FINANCIAL MANAGEMENT

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ROA = Net Income/Total Asset ROA = 21,000,000/400,000,000 ROA = 0.0525 or 5.25% BEP = EBIT/Total Assets 0.10 = 40,000,000/TA Total Assets =40,000,000/0.10 Total Assets = 400,000,000

10. Humphrey Hotels' operating income (EBIT) is $40 million. The company's times interest earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company's return on assets ROA?

c. The company's net income will increase.

10. The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the company's outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The company's tax rate will also remain the same. Which of the following will occur?

c. An increase in accounts receivable.

11. All else being equal, which of the following will increase a company's current ratio?

d. Only Pepsi Corporation's current ratio will be increased.

12. Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of its window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

b. Statements a and c are correct

13. Stennett Corp.'s CFO has proposed that the company issue new debt and use the proceeds to buy back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume that the proposal would have no effect on the company's operating income.) a. Taxes paid will decline. c. The times interest earned ratio (TIE) will increase.

d. All are correct

14. Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

d. Bedford has a higher return on equity (ROE).

15. Bedford Hotels and Breezewood Hotels both have $100 million in total assets and a 10 percent return on assets (ROA). Each company has a 40 percent tax rate. Bedford, however, has a higher debt ratio and higher interest expense. Which of the following statements is most correct?

c. The company has a high dividend payout ratio.

16. A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)?

c. The company decides to reduce its reliance on accounts payable as a form of financing.

17. Which of the following is likely to increase the additional funds needed (AFN) in a given year?

b. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

18. Additional funds needed are best defined as:

c. Maximize the stock price per share

2. The primary goal of a publicly owned firm interested in serving its stockholders should be to

a. FALSE

21. Capital Management refers to capital procurement, funds allocation, capital restructuring, and profit administration which involves financial planning, analysis of financial condition and supervision of financial operations.

d. Statements a and b are correct.

21. Which of the following statements is most correct? a. Compensating managers with stock can reduce the agency problem between stockholders and managers. b. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. c. The threat of a takeover can reduce the agency problem between bondholders and stockholders. d. Statements a and b are correct.

b. TRUE

22. The primary goal for managerial decisions; considers the risk and timing associated with expected earnings per share in order to maximize the price of the firm's common stock is known as stockholders Wealth Maximization

b. FALSE

23. Accounting is the art and science of managing money. The field of finance is closely related to economics and accounting. Thus, a financial manager must understand both economics and accounting.

b. FALSE

24. Accountant is responsible for the firm's financial activities including financial planning, raising funds, making capital budgeting decisions, and managing the firm's working capital. It is also known as the Chief Financial Manager.

b. TRUE

25. Risk Management involves determining which risks to accept, which to neutralize, and which to transfer. The four key processes in risk management are: Identification, Assessment, Mitigation and Transference.

b. The company decides to reduce its reliance on accounts payable as a form of financing.

25. Which of the following is likely to increase the additional funds needed (AFN) in a given year?

d. Company J must have a higher P/E ratio.

28. Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

Statements a and b are correct.

3. Which of the following statements is most correct? a. Compensating managers with stock can reduce the agency problem between stockholders and managers. b. The threat of a takeover can reduce the agency problem between bondholders and stockholders. c. Statements a and b are correct. d. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders.

Solution: Retained earnings, beginning 400,000 Add: Net Income (200,000*3.00) 600,000 Less: Dividends Paid (200,000*1.0) 200,000 Retained earnings, end 800,000

30. Layla Corp. had retained earnings of $400,000 on its 2001 balance sheet. In 2002, the company's earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of common stock outstanding. What will be the level of retained earnings on the company's 2002 balance sheet?

c. None of the statements above is correct.

4. Which of the following statements is most correct?

b. None of the statements above is correct

5. Which of the following is an example of an area of business in which the use of "questionable" ethics is considered a necessity? a. Keeping up with the competition. c. Attracting and sustaining new customers. d. Hiring and keeping skilled employees.

b. The company purchased a lot of new fixed assets

6. Last year, Blanda Brothers had positive operating net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the company's financial performance?

c. If the company's net income in 2002 was $200 million, dividends paid must have also equaled $200 million

7. On its 2001 balance sheet, Sherman Books had retained earnings equal to $510 million. On its 2002 balance sheet, retained earnings were also equal to $510 million. Which of the following statements is most correct?

d. The company's depreciation and amortization expenses increased.

8. Analysts who follow Cascade Technology recently noted that, relative to the previous year, the company's operating income (EBIT) and net income had declined but its operating cash flow had increased. What could explain these changes?

The company has a high dividend payout ratio.

A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital that they need to raise. Which of the following factors are likely to increase the additional funds needed (AFN)?

1/(1 - 0.4) = 1.67. 18% = (ROA)(1.67) ROA = 10.8%

A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what would be the return on assets (ROA?

ROA = Net Income/Total Assets ROA = 540,000/5,000,000 ROA = 0.108 or 10.80% Debt Ratio = Total Liabilities/Total Assets 0.40 = 2,000,000/Total Assets Total Assets = 2,000,000/0.40 Total Assets = 5,000,000 Asset = Liability + Equity 5,000,000 = 2,000,000 + Equity Equity = 3,000,000 ROE = Net Income/Total Equity 0.18 = Net Income/5=3,000,000 Net Income = 0.18*3,000,000 Net Income = 540,000

A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what would be the return on assets ROA?

FALSE

Accountant is responsible for the firm's financial activities including financial planning, raising funds, making capital budgeting decisions, and managing the firm's working capital. It is also known as the Chief Financial Manager. (T/F)

FALSE

Accounting is the art and science of managing money. The field of finance is closely related to economics and accounting. Thus, a financial manager must understand both economics and accounting (T/F)

Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

Additional funds needed are best defined as:

An increase in accounts receivable.

All else being equal, which of the following will increase a company's current ratio?

a. The company's depreciation and amortization expenses increased.

Analysts who follow Cascade Technology recently noted that, relative to the previous year, the company's operating income (EBIT) and net income had declined but its operating cash flow had increased. What could explain these changes?

(100,000 + 300,000 + 50,000) FINANCING ACTIVITIES = 450,000

At the beginning of the year, Eudora Corporation had $100,000 in cash. The company undertook a major expansion during this same year. Looking at its statement of cash flows, you see that the net cash provided by its operations was $300,000 and the company's investing activities required cash expenditures of $800,000. The company's cash position at the end of the year was $50,000. What was the net cash provided by the company's financing activities?

Solution: Cash beginning 100,000 Add: Net Cash from Operations 300,000 Less: Cash Expenditures 800,000 Cash balance (400,000) Add: Net Cash from Financing 450,000 Cash, end 50,000

At the beginning of the year, Eudora Corporation had $100,000 in cash. The company undertook a major expansion during this same year. Looking at its statement of cash flows, you see that the net cash provided by its operations was $300,000 and the company's investing activities required cash expenditures of $800,000. The company's cash position at the end of the year was $50,000. What was the net cash provided by the company's financing activities?

Bedford has a higher return on equity (ROE).

Bedford Hotels and Breezewood Hotels both have $100 million in total assets and a 10 percent return on assets (ROA). Each company has a 40 percent tax rate. Bedford, however, has a higher debt ratio and higher interest expense. Which of the following statements is most correct?

FALSE

Capital Management refers to capital procurement, funds allocation, capital restructuring, and profit administration which involves financial planning, analysis of financial condition and supervision of financial operations. (T/F)

5.25%

Humphrey Hotels' operating income (EBIT) is $40 million. The company's times interest earned (TIE) ratio is 8.0, its tax rate is 40 percent, and its basic earning power (BEP) ratio is 10 percent. What is the company's return on assets ROA?

The company purchased a lot of new fixed assets.

Last year, Blanda Brothers had positive operating net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the company's financial performance?

EPS = $3, but $1 per share is paid out as dividends. This means that $2 per share is added to retained earnings. (2 x 200,000 + 400,000) = 800,000

Layla Corp. had retained earnings of $400,000 on its 2001 balance sheet. In 2002, the company's earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of common stock outstanding. What will be the level of retained earnings on the company's 2002 balance sheet?

b. If the company's net income in 2002 was $200 million, dividends paid must have also equaled $200 million. (Net Income - Dividend = Retained earnings)

On its 2001 balance sheet, Sherman Books had retained earnings equal to $510 million. On its 2002 balance sheet, retained earnings were also equal to $510 million. Which of the following statements is most correct? a. If the company lost money in 2002, they must have paid dividends. b. If the company's net income in 2002 was $200 million, dividends paid must have also equaled $200 million. (Net Income - Dividend = Retained earnings) c. The company did not pay dividends in 2002. d. The company must have had net income equal to zero in 2002.

a. Only Pepsi Corporation's current ratio will be increased

Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of its window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

TRUE

Risk Management involves determining which risks to accept, which to neutralize, and which to transfer. The four key processes in risk management are: Identification, Assessment, Mitigation and Transference. (T/F)

d. Statements a and c are correct.

Stennett Corp.'s CFO has proposed that the company issue new debt and use the proceeds to buy back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume that the proposal would have no effect on the company's operating income.) a. Taxes paid will decline. b. The times interest earned ratio (TIE) will increase. c. Return on assets (ROA) will decline. d. Statements a and c are correct.

a. The company's net income will increase.

The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the company's outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The company's tax rate will also remain the same. Which of the following will occur?

b. Both statements a and c are correct

The capital intensity ratio is: a. The percentage of liabilities that increase spontaneously as a percentage of sales. c. The amount of assets required per dollar of sales.

d. Both statements a and c are correct.

The capital intensity ratio is: a. The percentage of liabilities that increase spontaneously as a percentage of sales. c. The amount of assets required per dollar of sales.

TRUE

The primary goal for managerial decisions; considers the risk and timing associated with expected earnings per share in order to maximize the price of the firm's common stock is known as stockholders Wealth Maximization. (T/F)

Maximize the stock price per share.

The primary goal of a publicly owned firm interested in serving its stockholders should be to

c. None of the statements above is correct

Which of the following is an example of an area of business in which the use of "questionable" ethics is considered a necessity? a. Hiring and keeping skilled employees. b. Keeping up with competition. c. None of the statements above is correct. d. Attracting and sustaining new customers.

One way to increase EVA is to maintain the same operating income with less capital.

Which of the following statements is most correct?

a. Additional funds needed are typically raised from some combination of notes payable, long-term bonds, and common stock. These accounts are nonspontaneous in that they require an explicit financing decision to increase them.

Which of the following statements is most correct?

a. Additional funds needed are typically raised from some combination of notes payable, longterm bonds, and common stock. These accounts are nonspontaneous in that they require an explicit financing decision to increase them.

Which of the following statements is most correct?

d. None of the statements above is correct.

Which of the following statements is most correct? a. Since they are guaranteed a certain set of cash flows, corporate bondholders generally want corporate managers to select high risk/high return projects. b. One advantage of forming a corporation is that you can deduct your corporate taxes, and thereby eliminate the double taxation that you would face as a sole proprietor. c. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor. d. None of the statements above is correct.

One way to increase EVA is to maintain the same operating income with less capital.

Which of the following statements is most correct? a. Statements a and b are correct. b. One way to increase EVA is to maintain the same operating income with less capital. c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. d. Actions that increase net income will always increase net cash flow.

Sole proprietorships do not have to pay corporate tax.

Which of the following statements is true?

d. Sole proprietorships do not have to pay corporate tax.

Which of the following statements is true?

Book Value per Share = SH Equity/No. of Outstanding Shares Book Value per Share = 1,250/25 BVS = 50 Market/Book Value Ratio = Market Price per Share/BVS 1.5 = Market Price/50 Market Price = 50*1.5 Market Price per Share = 75

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5. Calculate the market price of a share of the company's stock.

Total market value = $1,250(1.5) = $1,875. Market value per share = $1,875/25 = $75.

You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; and market/book ratio = 1.5. Calculate the market price of a share of the company's stock.


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