Corporate Financial Management Exam 1

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

$301.10

What are the three major forms of business organization?

-Sole proprietorship -Partnership -Corporation

What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.

1. capital budgeting *deciding whether to expand a manufacturing plant 2. capital structure *deciding whether to issue new equity and use the proceeds to retire outstanding debt 3.working capital management *modifying the firm's credit collection policy with its customers

What are the four basic areas of finance?

1. corporate finance 2. investments 3. financial institutions 4. international finance

A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio?

1.45

Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?

27.56%

During the past year, Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors?

39,200

Rooster's currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and $41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $56,500. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

84,900

•How do you standardize balance sheets and income statements?

Common-size balance sheet - all accounts = percent of total assets (%TA) Common-size income statements - all line items = percent of sales or revenues (%SLS)

What are agency problems, and why do they exist within a corporation?

Conflict of interest between principal and agent

What are some of the problems associated with financial statement analysis?

Conglomerates - no readily available comparable global competitors different accounting procedures different fiscal year ends differences in capital structure seasonal variations and one-time events

You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Social networking company Facebook is a relatively recent example. Is an IPO a primary or secondary market transaction?

a primary market transaction

The ratios that are based on financial statement values and used for comparison purposes are called:

accounting ratios

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

agency problem

The sustainable growth rate is based on the premise that:

an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued.

Highly liquid assets:

can be sold quickly at close to full value

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of:

capital structure management

Why is standardization useful?

comparing financial information year-to-year comparing companies of different sies, particularly within the same industry

Which one of the following is a measure of long-term solvency?

debt equity ratio

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease

Net working capital increases when:

inventory is sold for cash at a profit

Given a profitable firm, depreciation:

lowers taxes

The primary goal of financial management is most associated with increasing the:

market value of the firm

What is the goal of financial management?

maximize shareholder wealth

What is the difference between accounting income and cash flow?

Accounting income is purely revenue - expenses = income. Cash flow is when cash is actually changing hands, either coming in or leaving

What is the difference between average and marginal tax rates?

Average tax rates measure tax burden, while marginal tax rates measure the impact of taxes on incentives to earn, save, invest, or spend.

How do we determine a firm's cash flows?

Calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period.

What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization? What benefit are there to these types of business organizations as opposed to the corporate form?

Disadvantages: 1. unlimited liability 2. limited life 3. difficulty in transferring ownership 4.hard to raise capital funds Benefits: 1. simpler 2. less regulation 3. the owners are also the managers 4. sometimes personal tax rates are better than corporate tax rates

What is the primary disadvantage of the corporate form of organization? Name at least two of the advantages of the corporate organization.

Disadvantages: double taxation to shareholders of distributed earnings and dividends Advantages: 1. limited liability 2. ease of transferability 3. ability to raise capital, and unlimited life

Use the following financial information to answer this question. What are the values of the three components of the DuPont identity? Use ending balance sheet values.

Learn DuPont

Helmuth Inc's latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?

Net income X Payout ratio / # of shares1250000 X .60 / 225000 = 3.33

What are the major determinants of a firm's growth potential?

Profit margin - operating efficiency Total asset turnover - asset use efficiency Financial leverage - choice of optimal debt ratio Dividend policy - choice of how much to pay to shareholders versus reinvesting in the firm

What are the major categories of ratios?

Short-term solvency or liquidity ratios Long-term solvency or financial leverage ratios Asset management or turnover ratios Profitability ratios Market value ratios

Suppose you own stock in a company. The current price per share is $25 Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company's management immediately begins fighting off this hostile bid. Is management acting in the shareholders' best interest? Why or why not?

The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed $35, then they should fight the offer from the outside company. If management believes that this bidder or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this.

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the:

secondary market

What goal should always motivate the actions of the firm's financial managers?

to max the current market value (share price) of the equity of the firm (whether it's publicly traded or not).

The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?

total asset turnover

The daily financial operations of a firm are primarily controlled by managing the:

total debt level

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

working capital managementa

What is the difference between book value and market value? And which should we use for decision making purposes?

•Book value = the balance sheet value of the assets, liabilities, and equity. •Market value = true value; the price at which the assets, liabilities, or equity can actually be bought or sold. Should use market value for decision purposes

What are the three types of financial management decisions, and what questions are they designed to answer?

•Capital budgeting -What long-term investments or projects should the business take on? •Capital structure -How should we pay for our assets? -Should we use debt or equity? •Working capital management -How do we manage the day-to-day finances of the firm?