Finance Midterm 1

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

II and III only

Which one of the following relates to a negative change in net working capital?

Increase in current liabilities with no change in current assets for the period

Which one of the following best matches the primary goal of financial management?

Increasing the market value of the firm

Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable income. Suppose both firms have identified a new project that will increase taxable income by $12,000. The additional project will increase Able Co.'s taxes by _____ and Bravo Co.'s taxes by ____.

$4,680; $4,080

Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years?

$244.20

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?

$37,168

The Brown Jug has compiled the following information: What is the operating cash flow for 2014?

$42,100

Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense?

$7,800

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Book value:

is based on historical cost

If a firm has a negative cash flow from assets every year for several years, the firm:

may be continually increasing in size.

The daily financial operations of a firm are primarily controlled by managing the:

Working Capital

Free cash flow is:

cash that the firm is free to distribute to creditors and stockholders.

A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively.

common-size statement

One key reason a long-term financial plan is developed is because:

there are direct connections between achievable corporate growth and the financial policy.

Nabors Inc What is the change in the net working capital from 2005 to 2006?

$1,335

Nabors What is the amount of the non-cash expenses for 2006?

$1,370

Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?

$2,911.30

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year?

$39,700

Baugh & Essary has net income of $149,200, sales of $936,800, a capital intensity ratio of 0.74, and an equity multiplier of 1.5. What is the return on equity?

32.25 percent

Goshen Industrial Sales has sales of $828,900, total equity of $539,200, a profit margin of 4.6 percent, and a debt-equity ratio of 0.55. What is the return on assets?

4.56 percent

A firm has $42,900 in receivables and $211,800 in total assets. The total asset turnover rate is 1.40 and the profit margin is 5.2 percent. How long on average does it take the firm to collect its receivables?

52.81 days

To calculate sustainable growth rate without using return on equity, the analyst needs the:

All of the above.

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity.

Debt is a contractual obligation that:

Both B and C.

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = 0.3

Which one of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

An increase in which one of the following will increase operating cash flow for a profitable, tax paying firm?

Depreciation

Working capital management includes which one of the following?

Determining which customers will be granted credit

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

Which of the following are effective means of aligning management goals with shareholder interests? I. Employee stock options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of a proxy fight

I, II, III, and IV

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

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?

Price-sales ratio

Which one of the following situations is most apt to create an agency conflict?

Rejecting a profitable project to protect employee jobs

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts?

The Country Bank account has paid $397.30 more in interest than the City Bank account.

The main objective of long-term financial planning models is to:

all the above

Growth can be reconciled with the goal of maximizing firm value:

because growth must be an outcome of decisions that maximize NPV.

Cash flow to creditors is equal to:

beginning long-term debt minus ending long-term debt plus interest paid.

An income statement prepared according to GAAP:

records expenses based on the matching principle.

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.

short-term solvency

Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

$132,827.88

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

$21,883.25

Nabors Inc What is the amount of net new borrowing for 2006?

$225

Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of $21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the beginning of the year, the firm had retained earnings of $318,300 and common stock of $250,000. At the end of the year, the firm has retained earnings of $322,500 and common stock of $280,000. What is the amount of the dividends paid for the year?

$45,366

Home Supply, Inc. has compiled the following information:For 2014, the cash flow from assets is _____ and the cash flow to shareholders is ______.

$49,100; $62,500

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent?

$93,560

For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

-$14,300

Martha's Fabric House has sales of $137,200, total equity of $74,400, and a debt-equity ratio of 0.45. What is the capital intensity ratio?

0.79

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?

11.25 percent

Joshua's Antiques has a total asset turnover rate of 1.2, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.8, and total assets of $120,000. What is the sustainable growth rate?

7.20 percent

A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was 0.42, and total debt was $548,000. What is the return on assets?

8.00 percent

Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the internal growth rate?

8.34%

Waldale Pools has total equity of $289,100 and net income of $64,500. The debt-equity ratio is 0.55 and the total asset turnover is 1.6. What is the profit margin?

9.00 percent

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

Compensating managers with shares of stock that must be held for three years before the shares can be sold

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

I, II, III, and IV

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

Which of the following are advantages of the corporate form of organization? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners

I, II, and IV only