Finance exam

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

$783,400 Current assets = $51,900 + 313,900 + 417,600 = $783,400

Gaspares Agricultural Cooperative has current liabilities of $162,500, net working capital of $28,560, inventory of $175,800, and sales of $1,941,840. What is the quick ratio?

.09

Discount Outlet has net income of $389,100, a profit margin of 2.8 percent, and a return on assets of 8.6 percent. What is the capital intensity ratio?

.33 Capital intensity ratio = ($389,100 / .086) / ($389,100 / .028) = .33

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?

.35

A firm has net working capital of $8,200 and current assets of $37,500. What is the current ratio?

1.28

Whitt's BBQ has sales of $1,318,000, a profit margin of 7.4 percent, and a capital intensity ratio of .78. What is the total asset turnover rate?

1.28 Total asset turnover = 1 / .78 = 1.28

What is the maximum average tax rate for corporations?

35 percent

Last year, Teresa's Fashions earned $2.03 per share and had 15,000 shares of stock outstanding. The firm paid a total of $16,672 in dividends. What is the retention ratio?

45.25 percent Plowback ratio = 1 − [($16,672 / 15,000)/$2.03] = .4525, or 45.25 percent

Lawler's BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the plowback ratio?

62.99 percent Plowback ratio = 1 − [$4,500/(.039 × $311,800)] = .6299, or 62.99 percent

Prime Electronic Sales has sales of $723,450, total equity of $490,000, a profit margin of 9.3 percent, and a debt-equity ratio of .42. What is the return on assets?

9.67 percent Return on assets = (.093 × $723,450)/[(1 + .42) × $490,000)] = .0967, or 9.67 percent

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

Agency

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of:

Capital Structure Management

Which one of the following is a measure of long-term solvency?

Cash coverage ratio

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

Based on the recognition principle, revenue is recorded on the financial statements when the: I. payment is collected for the sale of a good or service. II. earnings process is virtually complete. III. value of a sale can be reliably determined. IV. product is physically delivered to the buyer.

II and III only

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new external equity and a constant debt-equity ratio

All else held constant, which one of the following will decrease if a firm increases its net income?

Price-earnings ratio

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

Quick ratio

Which one of the following is the abbreviation for the U.S. government coding system that classifies a firm by its specific type of business operations?

SIC

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole Proprietorship

Net working capital decreases when:

a dividend is paid to current shareholders.

Net working capital includes:

an invoice from a supplier.

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

average tax rate

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

When conducting a financial analysis of a firm, financial analysts:

frequently use accounting information.

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

Cash flow to creditors is defined as:

interest paid minus net new borrowing.

The cash ratio is used to evaluate the:

liquidity of a firm.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

may be continually increasing in size.

Shareholders' equity is equal to:

net fixed assets minus long-term debt plus net working capital.

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

noncash item

The market value:

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

Net income increases when:

revenue increases.

One example of a primary market transaction would be the:

sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the:

secondary market.

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.

Operating cash flow is defined as:

the cash that a firm generates from its normal business activities.

The sustainable growth rate is based on the premise that:

the debt-equity ratio will be held constant.

The primary goal of financial management is to maximize:

the market value of existing stock.

Theo's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management

For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

−$14,300 Cash flow to creditors = $38,100 − 21,500 = $16,600 Net new borrowing = $2,300 − 16,600 = −$14,300

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?

21.55 percent Return on equity = .132 × 1.54 × 1.06 = .2155, or 21.55 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?

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

UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate?

6.90 times

Last year, a firm earned $67,800 in net income on sales of $934,600. Total assets increased by $62,000 and total equity increased by $43,500 for the year. No new equity was issued and no shares were repurchased. What is the retention ratio?

64.16 percent Plowback ratio = $43,500/$67,800 = .6416, or 64.16 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?

66.87 percent

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets?

8.00 percent Debt-equity ratio = .42/(1 − .42) = .72414 Return on assets = .138/(1 + .72414) = .0800, or 8.00 percent

The Inside Door has total debt of $208,600, total equity of $343,560, and a return on equity of 13.27 percent. What is the return on assets?

8.26 percent Return on assets = (.1327 × $343,560)/($208,600 + 343,560)= .0826, or 8.26 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?

8.44 percent

A firm has sales of $311,000 and net income of $31,600. The price-sales ratio is 3.24 and market price is $36 per share. How many shares are outstanding?

27,990

A private placement is most apt to involve:

a life insurance

The Sarbanes-Oxley Act:

require the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results.

Suppose Healey Corp. has the following characteristics: Shares outstanding: 68,500 Current share price: $13.50 Total debt: $438,500 Total cash: $63,100 Based on the formula above, what is the enterprise value of this company?

$1,300,150 Enterprise value = (68,500 × $13.50) + $438,500 − 63,100 = $1,300,150

Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the net new equity raised during the year?

$34,000 Net new equity = $142,430 − 55,000 − 11,200 − ($48,420 + 26,310 − 32,500) = $34,000

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?

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

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

$96,700 Current liabilities = $519,300 − 380,200 − 42,400 = $96,700

The Dry Dock has inventory of $431,700, accounts payable of $94,200, cash of $51,950, and accounts receivable of $103,680. What is the cash ratio?

.55

A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must be the total asset turnover?

1.44 Internal growth rate = .045 = [.075 × TAT × (1 − .60)]/{1 − [.075 × TAT × (1 − .60)]} TAT = 1.44

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent?

1.56 percent Profit margin = {[(.058 × $137,000) − $4,700] × (1 − .34)} / $137,000 = .0156, or 1.56 percent

Neiger Flours owes $9,741 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $22 in taxes. What is the average tax rate on income of $61,609?

15.85 percent Average tax rate = ($9741 + 22) / $61,609 = .1585, or 15.85 percent

For the most recent year, Wilson Enterprises had sales of $689,000, cost of goods sold of $492,300, depreciation expense of $61,200, additions to retained earnings of $48,560, and dividends per share of $2.18. There are 12,000 shares of common stock outstanding and the tax rate is 35 percent. What is the times interest earned ratio?

6.59 Net income = $48,560 + ($2.18 × 12,000) = $74,720 Earnings before taxes = [$74,720/(1 − .35)] = $114,953.85 Earnings before interest and taxes = $689,000 − 492,300 − 61,200 = $135,500 Interest = $135,500 − 114,953.85 = $20,546.15 Times interest earned = $135,500/$20,546.15 = 6.59

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Cash payment of an account payable

The passage of the Tax Cuts and Jobs Act of 2017 created a revised progressive tax structure, which applies to all of the following except:

Corporations

Phil's Carvings sells its inventory in 93 days, on average. Costs of goods sold for the year are $187,200. What is the average value of the firm's inventory? Assume a 365-day year.

Inventory = $187,200 × 93 / 365 = $47,698

Which of the following is true regarding the Internal Growth Rate?

It represents the maximum possible growth rate a firm can achieve without external equity financing while maintaining a constant debt-equity ratio.

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Ratio Analysis cannot be taken at face value for all of the following reasons except:

While GAAP is consistent across the globe, multiple currencies may be considered.

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

$1,400 Change in net working capital = ($82,600 − 85,100) − ($67,200 − 71,100) = $1,400

Suzette's Market had long-term debt of $638,100 at the beginning of the year compared to $574,600 at year-end. If the interest expense was $42,300, what was the firm's cash flow to creditors?

$105,800 Cash flow to creditors = $42,300 − ($574,600 − 638,100) = $105,800

Steve's Music Supply has a return on equity of 19.3 percent, a profit margin of 10.1 percent, and total equity of $645,685. What is the net income?

$124,617.21 Net income = .193 × $645,685 = $124,617.21

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?

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

BR Trucking has total sales of $911,300, a total asset turnover of 1.1, and a profit margin of 5.87 percent. Currently, the firm has 18,500 shares outstanding. What are the earnings per share?

$2.89 Earnings per share = (.0587 × $911,300)/18,500 = $2.89

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

$34,645 Addition to retained earnings = [($318,400 − 199,400 − 28,600 − 1,100)(1 − .35)] − $23,400 Addition to retained earnings = $34,645

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

$71,600 Owners' equity = $29,800 + 64,800 − 23,000 = $71,600

Jackson Automotive has net working capital of $22,600, current assets of $56,500, equity of $62,700, and long-term debt of $31,900. What is the amount of the net fixed assets?

$72,000 Net fixed assets = $31,900 + 62,700 − 22,600 = $72,000

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?

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

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = .3