FIN 320 Quizzes - Midterm Study

If Ewing can reduce DSO to 50 in 2009, what is the change in the level of net income due to this change in DSO? $0 $2,460 $3,785 -$3,785 -$2,460

0

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate? $1,770.00 $2,049.00 $1,858.50 $1,951.43 $2,151.45

1770.00

Luther Industries currently has the following balance sheet (in thousands of dollars): quiz4_image1.jpg Luther is about to add a new fleet of delivery trucks. The price of the fleet is $2.5 million. If Luther acquires the new fleet of delivery trucks using a capital lease, Luther's Debt to Equity ratio will be closest to: 2.00 0.67 1.50 1.00 2.33

2.33

Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure? 2.86% 2.57% 3.14% 2.08% 2.32%

2.86%

Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 6-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 6 years, with 6 end-of-year payments. Stanley can also lease the equipment for 6 end-of-year payments of $1,595,220 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment. $177,169 $217,576 $228,455 $207,215 $196,854

217576

To finance some manufacturing tools it needs for the next 3 years, Ewing Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,140,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) $42 $106 $112 $96 $26

42

T/F In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

False

T/F The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

False

T/F A sale and leaseback arrangement is a type of financial, or capital, lease.

T

T/F Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.

T

T/F If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

T

T/F In a synthetic lease a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset. The SPE borrows up to 97% of its capital, uses its funds to buy the asset, and then leases it to the sponsoring corporation on a short-term basis. This keeps both the asset and the debt off the sponsoring company's books.

T

T/F The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

True

T/F Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

True

Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The tax bill will increase. b. The times interest earned ratio will decrease. c. The ROA will decline. d. Taxable income will decrease. e. Net income will decrease.

a

Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? a. The transaction would improve both firms' financial strength as measured by their current ratios. b. The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. c. The transaction would have no effect on the firm' financial strength as measured by their current ratios. d. The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. e. The transaction would lower both firm' financial strength as measured by their current ratios.

a

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance? a. The company's cost of goods sold increased. b. The company's depreciation and amortization expenses declined. c. The company's operating income declined. d.The company's expenditures on fixed assets declined. e. The company's interest expense increased.

b

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the a. residual value as a fixed asset. b. present value of future lease payments as an asset and also showing this same amount as an offsetting liability. c. undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability. d. undiscounted sum of future lease payments as an asset and as an offsetting liability. e. residual value as a liability.

b

Pro Forma Income Statement for Ewing, Inc., 2005-2010 based on the firm's estimation in year 2004 is as below. quiz3_image1.jpg With the proper changes it is believed that Ewing's credit policies will allow for an account receivables days of 60 (i.e. DSO = 60). The forecasted accounts receivable for Ewing in 2007 is closest to: a. 19,690 b. 16,970 c. 88,358 d. 22,710 e. 14,525

b

Seashell Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? a. 17.47 percent b. 19.05 percent c. 18.03 percent d. 18.87 percent e. 17.23 percent

b

Spontaneous funds are generally defined as follows: a. The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth. b. Assets required per dollar of sales. c. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes. d. Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock. e. A forecasting approach in which the forecasted percentage of sales for each item is held constant.

b

Which of the following items cannot be found on a firm's balance sheet under current liabilities? a. Accrued payroll taxes. b. Cost of goods sold. c. Accounts payable. d. Accrued wages. e. Short-term notes payable to the bank.

b

Which of the following statements is CORRECT? a. Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets. b. Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them. c. If a firm has a positive free cash flow, then it must have either a zero or a negative AFN. d. If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth. e. Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.

b

Which of the following statements is FALSE? a. Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee). b. Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease. c. The cost of the lease will depend on the asset's residual value, which is its book value at the end of the lease. d. Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term. e. A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.

b

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT? a. Its total assets turnover must be below the industry average. b. Its total assets turnover must be above the industry average. c. Its return on assets must equal the industry average. d. Its total assets turnover must equal the industry average. e. Its TIE ratio must be below the industry average.

b

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? a. The company would have to pay less taxes. b. The company's taxable income would fall. c. The company's net income would increase. d. The company's interest expense would remain constant. e. The company would have less common equity than before.

c

Operating leases often have terms that include a. restrictions on how much the leased property can be used. b. much longer lease periods than for most financial leases. c. maintenance of the equipment by the lessor. d. full amortization over the life of the lease. e. very high penalties if the lease is canceled.

c

Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? a. The company had a sharp increase in its depreciation and amortization expenses. b. The company had a sharp increase in its inventories. c. The company sold a new issue of common stock. d. The company had a sharp increase in its accrued liabilities. e. The company made a large capital investment early in the year.

c

In the lease versus buy decision, leasing is often preferable a. because lease obligations do not affect the firm's risk as seen by investors. b. because the lessee owns the property at the end of the least term. c. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset. d. because, generally, no down payment is required, and there are no indirect interest costs. e. because it has no effect on the firm's ability to borrow to make other investments.

c

Which of the following statements is CORRECT? a. Typically, a firm's EBIT should exceed its EBITDA. b. Typically, a firm's DPS should exceed its EPS. c. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. d. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. e. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

d

Which of the following statements is CORRECT? a. If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease. b. A reduction in inventories held would have no effect on the current ratio. c. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. d. An increase in inventories would have no effect on the current ratio. e. If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

e

Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company Heidee has a lower ROE. b. Company Heidee pays more in taxes. c. Company Heidee has a lower equity multiplier. d. Company Heidee has more net income. e. Company Heidee has a lower times interest earned (TIE) ratio.

e

Considered alone, which of the following would increase a company's current ratio? a. An increase in notes payable. b. An increase in net fixed assets. c. An increase in accrued liabilities. d. An increase in accounts payable. e. An increase in accounts receivable.

e

Gerald Stanton, the CEO of the Stanton Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last year's sales (S0) = $350 Sales growth rate (g) = 26% Last year's total assets (A0*) = $480 Last year's profit margin (PM) = 4.1% Last year's accounts payable = $30 Last year's notes payable = $40 Last year's accruals = $20 Target payout ratio = 80% a. $119.9 b. $125.9 c. $113.9 d. $102.8 e. $108.2

e

Mercer Corp. has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)? a.The company reduces its dividend payout ratio. b.The company discovers that it has excess capacity in its fixed assets. c. The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. d. A switch to a just-in-time inventory system and outsourcing production. e. A sharp increase in its forecasted sales.

e

On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. The company must have had zero net income in 2015. b. The company must have paid out half of its earnings as dividends. c. The company must have paid no dividends in 2015. d. If the company lost money in 2015, they must have paid dividends. e. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

e

Other things held constant, which of the following alternatives would increase a company's cash flow for the current year? a. Pay down the accounts payables. b. Increase the number of years over which fixed assets are depreciated for tax purposes. c. Pay workers more frequently to decrease the accrued wages balance. d. Reduce the inventory turnover ratio without affecting sales or operating costs. e. Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.

e

The most recent financial statements for 7 Seas, Inc. are shown here: quiz3_image2.jpg Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Like every other firm in its industry, next year's sales are projected to increase by exactly 16 percent. What is the external financing need? a. $1,411.16 b. $1,583.09 c. $2,349.98 d. $2,211.87 e. $1,317.16

e

Which of the following statements is CORRECT? a. The balance sheet for a given year tells us how much money the company earned during that year. b. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). c. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet. d. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. e. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

e

Which of the following statements is FALSE? a. The amount of the lease payment will depend on the purchase price, the residual value, and the appropriate discount rate for the cash flows. b. Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand. c. Because we are getting the entire asset when we purchase it with the loan, the loan payments are higher than the lease payments. d. In a perfect market, the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset. e. With a lease we are financing the entire cost of the asset, with a standard loan we are financing only the cost of the economic depreciation of the asset during its life.

e