MIDTERM CORP FINANCE
Which one of the following statements is correct concerning a corporation with taxable income of $125,000?
An increase in depreciation will increase the operating cash flow.
Which one of the following accounts is the most liquid?
accounts receivable
Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
agency problem
Why should financial managers strive to maximize the current value per share of the existing stock?
because they have been hired to represent the interests of the current shareholders
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
can provide less information to its shareholders than it did prior to "going dark".
Which one of the following terms is defined as the management of a firm's long-term investments?
capital budgeting
Net working capital is defined as:
current assets minus current liabilities.
A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:
general partnership.
Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?
good reputation of the company
A limited partnership:
has a greater ability to raise capital than a sole proprietorship.
The higher the degree of financial leverage employed by a firm, the:
higher the probability that the firm will encounter financial distress.
Which one of the following is an agency cost?
hiring outside accountants to audit the company's financial statements
Net capital spending:
is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
A general partner:
is solely responsible for all the partnership debts.
Decisions made by financial managers should primarily focus on increasing which one of the following?
market value per share of outstanding stock
Which one of the following grants an individual the right to vote on behalf of a shareholder?
proxy
Which one of the following parties has ultimate control of a corporation?
shareholders
A business owned by a solitary individual who has unlimited liability for its debt is called a
sole proprietorship.
Which one of the following statements is correct?
Corporations can raise large amounts of capital generally easier than partnerships can.
Which one of the following is true according to Generally Accepted Accounting Principles?
Costs of goods sold are recorded based on the matching principle.
Which of the following are cash flows from a corporation into the financial markets? I. repayment of long-term debt II. payment of government taxes III. payment of loan interest IV. payment of quarterly dividend
I. repayment of long-term debt II. payment of government taxes
Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. increased foreign stock exchange listings of U.S. stocks II. decreased compliance costs III. increased privatization of public corporations IV. increased public disclosure by all corporations
I. increased foreign stock exchange listings of U.S. stocks III. increased privatization of public corporations
The articles of incorporation: I. describe the purpose of the firm. II. are amended periodically. III. set forth the number of shares of stock that can be issued. IV. detail the method that will be used to elect corporate directors.
I. describe the purpose of the firm. III. set forth the number of shares of stock that can be issued.
Which of the following parties are considered stakeholders of a firm? I. employee II. long-term creditor III. government IV. common stockholder
I. employee III. government
Which of the following individuals have unlimited liability based on their ownership interest? I. general partner II. sole proprietor III. stockholder IV. limited partner
I. general partner II. sole proprietor
Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life
I. limited liability for firm debt III. ability to raise capital IV. unlimited firm life
Which one of the following characteristics applies to a limited liability company?
taxed similar to a partnership
Which one of the following is classified as an intangible fixed asset?
trademark
Dee Dee's Marina is obligated to pay its creditors $6,400 today. The firm's assets have a current market value of $5,900. What is the current market value of the shareholders' equity?
$0 Shareholders' equity = Max [($5,900 - $6,400), 0]. Since the market value of equity cannot be negative, the answer is zero.
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the cash flow from assets for 2009?
$1,580 Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644 Net capital spending = $4,123 - $4,006 + $122 = $239 Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495 - $717) = -$175 Cash flow from assets = $1,644 - $239 - (-$175) = $1,580
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the taxable income for 2009?
$1,592.42 Net income = $420 + $631 = $1,051 Taxable income = $1,051/(1 - .34) = $1,592.42
Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income?
$82,550 Net income = ($687,000 - $492,000 - $26,000 - $42,000) (1 - .35) = $82,550
Depreciation:
A. reduces both taxes and net income.
Which one of the following statements is generally correct?
Auction markets match buy and sell orders.
Which one of the following statements is correct?
Both sole proprietorship and partnership income is taxed as individual income.
Which one of the following statements related to an income statement is correct? Assume accrual accounting is used.
C. The labor costs for producing a product are expensed when the product is sold.
Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. interest expense II. taxes III. costs of goods sold IV. depreciation
D. I and IV only
As long as a firm maintains a positive cash balance, why is it essential to review the firm's cash flows?
Firms can have positive cash balances because they are using borrowed funds or equity investments. For a firm to be financially healthy over the long-term, it must be able to generate cash internally. Cash flow analysis enables you to determine the sources, and uses, of a firm's cash to evaluate the financial health of the firm and ensure that the firm is generating positive cash flows from its operations.
Which of the following are included in the market value of a firm but are excluded from the firm's book value? I. value of management skills II. value of a copyright III. value of the firm's reputation IV. value of employee's experience
I, III, and IV only
Which one of the following statements concerning NASDAQ is FALSE?
NASDAQ is an auction market.
Which one of the following statements concerning stock exchanges is correct?
Some large companies are listed on NASDAQ
Assume you are a credit manager in charge of approving commercial loans to business firms. Identify three aspects of a firm's cash flows you would review and explain the type of information you hope to gain from reviewing each of those five aspects.
Student answers will vary but here are some examples: 1) operating cash flow - Is the firm generating positive cash flow from its current operations? 2) cash flow to creditors - Is the firm currently repaying debt or is it assuming additional debt? 3) net working capital - Is the firm increasing or decreasing its net working capital and what effect, if any, is this having on the firm's liquidity? 4) cash flow to stockholders - Is the firm currently paying any dividends to its shareholders and are those shareholders investing additional capital into the firm? 5) net capital spending - Is the firm currently investing in additional fixed assets?
A positive cash flow to stockholders indicates which one of the following with certainty?
The dividends paid exceeded the net new equity raised.
A stakeholder is:
any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
balance sheet
Which one of the following will increase the cash flow from assets, all else equal?
decrease in net capital spending
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:
limited partner.
Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?
maximum loss limited to the capital invested
The controller of a corporation generally reports directly to the:
vice president of finance.
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction:
was facilitated in the secondary market.
Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
working capital
Cash flow from assets is also known as the firm's:
free cash flow.
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the cash flow to stockholders for 2009?
$0 Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644 Net capital spending = $4,123 - $4,006 + $122 = $239 Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495 - $717) = -$175 Cash flow from assets = $1,644 - $239 - (-$175) = $1,580 Net new borrowing = $1,100 - $2,400 = -$1,300 Cash flow to creditors = 280 - (-$1,300) = $1,580 Cash flow to stockholders = $1,580 - $1,580 = $0
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the amount of the noncash expenses for 2009?
$1,611 The noncash expense is the depreciation in the amount of $1,611.
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the net capital spending for 2009?
$239 Net capital spending = $4,123 - $4,006 + $122 = $239
Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital?
$30,300 Current liabilities = .60 $126,000 = $75,600 Total assets = $141,800 + $126,000 = $267,800 Current assets = $267,800 - $161,900 = $105,900 Net working capital = $105,900 - $75,600 = $30,300
Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?
$300 Net working capital = $4,900 - $3,200 - $1,400 = $300
Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense?
$7,000 Net income = $469 + $4,221 = $4,690 Earnings before taxes = $4,690/(1 - .30) = $6,700 Earnings before interest and taxes = $6,700 + $1,300 = $8,000 Depreciation = $30,000 - $15,000 - $8,000 = $7,000
The 2008 balance sheet of The Sports Store showed $800,000 in the common stock account and $6.7 million in the additional paid-in surplus account. The 2009 balance sheet showed $872,000 and $8 million in the same two accounts, respectively. The company paid out $600,000 in cash dividends during 2009. What is the cash flow to stockholders for 2009?
-$772,000 Cash flow to stockholders = $600,000 - [($872,000 + $8,000,000) - ($800,000 + $6,700,000) = -$772,000
Boyer Enterprises had $200,000 in 2008 taxable income. What is the firm's average tax rate based on the rates shown in the following table?
30.63 percent Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($200,000 - $100,000) = $61,250 Average tax rate = $61,250/$200,000 = 30.63 percent
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the operating cash flow for 2009?
4,267 Operating cash flow = $3,396 + $1,611 - $740 = $4,267
Which one of the following statements concerning net working capital is correct?
A decrease in the cash balance also decreases net working capital.
As of 2008, which one of the following statements concerning corporate income taxes is correct?
A firm's tax is computed on an incremental basis.
Which one of the following statements related to the cash flow to creditors is correct?
A positive cash flow to creditors represents a net cash outflow from the firm.
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Principles.
Which one of the following statements concerning a sole proprietorship is correct?
It is easy to create a sole proprietorship.
Which one of the following statements related to an income statement is correct?
Taxes reduce both net income and operating cash flow.
The book value of a firm is:
based on historical cost.
Which one of the following costs is most apt to be a fixed cost?
depreciation
Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?
limited partnership
The Sarbanes-Oxley Act of 2002 is a governmental response to:
management greed and abuses.
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
marginal
Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure?
The treasurer reports to the vice president of finance.
Which one of the following is a working capital management decision?
determining whether to pay cash for a purchase or use the credit offered by the supplier
Which one of the following represents the most liquid asset?
$100 of inventory that is sold today for $100 cash
A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?
$780 Current assets = $520 + $190 + $70 = $780
For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.
depreciation
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the amount of the net capital spending for 2009?
$1,229 Net capital spending = $17,107 - $17,489 + $1,611 = $1,229
Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?
$1,269.46 Net income = $75 + $418 = $493 Taxable income = $493/(1 - .35) = $758.46 Earnings before interest and taxes = $758.46 + $511 = $1,269.46
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the cash flow to stockholders for 2009?
$1,300 Cash flow to stockholders = [$1,374 - ($2,696 - $2,122)] - ($7,000 - $7,500) = $1,300
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is net new borrowing for 2009?
$1,300 Net new borrowing = $1,100 - $2,400 = -$1,300
The Blue Bonnet's 2008 balance sheet showed net fixed assets of $2.2 million, and the 2009 balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a depreciation expense of $900,000. What was the amount of the net capital spending for 2009?
$1,300,000 Net capital spending = $2,600,000 - $2,200,000 + $900,000 = $1,300,000
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the change in the net working capital from 2008 to 2009?
$1,306 Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the cash flow to creditors for 2009?
$1,580 Net new borrowing = $1,100 - $2,400 = -$1,300 Cash flow to creditors = 280 - (-$1,300) = $1,580
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the operating cash flow for 2009?
$1,644 Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the cash flow from assets for 2009?
$1,732 Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306 Net capital spending = $17,107 - $17,489 + $1,611 = $1,229 Operating cash flow = $3,396 + $1,611 - $740 = $4,267 Cash flow from assets = $4,267 - $1,229 - $1,306 = $1,732
The 2008 balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, and the 2009 balance sheet showed long-term debt of $2.3 million. The 2009 income statement showed an interest expense of $250,000. What was the cash flow to creditors for 2009?
$50,000 Cash flow to creditors = $250,000 - ($2,300,000 - $2,100,000) = $50,000
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the net working capital for 2009?
$1,945 Net working capital = $313 + $1,162 + $1,521 - $1,051 = $1,945
Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This equipment is currently valued at $64,500 on today's balance sheet but could actually be sold for $58,900. This is the only fixed asset the firm owns. Net working capital is $57,200 and long-term debt is $111,300. What is the book value of shareholders' equity?
$10,400 Book value of shareholders' equity = $64,500 + $57,200 - $111,300 = $10,400
At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?
$11,129 Cash flow to creditors = $6,430 - ($68,219 - $72,918) = $11,129
A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?
$18,700 Shareholders' equity = $5,900 + $21,200 - $8,400 = $18,700
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the operating cash flow for 2009?
$2,078.00 Net income = $420 + $631 = $1,051 Taxable income = $1,051/(1 - .34) = $1,592.42 Earnings before interest and taxes = $1,592.42 + $238 = $1,830.42 Operating cash flow = $1,830.42 + $789 - .34($1,592.42) = $2,078.00
The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?
$20,680 Cash flow from assets = $48,450 - (-$1,330) - $24,000 = $25,780 Cash flow to creditors =$2,480 - (-$2,620) = $5,100 Cash flow to stockholders = $25,780 - $5,100 = $20,680
At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?
$21,903 Change in net working capital = ($122,418 - $103,718) - ($121,306 - $124,509) = $21,903
During 2009, RIT Corp. had sales of $565,600. Costs of goods sold, administrative and selling expenses, and depreciation expenses were $476,000, $58,800, and $58,800, respectively. In addition, the company had an interest expense of $112,000 and a tax rate of 32 percent. What is the operating cash flow for 2009? Ignore any tax loss carry-back or carry-forward provisions.
$30,800 Earnings before interest and taxes = Net income = $565,600 - $476,000 - $58,800 - $58,800 = -$28,000 Operating cash flow = -$28,000 + $58,800 - $0 = $30,800
Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?
$309,076 Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600 Tax = $403,600 .34 = $137,224 Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076
Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?
$33,763 Net capital spending = $209,411 - $218,470 + $42,822 = $33,763
The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.
$4,600,000; $3,900,000 Book value = ($725,000 + $1,375,000) + $2,500,000 = $4,600,000 Market value = $1,900,000 + $2,000,000 = $3,900,000
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the cash flow to creditors for 2009?
$432 Cash flow to creditors = $1,282 - ($10,650 - $9,800) = $432
Webster World has sales of $12,900, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 32 percent?
$5,404 Earnings before interest and taxes = $12,900 - $5,800 - $1,100 = $6,000 Taxable income = $6,000 - $700 = $5,300 Tax = .32($5,300) = $1,696 Operating cash flow = $6,000 + $1,100 - $1,696 = $5,404
A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?
$5,860 Current assets = $6,230 - $3,910 = $2,320 Current liabilities = $2,320 - $640 = $1,680 Total liabilities = $1,680 + $4,180 = $5,860
Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?
$76,320 Net income = ($546,000 - $295,000 - $37,000 - $15,000) (1 - .32) = $135,320 Addition to retained earnings = $135,320 - $59,000 = $76,320
The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How much additional tax will the firm owe if taxable income increases by $21,000? Taxable Income Tax Rate 0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39%
$8,080 Additional tax = .34($100,000 - $97,800) + .39($97,800 + $21,000 - $100,000) = $8,080
The 2008 balance sheet of Global Tours showed current assets of $1,360 and current liabilities of $940. The 2009 balance sheet showed current assets of $1,640 and current liabilities of $1,140. What was the change in net working capital for 2009?
$80 Change in net working capital = ($1,640 - $1,140) - ($1,360 - $940) = $80
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the amount of dividends paid in 2009?
$800 Dividends paid = $1,374 - ($2,696 - $2,122) = $800
Galaxy Interiors 2009 Income Statement ($ in millions) Net Sales: $21,415 Cogs: $16,408 Depreciation: $1,611 Earnings before interest & taxes: $3,396 Interest Paid: $1,282 Taxable Income: $2,114 LESS: Taxes: $740 Net Income: $1,374 (left) Balance Sheet 2008/2009 Cash: $668 / $297 AR: $1,611 / $1,527 Inventory: $3,848 / $2,947 Total: $6,127 / $4,771 Net Fixed Assets: $17,489 / $17,107 Total Assets: $23,616 / $21,878 (right) Balance Sheet 2008/2009 AP: $1,694 / $1,532 NP: $2,500 / $0 Total: $4,194 / $1,532 Long Term Debt: $9,800 / $10,650 Common Stock: $7,500 / $7,000 Retained Earnings: $2,122 / $2,696 Total Liability. & Equity: $23,616 / $21,878 What is the amount of net new borrowing for 2009?
$850 Net new borrowing = $10,650 - $9,800 = $850
Jake owns The Corner Market which he is trying to sell so that he can retire and travel. The Corner Market owns the building in which it is located. This building was built at a cost of $647,000 and is currently appraised at $819,000. The counters and fixtures originally cost $148,000 and are currently valued at $65,000. The inventory is valued on the balance sheet at $319,000 and has a retail market value equal to 1.2 times its cost. Jake expects the store to collect 98 percent of the $21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of $414,700. What is the market value of this firm?
$919,000 Market value of firm = $819,000 + $65,000 + 1.2($319,000) + .98($21,700) + $26,800 - $414,700 = $900,166
Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?
$990 Net income = $1,300 + (-$310) = $990
Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt of $48,919. The beginning and ending total debt balances were $84,652 and $78,613, respectively. The interest paid was $4,767. What is the amount of the cash flow to creditors?
-$1,641 Cash flow to creditors = $4,767 - ($48,919 - $42,511) = -$1,641
M&M Foods 2008/2009 Sales: $5,831 / 6,423 COGS: $3,670 / 4,109 Interest: $291 / 280 Depreciation: $125 / 122 Cash: $250 / 313 AR: $1,092 / 1,162 C Liabilities: $717 / 1,051 Inventory: $1,495 / 1,521 lT Debt: $2,400 / 1,100 Net Fixed Assets: $4,006 / 4,123 C Stock: $1,900 / 2,100 Taxes: $590 / 670 What is the change in net working capital from 2008 to 2009?
-$175 Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) - ($250 + $1,092 + $1,495 - $717) = -$175
The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?
-$26,360 Cash flow to stockholders = .40($121,600) - $75,000 = -$26,360
Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate?
32.83 percent Earnings before taxes = $843,800 - $609,900 - $76,400 - $38,200 = $119,300 Net income = $18,000 + $62,138 = $80,138 Taxes = $119,300 - $80,138 = $39,162 Tax rate = $39,162/$119,300 = 32.83 percent
Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360? Taxable Income Tax Rate 0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39%
33.62 percent Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($211,360) = $104,680.40 Average tax rate = $104,680.40/$311,360 = 33.62 percent
Corporate bylaws:
determine how a corporation regulates itself.
Which one of the following is a capital structure decision?
determining how much debt should be assumed to fund a project
The managers of a firm wish to expand the firm's operations and are trying to determine the amount of debt financing the firm should obtain versus the amount of equity financing that should be raised. The managers have asked you to explain the effects that both of these forms of financing would have on the cash flows of the firm. Write a short response to this request.
Debt financing will require cash outflows for both interest and principal payments. The interest outflow will be partially offset by a decrease in the cash outflow for taxes. Should the firm accept additional debt, the liquidity of the firm might have to be increased to ensure the debt obligations can be met in a timely manner. On the other hand, equity financing does not create any requirement for future cash outflows as equity does not need to be repaid nor are dividends required. However, if dividends are paid, they would not lower the firm's cash outflow for taxes.
Cash flow to stockholders is defined as:
dividend payments less net new equity raised.
Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months
I and III only
Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory
I. accounts payable II. accounts receivable IV. inventory
Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight
Which of the following should a financial manager consider when analyzing a capital budgeting project? I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow
I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow
An increase in the depreciation expense will do which of the following? I. increase net income II. decrease net income III. increase the cash flow from assets IV. decrease the cash flow from assets
II and III only
Which of the following are current assets? I. patent II. Inventory III. accounts payable IV. cash
II and IV only
Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?
II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?
Which of the following apply to a partnership that consists solely of general partners? I. double taxation of partnership profits II. limited partnership life III. active involvement in the firm by all the partners IV. unlimited personal liability for all partnership debts
II. limited partnership life III. active involvement in the firm by all the partners IV. unlimited personal liability for all partnership debts
Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes
II. payment of dividends IV. payment of government taxes
Which one of the following statements related to liquidity is correct?
Liquid assets are valuable to a firm.
Which one of the following statements concerning net working capital is correct?
Net working capital increases when inventory is sold for cash at a profit.
Public offerings of debt and equity must be registered with which one of the following?
Securities and Exchange Commission
Discuss the difference between book values and market values and explain which one is more important to the financial manager and why.
The accounts on the balance sheet are generally carried at historical cost, not market values. Although the book value of the current assets and the liabilities may closely approximate market values, the same cannot be said for the rest of the balance sheet accounts. Market values are more relevant as they reflect today's values whereas the balance sheet reflects historical costs as adjusted by various accounting methods. To determine the current value of a firm, and its worth to the shareholders, financial managers must monitor market values.
Which one of the following must be true if a firm had a negative cash flow from assets?
The firm utilized outside funding.
Which one of the following statements is correct concerning the NYSE?
The listing requirements for the NYSE are more stringent than those of NASDAQ.
Which one of the following statements related to taxes is correct?
The marginal tax rate for a firm can be either higher or lower than the average tax rate.
Which one of the following statements concerning a sole proprietorship is correct?
The owner of a sole proprietorship is personally responsible for all of the company's debts.
Noncash items refer to:
expenses which do not directly affect cash flows.
Assume you are the financial officer of a major firm. The president of the firm has just stated that she wishes to reduce the firm's investment in current assets since those assets provide little, if any, return to the firm. How would you respond to this statement?
While it is true that current assets provide a low rate of return, those assets are essential to the firm's liquidity. Should the liquid assets be reduced too low, the firm could face a much greater problem than a low rate of return. That problem would be the inability to meet the firm's financial obligations which could even result in a bankruptcy due to a lack of cash flow.
The _____ tax rate is equal to total taxes divided by total taxable income.
average
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
capital structure
The decision to issue additional shares of stock is an example of which one of the following?
capital structure decision
The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
cash flow from assets.
The cash flow related to interest payments less any net new borrowing is called the:
cash flow to creditors.
You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?
construction of a new restricted access highway located between the store and the surrounding residential areas
Which form of business structure is most associated with agency problems?
corporation
Which one of the following business types is best suited to raising large amounts of capital?
corporation
Which type of business organization has all the respective rights and privileges of a legal person?
corporation
A business created as a distinct legal entity and treated as a legal "person" is called a:
corporation.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
corporations delisting from major exchanges
Which one of the following is a capital budgeting decision?
deciding whether or not to purchase a new machine for the production line
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 functions should be the responsibility of the controller rather than the treasurer?
income tax returns
Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
increase in the market value per share
Which one of the following actions by a financial manager is most apt to create an agency problem?
increasing current profits when doing so lowers the value of the firm's equity
Which one of the following is least likely to be an agency problem?
increasing the market value of the firm's shares
Which one of the following is NOT included in cash flow from assets?
interest expense
Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally.
limited liability company
Which one of the following best states the primary goal of financial management?
maximize the current value per share
Which one of these is most apt to be a fixed cost?
office salaries
Which term relates to the cash flow which results from a firm's ongoing, normal business activities?
operating cash flow
Which one of the following is a means by which shareholders can replace company management?
proxy fight
Shareholders' equity:
represents the residual value of a firm.
Which one of the following is a primary market transaction?
sale of a new share of stock to an individual investor
Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?
secondary, auction market
Which one of the following will increase the value of a firm's net working capital?
selling inventory at a profit