F300 Exam 1
What was Sondheim Motors' free cash flow in year 3? $(45,970) $(221,984) $(133,977)
$(221,984)
Fake Company Phi's receivables turnover is 4x. The accounts receivable at year-end are $600,000. The average collection period is 90 days. What was the revenues number for the year assuming all sales are on credit? $2,400,000 $60,000 $6,000,000
$2,400,000
In 2014, Cummins had a fixed asset turnover of about 5.2. This suggests that if the company invested another $10 million in fixed assets, the change in revenue, ceteris paribus (Links to an external site.)Links to an external site., should be about... $52 million. $1.923 million. $15.2 million
$52 million.
Your firm's revenues were: $65 million in 2017 $58 million in 2016 $55 million in 2015 $48 million in 2014 QUESTION: What was the average annual growth rate (AAGR) in revenues between 2014 and 2017?
10.7
What was Sondheim Motors growth in revenues between years 1 and 2? 51.1% 104.5% 204.5%
104.5%
Your firm is investigating whether it should increase its debt capital as a way to grow the business more quickly. If you obtain more debt, it's believed the interest expense will be about 7.5% annually. Your tax rate is about 30%. What is the after-tax cost of new debt? 5.25% 7.50% 2.25%
5.25%
Your firm's revenues were: $65 million in 2017 $58 million in 2016 $55 million in 2015 $48 million in 2014 QUESTION: What was the growth in revenues between 2015 and 2016?
5.5
If the total debt-to-equity ratio of a firm is 1.0, what is the company's simple capital structure? 100% debt Capital structure cannot be determined from the available information. 50% debt and 50% equity
50% debt and 50% equity
Which of the following illustrates how to calculate times interest earned? = earnings before interest and taxes / interest expense = operating expenses / interest expense = net income / interest expense
= earnings before interest and taxes / interest expense
Which of the following illustrates how to calculate return on assets? = net income / total assets = operating income / total assets = revenues (or sales) / total assets
= net income / total assets
Which of the following illustrates how to calculate the equity multiplier? = total assets / total equity = total assets / (total debt + total equity) = revenues (or sales) / total equity
= total assets / total equity
Imagine a company purchases a new warehouse. This is a fixed asset and a capital expense. Based on the example provided in the reading, which of the following is the most accurate explanation of how this purchase will be recorded initially? A decrease in cash on the balance sheet. Followed by an increase in fixed assets (or in property, plant, and equipment). An increase in cost of goods sold on the income statement. An increase in operating expenses on the income statement. Followed by a decrease in cash on the balance sheet.
A decrease in cash on the balance sheet. Followed by an increase in fixed assets (or in property, plant, and equipment).
Say you calculated an average collection period for your company of 38 days. How might you know if that is good or bad? A good first step is to compare the number to key competitors and the industry average. Any collection period over 30 days is not so good; a collection period under 30 days is okay. Compare this to operating profit margin.
A good first step is to compare the number to key competitors and the industry average.
When the owners of a corporation enable the board and executives to make decisions on their behalf, this usually results in...
Agency costs
What was the key lesson from the example of two companies with the same operating income, but one with debt and the other without debt? Because interest expense is deducted before taxes are determined, the after-tax cost of debt is something less than the actual interest rate. Because interest expense is deducted after operating income, a company with debt will have lower net income than a company in a similar income situation but without debt. Regardless of the impact of taxes, it is always better to have no debt.
Because interest expense is deducted after operating income, a company with debt will have lower net income than a company in a similar income situation but without debt.
On your company's balance sheet at the end of last quarter, marketable securities for that period was $12.7 million. Marketable securities at the end of the current quarter is $9.2 million. What is the impact on cash flow of this change in marketable securities? Cash flow between the two periods, and due only to marketable securities, must now be a decline of $9.2 million. Cash flow between the two periods, and due only to marketable securities, must have risen by $3.5 million. Cash flow between the two period, and due only to marketable securities, must have fallen by $3.5 million.
Cash flow between the two periods, and due only to marketable securities, must have risen by $3.5 million.
Your company has decided to buy back some of its outstanding common stock. (Management thinks the current stock price is low and has announced to shareholders that it will help create demand by buying some of the stock back.) According to the reading, and the example statements provided, which of the following represents one way this will be illustrated? Cash flow will be reduced in the "investing activities" section of the cash flow statement. Cash flow will be reduced in the "financing activities" section of the cash flow statement. Operating expenses will be reduced on the income statement.
Cash flow will be reduced in the "financing activities" section of the cash flow statement.
Which of the following choices is likely a cash management strategy at Sondheim that Mike Macke is not going to find attractive? Changing credit policies in order to collect receivables sooner. Changing policies in order to delay bill payments. Increasing the number of finished products in inventory.
Changing credit policies in order to collect receivables sooner.
Typically, the formal study of finance in a university degree program is organized into
Corporate finance, markets and institutions, and investments.
According to the reading, what is often the same number as reported in operating income? Bottom line profit. Earnings before interest and taxes, or EBIT. Earnings after research and development, or EARD.
Earnings before interest and taxes, or EBIT.
How did Stephen first identify his company to the outside world? Since he and his friends were largely located in the beach communities of LA, he hired a service to fly a banner with "Sondheim Motors" around the beaches one summer afternoon. He printed a sign on legal size paper, "Sondheim Motors," and stuck on the door of the plant with duct tape. He took out a small ad in a trade magazine announcing the formation of "Sondheim Motors."
He printed a sign on legal size paper, "Sondheim Motors," and stuck on the door of the plant with duct tape.
The controller and comptroller's positions are usually about the same. Both are generally in charge of the accounting functions inside organization. But the comptroller..
Is usually someone working for government or non-profit organization
Which of the following is the best description of a mission statement?
It is a description of what the organization is currently trying to accomplish
Which of the following is the best description (of those available) of a vision statement?
It is a statement of what the organization aspires to become.
Match the characters from Sondheim Motors with their responsibilities, according to the information in A financial management production and operations founder and CEO sales and marketing loan officer from South Bay Bank
Jessica Tanaka Andy Weber Stephen Sondheim Mike Macke Robert Towne
Match each question below with the set of metrics that will best answer it. How well can the firm raise short-term cash if the need develops? How efficiently does the firm use its assets to generate revenues or profits How is the firm currently valued by investors in the market? How much debt is the firm relying on to finance its activities?
Liquidity Ratios Asset Management Valuation Ratios Leverage Ratios
Financial managers should be driven in their decisions and actions to..
Maximize the value of the firm to firm owners.
The company's arrangement with South Bay Bank shows up on its balance sheet primarily in... other long-term liabilities. increasingly negative retained earnings. notes payable.
Notes Payable
Match each question below with the metric that will best answer it. Is the company doing well with respect to its basic business model? Is the company able to obtain resources and produce its products or services at a profit? Is the company able to complete all of its operating, financing, and legal obligations and still end up with a profit? What is behind an increasing ROE over the past few years?
Operating Income Gross Margin Net Margin DuPont Analysis
Sondheim Motors' plant is located in... Redondo Beach, California. Manhattan Beach, California. Hermosa Beach, California.
Redondo Beach, California.
According to what you read, when must revenues be accounted for when following accounting conventions? Revenues must be recorded at the time when an item is actually paid for. Revenues must be recorded at the time when an item is sold. Revenues must be recorded at the time when a good moves from factory inventory to warehouse inventory.
Revenues must be recorded at the time when an item is sold.
What is usually included under notes payable? Short-term bills for which you have received invoices but have not yet paid and short-term borrowings that are due within a year. Short-term bank loans that are due to be paid within a year and any short-term lines of credit that your company uses to even out cash flow needs. Short-term borrowings that are due within a year and what was once long-term debt but is now due to be paid within a year.
Short-term borrowings that are due within a year and what was once long-term debt but is now due to be paid within a year.
Which of the following statements best describes what has been happening to Sondheim Motors' simple capital structure over the three years? The company's reliance on debt has not changed significantly. It is now about 10.6% debt and was about 10.9% at the end of Year 1. The company's simple capital structure has changed very little since it was first formed. Stephen is still the primary stockholder, and the amount of common stock has not changed. The company is increasingly dependent on debt, which is now 44.5% of its assets compared to 19.5% at the end of its first year.
The company is increasingly dependent on debt, which is now 44.5% of its assets compared to 19.5% at the end of its first year.
Which of the following is reasonably the most important point (of the three available) intended from the the Blackberry/Apple discussion in class? The failure of Blackberry suggests that its mission and vision were poorly designed and executed. Milton Friedman's 1970 essay did not promote pursuing profits at all costs. In fact, Friedman explicitly noted that profits should be pursued legally and within the framework of society's customs. There is an important connection between profits and the level of employment a company is able to support.
There is an important connection between profits and the level of employment a company is able to support.
Where did Jessica and Stephen first meet? They shared a house in Westwood during Jessica's junior year at UCLA. They were in an finance class together during her junior year at USC. They were table partners in a "Designing for Innovation" class her junior year at USC.
They were table partners in a "Designing for Innovation" class her junior year at USC.
According to the reading, what does it mean when you see a number for "basic shares"? This is a count, as of a particular date, of the total number of shares of stock outstanding that could be traded. "Basic" always refers to any preferred stock a company has issued. This is the number of shares of common stock times the current market price of the common stock.
This is a count, as of a particular date, of the total number of shares of stock outstanding that could be traded.
An important disadvantage of the corporate structure, at least for owners of the firm, is that...
US tax laws result in something called double taxation: profits are taxed once inside the firm and then a second time when those after-tax profits are distributed to shareholders via dividends.
What are marketable securities? Any financial securities that currently trade in open markets, such as stock markets or bond markets. Very short-term investments that earn the company a bit of interest but that can also be converted into cash quickly. Any financial investment that is marketed by investment banking organizations, such as JP Morgan.
Very short-term investments that earn the company a bit of interest but that can also be converted into cash quickly.
If a company places some of its cash in long-term investments that will earn interest income, then this should be reflected as... a decrease in cash flow under investing activities. an increase in cash flow under investing activities. a decrease in cash under financing activities.
a decrease in cash flow under investing activities.
What was the compound annual growth rate for Sondheim Motors, Year 1 to Year 3? about 108.5% about 106.5% about 47.9%
about 108.5%
Your company has annual sales for the past four years of the following: 2017: $246 (million) 2016: $215 2015: $197 2014: $168 Given this information, what is the compounded annual growth rate (CAGR) across that time? (When doing your calculations, round everything to the nearest fourth decimal.) about 10.0% about 7.2% about 13.6%
about 13.6%
A company you have been studying for a possible investment has the following information on its financial statements for the most recent fiscal year: net margin: 12.0% total assets: $157 million revenues: $210 million shareholder's equity: $110 million What is the company's return on equity? No way to determine ROE. about 5.7% about 22.9%
about 22.9%
Fake Company Delta is part of a $15.7 billion industry in the United States, according to annual revenues. FCD itself had revenues in its most recent fiscal year of $4.2 billion. Using revenues, what was the company's market share? about 3.7% Unknown, since market share always uses product shipments as a base. about 26.6%
about 26.6%
A company you have been studying for a possible investment has the following information on its financial statements for the most recent fiscal year: revenues: $125.6 million gross profit: $42.7 million depreciation: $12.0 million net income: $11.3 million taxes: $4.5 million What is the company's gross profit margin? about 24% about 9% about 34%
about 34%
Which of the following do not belong under current assets in the company's balance sheet. Choose all that apply. accounts payable cash marketable securities notes payable accounts receivable cash equivalents new plant and equipment
accounts payable notes payable new plant and equipment
One of the major adjustments to net income to make it look more like actual cash flow is... adding back depreciation, which is a non-cash expense. subtracting out depreciation, since it is a non-cash expense. adding back operating income, since it is a measure of the company's business model success.
adding back depreciation, which is a non-cash expense.
A method of measuring business performance that accounts for a wide range of activities in the firm - such as financial performance, internal operations and efficiencies, human resources development, and customer development and satisfaction - is often known as... market share balance scorecard. total market performance
balance scorecard.
As a young company, Sondheim Motors may well need lots of capital to help it grow. Jessica knows, of course, that there are only two general sources of capital. They are... debt and equity. short-term debt and long-term debt. non-current liabilities and retained earnings.
debt and equity.
The three profitability margins are actually easy to memorize. They are simply gross profit, operating profit, and net profit... divided by net income, or bottom line profit, and expressed as a decimal. divided by assets and expressed as a percent (rounded to one decimal is fine). divided by revenues and expressed as a percent (rounded to one decimal is fine).
divided by revenues and expressed as a percent (rounded to one decimal is fine).
If net income is divided by the number of shares outstanding, the resulting number is... earnings per share, or EPS. the best measure of the company's operating expenses for the time period. net income before dividends, or NIBD.
earnings per share, or EPS.
In year 3, it appears that Sondheim Motors... increased its inventory by about $166,950. increased its inventory by about $271,900. had free cash flow of $38,533.
had free cash flow of $38,533.
Compared to Facebook, it isn't surprising that Boeing might... have a capital structure that relies on equity more than on debt. have a large portion of its current assets in inventories. not have any preferred stock.
have a large portion of its current assets in inventories.
The DuPont formula... helps you understand changes taking place on a firm's balance sheet. helps you understand what might be driving changes in return on equity. helps you understand what is affecting operating profit in a firm
helps you understand what might be driving changes in return on equity.
In year 2, it appears that Sondheim Motors... invested some in fixed assets and also borrowed an additional $71,000. invested about $71,000 total in new plant and equipment. paid dividends to the small group of shareholders.
invested some in fixed assets and also borrowed an additional $71,000.
One benefit of using the quick ratio when evaluating performance of a retailer... is that it communicates how quickly a retailer is collecting its credit sales. is that it highlights the remaining accounts receivable (or net receivables), which are usually large for many retailers due to the popularity of using credit cards for retail purchases. is that it takes away inventory, which often is a large current asset for retailers and might be difficult to turn into meaningful cash in the short-term.
is that it takes away inventory, which often is a large current asset for retailers and might be difficult to turn into meaningful cash in the short-term.
An important benefit of using ratios to evaluate performance... is that ratios allow for more sophisticated mathematics, which is always the preferred method of any analysis. is that they remove the impact of size so that better comparisons might be made. is that ratios are better at showing the particular direction of any change in company performance.
is that they remove the impact of size so that better comparisons might be made.
Long-term capital is... long-term debt + equity. total liabilities + equity. long-term liabilities + equity.
long-term debt + equity.
Which of the following is the proper way to find the proportion of debt in a company's long-term capital structure? long-term debt / (long-term debt + equity) non-current liabilities / long-term capital long-term debt / (non-current liabilities + equity)
long-term debt / (long-term debt + equity)
f you wanted to know bottom line profitability of a firm, which of the following would give you that knowledge? EBIT gross profit net income
net income
What are the metrics Robert Towne have in mind for Sondheim Motors? net margin of 3% and gross margin of about 45% net margin of about 4% and an ROE of 10% or more net margin of about 5% and an ROA of 10% or more
net margin of about 5% and an ROA of 10% or more
The text argues that choosing actions that add value to the organization is consistent with most goals targeting employees or employment since...
only an organization that is growing in value has the resources to increase employment and provide improved services to employees.
As director of marketing at your firm, you make a key decision to increase advertising and promotions expenditures by almost 50%. This is to combat increased aggressiveness from competitors. Your decision means that... short-term notes payable will rise. expenses related to the production of your products or services will rise. operating expenses will rise.
operating expenses will rise.
A good first measure (of the ones listed) of whether a company's basic business model is healthy and sustainable would be... operating income net profit simple capital structure
operating income
As described in the reading, which of the items below communicates something about the effectiveness of a company's overall business model? operating profit net profit gross profit
operating profit
An important reason why so many CEOs and other members of a company's executive team receive stock options as part of their compensation is that...
owning stock options ties the executives' compensation to company performance and helps reduce agency costs.
A number for "capital expenditures" isn't reported on many cash flow statements. A good estimate of this, however, is... reported on the cash flow statement as net new borrowings. reported on the balance sheet as new long-term investments. reported on the cash flow statement as net purchases of property, plant, and equipment, or new investments in property, plant, and equipment.
reported on the cash flow statement as net purchases of property, plant, and equipment, or new investments in property, plant, and equipment.
Jessica was attracted to the job Stephen offered at Sondheim Motors in part because... she wanted to become more deeply involved in financial analysis, the kind of work her current job as an accountant did not allow. she and Stephen were now engaged, and working at the same place would make daily life much more convenient for each of them. she was finding that corporate life at Toyota did not offer her the challenge she wanted.
she was finding that corporate life at Toyota did not offer her the challenge she wanted.
If you set up a limited liability company for your app development company, then you are protected from personal responsibility for company liabilities. But...
taxes pass through the organization and must be paid as personal income taxes.
You hear someone say that their company is in trouble because it is highly leveraged. This means... that the company has a lot of debt. The "in trouble," if true, means the company probably has too much debt. that the company is relying too heavily on equity. As a result, it is not able to utilize as much capital as its competitors. that the company may find it difficult to raise cash in a hurry.
that the company has a lot of debt. The "in trouble," if true, means the company probably has too much debt.
A company's "average collection period is 39.7". This means... the company takes about 40 days to collect actual cash from its credit sales. the company turns over its accounts receivables almost 40 times a year. the company turns over its accounts payable almost 40 times a year.
the company takes about 40 days to collect actual cash from its credit sales.
Capital structure is... the proportion of debt and the proportion of equity used to finance the firm's assets. the amount of long-term debt a company uses as capital. long-term debt / revenues.
the proportion of debt and the proportion of equity used to finance the firm's assets.
Robert Towne has cut off short-term lending to Sondheim Motors, and he commented that, while he was sure they could work something out... this was not as serious as it looked because Stephen had plenty of equity in his Manhattan Beach property. this was serious, and the bank was trying to get Stephen's attention. this was serious, and so he wanted Stephen to persuade Jessica to take the job he had offered.
this was serious, and the bank was trying to get Stephen's attention.
Reference to something called "total debt" could mean a few different things. For example, it might mean total liabilities, or total non-current liabilities, or just the "long-term debt" line on many balance sheets. For our purposes, total debt is defined as... total liabilities. the sum of total long-term loans and total bonds outstanding. total non-current liabilities.
total liabilities.
Which of the following is the expression for fixed asset turnover? total revenues / net property, plant, and equipment total revenues / non-current assets total assets / fixed assets
total revenues / net property, plant, and equipment
Analyzing the performance of a company starts with ratios in order to get a perspective on the firm's past and present. But good analysis must also include... intuition about the political situation inside a firm. trend analysis and benchmarking with the industry or major competitors. trend analysis and financial modeling.
trend analysis and benchmarking with the industry or major competitors.
Blockbuster no longer exists in its once proud form - a company offering video rentals from stores at prime locations all around the country. For the most part, Blockbuster and other similar companies failed due to technological changes and the smarts of competitors (such as Netflix). Based on the relevant discussion in class and as suggested in the readings, it seems likely that trouble with Blockbuster's business model... could have been prevented if it had collected more of its accounts receivables. was a result of the company failing to add more equity to its balance sheet. would have first surfaced as declining and then negative operating income on the income statement.
would have first surfaced as declining and then negative operating income on the income statement.
