FIN 370 Final
JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share?
$10
Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is:
$100,000/$1,000,000 = 10%.
Wax Music expects sales of $437,500 next year. The profit margin is 4.8 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings?
$14,700
Atmosphere, Inc. has offered $860 million cash for all of the common stock in ACE Corporation. Based on recent market information, ACE is worth $710 million as an independent operation. For the merger to make economic sense for Atmosphere, what would the minimum estimated value of the enhancements from the merger have to be?
$150 million Minimum economic value in PV terms = $860 million - $710 million = $150 million
To estimate Missed Places, Inc.'s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP's retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year?
$169,000
You are estimating your company's external financing needs for the next year. At the end of the year you expect that owners' equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the year?
$20 million
JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?
$3.50
Elements of Porter's 5 force model
1. competition in the industry 2. potential of new entrants into history 3. power of suppliers 4. power of customers 5. threat of substitute products
At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2012?
1.79%
Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:
12.5%.
At the end of fiscal year 2011, Crane Industries, Inc.'s stock price was $30.75. A year later it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2012?
13.43%
Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:
2 times. $4,000,000/$2,000,000 = 2 times.
You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?
4.80 percent
Which one of the following statements is correct concerning the cash balance of a firm?
A cumulative cash deficit indicates a borrowing need.
The sale or disposal of a significant component of a company's operations is referred to as:
A discontinued operation.
A list of all accounts and their balances after posting closing entries is referred to as:
A post-closing trial balance.
Making insurance payments in advance is an example of:
A prepaid expense.
It is important that budgets be accepted by a. division managers. b. department heads. c. supervisors. d. all of these.
ALL
Which of the following is a conservative accounting practice?
Adjust the allowance for uncollectible accounts to a larger amount.
Which of the following will cause an increase in ROI?
An increase in sales
When a magazine sells subscriptions to customers, it is an example of:
An unearned revenue.
Extraordinary items:
Are items that are both unusual in nature and occur infrequently.
Which of the following is NOT a likely financing policy for a rapidly growing business?
Borrow funds rather than limit growth, thereby limiting growth only as a last resort.
Which of the following is correct about the statement of cash flows?
C. Cash dividends received on stock investments are classified as cash flows from operating activities.
Prepayments occur when:
Cash payment (or an obligation to pay cash) occurs before the expense recognition.
Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1900-2015 period)?
Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills
Operating cash flows exclude:' A. Interest received. B. Interest paid. C. Dividends received. D. Dividends paid.
D. Dividends paid.
4. Which of the following statements is true? A. Rapid growth spurs increases in market share and profits and thus, is always a blessing. B. Firms that grow rapidly only very rarely encounter financial problems. C. The cash flows generated in a given time period are equal to the profits reported. D. Profits provide assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke". F. None of the above.
E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".
Which of the following is not an important step in the financial evaluation of an investment opportunity?
Estimate the accounting rate of return for the investment.
Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May and June), AmDocs will collect payment for the sales it made during which of the months listed below?
February, March, and April
The issuance of notes payable for borrowing is classified in the statement of cash flows as:
Financing activity.
The purchase of treasury stock is classified in the statement of cash flows as a(n):
Financing activity.
Which of the following items does not follow from the adoption of a budget?
Guarantee of accomplishing the profit objective
The financial statements of a firm that uses more aggressive accounting practices would be likely to report:
Higher profitability.
Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk
I and III only
The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed, but not bankrupt IV. Indirect costs related to being financially distressed, but not bankrupt
I, II, III, and IV
You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?
I, II, III, and IV
The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. IV. no leverage.
I, III, and IV only
Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test
II and IV only
Financial leverage: I. increases expected ROE but does not affect its variability. II. increases breakeven, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.
II, III, and IV only
What does Porter's 5 force model do?
Identifies and analyzes 5 competitive forces that shape every industry and helps determine an industry's strengths and weaknesses
Which of the following is NOT an example of applying conservatism in accounting?
Increasing the useful life used in calculating depreciation.
The purchase of land is classified in the statement of cash flows as a(n):
Investing activity.
Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report:
Investing cash inflows of $12,000.
Which of the following is an example of a cash inflow from a financing activity?
Issuance of bonds.
Which of the following would not be considered an aspect of budgetary control?
It provides a guarantee for favorable results.
Resources owned by the company that will provide a benefit for more than one year are called:
Long-term assets.
Which of the following is not an operating budget?
Manufacturing overhead budget
Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable?
Noncash activity.
A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle?
November.
The statement of cash flows reports cash flows from the activities of:
Operating, investing, and financing.
The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows?
Operating.
Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows.
Operating; Financing.
What is the correct order to present the following items on the income statement?
Other revenues and expenses, income tax expense, discontinued operations, extraordinary items.
Present Value formula
PV = FV/(1 + r)^t
Future Value Formula
PV*(1 + r)^t
Which of the following transactions would not create a cash flow?
Payment of a dividend.
Which of the following is an example of a cash outflow from an investing activity?
Payment of cash for the purchase of land.
Which is the last step in developing the master budget?
Preparing the budgeted balance sheet
Which of the following is an example of a noncash activity?
Purchase of land by issuing debt.
_________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement of Cash Flows.
Purchasing land; repaying a bank loan.
Which of the following is an aggressive accounting practice?
Record sales revenue before it is actually earned.
The revenue recognition principle states that:
Revenue should be recognized in the period earned.
A discontinued operation refers to:
The sale or disposal of a significant component of a company's operations.
The primary difference between accrual-basis and cash-basis accounting is:
The timing of when revenues and expenses are recorded.
What is budgetary control?
The use of budgets in controlling operations
Why are budgets useful in the planning process?
They help communicate goals and provide a basis for evaluation.
Which of the following items is most likely to be reported as an extraordinary loss?
Uninsured losses from a natural disaster.
An extraordinary item must meet which of the following criteria?
Unusual in nature and infrequent in occurrence.
Which of the following is an aggressive accounting practice?
Waiting to record a litigation loss.
In many companies, responsibility for coordinating the preparation of the budget is assigned to
a budget committee.
If a company has adopted continuous budgeting, the budget will show plans for
a full year ahead.
A profit center is
a responsibility center that incurs costs and generates revenues.
5. Which one of the following correctly defines the retention ratio? A. one plus the dividend payout ratio B. additions to retained earnings divided by net income C. additions to retained earnings divided by dividends paid D. net income minus additions to retained earnings E. net income minus cash dividends F. None of the above.
additions to retained earnings divided by net income
Top management can control
all costs.
The best measure of the performance of the manager of a profit center is the
amount of controllable margin generated by the profit center.
If budgets are to be effective, there must be
an organizational structure with clearly defined lines of authority and responsibility.
The comparison of differences between actual and planned results
appears on periodic budget reports.
Budget reports should be prepared
as frequently as needed.
Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?
asset turnover
Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.
asset turnover and control
The sustainable growth rate:
assumes the debt-equity ratio is constant.
Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?
balance sheet
The book value of a firm is:
based on historical cost.
Which of the following securities has a purely fixed claim against a firm's cash flows?
bonds
The culmination of preparing operating budgets is the
budgeted income statement.
Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a:
cash budget.
Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?
cash flow statement
The sources and uses of cash over a stated period of time are reflected on the:
cash flow statement.
Which of the following securities has a purely residual claim against a firm's cash flows?
common stock
Financial planning:
considers multiple options and scenarios for the next two to five years.
The purpose of the departmental overhead cost report is to
control overhead costs.
The maintenance department of a manufacturing company is a(n)
cost center.
Mike just purchased a bond which pays $40 each year in interest. The $40 interest payment is
coupon.
On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. all of these.
d. all of these.
Which one of the following is a source of cash?
decrease in accounts receivable
Which one of the following will increase the sustainable rate of growth a corporation can achieve?
decrease in the dividend payout ratio
The purpose of the sales budget report is to
determine whether sales goals are being met.
Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?
dividend policy
An overly optimistic sales budget may result in
excessive inventories.
Noncash items refer to:
expenses, like depreciation, which do not directly affect cash flows.
Finance & Accounting generally has the responsibility for
expressing the budget in financial terms.
The budget committee would not normally include the
external auditor.
If costs are not responsive to changes in activity level, then these costs can be best described as
fixed.
An unrealistic budget is more likely to result when it
has been developed in a top down fashion.
A manager of a cost center is evaluated mainly on
his or her ability to control costs.
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
income statement
A master budget consists of
interrelated financial budgets and operating budgets.
A budget
is an aid to management.
In computing ROI, land held for future use
is considered a non-operating asset.
A budget is most likely to be effective if
it has top management support.
A budget period should be
long enough to provide an obtainable goal under normal business conditions.
The best financing choice is the one that:
maximizes expected cash flows.
The sustainable growth rate of a firm is best described as the:
maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
The most common budget period is
one year.
A cost center
only incurs costs and does not directly generate revenues.
Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the:
par value.
A common starting point in the budgeting process is
past performance.
The most common approach to developing proforma financial statements is called the:
percent-of-sales method.
Budgeting is usually most closely associated with which management function?
planning
The total direct labor hours required in preparing a direct labor budget are calculated using the
production budget.
A flexible budget
projects budget data for various levels of activity.
Depreciation expense:
reduces both taxes and net income.
The most popular yardstick of financial performance among investors and senior managers is the:
return on equity.
The starting point in preparing a master budget is the preparation of the
sales budget.
Budget development for the coming year usually starts
several months before the end of the current year.
A sales forecast
shows forecasts for the industry and for the firm.
The Statement of Cash Flows:
shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows.
If budgets are to be effective, all of the following must be present except
stockholders' approval of the budget.
pecking order theory states
that a company should prefer to finance itself first internally through retained earnings.
Homemade leverage is:
the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.
A major element in budgetary control is
the comparison of actual results with planned objectives.
Top management's reaction to a difference between budgeted and actual sales often depends on
the materiality of the difference.
The retention ratio is:
the percentage of net income available to the firm to fund future growth.
The basic lesson of the M&M theory is that the value of a firm is dependent upon:
the total cash flow of the firm.
On a common-size balance sheet, all accounts are expressed as a percentage of:
total assets for the current year.
When budgeted and actual results are not the same amount, there is a budget
variance.
In general, the capital structures used by non-financial U.S. firms:
vary significantly across industries.
