Finance Ch. 1-4 Connect
How is ownership transferred in a corporation?
By gifting or selling shares of stock
The purpose of the Securities Act of 1933 was to provide the basic regulatory framework for which function?
Issuing new securities
Which of these computes the projected increase in retained earnings using the percentage of sales approach?
PM x Projected sales x (1-d)
PE Ratio
Price per share/Earnings per share
Total Asset Turnover
Sales/Total Assets
Total debt ratio
Total assets-Total equity/Total assets
Which of the following is true concerning government regulation?
-Help reduce conflicts of interest between managers and shareholders -Can help ensure firms disclose relevant information to investors -Can be costly to the firm.
What is the effective annual rate of 12.36% equal to?
12% compounded semiannually EAR+ (1+.12/2)^2 -1=12.36%
Why is positive net working capital important?
It means the firm should have sufficient cash to meet its current obligations.
When is the appreciation on property recognized as a gain?
When the property is sold
Net earnings refers to income earned______.
after interest and taxes
The EAR is meaningful ______.
without a compounding interval
Examples of fixed assets:
-Equipment -Warehouses
What 3 things affect ROE?
-Financial leverage -Asset use efficiency -Operating efficiency
More frequent compounding leads to _____>
-higher EAR's -higher EAY's
Paying off debt service means repaying _____.
-interest -principal
The cash flows from financing activities include changes in:
-long-term debt -common stock
Liabilities usually involve which of these?
-obligations of the firm -require a cash payout within a stated period of time
Retention or Plowback Ratio
1-dividend payout ratio
Equity Multiplier
Assets/Total Equity
Present value of a growing perpetuity
C/(r-g)
What does GAAP stand for?
Generally accepted accounting principles
In a shareholder-management relationship. Who is the agent?
Managers
An official accounting statement that helps to explain the change in cash and cash equivalents is called the ______.
statement of cash flows
The cash flow identity states that cash flow from assets equals cash flows to _____.
creditors and stockholders
If you increase the risk level of a project, the discount rate should ______ which will ______ the project's present value.
increase; decrease
A perpetuity is a constant stream of cash flows for a(n) _______ period of time.
infinite
Cash flows from the acquisition and sale of fixed assets are located in the _____ activities section of the accounting statement of cash flows.
investing
Financial planning is a(n) _____ process.
iterative
A dollar tomorrow is worth ____ a dollar today.
less than
An effective annual rate of 7.12% is equal to 7% compounded _____.
semiannually EAR=(1+.07/2)^2 - 1= 7.12%
Common-size statements are used for comparing firms with differing _____.
sizes
True or False: Accounting profit does not adequately account for cash flow.
True
Corporate bonds are generally classified as ______.
Long-term debt
Market-to-book-ratio
Market value per share/Book value per share
Profit Margin
Net Income/Sales
ROA
Net Income/Total Assets
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Non-cash expenses
A firm's balance sheet shows a snapshot of the firms finances_________.
On a stated date
A current liability is defined as debt that must be repaid within which period of time?
One year
Indirect agency costs are often due to lost ____.
Opportunities
The short run is a period when there are _____ costs.
both fixed and variable
Who owns treasury stock?
the issuer of the stock
If a firm's net working capital goes from $150 in 2013 to $130 in 2014, then the change in net working capital is _____.
-$20
Which of the following are true of a sole proprietorship?
-Has a limited life -Is one of the simplest types of businesses to form
A good financial decision will do the following?
-Increase shareholder's equity -Increase the value of the firm's existing stock
The 1934 Securities Exchange Act restricts anyone who has access to _______ information from trading on that information.
-Inside -Non-public
Accounting _____ refers to the speed and ____ with which assets can be converted to ____.
-Liquidity -ease -cash
The Sarbanes-Oxley Act requires corporate officers to do which of the following?
-List any deficiencies in internal controls -Accept responsibility for material errors in the annual report -Confirm the validity of the annual financial report
When a corporation is formed, it is granted which of the following rights?
-Provincial citizenship for jurisdictional purposes -Legal powers to sue -The ability to issue stock
Which of the following are examples of short-run fixed costs?
-Rent -Bond Interest
True statements about stockholder's equity
-Shareholder's equity is the difference between the value of a firm's assets and debts. -Shareholder's equity is a residual claim on a firm's assets.
The short run for a firm is a period of time during which______.
-Some costs are fixed -Output can vary
Operating cash flow includes which one of these?
-Tax payments
Which of the following are important when considering a partnership?
-Taxation of partnership income -Personal liability for firm debts -Fund raising limitations
Which of these questions can be answered by reviewing a firm's balance sheet?
-What is the total amount of assets the firm owns? -How much debt is used to finance the firm?
One of the most important limitations of a _____ _____ is that it does not show ______ values.
-balance sheet -market
Increasing its non-cash liquid assets will enable a firm to do which of the following?
-increase its ability to meet short-term obligations -increase its ability to avoid financial distress
Which of the following are found on an income statement?
-the non-operating section -the operations section
Under a flat-tax rate, all income levels are taxed at _____.
-the same marginal rate -the same average rate
What is true about product costs?
-they contain both fixed and variable costs -reported as costs of goods sold
_______ assets last a long time and include items such as equipment, land, machinery or buildings.
Fixed
On a balance sheet, patents and trademarks are classified as________.
Fixed assets
AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the return on equity?
$51,750/($523,400-267,000)=20.18%
BC Toys has total equity of $584,000. There are 35,000 shares outstanding at a market price of $54 per share. What is the market-to-book ratio?
$54/($584,000/35,000)=3.24 times
If EBIT equals $100, the tax rate is 40%, and interest expense is $10, and there are 30 shares outstanding. What is EPS?
((100-10) x (1-.40)) / 30= $1.80
Which of the following are current assets?
-Accounts receivable -Inventory
The controller is responsible for:
-Financial accounting -Tax reporting and payments
What should you keep in mind when examining an income statement?
-GAAP -Cash vs. non-cash items -time and costs
Which of the following are considered non-owner stakeholders in a company?
-Government -Suppliers -Employees
Which of the following are classified as liabilities on a firm's balance sheet?
-Long-term debt -Accounts payable
Traditional Financial Ratio Categories:
-Market value ratios -Asset utilization ratios -Profitability ratios
Assuming interest rates are positive, one dollar received today is worth _______ one dollar received next year.
-More than
Operating cash flow differs from total cash flow in that the latter makes adjustments for ____.
-additions to net working capital -capital spending
If a firm defaults on its bond contract, the bondholders _____.
-can sue the firm -can force the firm into bankruptcy
Marginal tax rates are the most important tax rate because:
-financial decisions are usually based on new cash flows -incremental cash flows are taxed at marginal tax rates
What are generally considered to be short-run fixed costs?
-overhead expenses -management salaries -property taxes
Which of the following can put a firm at risk of bankruptcy if not paid?
-principal payments on debt -interest payment on outstanding bonds -interest payments on debt
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. Cash equivalents 2. Accounts receivable 3. Inventory 4. Plant and equipment
Compounding Intervals ranked from highest to lowest in terms of their effect on the size of a future value amount assuming all else is held constant
1. Continuous 2. Daily 3. Semiannual 4. Annual
If ending net fixed assets are $100, beginning net fixed assets are $60, and depreciation is $10, then the change in capital spending is ________.
100-60+10=$50
Days' sales in receivables
365/Receivables turnover
Rock construction has current assets of 45 million, total liabilities and equity of 67 million, and sales of 59 million. How would current assets be expresses on a common-size balance sheet?
45 mil/67 mil=67%
AC Motors has net income of $51,750, total assets of $523,400, total debt of $267,000, and total sales of $491,300. What is the ROE?
51,750/(523,400-267,000)=20.18%
What does stockholders' equity represent?
A residual claim against the firm's assets
Which is the most apt to increase spontaneously with sales?
Accounts Payable
In a financial plan using the percentage of sales approach, why is it assumed that assets increase with sales?
Additional working capital and fixed assets are needed to support growth
What will decrease a firm's SGR?
An increase in the dividend payout ratio
Inventory Turnover
COGS/Inventory
Cal's market has ROE of 15%. What does this mean?
Cal's generated $.15 in profit for ever $1 of book value equity
Which term applies to the mixture of debt and equity maintained by a firm?
Capital Structure
Dividend Payout Ratio
Cash Dividends/Net Income
The officer responsible for corporate tax reporting is the ______.
Controller
The federal government taxes:
Corporate earnings and shareholder dividends
Equity Financing Needed (EFN)
Create pro-forma statement to determine and it is the difference between total assets and total liabilities and equity
Current Ratio
Current Assets/Current Liabilities
Quick Ratio
Current assets-Inventory/Current Liabilities
Some of the cash flow generated by a firm goes back to the financial markets in the form of ________.
Dividends and debt payment
Cash Coverage Ratio
EBIT + (Depreciation and amortization)/Interest
Times Interest Earned Ratio
EBIT/Interest
Times Interest earned ratio
EBIT/Interest
EBITDA Margin
EBITDA/Sales
EPS is
Earnings Per Share
PV
FV/(1+r)^t
Multi-period formula for compounding a present value into a future value?
FV= C x (1+r)^t
A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of .5 is maintained, then debt must increase by _____.
If D/E=.5 and increase of 300,000 in assets will be financed with 100,000 of debt and 200,000 of equity. 100/200=.5
How is interest expense recorded in the common-size income statement?
Interest Expense/Sales
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
It will increase
Price-Earnings Ratio (PE)
Price per share/Earnings per share
ROE
Profit Margin x Total Asset Turnover x Equity Multiplier
Internal Growth Rate
ROA x b/1-(ROA x b)
Sustainable Growth Rate
ROE x b/1-(ROE x b)
Which of the following is a variable cost in the short run?
Raw materials
If a firm maintains a constant debt-equity ratio and does not use any new external equity financing, the percentage of sales approach to financial planning says the firm can grow at a rate no greater than its _____.
SGR
Receivables Turnover Ratio
Sales/Accounts Receivable
What happens when a firm creates value?
Shareholder wealth increases
A current asset has a(n) _____ life.
Short
A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.
Stakeholder
What does it mean when a company reports ROA of 12%?
The company generates $12 in net income for every $100 invested in assets
Which one of the following statements is most likely correct for a firm with an average collection period of 30 days?
The firm finance approximately 8% of its annual sales. 30/365=8%
What does total asset turnover ratio of .75 mean?
The firm generated $.75 in sales for every $1 in assets
What is the main goal of financial management?
To maximize current share value
Total Debt Ratio
Total Assets-Total Equity/Total Assets
Shareholder's equity is the difference between?
Total assets and total debt
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.
a long time
Deferred taxes arise from differences in true taxable income and _____ income.
accounting
The sustainable growth rate can be used to ____.
assess planned growth
An annuity due is a series of payments that begin _____.
at the beginning of each period
The enterprise value multiple allows for comparing the value of firms with different ____ structures.
capital
The liquidity of a company with significant amounts of obsolete inventory and past-due receivables is best measured by the _____ ratio.
cash
The stated annual interest rate is the annual interest rate without consideration of ______.
compounding
Net working capital equals _____.
current assets minus current liabilities
The actual economic value of an asset varies ____ the asset's future cash flows.
directly with
Cash flow to stockholders equals ____.
dividends paid minus net new equity raised
The activity of making net payments to creditors and owners (excluding interest) is called a(n) ______ activity in the accounting statement of cash flows.
financing
A growing annuity has a(n)______.
finite number of growing cash flows
Costs that do not change in the short run arise because of ______.
fixed commitments
Fixed costs are costs that will not change due to _____.
fixed commitments over a stated period of time
A high-growth firm will have a relatively _____ need for external funding than a low-gross firm.
higher
When the typical stock in the S&P 500 Index has a PE ratio 12, a company with a PE ratio of 15 may have ____ than average growth prospects, given similar earnings per share.
higher
An increase in profit margin will _____ a firm's sustainable growth rate.
increase
If a firm increases its debt-equity ratio it will ____ its sustainable rate of growth.
increase
When a firm pays out fewer dividends, it _____ its retained earnings.
increases
Changes in capital spending can be negative when the acquisition of fixed assets is _____ the sale of fixed assets.
less than
If management has been unsuccessful at creating value for the company's stockholders, the market-to-book ratio will be _____.
less than 1
In an infrequent annuity, the payments occur ______.
less than once a year
Long-term debt on the common-size balance sheet over the past 3 years was 30, 34, and 40%, respectively. This indicated the firm has increased its _____.
leverage
Some financial ratios measure a firm's ______, which shows the ability to meet short-term obligations without undue stress, while others measure a firm's financial _____, which demonstrates the ability to meet long-term obligations.
liquidity; leverage
If reinvestment of interest or dividends does not occur, then the future value of an investment will be _____ and the realized yield will be ______ than if investment occurred.
lower; lower
The price at which willing buyers and sellers would trade is called _____ value.
market
Which ratios use information that is not contained in financial statements?
market value ratios
Enterprise value is the sum of a firm's market capitalization and the ____ value of its interest bearing debt ____ any cash on hand.
market; less
The SGR is the ____ rate of growth a firm can maintain _____ increasing its financial leverage.
maximum;without
Interest expense is placed in the _____ section of the income statement.
non-operating
The loan balance on partial amortization loans declines so slowly because the _____.
payments are mostly interest
A 5-year loan that is repaid in a single lump sum at the end of the loan term is called a(n) _________ loan.
pure discount
Assume 10$ invested today will be worth $64 in 25 years. Which one of these is the correct formula for computing the interest rate on this investment?
r = (64/10)^1/25 -1
Capital Intensity Ratio
ratio of total assets to total sales
The percentage of sales approach separates accounts on the pro forma income statement and balance sheet into those that change directly with _____ and those that do not.
sales
The difference between _____ interest and compound interest is that compound interest (increases and decreases) _____ with ______.
simple; increases; time
A common-size balance sheet expresses accounts as a percentage of ______.
total assets
In the long run, all costs are _____.
variable
In the percentage of sales approach to financial planning described in the text book, it is assumed that any surplus funds _____.
were used to pay off debt
PV of an annuity
{1-[1/1(1+r)]/r}
Which of the following are period costs?
-Administrative expenses -General expenses -Selling costs
What are 2 ways to calculate a balloon payment?
-Amortize the loan life to find the ending balance -Find the present value of the payments remaining after the loan term
What 2 groups are most interested in liquidity ratios?
-Bankers -Suppliers
Who are the most interested in liquidity ratios?
-Bankers -Suppliers
Which of the following positions generally report to the CFO?
-Controller -Treasurer
What creates problems when comparing financial statements for multiple firms?
-Differing fiscal years -Differing accounting methods -Seasonality
Based on ROE and SGR, what are the factors that affect a firm's ability to sustain growth?
-Profit Margin -Dividend Policy -Financial Policy -Total Asset Turnover
What calculations are necessary for the computation of NPV?
-Subtracting the current cash outflow from the sum of the PV of all future cash flows -Finding the PV of each future cash flow
Suppose you invest $1,000 and the PV of your future cash flows is $1,100. If the investment becomes riskier, what can happen?
-The NPV will decrease -The NPV can turn negative
What is true about the amortization of a fixed payment loan?
-The amount of interest paid decreases each period -The principal amount paid increases each period
A financial planning model can be used to test the feasibility of a planned growth rate because it incorporates which of the following?
-The firm's use of financial leverage -The asset turnover rate -The firm's dividend policy
What are ways In which $5,000 fixed principal repayment loan differs from a comparable $5,000 fixed payment loan?
-The total payment each period for each type of loan is different -The amount of principal paid each period is different -The amount of interest paid each period is different
What is true about the growing perpetuity model?
-the interest rate must exceed the growth rate -the cash flow used is that for next year -the cash flows occur at regular intervals
What does the asset side of the balance sheet depend on?
-the nature of the business -how management chooses to conduct the firm's business
When is revenue recognized on an income statement?
-when the earnings process is virtually completed -when the exchange of goods or services is completed
Earnings before interest expenses, taxes, depreciation, and amortization (EBITDA)
EBIT + depreciation and amortization
What are the 2 basic classifications under which most potential financial goals fall?
-Controlling risk -Earning or increasing profits
The financial goal of profit maximization:
-Critical inventory reduction -Cost-cutting -Maintenance deferment
Which of the following are examples of non-cash items on an income statement?
-Depreciation -Deferred taxes
A general partnership has these characteristics:
-Each owner has unlimited liability for all firm debts -It is difficult to transfer ownership
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
-Enron -Worldcom -Tyco
Included in a firm's capital structure:
-Equity -Long-term debt
What does a balance sheet reflect about a firm?
Accounting value on a specific date
When a customer purchases an item on credit, the purchase amount is recorded in which account?
Accounts receivable
The costs incurred due to a conflict of interest between stockholders and management are called _______.
Agency costs
A corporation receives cash from financial markets by selling ______ and _______.
Bonds and Stocks
An organization must prepare _____ and bylaws when forming a corporation.
Articles of incorporation
______ budgeting is the process of making and managing expenditures on long-term assets.
Capital
The cash flows paid into a corporation by its bondholders and stockholders should be ____ the cash flows paid out to bondholders and stockholders.
Less than
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
Proxy fight
What is treasury stock?
Stock the firm has repurchased
The primary responsibility of financial managers is to increase the value of _______.
The existing shares of stock.
Which of the following is true about the US modified flat-rate tax system?
The tax rate becomes flat very high income levels
Which of the following show why a corporation is the most important form of business?
-Enter into contracts -Can sue and be sued -A separate legal entity with the ability to acquire and exchange property.
Which of the following are included in a firm's inventory?
-Finished goods -Raw materials -Work in Process
A treasurer's responsibilities typically include:
-Handling cash flows -Making financial plans -Managing capital expenditure decisions
A _______ liability does not have to be paid within one year.
Long-term
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.
Management