash from operating activity = $99,700

Lewis & Price Corporation paid $700 in dividends and $320 in interest this past year. Common stock remained constant at $6,800 and retained earnings decreased by $180. What is the net income for the year? A. $180 B. $520 C. $1,020 D. $880

Net income = $700 − 180 Net income = $520

During the year, Manbeck Gardens decreased its accounts receivable by $160, increased its inventory by $115, and decreased its accounts payable by $70. How did these three accounts affect the sources or uses of cash by the firm? A. Net source of cash of $120 B. Net source of cash of $205 C. Net source of cash of $45 D. Net use of cash of $25

Sources(uses) of cash = $160 − 115 − 70 Sources(uses) of cash = −$25

Assuming accrual accounting is employed, which one of the following statements is accurate? A) interest is a noncash expense B) credit sales are recorded on the income statement when the cash from the sale is collected C) the addition to retained earnings is equal to net income plus dividends paid D) the cost of acquiring a product are expensed when the product is sold E) depreciation expenses increase a firm's marginal tax rate

credit sales are recorded on the income statement when the cash from the sale is collected

Which one of the following actions by a financial manager is most apt to create an agency problem? A) Refusing to borrow money when doing so will create losses for the firm B) Refusing to lower selling prices if doing so will reduce the net profits C) Refusing to expand the company if doing so will lower the value of the equity D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales E) Increasing current profits when doing so lowers the value of the company's equity

Increasing current profits when doing so lowers the value of the company's equity

Vuong Rentals has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?

Net income = ($546,000 − 295,000 − 37,000 − 15,000)(1 − .21)Net income = $157,210 Addition to retained earnings = $157,210 − 59,000Addition to retained earnings = $98,210

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?

t= ln(FV / PV) / ln(1 + r) = In(756/300)/ In(1.045) = t=21 Age today = 10 + 21 Age today = 31 years

For the past year, Pellicier Incorporated had depreciation of $2,419, beginning total assets of $23,616, and ending total assets of $21,878. Current assets decreased by $1,356. What was the amount of net capital spending for the year? A. −$382 B. $2,037 C. $2,801 D. $1,993

Net capital spending = $21,878 − 23,616 + 1,356 + 2,419 Net capital spending = $2,037

Kasturi Safe & Lock generated net income of $911, depreciation expense was $47, and dividends paid were $25. Accounts payables increased by $15, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity? A. $776 B. $865 C. $959 D. $922

Net cash from operating activities = $911 + 47 + 15 − 28 + 14 Net cash from operating activities = $959

For the past year, Zhao Events had taxable income of $198,600, beginning common stock of $68,000, beginning retained earnings of $318,750, ending common stock of $71,500, ending retained earnings of $316,940, interest expense of $11,300, and a tax rate of 21 percent. What is the amount of dividends paid during the year? A. $157,280 B. $159,935 C. $163,200 D. $158,704

Net income = $198,600(1 − .21) Net income = $156,894 Dividends paid = $156,894 − ($316,940 − 318,750) Dividends paid = $158,704

Suppose the first comic book of a classic series was sold in 1954. In 2020, the estimated price for this comic book was $310,000, which is an annually compounded 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)66 PV = $.62

Assume your parents invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your parents originally invest?

PV = $48,613.24/(1.0405)28 PV = $15,994.70

Humphries has cash of $10,000, accounts receivable of $2,500, accounts payable of $900, and inventory of $1,200. What is the value of the quick ratio? A. 13.89 B. 14.22 C. 12.89 D. 15.22

Quick ratio = ($10,000 + 2,500)/$900 Quick ratio = 13.89

Wommack Interiors 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? A. −$11,685 B. −$11,272 C. $17,301 D. $17,418

CFC = $2,808 − ($36,714 − 51,207) CFC = $17,301

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?

CFC = $6,430 − ($68,219 − 72,918)CFC = $11,129

Hinojosa Music has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. The company will sell $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) − $75,000CFS = $1,328

Steele Video has sales of $96,400, costs of $53,800, interest paid of $2,800, and depreciation of $7,100. The tax rate is 21 percent. What is the value of the cash coverage ratio? A. 15.21 B. 12.14 C. 17.27 D. 23.41

Cash coverage ratio = ($96,400 − 53,800)/$2,800 Cash coverage ratio = 15.21

Mikeska Equipment Repair 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? A. $2,050 B. $2,920 C. $4,130 D. $6,890

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

Which one of the following is a disadvantage of the corpoate form of business? A) shareholders may experience limited liability B) Distributed profits may experience double taxation C) Raising capital may be more difficult than for other forms of business D) The firm may have unlimited life E) The firm may issue additional shares of stock

Distributed profits may experience double taxation

Jacob 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

Werden's Workshop invested $225,000 today 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? (Assume annual compounding.)

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

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

FV = $6,220 + ($6,220)(.11)(40) FV = $33,588

Based on the tax table below, what is the average tax rate for a sole proprietor with taxable income of $155,000? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875 10% 9,875 − 40,125 12 40,125 − 85,525 22 85,525 − 163,300 24 A. 20.18% B. 24.00% C. 16.26% D. 21.00%

Income Tax = [($9,875 − 0) × 10%] + [($40,125 − 9,875) × 12%] + [($85,525 − 40,125) × 22%] + [($155,000 − 85,525) × 24%] = $31,279.50 Average tax rate = $31,279.50/$155,000 Average tax rate = .2018, or 20.18%

Which one of the following is least apt to help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. A) Compensation based on the value of the stock B) Stock option plans C) Threat of a company takeover D) Threat of a proxy fight E) Increasing managers' base salaries

Increasing managers' base salaries

Which one of the following is excluded from the cash flow from assets? A. Accounts payable B. Sales C. Interest expense D. Cost of goods sold

Interest expense

The balance sheet of Perez Printing shows $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. How much net working capital does the company have? A. $970 B. $720 C. $640 D. $2,860

NWC = $680 + 210 + 80 − 250 NWC = $720

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

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

The income statement of Lashari Design shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?

Noncash expenses = Depreciation = $1,611

Bohensky's 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? A. 13,520 B. 12,460 C. 165,745 D. 170,702

Number of shares = $73,402/$.43 Number of shares = 170,702

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. (Assume annual compounding.)

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

Park Resources has sales of $687,400, cost of goods sold of $454,200, and a net profit margin of 5.5 percent. The balance sheet shows common stock of $324,000 with a par value of $5 a share, and retained earnings of $689,500. What is the price-sales ratio if the market price is $43.20 per share? A. 4.28 B. 12.74 C. 6.12 D. 4.07

Price-sales ratio = $43.20/[$687,400/($324,000/$5)] Price-sales ratio = 4.07

Mashburn Roasters has sales of $807,200, total assets of $768,100, and a net profit margin of 6.68 percent. The firm has a total debt ratio of 54 percent. What is the return on equity? A. 13.09% B. 12.04% C. 11.03% D. 15.26%

ROE = [.0668($807,200)]/[$768,100(1 − .54)] ROE = .1526, or 15.26%

Assuming accrual accounting is employed, which one of the following statements is correct? A) Interest is a noncash expense. B) Credit sales are recorded on the income statement when the cash from the sale is collected. C) The addition to retained earnings is equal to net income plus dividends paid. D) The costs of acquiring a product are expensed when the product is sold.

The costs of acquiring a product are expensed when the product is sold.

Boutique Marketing has total debt of $4,910 and a debt-equity ratio of .52. What is the value of the total assets? A. $16,128.05 B. $7,253.40 C. $9,571.95 D. $14,352.31

Total equity = $4,910/.52 Total equity = $9,442.31 Total assets = $4,910 + 9,442.31 Total assets = $14,352.31

Shareholders can replace company management by implementing: A) stock options B) promotions C) the Sarbanes-Oxley Act D) an agency plan E) a proxy fight

a proxy fight

The book value of a firm is: A) equivalent to the firms market value minus its liabilities B) a financial, rather than accounting, valuation C) generally greater than the market value when fixed assets are included D) based on historical transactions E) adjusted to the market value whenever the market value exceeds the stated book value

based on historical transactions

Deciding which long-term investments a firm should make is a ____ decision A) working capital management B) capital constraints C) cost of capital D) capital budgeting E) capital structure

capital budgeting

Determining the number of shares of stock to issue is an example of a _______ decision A) capital rationing B) net working capital C) capital budgeting D) capital allocation E) capital structure

capital structure

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: A. operating cash flow. B. net capital spending. C. net working capital. D. cash flow from assets.

cash flow from assets.

Which of the following parties are not considered stakeholders of a firm? A) employees B) government C) competitors D) customers E) suppliers

competitors

For a firm that must pay income taxes, depreciation expense: A. increases expenses and lowers taxes. B. increases the net fixed assets as shown on the balance sheet. C. reduces both the net fixed assets and the costs of a firm. D. is a noncash expense that increases the net income.

increases expenses and lowers taxes.

Net capital spending: A. is equal to ending net fixed assets minus beginning net fixed assets. B. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. C. reflects the net changes in total assets over a stated period of time. D. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital.

is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

As the degree of financial leverage increases, the: A) probability a firm will encounter financial distress increases B) amount of a firm's total debt decreases C) less debt a firm has per dollar of total assets D) number of outstanding shares of stock increases E) accounts payable balance decreases

probability a firm will encounter financial distress increases

Which one of the following grants an individual the right to vote on behalf of a shareholder? A) Proxy B) Bylaws C) Indenture agreement D) Stock option E) stock audit

proxy

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn?

r= (FV/PV)^(1/t) -1 r= (18250/5000)^(1/15) -1 r = .0901, or 9.01%

At 5 percent annually compounded interest, how long would it take to triple your money?

t= ln(FV / PV) / ln(1 + r) = In(3/1)/ In(1.05) = t= 23 years (rounded) or 22.52 years

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annually compounded interest until you have accumulated $50,000. How many years from today will it be when this occurs?

t= ln(FV / PV) / ln(1 + r) = In(50000/4000)/ In(1.05) = t=51.77 Total time = 3 + 51.77Total time = 54.77 years

The term "capital structure" refers to: A) the mix of long-term debt and equity financing B) the type of assets a firm acquires C) whether or not the firm invests in a capital budgeting projects D) refers to the real assets (tangible and intangible assets)

the mix of long-term debt and equity financing

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?

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) Change in NWC = $21,903

Fierro Fitness had 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. When evaluating last year's performance, what is the common-size statement value of inventory? A. 12.22% B. 44.16% C. 16.54% D. 13.36%

Common-size inventory = $430/($2,600 + 920) Common-size inventory = .1222, or 12.22%

Herrera Corporation has total sales of $3,110,400 and costs of $2,776,000. Depreciation is $258,000 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow? A. $318,356 B. $522,176 C. $264,176 D. $60,356

EBIT = $3,110,400 − 2,776,000 − 258,000 EBIT = $76,400 Tax = $76,400(.21) Tax = $16,044 OCF = $76,400 + 258,000 − 16,044 OCF = $318,356

Mahmood Productions had sales of $843,800 and costs of $609,900. The company paid $38,200 in interest and $35,000 in dividends. The depreciation was $76,400. The firm has a combined tax rate of 24 percent. What was the addition to retained earnings for the year? A. $55,668 B. $57,240 C. $61,060 D. $56,200

EBT = $843,800 − 609,900 − 76,400 − 38,200 EBT = $119,300 Net income = $119,300(1 − .24) Net income = $90,668 Addition to retained earnings = $90,668 − 35,000 Addition to retained earnings = $55,668

Halabi's Market has annual sales of $813,200, total debt of $171,000, total equity of $396,000, and a net profit margin of 5.78 percent. What is the return on assets? A. 8.29% B. 6.48% C. 9.94% D. 7.78%

ROA = [.0578($813,200)]/($171,000 + 396,000) ROA = .0829, or 8.29%