Practice exam 1 BA 323

Beginning in 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires corporations with a market value over ________ to allow a nonbinding shareholder vote on executive pay.

$75,000,000

Maria is the sole proprietor of an antique store that she has operated at the same location for the past 16 years. The store rents the space in which it is located but does own all of the inventory and fixtures. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific loan covenants or assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

1,2,3,4

Which statement is correct?

A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.

Chevelle, Inc. has sales of $487,000 and costs of $394,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings?

Addition to retained earnings = [($487,000 - $394,500 - $43,800 - $18,200)(1 - 0.35)] - $6,500 = $13,325

Bama & Co. owes a total of $21,684 in taxes for this year. The taxable income is $61,509. If the firm earns $100 more in income, it will owe an additional $56 in taxes. What is the average tax rate on income of $61,609?

Average tax rate = ($21,684 + $56)/$61,609 = 35.29 percent

Which one of the following is a graphical representation of the operating and cash cycles?

Cash flow time line

Tressler Dry Cleaners has inventory of $1,700, accounts payable of $4,200, cash of $1,950, and accounts receivable of $3,680. What is the cash ratio?

Cash ratio = $1,950/$4,200 = 0.46

Your firm has cash of $3,800, accounts receivable of $8,600, inventory of $33,100, and net working capital of $1,100. What is the cash ratio?

Cash ratio = $3,800/($3,800 + $8,600 + $33,100 - $1,100) = 0.09

Which one of the following statements related to securities dealers is correct?

Dealers buy and sell from their own inventory.

A firm has total assets of $523,100, current assets of $186,500, current liabilities of $141,000, and total debt of $215,000. What is the debt-equity ratio?

Debt-equity ratio = $215,000/($523,100 - $215,000) = 0.70

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

Dividends paid = $31,800 - $24,200 = $7,600

The Paint Ball Range, Inc. paid $30,500 in dividends and $7,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow?

EBIT = $211,800 - $167,900 - $16,500 = $27,400; Tax = ($27,400 - $7,600) × 0.34 = $6.732; OCF = $27,400 + $16,500 - $6,732 = $37,168

Suppose Gallinger Corp. has the following characteristics: Shares outstanding: 1,000,000 Current share price: $10 Total debt: $1,000,000 Total cash: $500,000 Based on the formula above, what is the enterprise value of Gallinger Corp.?

Enterprise value = ($1,000,000 × $10) + $1,000,000 - $500,000 = $10,500,000

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Which statement related to a cash budget is correct?

Financially healthy firms can have a negative quarterly net cash inflow.

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit margin II. Return on assets III. Total asset turnover IV. Return on equity

I, II, and IV only

The Universal Network has sales of $496,500, cost of goods sold of $264,900, and inventory of $87,100. What is the inventory turnover rate?

Inventory turnover = $264,900/$87,100 = 3.04

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

Losses limited to capital invested

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

Maximize the market value of the equity

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

Net capital spending = $371,920 - $348,200 + $46,080 = $69,800

Furniture Outlet has an accounts receivable period of 63 days and an accounts payable period of 87 days. The company turns over its inventory 4.3 times per year and marks up the inventory an average of 38 percent over its wholesale cost. What is the length of the firm's operating cycle?

Operating cycle = (365/4.3) + 63 = 147.88 days

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

The Green House has a profit margin of 5.6 percent on sales of $311,200. The firm currently has 15,000 shares of stock outstanding at a market price of $11.60 per share. What is the price-earnings ratio?

Price-earnings ratio = $11.60/[(0.056 × $311,200)/15,000] = 9.98

Children's Place has a market-to-book ratio of 2.9, net income of $68,400, a book value per share of $37, and 45,000 shares of stock outstanding. What is the price-earnings ratio?

Price-earnings ratio = (2.9 × $37)/($68,400/45,000) = 70.59

Theo's has estimated quarterly sales, starting with Quarter 1, of $9,800, $10,700, $12,400, and $14,600.Purchases are equal to 66 percent of the following quarter's sales and are payable in 90 days. Assume there are 30 days in each month. How much will Theo's pay its suppliers in the third quarter?

Q3 payments = (.66 ×$12,400) = $8,184

A firm earns $0.18 in profit for every $1 of equity in the firm. The company borrows $0.60 for every $1 of equity. What is the firm's return on assets?

Return on assets = ($0.18/$1)/($1.60/$1) = 11.25 percent

Accounts receivable financing is the term used to describe which one of the following types of loans that involve either the assignment or the factoring of a firm's accounts receivable?

Secured short-term loan

Which one of the following statements is correct?

Shareholders' equity is the residual value of a firm.

Which one of the following statements about a limited partnership is correct?

There must be at least one general partner.

The Berry Patch has sales of $438,000, cost of goods sold of $369,000, depreciation of $37,400, and interest expense of $13,800. The tax rate is 35 percent. What is the times interest earned ratio?

Times interest earned ratio = ($438,000 - $369,000 - $37,400)/$13,800 = 2.29

The operating cycle is equal to the:

accounts receivable period plus the inventory period.

Which one of the following has nearly the same meaning as free cash flow?

cash flow from assets

Financial leverage:

increases the potential return to the shareholders.

The Sarbanes-Oxley Act:

makes the officers of a public corporation personally responsible for the firm's financial statements.

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

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

working capital