510 Finance Study Guide

Vasquez Pottery has shareholders' equity of $218,700. The firm owes a total of $141,000, only 40 percent of which is payable within the next 12 months. 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) Current liabilities = $56,400 Total assets = $218,700 + 141,000 Total assets = $359,700 Current assets = $359,700 − 209,800 Current assets = $149,900 NWC = $149,900 − 56,400 NWC = $93,500

A firm has inventory of $29,406, accounts receivable of $46,215, net working capital of $4,507, and current liabilities of $90,549. What is the quick ratio?

.75 Current Assets = Current Liabilities + Net Working Capital Current Assets = $90,549 + 4,507 = $95,056 Quick ratio = ($95,056 − 29,406)/$90,549 Quick ratio = .75

Kroencke Freight is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What annually compounded rate of interest is the firm earning on this investment?

10.94% $31,406 = $23,000[(1 + r) 3 ] r = .1094, or 10.94%

You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annually compounded interest. How many years will it be before you purchase the car, assuming the price of the car remains constant?

12.81 years $68,000 = $36,840(1.049 t ) t = 12.81 years

Your cousin deposited $2,500 today at 6.5 percent interest for 15 years. However, you can only earn 6.25 percent interest. How much more money must you deposit today than your cousin invested if you are to have the same amount saved at the end of the 15 years? (Assume annual compounding on both accounts.)

$89.70 FV = $2,500(1.065 15 ) FV = $6,429.60 PV = $6,429.60/1.0625 15 PV = $2,589.70 Difference = $2,589.70 − 2,500 Difference = $89.70

You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. The prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent, compounded annually. What is the present value of your winnings?

$9,300.82 PV = $1,250,000/(1.064 79 ) PV = $9,300.82

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

How much inventory should the company keep on hand?

The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes.

marginal

The most acceptable method of evaluating the financial statements is to compare the company's current financial:

ratios to the company's historical ratios.

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

sales

Ratios that measure a firm's liquidity are known as ______ ratios.

short-term solvency

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.)

$1,256.43 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

Which one of the following statements is correct?

An increase in the depreciation expense will not affect the cash coverage ratio.

According to the Rule of 72, you can do which one of the following?

Approximately double your money in 11 years at 6.55 percent interest r = 72/11 r = .0655, or 6.55%

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):

Corporation

Which one of the following statements regarding corporations is correct?

Corporations can have an unlimited life.

Which one of the following is a source of cash?

a) Decrease in inventory

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?

age 31 $756 = $300(1.045 t ) t = 21 years Age today = 10 + 21 Age today = 31 years

The book value of a firm is:

based on historical transactions.

Determining the number of shares of stock to issue is an example of a ______ decision.

capital structure

For a firm that must pay income taxes, depreciation expense:

increases expenses and lowers taxes.

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?

$55,668 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

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?

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

Roessler Fine Dining has total assets of $310,100 and net fixed assets of $168,500. The average daily operating costs are $2,980. What is the value of the interval measure?

4752 days Interval measure = ($310,100 − 168,500)/$2,980 Interval measure = 47.52 days

Which of the following parties are not considered stakeholders of a firm?

Competitors

Which one of the following describes a noncash item?

Expenses that do not consume cash

Which one of the following determines the standards and procedures with which audited financial statements are prepared?

Generally Accepted Accounting Principles

Caroline is going to receive a award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Caroline's award is worth more than Jiexin's.

Which one of the following questions is least likely to be addressed by financial managers?

In which region of the country should a new product be launched?Bottom of Form

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?

Income statement

Which one of the following is excluded from the cash flow from assets?

Interest expense

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Interest on interest

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

Maximize the current value per share

Which one of the following is a primary market transaction?

Sale of a new share of stock from a corporation to an individual investor

The cash flow that results from a company's ongoing, normal business activities is called:

Operating cash flows

Which one of the following would cause a cash outflow from a corporation?

Paying dividends

Which one of the following is a cash flow from a corporation into the financial markets?

Payment of loan interest

Which one of the following accurately lists the three components of the DuPont identity?

a) Equity multiplier, net profit margin, and total asset turnover

Which one of the following is a correct formula for computing the return on equity?

a) ROA × Equity multiplier

The Natural Pet had sales of $763,500 in 2020, and $864,200 in 2021. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

a) The net working capital turnover rate increased.