Finance Exam 2 (self test)

Shattuck Corporation had operating income (EBIT) of $2,500,000 in 2018, depreciation expense of $500,000, and dividends paid of $400,000. What is Shattuck's operating cash flow (EBITDA) for 2018?

$2,500,000 EBIT + $500,000 = $3,000,000 cash flow from operations (Dividend payments are not operating cash flows; they are financial cash flows)

Ron's In-Line Skating Corporation had retained earnings at the end of 2018 of $120,000. At the end of 2017, this figure was $90,000. If the company paid $5,000 in dividends to common stockholders during 2018, what was the amount of earnings available to common stockholders?

Beginning retained earnings + net income - dividends paid = ending retained earnings Therefore: Net income = ending retained earnings - beginning retained earnings + dividends paid So, for Ron's In-Line Skating Corporation: Net income = $120,000 - $90,000 + $5,000 = $35,000

Pendell Company has total sales of $4 million. One-fourth of these are credit sales. The amount of accounts receivable is $100,000. What is the average collection period for the company? Use a 365-day year.

Credit sales = $4,000,000 ÷ 4 = $1,000,000 Average collection period = accounts receivable ÷ average daily credit sales = $100,000 Accounts receivable ÷ ($1,000,000 annual credit sales ÷ 365 days per year) = 36.5 days

If one-half the current assets in (Francisco Company has current assets of $50,000. Total assets are $200,000; and long-term liabilities and common stock collectively total $180,000. What is the value of the current ratio?) consist of inventory, what is the value of the quick ratio?

Current assets - inventory = $50,000 - (.5 × $50,000) = $25,000$25,000 ÷ $20,000 current liabilities = 1.25 quick ratio

Francisco Company has current assets of $50,000. Total assets are $200,000; and long-term liabilities and common stock collectively total $180,000. What is the value of the current ratio?

Current liabilities = $200,000 total assets - $180,000 LTD & CS = $20,000 $50,000 current assets ÷ $20,000 current liabilities = 2.5 current ratio

Refer to the pro forma financial statements for Esoteric Enterprises, Figures 6-6a and 6-6b. Calculate Esoteric's return on equity (ROE) ratio for 2018 and 2019. Comment on the results.

For Esoteric in 2018 (from the 2018 financial statements): ROE = $26,252/$150,607= .174, or 17.4% For Esoteric in 2019 (from the 2019 pro forma financial statements): ROE= $30,290/$153,636 = .197, or 19.7% Note that this is a favorable forecast. The gain of over two percentage points in an already respectable ROE value should be particularly pleasing to the stockholders. Esoteric's financial managers should recommend that the company continue with its current plans, assuming that the increase in ROE does not signal an excessive increase in risk.

The Globex Company's pro forma balance sheet for Dec. 31, 2019, indicates that total assets will be $8,420,000, but total liabilities and equity will be only $7,685,000. What should CFO Hank Scorpio do to resolve Globex's discrepancy between its assets and liabilities?

Globex's total liabilities and equity are forecast to be $735,000 less than total assets. This means Globex must arrange for $735,000 in additional financing to support expected asset growth. Possible sources of this financing include bank loans, a bond issue, a stock issue, or perhaps lowering the 2019 dividend (if any).

For the last five years, cost of goods sold (COGS) for Initech Corporation has averaged 60 percent of sales. This trend is expected to continue for the foreseeable future. If sales for 2019 are expected to be $2.5 million, what would be the forecast 2019 value for COGS?

If COGS is expected to remain 60 percent of sales, then in 2019 COGS will be 60 percent of 2010's sales: 60 × $2,500,000 = $1,500,000

In 2018 the Initech Corporation had $180,000 in retained earnings. During 2019, the company expects net income to be $750,000. What will the value of retained earnings be on the company's pro forma balance sheet for Dec.31, 2019, if the company continues its policy of paying 50 percent of net income in dividends?

If Initech earns $750,000 in 2019 and pays 50 percent of it to stockholders as dividends, then the other 50percent, or $375,000, will be retained and added to the existing retained earnings account. Therefore, retained earnings on Ishtar's December 31, 2019, pro forma balance sheet will be $180,000 + $375,000 = $555,000

A portfolio of three stocks has an expected value of 14percent. Stock A has an expected return of 6percent and a weight of .25 in the portfolio. Stock B has an expected return of 10 percent and a weight of .5 in the portfolio. Stock C is the third stock in this portfolio. What is the expected rate of return of Stock C?

ks = .04 + (.06 × .4) = .064 = 6.4%

Using the information provided in ST-6, what is the required rate of return on the common stock of Zack's Salt Corporation? This stock has a beta of .4

ks = .04 + (.06 × 1.2) = .112 = 11.2

Investors in Tyrion Industries common stock have a .2 probability of earning a return of 4 percent, a .6 probability of earning a return of 10 percent, and a .2 probability of earning a return of 20 percent. What is the mean of this probability distribution (the expected rate of return)?

μ = (.2 × .04) + (.6 × .10) + (.2 × .20) = .108 = 10.8%

The standard deviation of the possible returns of Boris Company common stock is .08, whereas the standard deviation of possible returns of Natasha Company common stock is .12. Calculate the standard deviation of a portfolio comprised of 40 percent Boris Company stock and 60 percent Natasha Company stock. The correlation coefficient of the returns of Boris Company stock relative to the returns of Natasha Company stock is -.2.

σ = ([.2 × (.04 - .108)2] + [.6 × (.10 - .108)2] + [.2 × (.20 - .108)2]).5= [(.2 × .004624) + (.6 × .000064) + (.2 × .008464)].5= .002656.5 = .0515 = 5.15%

The mean of the normal probability distribution of possible returns of Gidney and Cloyd Corporation common stock is 18 percent. The standard deviation is 3 percent. What is the range of possible values that you would be 95 percent sure would capture the return that will actually be earned on this stock?

σp = [(.42 × .082) + (.62 + .122) + (2 × .4 × .6 × (-.2) × .08 × .12)].5= [(.16 × .0064) + (.36 × .0144) + (-.0009216)].5= .0052864.5 = .0727 = 7.27%

Cercei Corporation common stock has a beta of 1.2. The market risk premium is 6 percent and the risk-free rate is 4 percent. What is the required rate of return on this stock according to the CAPM?

.18 + (2 × .03) = .24 = 24%.18 - (2 × .03) = .12 = 12%Therefore, we are 95% confident that the actual return will be between 12% and 24%

Bubba's Sporting Goods Company had retained earnings of $3 million at the end of 2017. During 2018, the company had net income of $500,000 and of this paid out $100,000 in dividends. What is the retained earnings figure for the end of 2018?

$3,000,000 end-of-2017 retained earnings + $500,000 net income - $100,000 dividends paid = $3,400,000 end-of-2018 retained earnings

Adams Computer Store had accumulated depreciation of $75,000 at the end of 2018, and at the end of 2017, this figure was $60,000. Earnings before interest and taxes for 2018 were $850,000. Assuming that no assets were sold in 2018, what was the amount of depreciation expense for 2018?

$75,000 end-of-2018 accumulated depreciation - $60,000 end-of-2017 accumulated depreciation = $15,000 2018 depreciation expense

Hayes Company recently bought a new computer system. The total cost, including setup, was $8,000. If this is five-year asset class equipment, what would be the amount of depreciation taken on this system in year 2 using MACRS rules?

$8,000 depreciation basis × .32 (second-year MACRS depreciation percentage for a five-year class asset) = $2,560 year - depreciation expense

Brother Mel's Bar-B-Q Restaurant has $80,000 in assets and $20,000 in liabilities. What is the equity of this firm?

$80,000 assets - $20,000 liabilities = $60,000 equity

Mitra Company has a quick ratio value of 1.5. It has total current assets of $100,000 and total current liabilities of $25,000. If sales are $200,000, what is the value of the inventory turnover ratio?

($100,000 current assets - inventory) ÷ $25,000= 1.5 quick ratio, therefore inventory = $62,500$200,000 sales ÷ $62,500 inventory = 3.2 inventory turnover ratio

For Tyrion Corporation, the mean of the distribution of next year's possible sales is $5 million. The standard deviation of this distribution is $400,000. Calculate the coefficient of variation (CV) for this distribution of possible sales.

CV = σ ÷ μ = $400,000 ÷ $5,000,000 = .08 = 8%

Cantwell Corporation has sales revenue of $2 million. Cost of goods sold is $1,500,000. What is Cantwell Corporation's gross profit?

Cost of goods sold = $1,500,000 Gross profit = $2,000,000 sales revenue - $1,500,000 cost of goods sold = $500,000

Yates Corporation has total assets of $500,000. Its equity is $200,000. What is the company's debt to total asset ratio?

Debt = $500,000 assets - $200,000 equity = $300,000$300,000 debt ÷ $500,000 assets = .6 = 60% debt to total asset ratio

Sheth Corporation has a return on assets ratio of 6percent. If the debt to total assets ratio is .5, what is the firm's return on equity?

Debt ÷ assets = .5, therefore equity ÷ assets = .5, therefore assets ÷ equity = 1 ÷ .5 = 2 ROE = ROA × (A/E) = .06 × 2 = .12, or 12%

De Marco Corporation has total assets of $5 million and an asset turnover ratio of 4. If net income is $2 million, what is the value of the net profit margin?

Sales ÷ $5,000,000 = 4, therefore sales = $20,000,000 $2,000,000 net income ÷ $20,000,000 sales =.1=10% net profit margin

What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies?

WT of Stock C must be .25 for the total of the weights to equal 1: .14 = (.06 × .25) + (.10 × .5) + [E(RC ) × .25].14 = .065 + [E(RC ) × .25].075 = E(RC ) × .25E(RC ) = .30 = 30%