FIN - ch 1, 2 & 3

what is the maximum average tax rate for corporations?

35%

the potential conflict of interest between a firm's owner and its managers is referred to as which type of conflict?

agency

Roscoe's fixed assets were purchased three years ago for $1.8 million. These assets can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is ____.

answer: $1,429,000; $1,718,000 explanation: Book value = $121,000 + 348,000 + 960,000 = $1,429,000 Market value = $518,000 + 1,200,000 = $1,718,000

Use the following tax table to answer this question: Taxable Income Tax Rate$0-9,525 10% 9,525-38,700 12% 38,700-82,500 22% 82,500-157,500 24% 157,500-200,000 32% 200,000-500,000 35% 500,000+ 37% Andrews Dried Fruit, LLC has taxable income of $630,000. How much does it owe in taxes?

answer: $198,790 explanation: Total tax = .10($9,525) + .12($29,175) + .22($43,800) + .24($75,000) + .32($42,500) + .35(300,000) + .37(630,000 − 500,000) = $198,790 Total

Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650. The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 34 percent, what was the amount of the depreciation expense?

answer: $2,503 explanation: Earnings before interest and taxes = [($6,230 + 2,500) / (1 − .34)] + $1,620 = $14,847 Depreciation = $104,650 − 87,300 − 14,847 = $2,503

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $189,000. The building is currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at $32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the firm's assets?

answer: $251,000 explanation: Book value = $189,000 + 56,000 − 49,000 + 18,400 + 36,600 = $251,000

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

answer: $29,400 explanation: Current liabilities = $98,300 − 38,600 − 41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400

AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is $43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is 33 percent. What is the addition to retained earnings?

answer: $29,804 explanation: Addition to retained earnings = [($513,000 − 406,800 − 43,800 − 11,200)(1 − .33)] − $4,500 = Addition to retained earnings = $29,804

Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm's assets?

answer: $293,200 explanation: Total book value = $41,100 + 54,200 + 82,300 + 234,500 − 118,900 = $293,200

Kahlan Opinion Surveys had beginning retained earnings of $24,600. During the year, the company reported sales of $105,700, costs of $78,300, depreciation of $9,000, dividends of $1,200, and interest paid of $635. The tax rate is 30 percent. What is the retained earnings balance at the end of the year?

answer: $35,835.50 explanation: EBT = $105,700 − 78,300 − 9,000 − 635 = $17,765 Net Income = $17,765 × .70 = 12,436 Balance of Retained Earnings = $24,600 +12,436 − 1,200 = $35,835.50

Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year, the company earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased $3,500 of stock from one of its shareholders. What is the value of the owners' equity at year end?

answer: $61,100 explanation: Ending owners' equity = $58,900 + 8,200 − 2,500 − 3,500 = $61,100

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

answer: $63,300 explanation: Ending long-term debt = $64,500 − 16,300 + 4,100 + 11,000 = $63,300

Use the following tax table to answer this question: Taxable Income Tax Rate $0-9,525 10% 9,525-38,700 12% 38,700-82,500 22% 82,500-157,500 24% 157,500-200,000 32% 200,000-500,000 %35 500,000+ 37% Stacey's Fabrics, a sole proprietorship earned $260,000 in taxable income for the year. How much tax does the company owe?

answer: $66,690 explanation: Total tax = .10($9,525) + .12($29,175) + .22($43,800) + .24($75,000) + .32($42,500) + .35($260,000 − $200,000) = $66,690 Total

National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?

answer: $67,015 explanation: Cash flow from assets = ($24,615 + 23,800) + ($38,600 − 20,000) = $67,015

Thorkfeld Company incurred depreciation expenses of $28,900 last year. The sales were $755,000 and the addition to retained earnings was $10,200. The firm paid interest of $6,200 and dividends of $5,000. The tax rate was 33 percent. What was the amount of the costs incurred by the company?

answer: $697,213 explanation: Earnings before interest and taxes = [($5,000 + 10,200) / (1 − .33)] + $6,200 = $28,886.57 Costs = $755,000 − 28,900 − 28,8863.57 = $697,213.43

Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was35 percent. What was the amount of the operating cash flow?

answer: $70,056 explanation: EBIT = $361,820 − 267,940 − 16,500 = $77,380 Tax = ($77,380 − 9,310) × .35 = $23,824.50 OCF = $77,380 + 16,500 − 23,824.50 = $70,056

The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year?

answer: $70,200 explanation: Net capital spending = $28,600 + 41,600 = $70,200

The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

answer: $76,428 explanation: Net income = ($398,600 − 254,800 − 26,400 − 1,600) (1 − .34) = $76,428

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

answer: $9,324 explanation: Net income = ($509,600 − 448,150 − 36,100 − 12,400)(1 − .28) = $9,324

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year?

answer: $95,700 explanation: Cash flow to stockholders = [$187,000 − 47,900 − (−$28,000)] − $71,400 = $95,700

Southern Style Realty has total assets of $485,390, net fixed assets of $250,000, current liabilities of $23,456, and long-term liabilities of $148,000. What is the total debt ratio?

answer: 0.35 explanation: Total debt ratio = ($23,456 + 148,000) / $485,390 = 0.35

You are analyzing a company that has cash of $8,800, accounts receivable of $15,800, fixed assets of $87,600, accounts payable of $40,300, and inventory of $46,900. What is the quick ratio?

answer: 0.61 explanation: Quick ratio = ($8,800 + 15,800) / $40,300 = 0.61

A firm has total assets of $638,727, current assets of $203,015, current liabilities of $122,008, and total debt of $348,092. What is the debt-equity ratio?

answer: 1.20 explanation: Debt-equity ratio = $348,092 / ($638,727 − 348,092) = 1.20

Philippe Organic Farms has total assets of $689,400, long-term debt of $198,375, total equity of $364.182, net fixed assets of $512,100, and sales of $1,021,500. The profit margin is 6.2 percent. What is the current ratio?

answer: 1.40 explanation: Current ratio = ($689,400 − 512,100) / ($689,400 − 364,182 − 198,375) = 1.40

Healthy Foods has a book value per share of $32.68, earnings per share of $3.09, and a price-earnings ratio of 16.8. What is the market-to-book ratio?

answer: 1.59 explanation: Market-to-book ratio = ($3.09 × 16.8)/$32.68 = 1.59

Mike's Place has total assets of $152,080, a debt-equity ratio of .62, and net income of $14,342 What is the return on equity?

answer: 15.28 percent explanation: Return on equity = ($14,342/$152,080) × (1 + .62) = .1528, or 15.28 percent

Allyba Dance Supply has total assets of $550,000 and total debt of $295,000. What is the equity multiplier?

answer: 2.16 explanation: Equity multiplier = $550,000 / ($550,000 − 295,000) = 2.16

A firm has sales of $811,000 for the year. The profit margin is 5.1 percent and the retention ratio is 56 percent. What is the common-size percentage for the dividends paid?

answer: 2.24 percent explanation: Dividends paid common-size percentage = [$811,000 × .051 × (1 − .56)] / $811,000 = .0224, or 2.24 percent

Computer Geeks has sales of $618,900, a profit margin of 13.2 percent, a total asset turnover rate of 1.54, and an equity multiplier of 1.06. What is the return on equity?

answer: 21.55 percent explanation: Return on equity = .132 × 1.54 × 1.06 = .2155, or 21.55 percent

Spring Falls Gifts has sales of $680,300, total assets of $589,100, and a profit margin of 4.3 percent. What is the return on assets?

answer: 4.97 explanation: Return on assets = (.043 × $680,300)/$589,100 = .0497, or 4.97 percent

The Kids' Mart has a market-to-book ratio of 3.3, net income of $87,100, a book value per share of $18.50, and 7,500 shares of stock outstanding. What is the price-earnings ratio?

answer: 5.26 explanation: Price-earnings ratio = (3.3 × $18.50)/($87,100/7,500) = 5.26

Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets?

answer: 5.56 percent explanation: Return on assets = .1128 /(1 + 1.03) = .0556, or 5.56 percent

Wiggle Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin?

answer: 6.58 percent explanation: Profit margin = ($47,500/$358,200)/[1.2 × (1 + .68)] = .0658, or 6.58 percent

A firm has inventory of $46,500, accounts payable of $17,400, cash of $1,250, net fixed assets of $318,650, long-term debt of $109,500, and accounts receivable of $16,600. What is the common-size percentage of the equity?

answer: 66.87 percent explanation: Total assets = Total liabilities and equity = $1,250 + 16,600 + 46,500 + 318,650 = $383,000 Equity common-size percentage = ($383,000 − 17,400 − 109,500) / $383,000 = .6687, or 66.87 percent

Saki Kale Farms has net income of $96,320, total assets of $975,200, total equity of $555,280, and total sales of $1,141,275. What is the common-size percentage for the net income?

answer: 8.44 percent explanation: Net income common-size percentage = $96,320 / $1,141,275 = .0844, or 8.44 percent

Rogers Radiators has net income of $48,200, sales of $947,100, a capital intensity ratio of .87, and an equity multiplier of 1.53. What is the return on equity?

answer: 8.95 percent explanation: Return on equity = ($48,200/$947,100) × (1/.87) × 1.53 = .0895, or 8.95 percent

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

answer: −$4,940 explanation: Interest = $27,130 − 16,220 − 5,450 = $5,460 Cash flow to creditors = $5,460 + 31,600 − 42,000 = −$4,940

which one of the following is a capital structure decision

establishing the preferred debt-equity level

the primary goal of financial management is to maximize:

the market value of existing stock

the daily financial operations of a firm are primarily controlled by managing the:

working capital