FINA 3770 - Exam 1

If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

FAlse

1. XYZ has earnings before interest & taxes of $30M, depreciation expenses of $1M, capital expenditures of $5M, CA is 500,000 and current liabilities 200,000. If its tax rate is 40%. What is its free cash flow?

Free cash flow = earnings before interest & taxes - taxes + depreciation expenses - capital expenditure - (current asset - current liabilities) 30m -.4(30) +1 - 5-(500,000-200,000) = 13.7 m

In December , General Electric (GE) had a book value of equity of $98.1 billion, 9.2 billion shares outstanding, and a market price of $32.46 per share. GE also had cash of $100.7 billion, and total debt of $197.4 billion. 2015 a. What was GE's market capitalization? What was GE's market-to-book ratio? b. What was GE's book debt-equity ratio? What was GE's market debt-equity ratio? c. What was GE's enterprise value?

GE's market capitalization was (9.2*32.46) =$298.6 GE's market-to-book ratio was 298.6/98.1=3.044 GE's book debt-equity ratio = total debt /book value was 197.4/98.1 =2.01 GE's market debt-equity ratio = total debt/mkt value was 197.4/298.6 = .66 GE's enterprise value = mkt value +short term/long term debt - cash was $298.6+197.4-100.7 = 295.3

Local Co. has sales of $10.7 million and cost of sales of $5.8 million. Its selling, general and administrative expenses are $530,000 and its research and development is $1.2 million. It has annual depreciation charges of $1.1 million and a tax rate of 35%. a. What is Local's gross margin? b. What is Local's operating margin? c. What is Local's net profit margin?

Gross margin = (10.7-5.8)/10.7 = 45.8 = gross profit/sales = (sales-cost of sales)/sales Operating margin = (10.7-5.8-0.53-1.2-1.1)=19.3 = Operating income/ sales = (total rev. - direct and indirect cost)/sales Profit margin = net income/sales = (total rev. -total exp.)/sales = (10.7-5.8-.53-1.2-1.1)*(1-.35)=1.3455/10.7=12.57

Owner's Equity

the amount remaining after the value of all liabilities is subtracted from the value of all assets (paid in surplus, retained-earning, common stock)

In which of the following relationships is an agency conflict problem LEAST likely to arise?

the relationship between a driver and the passengers in a car regarding the safe driving of that car

Current Liabilities

liabilities due within a short time, usually within a year (note payable, deferred tac liability, accounts payable, accruals)

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

Since net working capital is negative, the company will not have enough funds to meet its obligations.

Which of the following amounts would be included on the right side of a balance sheet?

the amount of deferred tax liability held by the company

Agency costs refer to

the costs of any conflicts of interest between stockholders and management.

In early , the following information was true about Abercrombie and Fitch (ANF) and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars. 2016 Book Equity Price Per Share Number of Shares ANF $1,294 $22.05 65.13 million GPS $2,550 $24.68 393.14 million a. What is the market-to-book ratio of each company? b. What conclusion do you draw from comparing the two ratios?

The market-to-book ratio for ANF is (mkt value /book value) = (price per share * number shares)/book value = 1.11. The market-to-book ratio for GPS is 3.8. It implies that the market has a more favorably outlook on (1)the Gap than on (2)Abercombie

Long-term liability

long-term debt

The primary goal of financial management is to

maximize the current value per share of the existing stock.

1. Which of the following are all items from the income statement?

net sales = revenue, depreciation expense, advertising expense, taxes, admin exp., marketing exp., interest exp., COGS, amortization exp.

Long-term Assets

plants and property, equipment, accumulated depr.

For the year ending December 31, 2006 Luther's earnings per share is closest to

$1.06

The profits and losses of the (1) are passed directly to shareholders and are not subject to corporate taxes, while the (2) must first pay taxes on any profits before passing the after-tax profits on to shareholders. In addition, the (3) can have no more than 100 shareholders, all of whom must be U.S. citizens or residents. The (4) does not have any such restrictions on its shareholders.

(1) S corporation (2) C corporation (3) S corporation (4) C corporation

1. A specialist on the floor of the New York Stock Exchange quotes a bid price is $50 and the ask price is $51.50, for XYZ company. What is the bid-ask spread if you buy 50 shares?

(51.5-50)*50 = 75

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

10 − K

Which of the following is a USE of cash in the statement of CashFlow? A. purchase of investment assets B. sale of investment assets C. increasing a bank loan D. paying off a bank loan E. A & D are correct

A. A & D are correct

Which of the following is true of AOS Industries' operating cash flows?

All of the above are true. It charged more on its accounts payable back than it paid back. B. It sold more inventory than it bought. C. It collected more cash from its customers than they charged.

Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than in their own interests. What strategies are available to shareholders to help ensure that managers are motivated to act this way?

B. , C. , D. , E. Write contracts that ensure that the interests of the managers and shareholders are closely aligned. Mount hostile takeovers. Ensure that employees are paid with company stock and/or stock options. Ensure that underperforming managers are fired.

Which organizational forms give their owners limited liability?

D. Limited partnership for limited partners only., E. Corporation.

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400. The market price per share is $14.773 and a book value per share of $9.12. What is the EPS and the market-to-book ratio?

Earning per share = (net income)/(# of share outstanding) 126,400/160,000 = 0.79 Market to Book ratio = market value of equity / book value of equity 14.773/9.12 = 1.62

Which of the following features of a corporation is LEAST accurate?

Earnings from a corporation are taxed only once.

Suppose a firm's tax rate is 25%. a. What effect would a $9.95 million operating expense have on this year's earnings? What effect would it have on next year's earnings? b. What effect would 12.45 million capital expense have on this year's earnings if the capital is depreciated at a rate of 2.49 million per year for five years? What effect would it have on next year's earnings?

Earnings would increase (decline) by (9.95*(1-.25)) = -$7.46 million. (Round to two decimal places, and use a negative number for a decline.) What effect would it have on next year's earnings? There would be no effect on next year's earnings. Earnings would be higher (lower) each year by (2.49*.75)= $ − 1.87 million.

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

It would be an addition to property, plant and equipment so it would be an investing activity.

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?

Jane's liability for the firm's debts consists solely of her investment in the firm.

A company has share price of $22.15 & 118 million shares outstanding. Market-to-book ratio 4.2, book debt-equity ratio 3.2, & cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?

Market cap = $22.15 × 118 = $2.614 billion; Book Value of Equity =Market Equity value / [ M/B ] = $2.614 billion / 4.2 = $0.662 billion. Debt = [ D/E ] * Equity = 3.2 * $0.622 = $1.991 billion. Enterprise Value = $2.614 + $1.991 - $0.800 = $3.805 billion.

An S corporation earns $ 9.50per share before taxes. The corporate tax rate is​ 39%, the personal tax rate on dividends is​ 15%, and the personal tax rate on​ non-dividend income is​ 36%. What is the total amount of taxes paid if the company pays a $ 4.00 ​dividend?

S corp. only pay corp tax rate. Correct Answer D: 3.42 S corp pays taxes on the total profit at a tax rate of non-dividend income (36%) $9.50 * .36 = 3.42

What is the most important type of decision that the financial manager makes?

The financial manager's most important job is to make the firm's investment decisions.

What is the difference between a public and private corporation?

The shares of a (1)public corporation are traded on an exchange (or "over the counter" in an electronic trading system) while the shares of a (2)private corporation are not traded on a public exchange.

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?

The transaction was between the corporation and investors.

Which of the following is a secondary market transaction?

Vanguard sells all its Facebook shares on NASDAQ

Which of the following amounts would be included on right side of balance sheet?

amount of deferred tax liability held by company

Current assets

cash and other assets expected to be exchanged for cash or consumed within a year (inventories, account receivable, prepaid exp., cash)

Which of the following is NOT one of the financial statements that must be produced by a public company? A. the statement of activities B. the balance sheet C. the statement of cash flows D. the income statement

the statement of activities

Accounts payable is a

current liability

Consider the following potential events that might have occurred to Global on December 30, 2016. For each one, indicate which line items in Global's balance sheet would be affected and by how much. Also indicate the change to Global's book value of equity. a. Global used $20.0 million of its available cash to repay $20.0 million of its long-term debt. b. A warehouse fire destroyed $5.0 million worth of uninsured inventory. c. Global used $5.0 million in cash and $5.0 million in new long-term debt to purchase a $10.0 million building. d. A large customer owing million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment. $3.0 e. Global's engineers discover a new manufacturing process that will cut the cost of its flagship product by more than 50%. f. A key competitor announces a radical new pricing policy that will drastically undercut Global's prices.

A. Long-term liabilities would decrease by million, and cash would decrease by the same amount. The book value of equity would be unchanged. $20.0 C. Inventory would decrease by $5.0 million, as would the book value of equity. A. Long-term assets would increase by million, cash would decrease by million, and long-term liabilities would increase by million. There would be no change to the book value of equity. $10.0 $5.0 $5.0 A. Accounts receivable would decrease by $3.0 million, as would the book value of equity. B. This event would not affect the balance sheet. B. This event would not affect the balance sheet.

What are the main advantages and disadvantages of organizing a firm as a C corporation?

Advantages: There is no limit on the number of owners a C corporation may have, thus allowing the corporation to raise substantial amounts of capital. The life of the business can continue beyond the death of any of the owners. The liability of the owners is limited to the amount of their investment in the firm. Disadvantages: Income to a C corporation is subject to double taxation, once at the corporate level and again when received by the owners in the form of a dividend. The C corporation is more complicated and more expensive to set up than other business entities.

ValiantCorp is a C corporation that earned $ 3.70 per share before it paid any taxes. ValiantCorp retained​ $1 of after tax earnings for​ reinvestment, and distributed what remained in dividend payments. If the corporate tax rate was 30​% and dividend earnings were taxed at​ 12.5%, what was the value of the dividend earnings received after tax by a holder of​ 100,000 shares of​ ValiantCorp?

Correct Answer B: $139,125 C corp double taxation NI after taxes = $3.70* (1-.3) = 2.59 Dividend paid = NI - R.E. = $2.59-$1= $1.59 Taxed on dividend/share = $1.59*.125 = 0.19875 Dividend income/share after taxes = 1.59 - 0.19875 =1.39125 Total dividend income after taxes: 1.39125 * 100,000 = 139,125

Ansawry Company Balance Sheets For the Year Ending December 31, 2004 and 2005 (dollars in thousands) 2004 2005 Cash 1,800 900 Accounts receivable 3,000 2,000 Inventories 7,200 9,000 Total current assets 12,000 11,900 Net fixed assets 65,000 75,100 Total assets 77,000 87,000 Notes payable 300 900 Accounts payable 3,200 4,600 Accrued expenses 500 300 Total current liabilities 4,000 5,800 Long-term debt 39,300 44,000 Common stock ($0.20 par value) 13,700 11,700 Retained earnings 20,000 25,500 Total liability & equity 77,000 87,000 Additional Data from 2005 Income Statement (in thousands): Depreciation $ 6,200 Net income $ 15,000

Net cash flow from operating activities for 2005: NCF from Operation = Net income + Dep. Exp + Decrease Account receivable - Increase inventory + Increase Account Payable - Decrease Accrued expenses NI $ 15,000.00 Dep Exp $ 6,200.00 Decrease A/R $ 1,000.00 Increase INV $ (1,800.00) Increase A/P $ 1,400.00 Decrease Accr Exp $ (200.00) NCF from Operation $ 21,600.00. Net cash flow from investing activities: Increase in NFA $10,100.00 Dep Exp 6,200.00 Increase in GFA $ 16,300.00 NCF from investing $ $ (16,300.00) 7c. Net cash flow from financing activities: Increase in NP $600.00 Increase in LTD $4,700.00 Decrease in common stock $(2,000.00) DIV payment $(9,500.00) NI - addition to R.E. = 15,000-(25,500-20,000) NCF from financing $-6200

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $7 million per year?

Net property, plant, and equipment would fall to $113 million, and Total Assets and Stockholders' Equity would be adjusted accordingly.

Assets Liabilities Current Assets Current Liabilities Cash 46 Accounts payable 39 Accounts receivable 23 Notes payable/short-term debt 5 Inventories 20 Total current assets 89 Total current liabilities 44 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 121 Long-term debt 133 Total long-term assets 121 Total long-term liabilities 133 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and 210 Stockholders' Equity What is the net working capital for the above company?

Net working capital = total current assets - total current liabilities, which equals $89-$44 = $45 million, as all quantities are expressed in millions of dollars on the table.

What does the phrase limited liability mean in a corporate context?

Owners' liability (1)is limited to the amount they invested in the firm. Stockholders (2)are not responsible for any encumbrances of the firm; in particular, they (3)cannot be required to pay back any debts incurred by the firm.

Suppose your firm receives a $4.62 million order on the last day of the year. You fill the order with $2.05 million worth of inventory. The customer picks up the entire order the same day and pays $1.04 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $3.58 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: a. Revenues b. Earnings c. Receivables d. Inventory e. Cash

a. Revenues will (1)increase by $4.62 million. b. Earnings will (2)increase by $2.57 (4.62-2.05) million. c. Receivables will (3)increase by $3.58 million. d. Inventory will (4)decrease by $2.05 million. e. Cash will (5)decrease by $1.04 million.

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

as outflow under investment activities

Which of the following is NOT considered to be an operating expense on the income statement?

corporate taxes