Finance Test #1

Which of the following is NOT a valid theory that attempts to explain the shape of the term structure of interest rates?

The Fisher Effect theory

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to...?

$1,100,000 Operating income = sales - cost of goods sold - (depreciation expenses + administrative expenses + marketing expenses)

Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's Total Liabilities & Equity?

$2,000,000

Racing Horse Corporation reported net income for 2010 of $200,000, sales of $540,000, expenses (excluding depreciation) of $180,000, and depreciation expense of $60,000. The company's accounts receivable balance increased by $40,000 during the year and its accounts payable balance remained the same. The company's change in cash for the year is estimated to be...?

$220,000 Refer to updated Handout3, slides-32. Five steps how to convert accrual to cash basis: Change in cash = Net income + depreciation expense -increase in account receivables = 200,000 + 60,000 - 40,000 = 220,000 Here accounts payable remains the same thus not included in our calculation.

Use the following information to calculate the change in the company's cash balance for the year. Credit Sales $800,000 Cash Sales $500,000 Operating Expenses on Credit $200,000 Cash Operating Expenses $700,000 Accounts Receivable (Beg. of Year) $50,000 Accounts Receivable (End of Year) $80,000 Accounts Payable (Beg. of Year) $50,000 Accounts Payable (End of Year) $100,000 Income Taxes Paid $160,000

$260,000 Net Income = credit sales + cash sales - operating expenses on credit - cash operating expenses - income taxes = 800,000 + 500,000 -200,000 -700,000 - 160,000 = 240,000 Increase in account receivable = ending AR - beginning AR = 30,000 Increase in account payable = ending AP - beginning AP = 50,000 Change in cash flow = Net income - increase in AR + increase in AP

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $40,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is California Retailing's "Addition to Retained Earnings"?

$290,000 net income = (sales - cost of goods sold - operating expenses - income expenses)*(1 - tax rate) = 390 retained earning = net income - dividends to preferred stockholders - dividends to common stockholders

Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?

$390,000 Net working capital = CA - CL = (cash + AR + inventories) - (short-term notes payable + AP + accrued expenses)

California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing's net income?

$390,000 net income = (sales - cost of goods sold - operating expenses - income expenses)*(1 - tax rate)

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the acid-test ratio is...?

1.16

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, and assuming the company's stock price is $50 per share, the P/E ratio is...?

10.89

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the return on equity is...?

15.65%

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the current ratio is

2.35

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the inventory turnover ratio is...?

2.37 times

Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to...?

25.67% net income = sales - cost of goods sold - (depreciation expenses + administrative expenses + marketing expenses) - income expenses - taxes = 770,000 net profit margin = net income/sales

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the debt ratio is...?

45.69%

You are considering an investment in a 30-year U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for the 30-year corporate bonds is 3.5%. What rate of interest should this U.S. corporate bond pay?

8.5% 30-yr Corporate Bond = 30-yr Treasury Bond + Default Risk Premium = 3-month Treasury Bill + Maturity Risk Premium + Default Risk Premium = Real risk-free rate + inflation + Maturity Risk Premium + Default Risk Premium

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the times interest earned ratio is...?

8.65

Drummond Company Balance Sheet Assets: Cash and marketable securities $400,000 Accounts receivable 1,415,000 Inventories 1,847,500 Prepaid expenses 24,000 Total current assets 3,686,500 Fixed assets 2,800,000 Less: accum. depr. (1,087,500) Net fixed assets 1,712,500 Total assets $5,399,000 Liabilities: Accounts payable $600,000 Notes payable 875,000 Accrued taxes 92,000 Total current liabilities $1,567,000 Long-term debt 900,000 Common Stock (100,000 shares) 700,000 Retained Earnings 2,232,000 Total liabilities and owner's equity $5,399,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold (4,375,000) Selling and administrative expense (1,000,000) Depreciation expense (135,000) Interest expense (100,000) Earnings before taxes $765,000 Income taxes (306,000) Net income $459,000 Based on the information in Table 4-2, the average collection period is...?

81 days

All of the following securities are sold in money markets EXCEPT...?

Common stock

If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods?

Competitive bid purchase

Which of the following is an example of both a capital market and a primary market transaction?

Ford Motor Company sells a new issue of common stock to raise funds through a public offering.

Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?

Higher interest costs

Which of the following best describes cash flow from financing activities?

Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid.

The real rate of return is the return earned above the...?

Inflation risk premium.

Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a...?

Negotiated purchase

When an investment banking firm "underwrites" an issue of securities, the firm is performing which of the following?

Offering to purchase the securities from the firm, thereby assuming the risk of resale to investors

A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore...

The corporate bonds are direct securities and the life insurance policies are indirect securities.

Which of the following statements about the corporate form of business organization is true?

The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that...?

The firm's products are in inventory for fewer days before they are sold than is average for the industry.

Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler's net income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million. Therefore...?

Wheeler paid a dividend in 2011 of $2 million. Ending Retained earning = Begin Retained earning + net income - dividend paid during the year