Corporate Finance Chapter 4 & 5

4 A balance sheet measures a firm's profitability over a period of time, while an income statement shows the firm's assets, liabilities, and equity at a given point in time.

False

4 A statement of cash flows shows how cash flows in and out of a firm at a particular point of time.

False

4 Ajax Inc. had profits of $200,000 for the year. Their retained earnings account grew from $800,000 at the beginning of the year to $950,000 by year end. Then the firm pay out $150,000 in dividends.

False

4 Common stock dividends paid should be added to the balance sheet item--retained earnings, because they were paid to the owners and as such are considered residual profits.

False

4 EBITDA is one of the numbers publicly traded corporations are required to report according to the rules of the Financial Accounting Standards Board (FASB).

False

4 Equity is an obligation owed to creditors while equity represents funds provided by owners or shareholders of the firm.

False

4 Preferred stock is a security that represents a residual claim on a corporation after all other obligations have been met.

False

4 Preferred stocks are similar to a debt, however, they are paid their preferred dividends before the interest has been paid to bondholders.

False

4 Working capital includes both current assets and non-current assets.

False

5 A firm expects to have net income of $85,000. If preferred dividends paid are 42,000, common stock dividends paid are $20,000, and shares of common stock outstanding are 10,000, then the EPS of the firm is $4.25.

False

5 A lower debt ratio than industry average, may cause the interest expense to be lower resulting in the lower profit margin and consequently lower ROE.

False

5 EVA is the market value of the firm minus the total amount of capital invested in the firm.

False

5 Greater assets turnover ratio may indicate asset levels are too high or existence of obsolete assets.

False

5 MVA is the measure of profit earned by a firm after all costs have been subtracted, including the cost of funds used for the investment.

False

4 Current assets are cash, marketable securities, accounts receivable, inventory, and prepaid expenses.

True

4 EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is used by financial analysts to measure the amount of cash thrown off by the operations of the firm during a specified period.

True

4 Inventory is the least liquid current asset due to potential obsolescence and consumer demand changes.

True

4 Preferred stock is a security issued by a corporation with a given dividend promised as long as the corporation has the ability to pay that dividend.

True

4 Preferred stockholders are paid their preferred dividend before common stockholders can be paid their common stock dividend.

True

4 Prepaid expenses are considered to be an asset because prepaid expenses have been paid for but the benefits not yet received, they are owed to the company.

True

4 Retained earnings are earnings available to common shareholders not paid out as dividends that have accumulated over time.

True

4 The "capital in excess of par" account adjusts for the fact that the common stock which is outstanding was sold at a higher price than the par value.

True

4 We cannot use net income as a proxy for cash flow because the income statement contains items such as depreciation which do not reflect an outflow of cash, and also we need to consider dividend payouts.

True

5 A firm has a low asset turnover ratio, this might be due to it is holding onto obsolete items, or may be unnecessary assets.

True

5 Compared with industry, if a company has a high current ratio and a low quick ratio, the firm most likely has excess inventory due to obsolescence or changes in customer demand.

True

5 Debt can leverage up returns on equity, but it also increases interest expense and may be responsible for the low net profit margin.

True

5 If the firm's debt level is too high, it will cause a low net profit margin relative to the industry.

True

5 Lowering debt ratio alone may not boost ROE because the debt is also causing the ROE to be leveraged upward.

True

5 ROE is calculated by using Net Profit Margin to multiply Total Asset Turnover, then times Equity Multiplier.

True

5 Trend analysis is comparing a ratio or group of ratios to determine if a firm's financial situation is improving or deteriorating

True

4 Common stock account $1,000,000, Capital in excess of par $500,000 Retained earnings $1,000,000. Common shares outstanding 1,000,000. Par value is: a. $1.00 b. $2.50 c. $1.50 d. $.25

a. $1.00

4 Net income is $100,000 and common stock dividends paid are $100,000 for the year. Retained earnings were $500,000 at the beginning of the year. The end of year balance in retained earnings would be: a. $500,000 b. $300,000 c. $400,000 d. $600,000

a. $500,000

4 Use the following information to answer the question: December 31 ($000) Stockholder's equity 1,000 Accrued Expenses 400 Cost of Goods Sold 800 Accumulated Depreciation 200 General & Administrative Expenses 120 Tax Rate 40% Interest expense 15 Sales revenue 2,000 Depreciation expense 200 Calculate net income. a. $519 b. $279 c. $459 d. $ 99

a. $519

5 The Total Asset Turnover ratio is: a. 0.235 times b. 4.25 times c. 2.35 times d. 4.25%

a. 0.235 times

5 The Quick Ratio is: a. 0.83 b. 1.20 c. 8.33 d.0.29

a. 0.83

4 Given the following information, calculate earnings per share. **Round to the nearest cent. . Earnings before depreciation, interest, and taxes $1,600,000 Depreciation expense $100,000 Tax rate 40% Interest expense $10,000 Common dividends paid $200,000 Number of shares of common stock outstanding $500,000 a. 1.79 b. 1.39 c. 3.20 d. 1.20

a. 1.79

5 Given the following information for XYZ Corporation, calculate the P/E ratio: EPS = $2.50 BVS= $7.00 Shares outstanding = 100,000 Market price = $30.00 a. 12.00 b. 18.00 c. 20.00 d. 4.29

a. 12.00

5 The Net Profit Margin is: a. 16.2% b. 37% c. 60% d. 13.7%

a. 16.2%

5 The Times Interest Earned ratio is: a. 3.7 b. 0.27 c. 2.7 d. 0.62

a. 3.7

5 The Average Collection Period (365 day year) is: a. 45.63 days b. 12.5 days c. 12.5% d. 4.563 days

a. 45.63 days

4 Which of the following statements is false? a. MACRS depreciation ratesare higher than straight line depreciation rates for each year. b. Depreciation is the allocation of the asset's cost over time. c. MACRS is an accelerated depreciation method method. d. Assets are assumed to be purchased mid-year using the MACRS depreciation rules.

a. MACRS depreciation ratesare higher than straight line depreciation rates for each year.

4 Which of the following statements is true in a progressive tax rate system? a. The marginal tax rate increases at higher taxable income levels b. The marginal tax rate always equals the average tax rate. c. The average tax rate is the tax on the next dollar of taxable income. d. More than one of the above is true.

a. The marginal tax rate increases at higher taxable income levels

5 Which of the following statements are true? a. When comparing a company ratio to the industry average, a company ratio value that is equal to the industry average is not necessarily good. b. A higher current ratio is always better than a lower one. c. Trend analysis compares the firm to other same-industry firms. d. All of the above are true.

a. When comparing a company ratio to the industry average, a company ratio value that is equal to the industry average is not necessarily good.

5 A company that is running "lean and mean:" a. has a total asset turnover ratio that is high b. is utilizing more assets to earn its profit c. has a high liquidity ratio d. has low gross profit margin

a. has a total asset turnover ratio that is high

4 Net income and dividends are for the current year. January 1 and December 31 refer to the beginning and end of the current year. Which of the following is correct? a. net income - dividends = retained earnings Dec 31 - retained earnings Jan 1 b. net income - dividends = retained earnings Jan 1 + retained earnings in Dec 31 c. net income = retained earnings in Jan 1 - retained earnings in Dec 31 + dividends d. net income + dividends = retained earnings in Jan 1 - retained earnings in Dec 31

a. net income - dividends = retained earnings Dec 31 - retained earnings Jan 1

4 The basic accounting equation: a. says that all assets of the firm are funded by the liabilities and equity of the firm b. says that current and non-current assets = current and non-current liabilities c. is an economic and not an accounting concept d. is a secret known only by CPAs

a. says that all assets of the firm are funded by the liabilities and equity of the firm

5 The Earnings Per Share is: a. $2.14 b. $3.24 c. $1.83 d. $2.74

b. $3.24

5 The Market to Book ratio is: a. 6.57 b. 0.90 c. 0.15 d. 0.51

b. 0.90

5 The Current Ratio is: a. 0.55 b. 1.83 c. 0.183 d. 0.35

b. 1.83

4 Becker and Company had $150,000 in EBT. Using the schedule below, what was their effective tax rate? Before-Tax Income (EBT) Tax Rate $0 - $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% Over $18,333,333 35% a. 39% b. 28% c. equal to the marginal tax rate d. 25%

b. 28%

4 Given the following information, calculate earnings per share: Interest expense 40,000 Net income 335,000 Common dividends paid 100,000 Common stock outstanding 100,000 a. 1.95 b. 3.35 c. 2.35 d. 3.60

b. 3.35

5 The Return on Assets ratio is: a. 0.162% b. 3.81% c. 16.2% d. 13.7%

b. 3.81%

5-30 Given the above information for XYZ Corporation, calculate the Market to Book Ratio: a. 6 b. 4.29 c. 10 d. 2

b. 4.29

5 The Gross Profit Margin is: a. 40% b. 60% c. 16.2% d. 37%

b. 60%

4 Which of the following is correct? a. Assets = Liabilities - Equity b. Assets = Liabilities + Equity c. Assets + Equity = Liabilities d. Assets + Liabilities = Equity e. More than one of the above

b. Assets = Liabilities + Equity

4 Gross profit equals: a. Revenues - cost of goods sold - depreciation expense b. Revenues - cost of goods sold c. Revenues - cost of goods sold - operating expenses d. Revenues - cost of goods sold - interest expense

b. Revenues - cost of goods sold

5 Which of the following statements is true? a. Increasing liquidity ratios are always indicative of improving firm health. b. The average collection period can be too high or too low. c. An increasing debt ratio is always indicative of declining firm health. d. All of the above are true.

b. The average collection period can be too high or too low.

5 A Net Profit Margin of 3.76% means: a. for every dollar of sales, income of $3.76 is generated b. for every dollar of sales, income of $.0376 is generated c. for every dollar of equity, income of $.0376 is generated d. for every dollar of assets, income of $3.76 is generated

b. for every dollar of sales, income of $.0376 is generated

5 Return on Assets can best be explained as: a. how many dollars of sales each dollar of assets generates b. how much income each dollar of assets generates c. how much income each dollar of working capital assets generates d. how much working capital is provided by the stockholders

b. how much income each dollar of assets generates

4 The income statement: a. is a financial statement that shows the firm's financial position at a particular point in time. b. is a financial statement that summarizes a firm's revenues and expenses over a period of time. c. is a financial statement that summarizes a firm's revenues and expenses at a particular point in time. d. details the firm's assets and liabilities over a period of time.

b. is a financial statement that summarizes a

5 An Average Collection Period that has a significantly higher industry average suggests (ceteris paribus): a. high profit levels b. poor credit decisions c. a period of strong economic growth d. rapid collection of accounts

b. poor credit decisions

4 Common equity includes all of the following except: a. common stock b. preferred stock c. capital in excess of par d. retained earnings

b. preferred stock

4 Which of the following is a use of cash that would appear on the statement of cash flows? a. increase in accumulated depreciation b. purchase of marketable securities c. receipt of interest income d. decrease in accounts receivable

b. purchase of marketable securities

4 Net Income: a. are earnings available to all bond investors b. reflects residual earnings of the firm available to the owners c. are calculated before cost of goods sold are deducted d. are calculated before taxes are deducted

b. reflects residual earnings of the firm available to the owners

5 The Modified DuPont Equation is most accurately described as a function of: a. net profit margin and debt b. return on assets and debt load c. accounts receivable and sales d. asset utilization

b. return on assets and debt load

5 If the Inventory Turnover Ratio is very high relative to industry averages: a. the firm has too high a level of inventory b. the firm may be losing sales if its inventory is too low c. the firm has good total assets management practices d. the firm has too many items that the customers probably do not want

b. the firm may be losing sales if its inventory is too low

4 A firm increases its debt ratio from 50% to 75%. Which of the following statements is most correct: a. the firm probably has very low borrowing b. the firm's positive ROE will increase c. the stockholders' leverage has decreased d. earnings after interest expense but before taxes will increase

b. the firm's positive ROE will increase

4 Which of the following equations describes net working capital? a. total assets - total liabilities b. total assets - fixed assets - current liabilities c. cash + inventory-accounts payables d. fixed assets - long-term liabilities e. none of the above

b. total assets - fixed assets - current liabilities

5 The Total Debt to Total Asset ratio is: a. 1.31 b. 76.4 c. 0.647 d. 0.59

c. 0.647

5 The Inventory Turnover ratio is: a. 1.5 times b. 1.5% c. 0.67 times d. 67%

c. 0.67 times

5- 15 The Return on Equity is: a. 16.2% b. 3.81% c. 13.7% d. 0.162%

c. 13.7%

5 The Debt to Equity ratio is: a. 0.31% b. 1.43 times c. 3.25 d. 0.70%

c. 3.25

4 Kerney's EBT is $450,000. What is the marginal tax rate? Before-Tax Income (EBT) Tax Rate $0 - $50,000 15% $50,001 - $75,000 25% $75,001 - $100,000 34% $100,001 - $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% Over $18,333,333 35% a. 15% b. 25% c. 34% d. 35%

c. 34%

4 Which of the following items is not part of current assets? a. prepaid expenses b. accounts receivable c. accounts payable d. marketable securities

c. accounts payable

4 Common stock dividends: a. are deducted before gross income b. are deducted from retained earnings c. are deducted after operating income d. equal the amount of residual income of the firm

c. are deducted after operating income

4 Selling expenses are subtracted: a. from depreciation expense b. before gross profit c. before operating income d. after net income

c. before operating income

4 Interest expense is deducted: a. before gross profit is calculated b. before operating income is calculated c. before taxes are calculated but after operating expenses d. after preferred dividends but before common stock dividends

c. before taxes are calculated but after operating expenses

5 Times Interest Earned is best described by: a. how much income is generated by debt b. how many sales are generated by debt c. how much operating income is available for every dollar of interest expense d. how much net profit is available for every dollar of interest expense

c. how much operating income is available for every dollar of interest expense

4 With respect to common stock claims: a. as long as a firm has net income it can pay a dividend b. there must be cash available to pay a dividend c. it is similar to long-term debt in that the claim on the firm is fixed d. the dividends paid are tax deductible to the firm

c. it is similar to long-term debt in that the claim on the firm is fixed

4 According to accounting principles: a. current assets should equal current liabilities b. net working capital should equal zero c. operating expenses during the year are tied to revenues they helped to generate d. depreciation is a cash expense

c. operating expenses during the year are tied to revenues they helped to generate

4 Each of the following items is a liability with the exception of: a. long-term debt b. notes payable c. prepaid expenses d. accrued expenses

c. prepaid expenses

5 A Current Ratio of 0.9 means: a. the firm has $0.90 of current liabilities for every $1.00 of current assets b. the firm has $0.90 of fixed assets for every $1.00 of current assets c. the firm has $0.90 of current assets for every $1.00 of current liabilities d. the firm has a debt ratio of 90%

c. the firm has $0.90 of current assets for every $1.00 of current liabilities

5 Return on Equity is most accurately described as a measure of: a. return on assets combined with liquidity b. the return available to all stockholders in the company c. the return on common stockholder investment d. is the amount of net income paid to retained earnings after allowing for dividends paid

c. the return on common stockholder investment

4 Net income for the year $1,000,000 EBT $2,500,000 Retained Earnings January $5,000,000 Common Stock Dividends paid for the year $300,000 Common Shares Outstanding 1,000,000 What are end-of-year retained earnings? a. $5,900,000 b. $6,000,000 c. $7,100,000 d. $5,700,000

d. $5,700,000

5-20 A Debt/Assets ratio of 75% and a ROE of 12% means: a. the owners of XYZ are financing 75% of the firm's assets in order to receive a 12% return on their personal investment in the company's stock b. 12% of the firm's profits are financed with equity c. the firm can cover interest payments with $0.25 of every dollar left for profit d. 25% of assets are financed with owners' equity

d. 25% of assets are financed with owners' equity

5- 10 The Operating Profit Margin is: a. 13.6% b. 16.2% c. 60% d. 37%

d. 37%

5 Johnson, Inc. has a current ratio of 1.7. Thompson Industries has a current ratio of 2.2. Which of the following is true? a. Johnson has less cash than Thompson. b. Thompson has more inventory than Johnson. c. Both of the above must be true. d. Neither of the above necessarily is true.

d. Neither of the above necessarily is true.

5 Analyzing a firm's ratios relative to industry averages is called a. industry comparison b. benchmarking c. cross-sectional analysis d. all of the above

d. all of the above

4 Retained earnings on the balance sheet: a. increase as operating income increases b. equals the sum of all net income before preferred dividends are deducted c. equals common stock plus capital in excess of par d. have already been reinvested in the firm

d. have already been reinvested in the firm

4 Which of the following is a source of cash that would appear on the statement of cash flows? a. increase in marketable securities b. decrease in notes payable c. increase in gross fixed assets d. increase in accrued expenses

d. increase in accrued expenses

4 Depreciation expense: a. is not a true expense b. represents a cash outflow on the cash flow statement c. is deducted from net income d. is a tax deductible non-cash expense

d. is a tax deductible non-cash expense

4 Which of the following statements is true of the statement of cash flows? a. it measures changes in profit from one year to the next year b. it includes changes in net working capital only c. it is the same as the income statement d. it includes dividends paid

d. it includes dividends paid

5 The Net Profit Margin represents a measurement of the firm's: a. liquidity b. asset utilization c. debt level d. profitability

d. profitability

5-25 Return on Equity represents a measurement of the firm's: a. liquidity b. asset utilization c. debt level d. profitability

d. profitability

5 A Debt/Equity ratio of 8.1 means: a. the firm is financing the company with 81% borrowed funds b. the firm has 81 times more equity than debt c. debt is turning over 8.1 times a year d. the firm has 8.1 times more debt than equity

d. the firm has 8.1 times more debt than equity