Finance Practice questions HW 1

Perrigo Corporation has total sales of $20.8 million, cost of sales of $12.6 million, operating expenses of $2.5 million, and "other" income of $6.7 million. What is its EBIT? A) $8.2 million B) $12.4 million C) $5.7 million D) $14.9 million

B) $12.4 million EBIT (Earnings before interest and taxes) = Total Sales - Cost of Sales - Operating Expenses + Other Income EBIT = $20.8 million - $12.6 million - $2.5 million + $6.7 million = $12.4 million

You own 500 shares of a corporation. The corporation earns $20.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 21% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? A) $3,876 B) $5,530 C) $7,000 D) $7,900

B) $5,530 Total Earnings = Earnings per Share x Number of Shares $20.00 x 500 shares = $10,000 Corporate Tax = Total Earnings x Corporate Tax Rate $10,000 x 0.21 = $2,100 Corporate Tax = $10,000-$2,100 = $7,900 Personal Tax Rate on Dividends = $7,900 x 0.30 = $2,370 7,900- 2,370 = $5,530

The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives: 1. Sell the restaurant now and retire. 2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant for $350,000. 3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant for $350,000. If the interest rate is 7%, the alternative with the highest NPV is: A) Alternative #1 with an NPV of approximately $350,000. B) Alternative #2 with an NPV of approximately $370,561. C) Alternative #3 with an NPV of approximately $357,196. D) Alternative #3 with an NPV of approximately $380,561.

B) Alternative #2 with an NPV of approximately $370,561.

Which of the following is (are) deducted from EBIT to determine pretax income? A) Earnings per share B) Interest expense C) Corporate taxes D) Both B and C E) All of the above. F) None of the above.

B) Interest expense

Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday, the account balance was $5033.83. The amount of money that your great aunt Matilda originally put in the account is closest to: A) $600. B) $800. C) $1000. D) $1200. The amount of money that would be in the account if you left the money there until your 65th birthday is closest to: A) $29,556. B) $148,780. C) $168,824. D) $748,932. If the current rate of interest is 10%, then the present value of an investment that pays $800 per year and lasts 10 years is closest to: A) $6,264. B) $12,784. C) $4,916. D) $3,568.

C) $1000. A = P(1 + r/100)^n 5033.83 = P * (1.08)^21 P = 5033.83 / (1.08)^21 = $1,000 -------- B) $148,780. Years = 65-21 = 44 8% annual growth - for 44 years Future value = present value * (1 + annual rate)^years = 5,033.83 x (1+0.08)^44 = 148,779.74 --------- C) $4,916. PV = PMT x [(1-(1 + r)^-n)/r] = $800 x ( 1 - (1 + 0.10)^-10)/0.10 = $4,916

You own 500 shares of a Sub Chapter "S" corporation. The corporation earns $10.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 21% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? A) $2,100 B) $3,000 C) $3,500 D) $5,000

C) $3,500

Use the following information for ECE incorporated: Assets $200 million Shareholder Equity $100 million Sales $300 million Net Income $15 million Interest Expense $2 million 6) If ECE's stock is currently trading at $24.00 and ECE has 25 million shares outstanding, then ECE's market-to-book ratio is closest to: A) 0.24. B) 4. C) 6. D) 30.

C) 6. Market value of equity = Number of shares * Share price 25,000,000 * $24 = $600 million Market to book ratio = Market value / Book Value $600,000,000 / $100,000,000 = 6

Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities? A) Add increases in accounts payable B) Add back depreciation C) Add increases in accounts receivable D) Deduct increases in inventory E) All of the above. F) None of the above.

C) Add increases in accounts receivable

The present value of $15,000 discounted at 9% per year and received at the end of 5 years is A) $10,000 / 1.25 B) $15,000 x 1.09^5 C) $15,000 / 1.09^0.1 D) $15,000 /1.09^5

D) $15,000 /1.09^5 PV = $15,000 / (1 +0.09) ^5

Accounts payable is a: A) long-term liability. B) current asset. C) long-term asset. D) current liability. E) All of the above. F) None of the above

D) current liability.

If shareholders are unhappy with a CEO's performance, they are most likely to: A) buy more shares in an effort to gain control of the firm. B) file a shareholder resolution. C) replace the CEO through a grassroots shareholder uprising. D) sell their shares. E) All of the above. F) None of the above.

D) sell their shares.

Which of the following is/are an advantage of corporation? A) Access to capital markets B) Limited liability C) Unlimited life D) Transfer of ownership is easy E) All of the above F) None of the above

E) All of the above