355 Exam study
The equity multiplier measures...
financial leverage
A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n)
growing perpetuity
A firm has total debt of $1,390 and a debt-equity ratio of .24. What is the value of the total assets?
$1,390/Total equity = .24 Total equity = $5,791.67 Total assets = $1,390 + 5,791.67 = $7,181.67
Gerritt wants to buy a car that costs $26,500. The interest rate on his loan is 5.31 percent compounded monthly and the loan is for 6 years. What are his monthly payments?
$26,500 = C[1 − (1/(1 + .0531/12)^72)/(.0531/12)] C = $430.60
Bob bought some land costing $15,440. Today, that same land is valued at $44,917. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?
$44,917 = $15,440 × 1.06^t 2.90913 = 1.06^t t = ln 2.90913 / ln1.06 t = 1.06785 / 0.05827 t = 18.33 years
Beatrice invests $1,440 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?
Balance Year 4 with simple interest = $1,440 + ($1,440 × 0.03 × 4) = $1,612.80 Balance Year 4 with compound interest = $1,440 × 1.034 = $1,620.73 Additional interest = $1,620.73 - $1,612.80 = $7.93
At the beginning of the year, long-term debt of a firm is $308 and total debt is $339. At the end of the year, long-term debt is $269 and total debt is $349. The interest paid is $35. What is the amount of the cash flow to creditors?
CFC = $35 - ($269 - 308) = $74
Rousey, Inc., had a cash flow to creditors of $16,740 and a cash flow to stockholders of $7,244 over the past year. The company also had net fixed assets of $49,580 at the beginning of the year and $56,980 at the end of the year. Additionally, the company had a depreciation expense of $12,132 and an operating cash flow of $50,801. What was the change in net working capital during the year?
Cash flow from assets = $16,740 + 7,244 = $23,984 Net capital spending = $56,980 − 49,580 + 12,132 = $19,532 Change in net working capital = $50,801 − 19,532 − 23,984 = $7,285
In the accounting statement of cash flows, which one of these is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities?
Cash flow from operations
The 2018 balance sheet of Speith's Golf Shop, Inc., showed long-term debt of $6 million, and the 2019 balance sheet showed long-term debt of $6.25 million. The 2019 income statement showed an interest expense of $205,000. The 2018 balance sheet showed $590,000 in the common stock account and $4.8 million in the additional paid-in surplus account. The 2019 balance sheet showed $630,000 and $5.3 million in the same two accounts, respectively. The company paid out $600,000 in cash dividends during 2019. Suppose you also know that the firm's net capital spending for 2019 was $1,450,000, and that the firm reduced its net working capital investment by $85,000. What was the firm's 2019 operating cash flow, or OCF?
Cash flow to creditors = Interest paid - Net new borrowingCash flow to creditors = $205,000 - (LTDend - LTDbeg)Cash flow to creditors = $205,000 - ($6,250,000 - 6,000,000)Cash flow to creditors = $205,000 - 250,000Cash flow to creditors = -$45,000 Cash flow to stockholders = Dividends paid - Net new equityCash flow to stockholders = $600,000 - [(Commonend + APISend) - (Commonbeg + APISbeg)]Cash flow to stockholders = $600,000 - [($630,000 + 5,300,000) - ($590,000 + 4,800,000)]Cash flow to stockholders = $600,000 - ($5,930,000 - 5,390,000)Cash flow to stockholders = $60,000 Note, APIS is the additional paid-in surplus. Cash flow from assets= Cash flow to creditors + Cash flow to stockholders = -$45,000 + 60,000 = $15,000 Cash flow from assets= OCF - Change in NWC - Net capital spending$15,000= OCF - (-$85,000) - 1,450,000 Operating cash flow= $15,000 - 85,000 + 1,450,000Operating cash flow= $1,380,000
You would like to compare your firm's cost structure to that of your competitors. However, your competitors are much larger in size than your firm. Which one of these would best enable you to compare costs across your industry?
Common-size income statement
DL Motors has sales of $22,400, net income of $3,600, net fixed assets of $18,700, inventory of $2,800, and total current assets of $6,300. What is the common-size statement value of inventory?
Common-size inventory = $2,800/($6,300 + 18,700)Common-size inventory = .1120, or 11.20%
Which one of these statements is correct concerning the time value of money?
Decreasing the PV decreases the FV
our credit card company charges you 1.33 percent per month. What is the EAR on your credit card?
EAR = (1 + .0133)^12 - 1 = .1718, or 17.18%
Retirement Investment Advisors, Inc., has just offered you an annual interest rate of 4.8 percent until you retire in 45 years. You believe that interest rates will increase over the next year and you would be offered 5.4 percent per year one year from today. If you plan to deposit $15,000 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit?
FV = $15,000 × 1.048^45 = $123,694.10 FV = $15,000 × 1.054^44 = $151,732.33 Difference = $151,732.33 − 123,694.10 = $28,038.23
Three years ago, you invested $2,900. Today, it is worth $3,700. What rate of interest did you earn?
FV = $3,700 = $2,900 × (1 + r)^3 r = 0.0846 or 8.46%
One year ago, the Jenkins Family Fun Center deposited $4,200 into an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,000 to this account. They plan on making a final deposit of $8,200 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a rate of return of 5 percent?
FV = $4,200 (1 + 0.05)^5 + $6,000 (1 + 0.05)^4 + $8,200 (1 + 0.05)^3 = $22,145.95
You have just started a new job and plan to save $5,500 per year for 30 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 9.12 percent?
FV = $5,500[1.0912^30 − 1)/.0912] = $766,679.77
A firm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts receivable, $890 in accounts payable, and $360 in cash. What is the amount of the net working capital?
NWC = $360 + 1,210 + 820 − 890 NWC = $1,500
A firm has a return on equity of 20 percent. The total asset turnover is 2.8 and the profit margin is 7 percent. The total equity is $6,000. What is the net income?
Net income = .20 × $6,000 = $1,200
Which account is least apt to vary directly with sales?
Notes payable
Mo will receive a perpetuity of $19,000 per year forever, while Curly will receive the same annual payment for the next 50 years. If the interest rate is 6.3 percent, how much more are Mo's payments worth?
PV = $19,000/.063 = $301,587.30 PV = $19,000[1 − (1/1.0630^50)/.0630] = $287,372.20 Difference = $301,587.30 − 287,372.20 = $14,215.10
Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $22,000 per month for the next 10 years with the first payment due today. If the APR is 8.76 percent compounded monthly, what is the value of the payments today?
PV = $22,000(1.0073)[(1 −1/1.0073^120) / .0073] = $1,767,467.00 2nd BGN 2nd SET
Your parents are giving you $250 a month for 4 years while you are in college. At an interest rate of .57 percent per month, what are these payments worth to you when you first start college?
PV = $250[(1 −1/1.0057^4×12)/.0057] = $10,472.48
You need to have $32,250 in 17 years. You can earn an annual interest rate of 4 percent for the first 5 years, 4.6 percent for the next 4 years, and 5.3 percent for the final 8 years. How much do you have to deposit today?
PV = $32,250/1.0538 = $21,335.50 PV = $21,335.50/1.0464 = $17,822.80 PV = $17,822.80/1.0405 = $14,649.05
The Green Giant has a 4 percent profit margin and a 40 percent dividend payout ratio. The total asset turnover is 1.5 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth?
Return on equity = .04 × 1.50 × 1.40 = .084 Sustainable rate of growth = [.084 × (1 - .40)]/{1 - [.084 × (1 - .40)]} = .0531, or 5.31 percent
What rate of return should be used to compute the NPV of a proposed purchase of Smiley's, an operating business?
The discount rate applicable to other investments with similar risks
A firm has sales of $1,030, net income of $207, net fixed assets of $506, and current assets of $262. The firm has $82 in inventory. What is the common-size balance sheet value of inventory?
Total assets = $506 + 262 = $768 Common-size value of inventory = $82/$768 = .1068, or 10.68%
Binder and Sons borrowed $138,000 for three years from their local bank and now they are paying monthly payments that include both principal and interest. Paying off debt by making instalment payments, such as this firm is doing, is referred to as...
amortizing the debt
The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.
annual percentage
Martha's Enterprises spent $4,100 to purchase equipment three years ago. This equipment is currently valued at $2,700 on today's balance sheet but could actually be sold for $3,200. Net working capital is $400 and long-term debt is $2,300. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity? a. $1,300 b. $800 c. $1,600 d. $1,900 e. $2,200
b. $800 2700+400-2300 = 800
Mariota Industries has sales of $374,300 and costs of $176,350. The company paid $31,750 in interest and $14,350 in dividends. It also increased retained earnings by $69,158 during the year. If the company's depreciation was $19,475, what was its average tax rate? a. 23.21% b. 43.09% c. 16.89% d. 75.70% e. 34.88%
b. 43.09% EBT = 374,300 - (176,350 + 31,750 + 19,475) = 146,725 NI = DIV + RE = 14,350 + 69,158 = 83,508 Tax = EBT - NI = 146,725 - 83,508 = 63,217 Tax Rate = 63,217 / 146,725 = 43.09%
A proxy fight occurs when: a. The board of directors disagree on the members of the management team. b. A group solicits voting rights to replace the board of directors. c. A competitor offers to sell their ownership interest in the firm. d. The firm files for bankruptcy. e. The firm is declared insolvent.
b. A group solicits voting rights to replace the board of directors.
Which one of the following is a current liability? a. Amount due to a supplier in 18 months b. Note payable in nine months c. Estimated taxes just paid d. Loan payment due in 13 months e. Amount due from a customer in 30 days
b. Note payable in nine months
Which one of the following statements correctly depicts the common chain of command in a corporation? a. The information systems manager reports to the treasurer. b. The credit manager reports to the treasurer. c. The controller reports to the chief executive officer. d. The tax manager reports to the treasurer. e. The capital expenditures manager reports to the controller.
b. The credit manager reports to the treasurer.
Financial managers primarily create firm value by: a. maximizing current dividends. b. investing in assets that generate cash in excess of their cost. c. lowering the earnings per share. d. increasing the firm's market share. e. maximizing current sales.
b. investing in assets that generate cash in excess of their cost.
Insider trading is: a. prohibited by the Securities Act of 1933. b. prohibited by the Securities Exchange Act of 1934. c. impossible in today's efficient markets. d. highly discouraged, but still legal. e. prohibited by the Sarbanes-Oxley Act of 2002.
b. prohibited by the Securities Exchange Act of 1934.
According to Generally Accepted Accounting Principles (GAAP), revenue is recognized as income when: a. a contract is signed to perform a service or deliver a good. b. the transaction is complete and the goods or services are delivered. c. payment is requested. d. income taxes are paid on the revenue earned. e. managers decide to recognize it.
b. the transaction is complete and the goods or services are delivered.
You find the following financial information about a company: net working capital = $951; fixed assets = $5,897; total assets = $8,446; and long-term debt = $4,489. What are the company's total liabilities? a. $5,440 b. $7,878 c. $6,087 d. $2,051 e. $6,778
c. $6,087 8446 - 5897 = 2549 2549 - 951 = 1598 1598 + 4489 = 6087
Which one of the following actions by a financial manager creates an agency problem? a. Borrowing money when doing so creates value for the firm b. Lowering selling prices that will result in increased firm value c. Agreeing to expand the company at the expense of stockholders' value d. Agreeing to pay management bonuses based on the market value of the firm's stock e. Refusing to spend current cash on an unprofitable project
c. Agreeing to expand the company at the expense of stockholders' value
A partnership: a. is taxed the same as a corporation. b. terminates at the death of any limited partner. c. creates an unlimited liability for all general partners for the partnership's debts. d. has the same ability as a corporation to raise capital. e. allows for easy transfer of interest from one general partner to another.
c. creates an unlimited liability for all general partners for the partnership's debts.
The cash flow of the firm must be equal to the: cash flow to stockholders minus the cash flow to creditors. cash flow to creditors minus the cash flow to stockholders. cash flow to governments plus the cash flow to stockholders. cash flow to stockholders plus the cash flow to creditors. aftertax operating cash flow.
cash flow to stockholders plus the cash flow to creditors.
Taxable Income Tax Rate $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39% Our firm currently has taxable income of $80,600. How much additional tax will you owe if you increase your taxable income by $21,800? a. $7,152 b. $7,412 c. $7,142 d. $7,532 e. $8,502
d. $7,532 50,000 * 15% = 7,500 24999 * 25% = 6,249.75 (80600 - 75,001) * 34% = 1,903.66 Total = 15,653.41 80,600 + 21800 = 102,400 50,000 * 15% = 7,500 24999 * 25% = 6,249.75 24,999 * 34% = 8,499.66 (102,400 - 100,001) * 39% = 935.61 Total = 23,185.02 23,185.02 - 15,653.41 = 7,531.61
A firm starts its year with positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that: a. the ending net working capital must be negative. b. both accounts receivable and inventory decreased during the year. c. the beginning current assets were less than the beginning current liabilities. d. accounts payable increased and inventory decreased during the year. e. the ending net working capital can be positive, negative, or equal to zero.
e. the ending net working capital can be positive, negative, or equal to zero.
One of the reasons why cash flow analysis is popular is because...
it is difficult to manipulate, or spin the cash flows.
Ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as...
liquidity measures.
Net capital spending is equal to the: net change in total assets plus depreciation. net change in fixed assets plus depreciation. net income plus depreciation. difference between the market and book values of the total assets. change in total assets.
net change in fixed assets plus depreciation.
The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its...
sustainable rate of growth
Financial planning models are most apt to omit...
the timing, risk, and size of the cash flows
