corporate finance midterm 1 practice questions

compute the 2013 DuPont identity for Nordstrom and Target. Which firm is more operationally efficient, which uses their assets more effectively, and which firm has the most leverage?

ROE = PM x TAT x EM =(NI/SALES)x(SALES/TA)(TA/TE) Nordstrom PM = (734/12540) = .059 TAT = (12540/8574) = 1.46 EM = 8574/(8574-6494) = 4.12 ROE = .059 x 1.46 x 4.12 = 35.49% Target PM = (1971/72596) = .027 TAT = (72596/44553) = 1.63 EM = (44553 / (44553-28322) = 2.74 ROE = .027 x 1.63 x 2.74 = 12.06% more operationally efficient: nordstrom uses assets most effectively: target most leverage: nordstrom

given the tax rates shown, what is the average tax rate for a firm with a taxable income of $260,000? what is the firm's marginal tax rate?

$50,000(.15) + 25,000(.25) + 25,000(.34) + 160,000(.39) = $84,650 taxable income avg tax rate = 84,650 / 260,000 = 32.56% marginal tax rate = 39% (tax rate if $1 more)

plowback ratio =

1 - payout ratio

during the year, grant furnitures decreased its A/R by $250, increased its inventory by $90, increased its NP by $150, and decreased its AP by $40. what is the overall cash impact of these transactions?

A/R- source $250 Inventory- use ($90) NP- source +$150 AP - use ($40) overall cash impact = source of $270 cash

TE =

TA - TL

using ________ to repay LTD will decrease the value of a firm's net working capital. (NWC = CA - CL)

Cash

how do accounts receivable and accounts payable affect the 2013 statement of cash flows for target?

Change in AR = 5220-5841 = (621) source Change in AP = 11617-11037 = 580 source

oranges inc. has a total asset turnover of 1.5, a profit margin of 10%, and a ROE of 20%. what is orange inc's debt-to-equity ratio?

PM = .10 TAT = 1.5 ROE = .20 EM? ROE = PM x TAT x EM .20=.10 x 1.5 x EM EM= .20 / (.10 X 1.5) = 1.333 DEBT TO EQUITY = EM - 1 = 1.333 - 1 = 33%

retained earnings formula =

beg retained earnings + net income during the period - dividends paid = ending retained earnings

net income does NOT equal

cash flow from assets

dividend payout ratio =

dividends / NI

a firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 18.7, and a book value per share of $7.92. what is the market-to-book ratio?

earnings per share = 126400/160000 = .79 price per share = .79 x 18.7 = $14.773 market to book ratio = 14.776/7.92 = 1.87

advantages of keeping fed funds and discount rates low

economic growth low cost to borrow positive for stock market

Fed Funds

excessive reserves that commercial banks and other financial institutions deposit at regional federal reserve banks -these funds can be lent to other market participants as unsecured loans at a relatively low interest rate called the FED FUNDS RATE or OVERNIGHT RATE - is typically for only an overnight period -rate between banks

the external financing need will limit

growth if unfunded

plowback ratio is the percentage of

income that a company reinvests into its own operations. - the percentage of income not used to payout as dividends.

payout ratio is the percentage of

income that a company will use to pay out dividends

disadvantages of keeping fed funds and discount rates low

inflation investors increasing risk to find acceptable return.

compute the 2013 market value to book value ratios for nordstrom and target. on which company does the market look more favorably?

market-book ratio = (stock price)(shares outstanding)/(TA - TL) nordstrom = (69)(193) / (8574-6494) = 6.4 target = (63)(634) / (44,553- 28,322) = 2.46 the market looks more favorably at Nordstrom whose M/B ratio is higher

the internal growth rate of a firm is the:

maximum growth rate achievable excluding external financing of any kind

book value = net asset value

net asset value = total assets - total liabilities

retained earnings refer to the percentage of

net earnings NOT paid out as dividends, but are retained by the company to be reinvested in its core business, or to pay debt.

retention ratio means the same thing as

plowback ratio

NI =

sales * PM

what is included in a firm's market value, but is excluded from a firm's book value

the firm's brand image

total equity =

total assets - total debt

jones motors inc has sales of $55 million, total assets of $120 million, and total debt of $64 million. the profit margin is 12%. what is the ROE?

NI = sales*PM = 55*.12 = 6.6 ROE = NI / TE TE = TA - Total Debt ROE = 6.6 / (120 - 64) = 11.79%

what is the change in net working capital from 2012 to 2013

NWC = CA - CL 2013: (5291-3572) = 1719 2014: (5171-3695) = 1476 change = 1719-1476 = increase of $243

a decrease in ____ _____ _____ will decrease the cash flow from assets, all else being equal

OCF

what is the operating cash flow in 2013?

OCF = EBIT + DEP - TAXES 26555 + 2555 - 7423 = $21,687

if universal exports decides to maintain a constant debt-equity ratio what rate of growth can it maintain assuming no additional equity financing is available?

ROE = NI / TOTAL EQUITY = (5135/19510) = .263 SGR = (ROE x b) / 1 - (ROE x b) =(.263x.60) / 1 - (.263 x .6) = 18.74%

a firm has a debt-equity ratio of .57, a TAT of 1.12, and a PM of .049. the total equity is $511,640. what is the amount of net income?

ROE = PM x TAT x EM NI/511640 = .049 x 1.12 x (1 + .57) NI/511340 = .0862 NI =$44,083.72

all universal exports costs, assets, and current liabilities vary directly with sales. the tax rate, dividend payout ratio and interest expense remain constant. how much additional debt is required if no new equity is raised and sales are projected to increase by 10% in 2014?

addition to RE = NI 2014 x retention rate = 5801 x .6 = 3480.6 CS & RE for 2014 = 19510 + 3480.6 = 22991 total liab & equity for 2014 = 34656 EFN = total asset 2014 - total liabilities 2014 = 33704-34656 = ($952) can pay back $952 dollars in debt

apple has a current ratio of 2.1 and a quick ratio of 1.3. samsung has a current ratio of 1.7 and a quick ratio of .90.

apple has more liquidity than samsung

universal exports does not want to incur any additional financing. the dividend payout ratio is constant. what is the firm's maximum rate of growth? The 2013 retention ratio is 60%.

internal growth rate = (ROA x b) / 1 -(ROA x b) ROA = NI / TA = (5135/30640) = .1676 iGR = (.1676 x .60) / 1 - (.1676 x .60) = 11.18%

which set of ratios indicate a firm's ability to meet its LT financial obligations?

leverage ratios

in increase in _______ & ________ will increase the ROE, all else constant

net income & Equity multiplier

smith company has sales of $325,000, costs of $160,000, depreciation expense of $40,000, interest expense of $12,000 and a tax rate of 40%. the firm has a 30% dividend payout ratio. what is the addition to retained earnings?

set up the income statement: sales $325,000 costs 160,000 depreciation 40,000 EBIT 125,000 interest 12,000 taxable income 113,000 taxes 45,200 net income 67,800 plowback ratio = 1 - payout ratio = 1-.30 = .70 addition to retained earnings = 67,800(.70) = $47,460 retained

discount rate

the interest rate charged to commercial banks for loans received from the federal reserve bank's discount window. -the fed's discount rate is an administered rate set by the federal reserve banks rather than a market rate of interest. -rate between bank and fed

What is the CFFA?

CFFA = OCF -NCS - CHANGE NWC NCS = End Net FA - beg Net FA + dep CFFA = 21687 - (21005-18450 + 2555) - 243 = $16,334