financial management exam 1

A firm has $720 in inventory, $1,340 in fixed assets, $460 in accounts receivable, $240 in net working capital, and $135 in cash. What is the amount of current liabilities?

$1,075 Current liabilities = ($135 + 460 + 720) − $240 = $1,075

A company has $635 in inventory, $1,930 in net fixed assets, $306 in accounts receivable, $145 in cash, and $362 in accounts payable. What are the company's total current assets?

$1,086 Current assets = $145 + 306 + 635 = $1,086

What were the total dividends paid for 2017?

$1,356 million Retention ratio = ($950 million - 700 million)/$1,606 million = .156 Dividends paid = (1 - .156) × $1,606 million = $1,356 million

If you earn an annual interest rate of 8.7 percent, how many years will it take to quadruple your money?

16.62 years $4 = $1(1.087)t t = 16.62 years

bob bought some land costing $16,090. Today, that same land is valued at $46,217. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?

18.11 years $46,217 = $16,090 × 1.06t 2.87241 = 1.06t t = ln2.87241/ln1.06 t = 1.05515/0.05827 t = 18.11 years

You are due to receive a lump-sum payment of $1,750 in three years and an additional lump-sum payment of $1,850 in five years. Assuming a discount rate of 3.0 percent interest, what would be the value of the payments today?

3,197.32 1,601.5 + 1,595.83 = 3,197.32

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

A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio?

5.11 percent Internal growth rate = [($32,600/$503,000) × (1 − .25)]/{1 − [($32,600/$503,000) × (1 − .25)]} = .0511, or 5.11 percent

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

8 percent interest for 9 years

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

agency

security dealers

buy and sell from their own inventory

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

operating cash flow is defined as

the cash that a firm generates from its normal business activities

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

Both you and your older brother would like to have $26,500 in 10 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 11.5 percent compared to your brother's 9.8 percent. How much less than your brother will you have to deposit today?

$1,481.81 You: PV = $26,500/1.11510 = $8,922.72 Brother: PV = $26,500/1.09810 = $10,404.53 Difference = $10,404.53 − $8,922.72 = $1,481.81

A firm has a return on equity of 21 percent. The total asset turnover is 2.9 and the profit margin is 8 percent. The total equity is $8,000. What is the net income?

$1,680 Net income = .21 × $8,000 = $1,680

Starlite Industries will need $2.2 million 4.5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 3.6 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

$1,876,306.49 Present value = $2,200,000/(1 + .036)4.5= $1,876,306.49

What is the present value of $12,900 to be received 2 years from today if the discount rate is 6 percent?

$11,480.95 PV = $12,900/1.06^2 = $11,480.95

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

At the beginning of the year, a firm has current assets of $329 and current liabilities of $233. At the end of the year, the current assets are $495 and the current liabilities are $273. What is the change in net working capital?

$126 Change in net working capital = ($495 - 273) - ($329 - 233) = $126

Your bank will pay you an interest rate of .097 percent per week. You want to have $22,000 in 10 years. How much will you have to deposit today? Assume 52 weeks per year.

$13,288.34 PV = $22,000/1.00097^10×52 = $13,288.34

You just purchased two coins at a price of $1,090 each. Because one of the coins is more collectible, you believe that its value will increase at a rate of 5.8 percent per year, while you believe the second coin will only increase at 5.2 percent per year. If you are correct, how much more will the first coin be worth in 12 years?

$141.45 FV = $1,090 × 1.05812 = $2,144.15 FV = $1,090 × 1.05212 = $2,002.70 Difference = $2,144.15 − 2,002.70 = $141.45

A company has total equity of $1,965, net working capital of $175, long-term debt of $940, and current liabilities of $1,770. What is the company's net fixed assets?

$2,730 Total liabilities and equity = Total assets = $1,965 + 940 + 1,770 = $4,675 NWC = Current assets − Current liabilities $175 = CA − $1,770 Current assets = $1,945 Net fixed assets = $4,675 − 1,945 = $2,730

Marcia has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 35 percent. What is the net income?

$2,860 Net income = ($79,600 - $48,200 - $18,700 - $8,300)(1 - 0.35) = $2,860

Windswept, Inc., has 550 million shares of stock outstanding. Its price-earnings ratio for 2017 is 12. What is the market price per share of stock?

$24.89 Earnings per share = $1,141/550 = $2.074545 Price = $2.074545 × 12 = $24.89

Theodoro has just received an insurance settlement of $18,500. She wants to save this money until her daughter goes to college. If she can earn an average of 5.2 percent, compounded annually, how much will she have saved when her daughter enters college 9 years from now?

$29,195.33 Future value = $18,500 × (1 + .052)^9 = $29,195.33

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

Your firm has net income of $273 on total sales of $1,180. Costs are $660 and depreciation is $130. The tax rate is 30 percent. The firm does not have interest expenses. What is the operating cash flow?

$403 EBIT = $1,180 - 660 - 130 = $390 (Sales - Costs - Depreciation) Taxes = .30 × $390 = $117 (Tax rate × EBIT) OCF = $390 + 130 - 117 = $403 (EBIT + Depreciation - Taxes)

You want to have $82,000 in 17 years to help your child attend college. If you can earn an annual interest rate of 3.8 percent, how much will you have to deposit today?

$43,496.95 PV = $82,000/1.038^17 = $43,496.95

What is the future value of $3,058 invested for 10 years at 5.8 percent compounded annually?

$5,373.96 FV = $3,058 × 1.058^10 = $5,373.96

You find the following financial information about a company: net working capital = $1,194; fixed assets = $6,473; total assets = $8,734; and long-term debt = $4,723. What are the company's total liabilities?

$5,790 Current assets = $8,734 − 6,473 = $2,261 $1,194 = $2,261 − CL CL = $1,067 Total liabilities = $1,067 + 4,723 = $5,790

Red Barchetta Co. paid $27,770 in dividends and $28,689 in interest over the past year. During the year, net working capital increased from $13,650 to $18,369. The company purchased $42,660 in fixed assets and had a depreciation expense of $17,075. During the year, the company issued $25,150 in new equity and paid off $21,210 in long-term debt. What was the company's cash flow from assets?

$52,519 Cash flow from assets = ($28,689 + 21,210) + ($27,770 − 25,150) = $52,519

Today, your dream car costs $51,200. You feel that the price of the car will increase at an annual rate 2.2 percent. If you plan to wait 6 years to buy the car, how much will it cost at that time?

$58,341.20 FV = $51,200 × 1.022^6 = $58,341.20

Turner's Store had a profit margin of 6.8 percent, sales of $498,200, and total assets of $542,000. If management set a goal of increasing the total asset turnover to 1.10 times, what would the new sales figure need to be, assuming no increase in total assets?

$596,200 Total asset turnover = 1.10 × $542,000 = $596,200

Your sister just deposited $12,500 into an investment account. She believes that she will earn an annual return of 10.2 percent for the next 9 years. You believe that you will only be able to earn an annual return of 9.6 percent over the same period. How much more must you deposit today in order to have the same amount as your sister in 9 years?

$629.54 FV = $12,500 × 1.1029 = $29,960.18 PV = $29,960.18/1.0969 = $13,129.54 Difference = $13,129.54 − 12,500 = $629.54

For the past year, Momsen, Ltd., had sales of $43,847, interest expense of $2,840, cost of goods sold of $14,384, selling and administrative expense of $10,531, and depreciation of $4,530. If the tax rate was 38 percent, what was the company's net income?

$7,168 EBT = $43,847 − 14,384 − 10,531 − 4,530− 2,840 = $11,562 Taxes = $11,562(.38) = $4,394 Net income = $11,562 − 4,394 = $7,168

You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now?

$7,295.71 Future value = $5,000 × (1 + .065)^(8 − 2) = $7,295.71

Beatrice invests $1,360 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?

$7.49 Balance Year 4 with simple interest = $1,360 + ($1,360 × 0.03 × 4) = $1,523.20 Balance Year 4 with compound interest = $1,360 × 1.034 = $1,530.69 Additional interest = $1,530.69 - 1,523.20 = $7.49

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

You expect to receive a payout from a trust funding 4 years. The payout will be for$10,400. You plan to invest the money at an annual rate of 6.3 percent until the account is worth $18,100. How many years do you have to wait from today?

13.07 years $18,100 = $10,400(1.063)t t = 9.07 years Years to wait = 9.07 + 4 = 13.07 years

Recently, the owner of Martha's Wares encountered severe legal problems and is trying to sell her business. The company built a building at a cost of $1,280,000 that is currently appraised at $1,480,000. The equipment originally cost $760,000 and is currently valued at $507,000. The inventory is valued on the balance sheet at $450,000 but has a market value of only one-half of that amount. The owner expects to collect 97 percent of the $245,200 in accounts receivable. The firm has $10,900 in cash and owes a total of $1,480,000. The legal problems are personal and unrelated to the actual business. What is the market value of this firm?

$980,744 Market value = $1,480,000 (building) + 507,000(equipment) + (.5 × 450,000) (inventory) + (.97 × 245,200) (accounts receivable) + 10,900cash - 1,480,000 (amount owed) Market value = $980,744

An investor who was not as astute as he believed invested $275,000 into an account 10 years ago. Today, that account is worth $212,400. What was the annual rate of return on this account?

-2.55 percent $212,400 = $275,000(1 + r)^10 r = ($212,400/$275,000)^(1/10) − 1 r = −.0255, or −2.55%

The Texas Rustler has total assets of $645,563 and an equity multiplier of 1.22. What is the debt-equity ratio?

.22 Debt-equity ratio = 1.22 − 1 = .22

A firm wants a sustainable growth rate of 3.03 percent while maintaining a dividend payout ratio of 25 percent and a profit margin of 4 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

.96 times Sustainable growth rate = .0303 = [ROE × (1 - .25)]/{1 - [ROE × (1 - .25)]} ROE = .03921 ROE = .03921 = .04 × (1/2) × Equity multiplier Equity multiplier = 1.96 Debt-equity ratio = 1.96 - 1 = .96times

A firm has an equity multiplier of 1.5. This means that the firm has a:

0.50 Debt to Equity Ratio = (1.5 − 1) / 1 = .50

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

what is the equity multiplier for 2017? (chart on practice test)

1.76 times Equity multiplier = $6,525/($2,950 + 760) = 1.76 times

Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio?

1.94 Current ratio = ($537,800 - 412,400) / ($388,700 - 323,900) = 1.94

Lee Sun's has sales of $3,600, total assets of $3,300, and a profit margin of 6 percent. The firm has a total debt ratio of 42 percent. What is the return on equity?

11.29 percent Net income = $3,600 × .06 = $216.00 Total debt ratio = .42 = ($3,300 - Total equity)/$3,300 Total equity = $1,914.00 Return on equity = $216.00/$1,914.00 = .1129, or 11.29%

When your father was born 48 years ago, his grandparents deposited $500 in an account for him. Today, that account is worth $28,000. What was the annual rate of return on this account?

8.75 percent $28,000 = $500(1 + r)^48 r = ($28,000/$500)^(1/48) − 1 r = .0875, or 8.75%

which one of the following parties can sell shared of ABC stock in the primary market?

ABC company

the DuPoint identity can be used to help a financial manager determine I. degree of financial leverage used by a firm II. operating efficiency of a firm III. utilization rate of a firm's assets IV. rate of return on a firm's assets

I, II, III, and IV (all of the above)

Which one of the following is the correct formula for the current value of $600 invested today at 5 percent interest for 6 years?

PV = $600 / (1 + .05)^6

which one of the following is the most apt to align management's priorities with shareholders' interests?

compensating managers with shares of stock that must be held for a minimum of three years

which one of the following is an intangible fixed asset?

copyright

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

corporate accounting and financial fraud

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 applies to: unmarried individuals sole proprietorships LLC's partnerships

which one of these transactions will increase the liquidity of a firm?

credit sale of inventory at cost

net working capital is defined as

current assets minus current liabilities

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

discounting

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

future value

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

general partnership

a sole proprietorship

has its profits taxed as personal income

Which one of the following is a working capital decision?

how much cash should the firm keep in reserve

a common-size balance sheet helps financial managers determine

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

which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

increase in accounts payable

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

increasing the interest rate

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

internal growth rate

a corporation

is a legal entity separate from its owners

shareholders' equity is equal to

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

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 constant debt-equity ratio

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 equity multiplier is equal to

one plus the debt-equity ratio

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested