Exam 1 Practice
The United States personal income tax system is _____.
progressive, which means that higher income levels have higher tax rates
On 12/31/21, Hite Industries reported retained earnings of $472,500 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/20, the company had reported $445,000 of retained earnings. No shares were repurchased during 2021. How much in dividends did the firm pay during 2021?
$107,500
Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past 5 years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of $125.0 million during the current year, and it expects sales to grow by 35% next year. What is the inventory forecast for next year? All dollars are in millions.
$43.1
Last year Godinho Corp. had $450 million of sales, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
$562.5
Hartzell Inc. had the following data for 2020, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2021 is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $1,250; and Total assets = $2,500. Assume the firm had no excess cash. How much free cash flow did the firm generate during 2021?
$750
Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock outstanding, and it sells at a price of $29.50 per share. How much value has O'Brien's management added to stockholder wealth over the years, i.e., what is O'Brien's MVA?
$9,500,000
Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $395,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. Assume all sales to be on credit. Do not round your intermediate calculations.
10.44
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 40.0%. The firm finances using only debt and common equity, and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations.
12.67%
Which of the following statements is CORRECT?
A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
Which of the following statements about financial statements is CORRECT?
A picture of the firm's financial position at a point in time is typically called a balance sheet.
Which of the following statements about business organizations is CORRECT?
A significant risk in starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.
Which one of the following terms is defined as the management of a firm's long-term investments?
Capital Budgeting
Last year, the Husky Corporation's cash balance increased, even though it had a negative cash flow. What could explain that?
Husky Corporation sold a new issue of bonds.
Consider the following balance sheet for Big Dog Games, Inc. Because Big Dog has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
False
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
False
Maximizing the stock price on a specific target date will maximize shareholder value.
False
The primary financial objective of the firm is to maximize EPS.
False
Which of the following statements is CORRECT?
Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.
Which is TRUE about business organizations?
Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations even though corporate earnings are subject to double taxation.
Which of the following statements is CORRECT?
Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
Which of the following represents a significant disadvantage to the corporate form of organization?
Exposure to taxation of corporate earnings and stockholder dividend income.
Spontaneously generated funds are generally defined as follows:
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals.
Which of the following statements is correct?
High income taxpayers may incur an additional 3.8% surtax on capital gains income.
Which of the following statements is CORRECT?
If a firm increases its sales and keeps the cost of goods sold as a percentage of sales the same while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
Which of the following statements about legal and ethical issues is CORRECT?
If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
Which of the following statements about the statement of cash flows is CORRECT?
In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
The Gabriel Corporation has asked you, a consultant, to recommend an action that is likely to REDUCE potential conflicts between stockholders and bondholders. Which action do you propose?
Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders)
Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?
Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).
Which of the following statements is CORRECT?
One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
Which of the following statements accurately describes business organizations?
Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
International Appliances Inc. has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio?
Purchase additional inventory on credit (accounts payable).
Which of the following factors could explain why Spartan Financials' net income increased sharply from the previous year, yet its net cash provided from operations declined?
Spartan Financials' depreciation expense declined.
Which of the following statements is CORRECT?
Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
Which of the following statements is CORRECT?
The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
The company sold a new issue of common stock.
Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
The company's depreciation expense declined.
Which of the following statements is CORRECT?
The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time.
Assume that Besley Golf Equipment commenced operations on January 1, 2021 and was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2021 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2021 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?
The firm's cash position in 2021 and 2020 would increase.
Which of the following statements is CORRECT?
The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
If a bank loan officer were considering a company's loan request, which of the following statements would be CORRECT, other things held constant?
The lower the total debt to total capital ratio, the lower the interest rate the bank should charge.
Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?
The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
Regarding financial statements, which of the following statements is CORRECT?
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
Which of the following statements is CORRECT?
The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
Corporate social responsibility may provide benefits to the firm such as product differentiation
True
Given that the retained earnings account on the balance sheet is not a cash account—rather, it represents part of the stockholders' claims against the firm's existing assets—we could say that retained earnings are stockholders' reinvested earnings.
True
One way to think about free cash flow is that if the amount were withdrawn, it would harm the firm's ability to operate and to produce future cash flows.
True
International Appliances has a current ratio of 1.2. Which of the following actions would improve (increase) this ratio?
Use cash to pay off current liabilities.
On its December 31, 2020 balance sheet, Wildcat Inc. showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
Wildcat Inc. could have paid dividends in 2021, but they would have had to equal the earnings for the year.
The Sarbanes-Oxley Act of 2002 holds a public company's _____ responsible for the accuracy of the company's financial statements
manager
Calistoga Combines is a publicly owned firm. In order to best serve shareholders, its primary operating goal should be to _____.
use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers
