Financial Management- Exam 1 Review Rutgers

Aidan deposited $8,500 in an account today. If the account earns 8.5 percent per year, compounded annually, how many years will it take for the account to reach a balance of $138,720?

$138,720 = $8,500(1.085t) t = 34.23 years

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn?

$18,250 = $5,000(1 + r15) r = .0901, or 9.01%

A firm's liquidity is measured with which one of the following ratios?

Current ratio

Capital Budgeting Decision

Decision to invest in tangible or intangible assets

Which one of the following actions will increase the present value of an amount to be received sometime in the future?

Decrease in the interest rate

A firm reported sales of $350,000, interest expense of $2,330, costs of $140,000, and depreciation expense of $17,800. The firm's average income tax rate is 21 percent. How much operating cash flow did the firm generate?

EBIT = $350,000 − 140,000 − 17,800 EBIT = $192,200 Tax = ($192,200 − 2,330)(.21) Tax = $39,873OCF = $192,200 + 17,800 − 39,873OC F = $170,127

Matsumoto Training has sales of $705,000, depreciation of $17,600, interest expense of $2,090, costs of $144,000, and a tax rate of 21 percent. What is the operating cash flow for the year?

EBIT = $705,000 − 144,000 − 17,600= 545,400 Tax = ($543,400 − 2,090)(.21)= 113,675 OCF = $543,400 + 17,600 − 113,675= 447,325

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

capital management decision

How much inventory should the company keep on hand?

Digital Movement has a return on assets of 9 percent and a dividend payout ratio of 75 percent. What is the internal growth rate?

Internal growth rate = [.09(1 − .75)]/[1 − .09(1 − .75)] = .0230, or 2.30%

Ryu and Fowler Attorneys has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

NWC = $4,900 − 3,200 − 1,400= 300

The Connection has an equity multiplier of 1.13, a total asset turnover of .56, and a net profit margin of 18.8 percent. What is the return on assets?

ROA = .56(.188) ROA = .1053, or 10.53%

capital structure decision

How should the firm raise money to fund these investments? How much debt should the firm incur to fund a project?

Hennessey Chicken and Waffles had $594,500 in sales, and a net profit margin of 4 percent. The firm has 2,750 shares of stock outstanding, with a market price per share of $42.40. What is the price-earnings ratio?

PE = $42.40/{[.04($594,500)]/2,750} = 4.90

The Natural Pet had sales of $763,500 in 2020, and $864,200 in 2021. The firm's current accounts remained constant. Given this information, which one of the following statements must be true?

The net working capital turnover rate increased.

Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?

The present value of this investment is equal to $6,000.

Tobin's Q relates the market value of a firm's assets to which one of the following?

Today's cost to duplicate those assets

Corporate dividends represent:

aftertax income from the corporation which becomes taxable income for the recipient.

Agency problems are most likely to be associated with:

corporations

Bowman's Boats has an interval measure of 53. This means that the firm has sufficient liquid assets to :

cover its operating costs for the next 53 days.

Net working capital is defined as:

current assets minus current liabilities.

According to the statement of cash flows, an increase in inventory will ______ the cash flow from ______ activities.

decrease; operating

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

discounting.

The plowback ratio is:

the percentage of net income available to the firm to fund future growth.

Curtis and Company currently has annual sales of $52,600, net fixed assets of $38,900, and total assets of $56,300. The firm is currently operating at 79 percent of capacity. What is the capital intensity ratio at full capacity?

Full-capacity sales = $52,600/.79 Full-capacity sales = $66,582.28 Capital intensity ratioFull capacity = $56,300/$66,582.28 Capital intensity ratioFull capacity = .85

Mario's Home Systems has sales of $2,820, costs of goods sold of $2,160, inventory of $504, and accounts receivable of $430. How many days, on average, does it take Mario's to sell its inventory?

85.17 days 365/inventory turnover ratio turnover ratio is 2,160/504 = 4.2857 365/4.2857= 85.17

An increase in which one of the following will increase a firm's quick ratio without affecting its cash ratio?

Accounts receivable

Which one of the following is a current liability?

An invoice payable to a supplier in 45 days

Which one of the following is classified as a tangible fixed asset?

Computer equipment

Hodgkiss Mfg., Incorporated, is currently operating at only 85 percent of fixed asset capacity. Fixed assets are $429,300. Current sales are $530,000 and projected to grow to $685,882. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.

To determine full capacity sales, we divide the current sales by the capacity the company is currently using, so: Full capacity sales = $530,000/.85 Full capacity sales = $623,529 The maximum sales growth is the full capacity sales divided by the current sales, so: Maximum sales growth = ($623,529/$530,000) − 1 Maximum sales growth = .1765, or 17.65% To find the new level of fixed assets, we need to find the current percentage of fixed assets to full capacity sales. Doing so, we find: Fixed assets/Full capacity sales = $429,300/$623,529 Fixed assets/Full capacity sales = .6885 Next, we calculate the total dollar amount of fixed assets needed at the new sales figure. Total fixed assets = .6885($685,882) Total fixed assets = $472,230 The new fixed assets necessary is the total fixed assets at the new sales figure minus the current level of fixed assets. New fixed assets = $472,230 − 429,300 New fixed assets = $42,930

If A7X Company has an ROA of 14 percent and a payout ratio of 24 percent, what is its internal growth rate?

We need to calculate the retention ratio to calculate the internal growth rate. The retention ratio is: b = 1 − .24b = .76 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b)/[1 − (ROA × b)} Internal growth rate = [.14(.76)]/[1 − .14(.76)] Internal growth rate = .1191, or 11.91%

You are scheduled to receive $44,000 in two years. When you receive it, you will invest it for 6 more years at 6.5 percent per year. How much will you have in 8 years?

We need to find the FV of a lump sum. However, the money will only be invested for 6 years, so the number of periods is 6. FV = PV(1 + r)t FV = $44,000(1.065)6 FV = $64,202.26

Pro forma statements:

are projections, not guarantees.

A firm's external financing need is met by:

debt and/or equity.

Decisions made by financial managers should primarily focus on increasing the:

market value per share of outstanding stock.

The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.

maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio

Financial plans:

often contain alternative options based on economic developments.

The cash flow that results from a company's ongoing, normal business activities is called:

operating cash flow.

Shareholders' equity:

represents the residual value of a firm.

At 5 percent annually compounded interest, how long would it take to triple your money?

$3 = $1(1.05t) t = 22.52 years

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) = 21,903

Which form of business would be the best choice if it were necessary to raise large amounts of capital?

Corporation

The Paper Mill is operating at full capacity. Assets, costs, and current liabilities vary directly with sales. The dividend payout ratio is constant. The firm has sales of $42,700, net income of $5,500, total assets of $48,900, current liabilities of $3,650, long-term debt of $18,100, owners' equity of $27,150, and dividends of $1,925. What is the external financing need if sales increase by 14 percent?

EFN = 1.14($48,900) − 1.14($3,650) − $18,100 − 27,150 − ($5,500 − 1,925)(1.14) = 2,260

Jupiter Explorers has $5,800 in sales. The profit margin is 4 percent. There are 5,000 shares of stock outstanding, with a price of $1.70 per share. What is the company's price-earnings ratio?

Earnings per share = ($5,800 × .04)/5,000 = $.04640 Price-earnings ratio = $1.70/$.04640 = 36.64 times

You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than 7.1 percent? (Assume annual compounding.)

FV = $49,000(1.07640) FV = $917,670.84 FV = $49,000(1.07140) FV = $761,684.14 Difference = $917,670.84 − 761,684.14 Difference = $155,986.70

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

FV = $6,220 + ($6,220)(.11)(40) FV = $33,588

A firm is operating at less than 100 percent of capacity. When preparing pro forma statements, this information is primarily needed to project which one of the following account values?

Fixed assets

Jacob's Escape has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working capital to total assets ratio?

NWC to total assets = ($1,263 + 3,907 + 7,950 − 2,214)/($1,263 + 3,907 + 7,950 + 8,400) = .51

Nielsen's has annual sales of $352,400 and a net profit margin of 5.2 percent. The firm has beginning owners' equity of $136,400 and ending owners' equity of $139,900. The firm neither sold nor repurchased shares during the year. What is the firm's retention ratio?

Net income = .052($352,400) Net income = $18,324.80 Retention ratio = ($139,900 − 136,400)/$18,324.80 Retention ratio = .1910, or 19.10%

Last year, Trailer Corporation reported total assets of $1,184,000, sales of $721,000, and net income of $144,200. The firm paid $57,680 in dividends and intends to hold its dividend payout ratio constant. At what annual rate can the firm grow without having to raise external funds?

ROA = $144,200/$1,184,000 ROA = .121791 Retention rate = 1 − ($57,680/$144,200 )Retention ratio = .60 Internal growth rate = [(0.121791)(.60)]/{1 − [(0.121791)(.60)]} Internal growth rate = .079, or 7.9%

What is the sustainable growth rate for a firm with a total asset turnover of 1.46 percent, a net profit margin of 8 percent, an equity multiplier of 1.2, and a dividend payout ratio of 32 percent?

ROE = .08(1.46)(1.20) ROE = .14016 Retention ratio = 1 − .32 Retention ratio = .68 Sustainable growth rate = [.14016(.68)]/{1 − [.14016(.68)]} Sustainable growth rate = .1053, or 10.53%

Agrawal, Incorporated, has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the total shareholders' equity that the company should report?

Shareholders' equity = $5,900 + 21,200 − 8,400 =18,700 The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

Which one of the following statements is correct?

Taxable income earned by a partnership is treated as individual income.

Financial managers should primarily focus on the interests of:

shareholders

A firm owned by a single person who has unlimited liability for the firm's debt is called a:

sole proprietorship