FINC Exam 1
Nataro, Inc., has sales of $742,000 costs of $316,000 depreciation expense of $39,000 interest expense of $34,000 tax rate of 21 percent. What is the net income for this firm?
742,000 - 316,000 - 39,000 - 34,000 = 353,000 x 0.79 = 278,870
Based only on the following information for Ortiz Corp., did cash go up or down? By how much? Classify each event as a source or use of cash. Decrease in inventory- 425 Decrease in accounts payable- 230 Increase in notes payable- 280 Increase in accounts receivable- 290
Dec inventory = Source of cash Dec in A/P = Use of cash Inc in N/P = Source of cash Inc in A/R = Use of cash Change in cash = Source - Use 425 - 230 + 280 - 290 = 185
As you increase the length of time involved, what happens to future values? What happens to present values?
Future Value Increases, present values decrease.
Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
Shareholders own the corporation. Shareholders elect directors of the corporation, who in turn elect the corporations management. Separation between ownership and contrl is what can cause problems to arise. Management may also act in their own interest instead of in a way that is best for the shareholders.
The basic present value equation has four parts. What are they?
The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t).
What goal should always motivate the actions of a firm's financial manager?
To maximize the current market value (share price) of the equity of the firm (whether it's publicly traded or not).
17 & 26 are long
they are in the book
The 2020 balance sheet of Dugan, Inc., showed current assets of $5,320 and current liabilities of $2,510. The 2021 balance sheet showed current assets of $5,970 and current liabilities of $3,240. What was the company's 2021 change in net working capital, or NWC?
2020 NWC: 5,970 - 3,240 = 2,730 2021 NWC: 5,320 - 2,510 = 2,810 Change: 2,730 - 2,810 = -80
What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels
Liquidity measures how quickly an asset can be turned to cash. Good to have high liquidity to meet short-term goals, but also good to have low liquidity because investing in productive assets can yield a higher return.
Suppose the firm in the previous question paid out $125,000 in cash dividends. What is the addition to retained earnings?
Net Income = Dividends + Addition to RE 278,870 - 125,000 = 153,870
Under standard accounting rules, it is possible for a company's liabilities to exceed its assets. When this occurs, the owners' equity is negative. Can this happen with market values? Why or why not?
No this cannot happen. If you bought stock for -$20, there would be no risk to buying the stock, really.
If Rogers, Inc., has an equity multiplier of 1.43, total asset turnover of 1.87, and a profit margin of 6.05 percent, what is its ROE?
ROE = (PM)(TAT)(EM) ROE = (.0605)(1.87)(1.43) ROE = .1618, or 16.18%
Construct the DuPont identity for Smolira Golf Corp.
ROE = (PM)(TAT)(EM) ROE = (.1229)(.86)(1.58) = .1681, or 16.81%
Jackson Corp. has a profit margin of 5.8 percent, total asset turnover of 1.75, and ROE of 13.85 percent. What is this firm's debt-equity ratio?
ROE = (PM)(TAT)(EM) ROE = .1385 = (.058)(1.75)(EM) EM = .1385/(.058)(1.75) EM = 1.36 D/E = EM - 1 D/E = 1.36 - 1 D/E = .36
What happens to a future value if you increase the rate r? What happens to a present value?
The future value rises (assuming it's positive); the present value falls.
Timmy Tappan is single and had $189,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate his income taxes. What is the average tax rate? What is the marginal tax rate?
10($9,875) + .12($40,125 - 9,875) + .22($85,525 - 40,125) + .24($163,300 - 85,525) + .32($189,000 - 163,300) = 41,495.50 Avg tax rate = tax paid / taxable income 41,495.50 / 189,000 = 21.96%
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false.
You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Is an IPO a primary market transaction or a secondary market transaction?
Primary market transaction Secondary market would be securities purchased by someone after being initially released to the public
Bing, Inc., has current assets of $5,400, net fixed assets of $28,100, current liabilities of $4,100, and long-term debt of $10,600. What is the value of the shareholders' equity account for this firm? How much is net working capital?
Assets = Liabilities + Equity Shareholder's Equity = Assets - Liabilities 33,500 - 14,700 = 18,800 NWC = Current Assets - Current Liabilities 5,400 - 4,100 = 1,300
What types of information do common-size financial statements reveal about the firm? What is the best use for these common-size statements? What purpose do common-base year statements have? When would you use them?
Common-size financial statements express all balance sheet accounts as a percentage of total assets and all income statement accounts as a percentage of total sales. Using these percentage values rather than nominal dollar values facilitates comparisons between firms of different size or business type. Common-base year financial statements express each account as a ratio between their current year nominal dollar value and some reference year nominal dollar value. Using these ratios allows the total growth trend in the accounts to be measured.
What effect would the following actions have on a firm's current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit.
Current Ratio = Current Assets / Current Liabilities a. If bought with cash, no change. If purchased on credit, decrease. b. Increases c. Increases d. As long-term debt approaches maturity, the principal repayment and the remaining interest expense become current liabilities. Thus, if debt is paid off with cash, the current ratio increases if it was initially greater than 1.0. If the debt has not yet become a current liability, then paying it off will reduce the current ratio since current liabilities are not affected. e. No change f. No change g. increase
In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?
Historical costs are precicesly measured while market values are hard to calculate, also differences between market values and book values.
So-called same-store sales are a very important measure for companies as diverse as McDonald's and Sears. As the name suggests, examining same-store sales means comparing revenues from the same stores or restaurants at two different points in time. Why might companies focus on same-store sales rather than total sales?
If a company is growing by opening new stores, then presumably total revenues would be rising. Comparing total sales at two different points in time might be misleading. Same-store sales control for this by only looking at revenues of stores open within a specific period.
Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company's management immediately begins fighting off this hostile bid. Is management acting in the shareholders' best interests? Why or why not?
If management cannot increase the actual price of the firm to above $35, then they are not acting in the best interest of their shareholders. But if management believes that they can make the share price higher than that, then they should fight off the bid for the shareholder's best interest.
Why is the DuPont identity a valuable tool for analyzing the performance of a firm? Discuss the types of information it reveals compared to ROE considered by itself.
Return on equity is probably the most important accounting ratio that measures the bottom-line performance of the firm with respect to the equity shareholders. The DuPont identity emphasizes the role of a firm's profitability, asset utilization efficiency, and financial leverage in achieving an ROE figure. For example, a firm with ROE of 20 percent would seem to be doing well, but this figure may be misleading if it were marginally profitable (low profit margin) and highly levered (high equity multiplier). If the firm's margins were to erode slightly, the ROE would be heavily impacted.
What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.
The primary disadvantage is double taxation to shareholders of earnings or dividends. Advantages include: - Limited liability - Ease of transferability - Ability to raie capital - Unlimited life
Nightwish Corp. shows the following information on its 2021 income statement: Sales = $336,000; Costs = $194,700; Other expenses = $9,800; Depreciation expense = $20,600; Interest expense = $14,200; Taxes = $21,275; Dividends = $21,450. In addition, you're told that the firm issued $7,100 in new equity during 2021 and redeemed $5,400 in outstanding long-term debt. a. What is the 2021 operating cash flow? b. What is the 2021 cash flow to creditors? c. What is the 2021 cash flow to stockholders? d. If net fixed assets increased by $53,200 during the year, what was the addition to NWC?
a. OCF = EBIT + Depreciation - Taxes EBIT = 336,000 - 194,700 - 9,800 - 20,600 = 110,900 110,900 + 20,600 - 21,275 = 110,225 b. CFC = Interest - Net new LTD 14,200 -(- 5,400) = 19,600 c. CFS = Dividends - New net equity 21,450 - 7,100 = 14,350 d. We know that CFA = CFC + CFS, so: CFA = $19,600 + 14,350 CFA = $33,950 CFA is also equal to OCF - Net capital spending - Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $53,200 + 20,600 Net capital spending = $73,800 Now we can use: CFA = OCF - Net capital spending - Change in NWC $33,950 = $110,225 - 73,800 - Change in NWC Change in NWC = $2,475 This means that the company increased its NWC by $2,475.