Bus. Finance CH 1& 2

Given a profitable firm, depreciation:

lowers taxes

Financial leverage increases ___

the potential return to the stockholders.

average tax rate formula

total taxes paid divided by total taxable income.

Nikki Heart Photography has total assets of $31,300, long-term debt of $8,600, net fixed assets of $25,600, and owners' equity of $20,540. What is the value of the net working capital?

23,200 Current assets = $31,300 − 25,600 = $5,700 Current liabilities = $31,300 − 20,540 − 8,600 = $2,160 NWC = $5,700 − 2,160 = $3,540

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year?

95700

The market value of an asset depends on: A. liquidation value and GAAP. B. riskiness and cash flows. C. accounting rules and cash flows. D. gains and losses. E. GAAP and losses.

B. riskiness and cash flows.

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

B. working capital management.

The concept of marginal taxation is best exemplified by which one of the following?

Burke's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

From the income statement, the corporation had a net income of $724 million for the year. Total dividends were $106 million. There were 400 million shares outstanding. How much is the earnings per share? A. $0.72 B. $1.18 C. $1.81 D. $2.72 E. $3.00

C. $1.81

You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information: Beginning Cash: Ending Cash: $285 Net cash increase: $102 Calculate the Beginning Cash. A. $102 B. $153 C. $183 D. $245 E. $387

C. $183

Franklin Corporation just paid taxes of $152,000 on taxable income of $512,000. The marginal tax rate is 35% for the company. What is the average tax rate for the Franklin Corporation? A. 22% B. 27% C. 30% D. 35% E. 39%.

C. 30%

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners? A. General partnership B. Sole proprietorship C. Limited partnership D. Limited liability company E. Corporation

C. Limited partnership

Which one of the following correctly defines a common chain of command within a corporation? A. The chief financial officer reports directly to the board of directors. B. The controller reports directly to the corporate treasurer. C. The controller reports directly to the chief financial officer. D. The credit manager reports directly to the controller. E. The treasurer reports directly to the board of directors.

C. The controller reports directly to the chief financial officer.

An auction market: A. is also referred to as an OTC market. B. is an electronic means of exchanging securities. C. has a physical trading floor. D. is dealer-based. E. handles primary market transactions exclusively.

C. has a physical trading floor.

A limited liability company (LLC): A. provides limited liability for some, but not all, of its owners. B.is a hybrid between a sole proprietorship and a partnership. C. prefers its profits be taxed as personal income to its owners. D. that meets the IRS criteria to be an LLC will be taxed like a corporation. E. cannot be created for professional service firms, such as accountants and attorneys.

C. prefers its profits be taxed as personal income to its owners.

The balance sheet of Koehn, Incorporated, has the following balances: Beginning balance Ending balance Cash$ 30,300$ 32,800Accounts receivable48,20051,600Inventory126,500129,200Net fixed assets611,900574,300Accounts payable43,20053,600Long-term debt415,000304,200 What is the amount of the change in net working capital?

Change in net working capital = ($32,800 + 51,600 + 129,200 − 53,600) − ($30,300 + 48,200 + 126,500 − 43,200) = −$1,800

From the income statement, the corporation had a net income of $724 million for the year. Total dividends were $106 million. There were 400 million shares outstanding. How much is the dividends per share? A. $0.075 B. $0.121 C. $0.205 D. $0.265 E. $0.562

D. $0.265

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? A. Formative B. Organizational C. Territorial D. Agency E. Structural

D. Agency

Jordan and Carmen created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. General partnership C. Sole proprietorship D. Corporation E. Public company

D. Corporation

The goal of financial management is to increase the:

D. current market value per share.

The balance sheet of XYZ Company is shown below. What is the Net Working Capital for the company? ASSETS LIABILITIES & OWNERS' EQUITY Current assets$300 Current liabilities$240 Net fixed assets 1,500 Long-term debt 700 Owners' equity 860 Total assets$1,800 Total liabilities and equity$1,800 A. $1,800 B. $1,560 C. $860 D. $180 E. $60

E. $60 Net Working Capital = Current Assets - Current Liabilities Net Working Capital = $300 − $240 Net Working Capital = $60

Which one of the following parties can sell shares of ABC stock in the primary market? A. Any institutional shareholder B. Any corporation, other than the ABC Company C. Only officers and directors of ABC Company D. Any private individual shareholder E. ABC company

E. ABC company

Which one of the following is most apt to align management's priorities with shareholders' interests? A. Allowing employees to retire early with full retirement benefits B. Increasing the number of paid holidays that long-term employees are entitled to receive C. Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers D. Paying a special management bonus on every fifth year of employment E. Compensating managers with shares of stock that must be h

E. Compensating managers with shares of stock that must be held for a minimum of three years

Which one of the following is an advantage of being a limited partner? A. Control over the daily operations of the firm B. Active market for ownership interest C. Nontaxable share of any profits D. Unlimited profits without risk of incurring a loss E. Losses limited to capital invested

E. Losses limited to capital invested

The first thing reported on an income statement would usually be: A. Depreciation B. Financing expenses C. Interest paid D. Taxes paid E. Revenues.

E. Revenues.

Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts? A. Limited partnership B. General partnership C. Corporation D. Joint stock company E. Sole proprietorship

E. Sole proprietorship

One advantage of the corporate form of organization is the: A. taxation of the corporate profits. B. double taxation of profits. C. unlimited liability for its shareholders. D. ease of formation compared to other organizational forms. E. ability to raise larger sums of equity capital than other organizational forms.

E. ability to raise larger sums of equity capital than other organizational forms.

Corporate shareholders: A. are proportionately liable for the firm's debts. B. are protected from all financial losses. C. receive tax-free distributions since all profits are taxed at the corporate level. D. have basically no control over the actual corporation. E. have the ability to change the corporation's bylaws.

E. have the ability to change the corporation's bylaws.

Ferry Boat Corporation has the following financial information: Net fixed assets: Book value: $2,500, Market value: $3,000 Net working capital: $700 Current accounts liquidated: $1,500 ABC Corporation has $900 in long-term debt. What is the book value of equity? $800 $1,100 $2,000 $2,300 $3,600

$2,300 Q.7 CH 2 HW

Girabaldi's Preztels, general partnership, has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 21 percent?

104740 EBIT = $821,300 − 698,500 − 28,400 = $94,400 Tax = ($94,400 − 8,400) × .21 = $18,060 OCF = $94,400 + 28,400 − 18,060 = $104,740

Operating Cash flow formula

= EBIT earnings before interest and taxes) + Depreciation − Taxes

Earnings per share formula

Net income/Total shares outstanding

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

Noncash item

Dividends per share formula

Total dividends/Total shares outstanding

Net working capital decreases when:

a dividend is paid to current shareholders.

Production equipment is classified as:

a tangible fixed asset.

Which one of the following has nearly the same meaning as free cash flow?

cash flows from assets

The passage of the Tax Cuts and Jobs Act of 2017 created a revised progressive tax structure, which applies to all of the following except:

corporations

Net working capital is defined as

current assets minus current liabilities

All else held constant, the book value of owners' equity will decrease when

dividends exceed net income for a period.

The market value of a firm's fixed assets:

is equal to the estimated current cash value of those assets.

For Year 2020, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate was 21 percent. What is the cash flow from assets for 2020?

12191 EBIT = ($42,900 − 26,800 − 1,900) = $14,200 Taxes = ($14,200 − 1,300)(.21) = $2,709 OCF = $14,200 + 1,900 − 2,709 = $13,391 CFA = $13,391 − ($13,900 − 14,300 + 1,900) − [($9,200 − 7,400) − ($8,700 − 6,600)] = $12,191

Net Working Capital Formula

Current Assets - Current Liabilities

Porter Jewelers, a sole proprietorship has a marginal tax rate of 32 percent and an average tax rate of 20.9 percent. If the firm owes $34,330 in taxes, how much taxable income did it earn?

164258 Taxable income = $34,330 ÷ .209 = $164,258

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $189,000. The building is currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at $32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the firm's assets?

251000 Book value = $189,000 + 56,000 − 49,000 + 18,400 + 36,600 = $251,000

The Milwaukee Printing Company has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the net new equity raised during the year?

34000 Net new equity = $142,430 − 55,000 − 11,200 − ($48,420 + 26,310 − 32,500) = $34,000

LaMarcus Photography, a sole proprietorship owes $190,874 in taxes on a taxable income of $608,606. The company has determined that it will owe $195,246 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

37% Marginal tax rate = ($195,246 − 190,874) ÷ ($620,424 − 608,606) = .37, or 37%

Devante's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm's assets?

487100 Market value = $18,600 + 34,500 + 85,000 + 349,000 = $487,100

Chun Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

783400 Current assets = $51,900 + 313,900 + 417,600 = $783,400

The ABC Corporation has the following information. How much is the Operating Cash Flow? ABC Corporation Earnings before interest & taxes$1,588 Depreciation 130 Beginning net fixed assets 1,650 Net new equity raised 450 Taxes 424 A. $1,294 B. $1,268 C. $1,588 D. $1,200 E. $874

A. $1,294 Explanation Operating Cash flow = EBIT + Depreciation − Taxes Operating Cash flow = $1,588 + 130 − 424 Operating Cash flow = $1,294

Which one of the following situations is most apt to create an agency conflict? A. Basing management bonuses on the length of employment B. Compensating a manager based on his or her division's net income C. Giving all employees a bonus if a certain level of efficiency is maintained D. Laying off employees during a slack period E. Hiring an independent consultant to study the operating efficiency of the firm

A. Basing management bonuses on the length of employment

Which one of the following statements is correct? A. The primary purpose of the NYSE is to match buyers with sellers. B. All of the major stock exchanges are U.S. based. C. The Chicago Stock Exchange is a dealer market. D. The NYSE was created by the National Association of Securities Dealers in the early 1930s. E. OTC markets have a physical trading floor generally located in either New York City or Chicago.

A. The primary purpose of the NYSE is to match buyers with sellers.

The Sarbanes-Oxley Act of 2002 has: A. essentially made officers of publicly traded firms personally responsible for the firm's financial statements. B. greatly increased the number of U.S. firms that are going public for the first time. C. decreased the number of U.S. firms going public on foreign exchanges. D. reduced the annual compliance costs of all publicly traded firms in the U.S. E. decreased senior management's involvement in the corporate annual report.

A. essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

A sole proprietorship: A. has its profits taxed as personal income. B. has an unlimited life. C. involves significant legal costs during the formation process. D. can generally raise significant capital from non-owner sources. E. provides limited financial liability for its owner.

A. has its profits taxed as personal income. Correct

One example of a primary market transaction would be the: A. sale of 1,000 shares of newly issued stock by Alt Company to Miquel. B. purchase by Theo of 5,000 shares of stock from his father. C. sale by Terry of 50,000 shares of stock to his brother. D. sale of 5,000 shares of stock owned by a corporate CEO to his son. E. sale of 100 shares of stock by Maria to her best friend.

A. sale of 1,000 shares of newly issued stock by Alt Company to Miquel. Correct

Levi had an unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled over onto his property. The potential claim that he has against this manufacturer is that of a(n): A. stakeholder. B. general creditor. C. shareholder. D. debtholder. E. agent.

A. stakeholder.

An agency issue is most apt to develop when:

A. the control of a firm is separated from the firm's ownership.

The Balance Sheet Identity is: A. The value of the Owners Equity B. The same as the Net Working Capital C. The Sum of all assets minus the liabilities D. Assets = Liabilities + Owners Equity E. Assets + Liabilities = Owners Equity

Assets = Liabilities + Owners Equity

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

The balance sheet for the Capella Corporation is as follows: Assets Liabilities and Shareholders' Equity Current assets$300 Current liabilities$110 Net fixed assets 1,200 Long-term debt 500 Shareholders' equity 890 Total assets$1,500 Total liabilities and shareholders' equity$1,500 What is the Net Working Capital for Capella Corporation? A. $110 B. $190 C. $300 D. $410 E. $890

B. $190

Which one of the following statements correctly applies to a sole proprietorship? A. The business entity has an unlimited life. The owner enjoys limited liability for the firm's debts. B. Obtaining additional equity is dependent on the owner's personal finances. C. The ownership can easily be transferred to another individual. D. Debt financing is easy to arrange in the firm's name.

B. Obtaining additional equity is dependent on the owner's personal finances.

A private placement is most apt to involve: A. only foreign investors. B. a life-insurance company. C. several private securities dealers. D. the U.S. Treasury department. E. a large number of private investors.

B. a life-insurance company. Correct

Cash flow from assets equals: A. The same as the Net Working Capital B. cash flow to creditors + cash flow to stockholders C. cash flow to creditors − cash flow to stockholders D. cash flow to creditors × cash flow to stockholders E. cash flow to creditors / cash flow to stockholders

B. cash flow to creditors + cash flow to stockholders

The issuer of a security must be involved in all _____________transactions involving that security. A. dealer market B. primary market C. exchange-listed D. secondary market E. over-the-counter

B. primary market

The Sarbanes-Oxley Act: A. requires all corporations to fully disclose its financial dealings to the general public. B. requires that the board of directors be solely responsible for the firm's financial dealings. C. places total responsibility for the financial statements of a firm on the auditor who certifies the statements. D. places the responsibility for a firm's financial statements solely on the chief financial officer. E. requires the corporate officers to personally attest that the

E. requires the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results.

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

Increase in accounts payable