Finance exam 1

A firm has a net income of $2,200, depreciation of $500, taxes of $600, other operating expenses of $800, interest of $200, and sales of $5,900. What is the value of EBT?

$2,800

Kettles Inc. paid $50,000 in preferred dividends and $100,000 in common dividends this year. There are 25,000 shares of preferred stock and 40,000 shares of common stock outstanding. What is the amount of the dividends per share on common stock?

$2.50, divide $100,000 by 25,000 shares

Delta's has an operating income of $128,000 and a 35% tax rate and is all equity financed. Sigma's has an operating income of $128,000, a 35% tax rate, and has $15,000 in interest expense since it is partially debt-financed. What is the difference in the income available for asset funders between these two firms?

0.35 ( 15,000) = 5,250

Assume net income is 32, cash dividends paid are 20, and the ending retained earnings balance is 44. What is the change in retained earnings for the period?

12

A firm has taxes of 2,000, interest expense of 1,000, EBIT of 7,500, common stock dividends of 1,500, and preferred dividends of 1,200. What is the profit margin if sales are 22,000?

15% Net income available to common stockholders = 7,500 - 1,000 - 2,000 - 1,200 = 3,300 Profit margin = 3,300 /22,000 = 15%

NY news has net earnings per share of 3.24, a book value per share of 22, and a market to book ratio of 2.5. What is the price earnings ratio?

16.98

Hillside Inc has a taxable income of 48,000 from its normal operations. In addition, the firm received 5,000 in interest income on municipal bonds, and 3,000 in dividends from Lakeside inc. What is Hillside's total taxable income for federal tax purposes?

48,000 + 0.3(3,000) =48,900

Which of these are correct versions for the return on equity?

= profit margin x (1/capital intensity ratio) x (1 + debt to equity) =profit margin x total asset turnover x equity multiplier =ROA x (1 + debt to equity)

What is the definition of an agency problem?

An agency problem is defined as a situation which arises when an agent's best interests does not align with the shareholders goal

Which of these statements is correct concerning the structure of a statement of cash flows?

An increase in accounts payable is an addition to the cash flows from operating activities, a decrease in fixed assets is an addition to cash flows from investing activities

Book value per share is dependent on which of the following

BVPS is based on the equity of a firm that is attributable to the common shareholders

If you want to compare the operations of similar firms without the firm's capital structure or tax status affecting the comparison, which ratio should you use?

Basic earnings power

Which one of these examples best explains a progressive tax?

Beth pays 15% tax on her $35,000 income. Anna pays 25% tax on her $60,000 income

Which of these is a monitor of corporate governance?

Board of directors, SEC

A statement of cash flows for the year ending December 31, 2012 shows a net change in cash and marketable securities of $20. How can this $20 change be defined?

Cash and marketable securities were $20 more on December 31, 2012 than they were on December 31, 2011

When computing BVPS which of these balance sheet values is used as the total book value?

Common stock + paid in surplus + retained earnings

Which parties monitor corporate activities as part of corporate governance?

Credit analysts, auditors, investment analysts

Martin has current assets of 600 and total assets of 2900. The firm has total debt of 1,500 and long term debt of 1,100. What is the current ratio?

Current ratio = current assets / current liabilities Current liabilities = 1,500 - 1,000 =400 Current ratio = 600 / 400 = 1.5

Which one of these best explains how debt financing affects the income available to a firm's asset funders?

Debt increases the income available to asset funders by an amount equal to the interest on the debt times the tax rate

Debt management ratios are used to do which of the following?

Debt management ratios measure the capital structure of a firm, debt management ratios determine the amount of financial leverage used by a firm, debt management ratios determine whether or not a firm can meet debt obligations

Which of these is classified as a cash flow from operating activities?

Decrease in accounts payable

Which one of these is a cash flow from a financing activity?

Decrease in loans payable

Which of these is an addition to the cash flows from investing activities

Decrease in other long term assets

Which of these accounts is a noncash expense?

Depreciation

Which of these are added or subtracted from net income to compute the net cash flows from operating activities?

Depreciation, increase in inventory, decrease in accrued wages and taxes

Not all cash a company generates will be returned to investors. Which of the following will NOT reduce the amount of capital returned to the investors?

Dividends

Equation of EBIT

EBIT = gross profit - depreciation - other operating expenses

What is the definition of EBIT

EBIT is the earnings before interest and taxes

Equation of EBT

EBT=dividends paid to preferred stockholders and equity stockholders + addition to retained earnings + taxes

Which of these factors are credited for providing financial institutions with high profit margins

Expertise and unique assets

What formula defines FCF?

FCF= OCF - IOC

True or false: The cash flows directly resulting from a firms sales and production activities are classified as cash flows from investing activities

False

Two firms have the same ROE for this year. Firm A retains 60% of its earnings as compared to Firm B's 40%. Which of these statements is correct?

Firm A has a higher sustainable growth rate than firm B

Two firms have the same amount of assets and equity. Firm A has a market to book value of 3.6 compared to 2.9 for firm B. Which one of these statements is correct given the provided information?

Firm A is expected to outperform firm B in the future

DJ's has an equity multiplier of 1.5. Which one of these statements is correct given this information?

For every $1 of equity, DJ's has 0.50 of debt and total assets of 1.50

Explain why following GAAP to record sales on an income statement may differ from the cash flows generated by those sales

GAAP requires the revenue from a sale be recorded at the time of the sale, which may not coincide with the cash flow from the sale

Equation of gross profit

GP=net sales-cost of goods sold

A firm has sales of $2,800 depreciation of $2000, EBIT of 900, and other operating expenses of 400. What is the gross profit?

Gross profit = EBIT + other operating expenses + depreciation = 900 + 400 + 200 = 1,500

Les' market has net sales of 1,300, depreciation of $100, cost of goods sold of $600, and other operating expenses of $200. What is the gross profit amount?

Gross profit = sales - costs of goods sold = 1,300 - 600 = 700

A firm has an operating cash flow of 600, a net change in gross fixed assets of 100, and a change in net operating working capital of 50. What is the firms FCF?

IOC = change in fixed gross assets + change in net operating working capital, FCF = OCF - IOC = 600 - (100+50) = 450

Which of these is a use of cash?

Increase in a fixed asset

Which one of these is a subtraction from the cash flows from investing activities?

Increase in a fixed asset

Which of these are cash flows from financing activities?

Increase in common stock, decrease in long term debt, preferred stock dividend

Which of these are a source of cash?

Increase in long term debt, decrease in inventory

Which of these are additions to the cash flows from financing activities?

Increase in long term debt, increase in common stock

Which of these statements regarding the federal taxation of interest income earned by corporation are correct?

Interest earned on a state and local government bond is tax exempt, interest earned on a corporate bond is taxable

Which of these reduce the taxable income of a corporation?

Interest expense

Abel's has a total asset turnover rate of 2.2 as compared to its industry average of 1.8. Which one of these might be the cause of Abel's higher rate?

Inventory stockouts

How is a debt ratio of 0.45 interpreted?

It means that for every dollar of assets, a firm has 0.45 of debt and 0.55 of equity

Which one of these features is an advantage of sole proprietorship?

Less regulation than other business forms

Which one of these is the price at which one share of common stock can currently be sold?

Market value per share

A firm has EBIT of $700, depreciation of $100, taxes of $200, and interest of $300. What is the net income?

Net income = EBIT - interest - taxes = 700 - 300 - 200 = 200

Which one of these best defines net income?

Net income is the amount of profit a firm can either distribute as dividends or reinvest in the firm

A firm has an EBIT of 600, depreciation of 200, and a tax rate of 34%. What is the operating cash flow?

OCF = EBIT (1 - tax rate) + depreciation, 600 (1-0.34)+200 = 596

Petty's has a fixed asset turnover of 2 and a sales working capital ratio of 4. The industry averages are 1.5 and 3, respectively. Assume all firms in the industry use the same depreciation method and have equipment of similar age. Which of these statements is correct?

Petty's has twice the amount of net fixed assets as it does working capital

An income statement is best defined by which of the following statements?

Reflects the total revenues that a firm earns over a period of time and the total expenses incurred to generate those sales

A firm has sales of $8,900, depreciation of $200, costs of goods sold of $3,700, other operating expenses of $4,200, and interest of $600. What is the firms EBIT?

Sales - cost of goods sold - depreciation - other operating expenses = 800

Which one of the following is an advantage offered by a hybrid organization?

Single taxation

What are two key characteristics of a hybrid organization?

Single taxation and limited liability

Which party has a residual claim to a firm's cash flows?

Stockholders

For taxable income of 0-50,000, the rate is 15%. For incomes 50,001-75,000 the base tax amount is 7,500 and the rate over the base is 25%. What is the tax amount due on an income of 68,000?

Tax = 7,500 + 0.25(68,000 - 50,000) =12,000

How can EBT be defined?

The earnings before taxes, also referred to as taxable income

Which one of these is a correct assumption given a firm with an increasing return on equity for each of the past five years?

The firm earned more profit per dollar of investment for its common stockholders last year than it did in previous years

Lester's has a current ratio of 0.86. What does this indicate?

The firm has 0.86 in current assets for every $1 it must pay in obligations within the next year

Which of these are a factor which requires caution when using ratios to evaluate firm performance?

The future may differ from the past, firms may use different accounting methods to value inventory, ratios may be calculated differently by different firms

What is the definition of an average tax rate?

The percentage of each dollar of taxable income that the firm pays in taxes

What is the retention ratio?

The percentage of net income available to common stockholders that is added to retained earnings

What is the definition of a marginal tax rate?

The percentage of the next additional dollar of taxable income that must be paid out in taxes

How is inventory turnover related to days' sale in inventory?

The shorter the inventory period the higher the turnover rate, the lower the turnover rate the more days sales that are held in inventory

Which one of these correctly defines the net change in cash and marketable securities as it is used on the statement of cash flows?

The sum of cash flows from operations, investing activities, and financing activities

True or false: a decrease in long term asset account balance is a cash flow from investing activities

True

Which of the following are disadvantages of a sole proprietorship?

Type of owner liability, ability to raise capital

What is the formula for earnings per share?

net income available to common stockholders/total shares of common stock outstanding