Fina 4300 Exam 1 Review

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

Insufficient information to find ROE

In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.?

Its inventory level is too high.

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Which one of the following statements is correct?

The assets‐to‐equity ratio can be computed as 1 plus the debt‐to‐equity ratio.

All of the followings are false except for

The forecast for retained earnings on the 2019 balance sheet can be determined as 2018 retained earnings plus projected 2019 after‐tax earnings less projected 2019 dividends.

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of

cash flow from financing and cash flow from investing.

Linkʹs current ratio

changed from 10.30 at the end of 2016 to 2.76 at the end of 2017. 2016: Current ratio = $462,593/ $44,919 = 10.30 2017: Current ratio = $249,801/ $90,558 = 2.76

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

Which one of the following is a source of cash?

increase in accounts payable

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios?

increase in the inventory turnover rate

Which of the following items does not belong to operating expenses?

interest expenses

The book value of a firm is

largely based on historical cost.

The most common approach to developing pro forma financial statements is called the

percent‐of‐sales method

Treasury stock is

previously outstanding stock that is bought back from stockholders by the issuing company

Depreciation expense

reduces both taxes and net income.

The most popular yardstick of financial performance among investors and managers is the

return on equity

Oscar's costs cost of goods sold varies directly with sales. For the next year, sales are projected to increase by 10 percent, and inventory turnover is projected to be 6. What is the inventory amount in the pro forma balance sheet for next year?

$1,943 = 10,600 × 1.10 = $11,660 6= 11,660/inventory =1,943

What is JM Case's market price per share? JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. IT's total assets and total liabilities are $4,000,000 and $2,250,000, respectively

$10 = $5 million/500,000 shares = $10 per share

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt‐to‐assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?

$3,000,000 Liabilities/Assets = 0.5 = $500,000/$1,000,000 Assets = $1,000,000 Asset Turnover = 3 = Sales/$1,000,000 Sales = $3,000,000

What is JM Case's book value per share? JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. IT's total assets and total liabilities are $4,000,000 and $2,250,000, respectively

$3.50 = $4,000,000 ‐ $2,250,000 = $1,750,000 = $1,750,000/500,000 shares = $3.50 per share

2018's year‐end net fixed assets will be

$4,540

If capital expenditures are planned to be $1,615 in 2017, then what would be the appropriate projection for net fixed assets in 2017?

$4,563 4,048 + 1,615 − 1,100 = $4,563

After adjusting for interest expense, 2018's year‐end retained earnings will be

$5,312

If Royal Corporation plans to issue $100 in new equity in 2017, what should be the projection for shareholders' equity for 2017?

$5,349 Chap 3 Q 14

You are preparing pro forma financial statements for 2017 using the percent‐of‐sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year‐end 2015 and $50,000 at year‐end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year‐end 2017?

$56,000 Equity @ 2016 ending + Projected addition to R.E. @year‐end 2017 = 50,000 + 6,000 = $56,000

At the end of 2017, Link had a gross margin of ‐‐‐‐‐‐‐, and a profit margin of ‐‐‐‐‐‐‐.

23.6, & ‐94% Gross margin = (Sales ‐ COGS) / Sales = ($274,219 − $209,628)/ $274,219 = 23.6% Profit margin = Net income / Sales = −$257,981/ $274,219 = −94%

Link's payables period in days, based on cost of goods sold, at the end of 2017 is

24.3 Payables period = Accounts payable/ Credit purchases per day = $13,962/($209,620/365) = 24.3

Link's days' sales in cash at the end of 2017 is:

249.7 Days' sales in cash = Cash & securities / Sales per day = ($164,952 + $22,638)/($274,219/365) = 249.7

Link's collection period in days, based on sales, at the end of 2017 is

28.8 Collection period = Accounts receivable/ Credit sales per day = $21,655 / ($274,219/365) = 28.8 days

Which of the following would NOT be considered a use of cash?

Depreciation

All of Oscar's costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year?

$1,034 = $940 × (1 + 0.10) = $1,034

External funding required (unadjusted for interest expense) in 2018 will be

$1,226

Adjusted for interest expense external funding required in 2018 will be

$1,313

What was Oscar's increase in retained earnings during 2017?

$1,380 = $1,830 − $450 = $1,380

To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?

$169,000 158,000 + 23,400 − 12,400 = $169,000

If the company repurchases 10 percent of its shares in the stock market, what will be the new book value of equity if all else remains the same? JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. IT's total assets and total liabilities are $4,000,000 and $2,250,000, respectively

$2.78 JM Case will pay $10 per share for the 50,000 shares (= 0.10 × 500,000) it repurchases. This reduces the book value by $500,000 (= $10 × 50,000). Assuming all else remains the same: New book value per share = ($1,750,000 ‐ $500,000) / (500,000 - 50,000 shares) = $2.78 per share

You are estimating your company's external financing needs for the next year. At the end of next year, you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the next year?

$20 million = $170 m - ($70 m + 80 m) = $20 m

Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and total long‐term assets of $1,800,000. How much is the firmʹs Total Liabilities & Equity?

$3,000,000 = $1,200,000 + $1,800,000 = $3,000,000

Assume that net fixed assets are projected to be $5,000 for 2017 and that shareholders' equity is projected to be $5,500 for 2017. External funding required in 2017 will be

$699 = 1,046 + 6,233 + 4,660 + 5000 - (431 + 8,161 + 2,148 + 5,500) = $699

Oscar's depreciation expense varies directly with sales. Sales are projected to increase by 10 percent, and capital expenditures are planned to be $850 in 2018. what would be the appropriate projection for net fixed assets in 2017?

$8,125 = 3,250 × 1.10 = $3,575 = $10,850 + $850 ‐ $3,575 = $8,125

In 2017, VGA Associates has $200,000 sales, $150,000 cost of goods sold, and $20,000 operating expenses. What was VGA Associates' breakeven sales volume in 2017?

$80,000 = ($200,000 ‐ $150,000)/$200,000 = 25%. Breakeven sales volume = $20,000/0.25 = $80,000

California Retailing Inc. has sales of $4,000,000; the firmʹs cost of goods sold is $2,500,000, and it's total operating expenses are $600,000. What is California Retailingʹs EBIT?

$900,000 Gross Profit - Total Operating Expenses = ($4,000,000 ‐ $2,500,000) - ($600,000) = $900,000

Given the financial data for Link, Inc. below, answer questions 13 to 18: Link, Inc. Selected financial data ($ thousands) Income statement and related items 2016 Sales $160,835 $ 274,219 Cost of goods sold 141,829 209,628 Net income (91,432) (257,981) Cash flow operations (35,831) (12,538) Balance sheet items $236,307 $ 164,952 Cash Marketable Sec. 209,670 22,638 Accounts receivable 12,645 21,655 Inventory 3,971 40,556 Total current assets 462,593 249,801 Accounts payable 17,735 13,962 Accrued liabilities 27,184 76,596 Total current liabilities $44,919 $90,558

- chap 2

Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar's assets and current liabilities vary directly with sales. Assume long‐term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar's external financing need for next year?

-$260 Chap 3 Q13

Link's inventory turnover, based on cost of goods sold, at the end of 2017 is

5.2 Inventory turnover = COGS/ Credit sales per day = $209,628/ $40,556 = 5.2

What is the length of the cash conversion cycle for a firm with $3 million in inventory, $1.5 million in accounts payable, a collection period of 40 days, and an annual cost of goods sold of $18 million?

70.4 Days = 3/(18/365) + 40 − 1.5/(18/365) = 60.8 + 40 − 30.4 = 70.4 days

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will always generate cash soon enough to replenish cash flows required for continued production.

Which of the following statements is true?

A reduction in long‐term debt is a use of cash.

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

All of these describe problems with ROE. A would increase CCC, because accounts receivable would increase. B would reduce CCC, because inventory would decrease. C would increase CCC, because accounts payable would decrease.

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products

Which of the following is NOT a typical reason for differences between profits and cash flow?

Goodwill

You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I, II, III, and IV

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

I, II, and IV only

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt‐equity ratio IV. acid test

II and IV only

You are estimating your company's external financing needs for the next year. Your first‐pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company's operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements?

Reduce the collection period

Which of the following statements is correct if a firm's pro forma financial statements project net income of $12,000 and external financing required of $5,000?

Retained earnings cannot grow by more than $12,000.

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?

asset turnover

All of the following statements about balance sheets are true EXCEPT

balance sheets show average asset balances over a one‐year period

Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5, and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, of which half, is in cash and marketable securities. Assume that Primavera earns a 3 percent after‐tax return on cash and securities. What would Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders?

between 40% and 60% Currently: Asset to equity = 1.5 = Equity / Total assets = Equity / $20 B Equity = $13.33 B Asset turnover = 0.5 = Sales / Total assets = Sales / $20 B Sales = $10.00 B Profit margin = 0.25 = Net income / Sales = Net income / $10.00 B Net income = $2.5 B After paying a $9 B dividend: Total assets = $20 B ‐ $9 B = $11 B Equity = $13.33 B ‐ $9 B = $4.33 B Net income = $2.5 B - (3% × $9 B) = $2.23 B (Note: since dividend is paid from cash and securities, paying dividend reduces the amount of return gained from cash and securities) ROE = $2.23 B / $4.33 B = 51.50%