Principles of Finance Exam 1 Prep Questions

Alan and Sara Winthrop are a married couple who file a joint income tax return. Their taxable income is $212,000. Assume the following tax table is applicable: Married Couples Filing Joint Returns If Your Taxable Income Is You Pay This Amount on the Base of the Bracket Plus This Percentage on the Excess over the Base Average Tax Rate at Top of Bracket Up to $18,450 $0.00 10.0% 10.0% $18,450-$74,900 1,845.00 15.0 13.8 $74,900-$151,200 10,312.50 25.0 19.4 $151,200-$230,450 29,387.50 28.0 22.4 $230,450-$411,500 51,577.50 33.0 27.1 $411,500-$464,850 111,324.00 35.0 28.0 Over $464,850 129,996.50 39.6 39.6 What is their average tax rate? What is their marginal tax rate?

21.9% 28%

Which of the following statements is NOT CORRECT?

b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares

Jordan Inc has the following balance sheet and income statement data: Cash $14,000 Accounts payable $42,000 Receivables 70,000 Other current liabilities 28,000 Inventories 280,000 Total CL $70,000 Total CA $364,000 Long-term debt 140,000 Net fixed assets 126,000 Common equity 280,000 Total assets $490,000 Total liab. and equity $490,000 Sales $280,000 Net income 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.25, without affecting either sales or net income. How much cash would be 'freed up' by this change in inventory?

c. $206,500

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

c. A secondary market transaction

Shrives Publishing recently reported $11,000 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? (Round your intermediate and final answers to whole dollar amount.)

d. $2,463

Considered alone, which of the following would increase a company's current ratio?

d. An increase in accounts receivable

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

Helmuth Inc's latest net income was $1,410,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare? Do not round your intermediate calculations.

e. $2.82

Ryngard Corp's sales last year were $42,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?

e. 2.63x

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

e. The current and quick ratios both increase

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

false

EBITDA stands for earnings before interest, taxes, debt, and assets.

false

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow

false

Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.

false

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

false

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

true

If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.

true

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

true

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

true

The profit margin measures net income per dollar of sales.

true