Which of the following are cash flows from a corporation into the financial markets? I. repayment of long-term debt II. payment of government taxes III. payment of loan interest IV. payment of quarterly dividend I and II only I and III only II and IV only I, III, and IV only I, II, and III only Refer to section 1.5
Which one of the following best states the primary goal of financial management? maximize current dividends per share maximize the current value per share increase cash flow and avoid financial distress minimize operational costs while maximizing firm efficiency maintain steady growth while increasing current profits Refer to section 1.3
Why should financial managers strive to maximize the current value per share of the existing stock? doing so guarantees the company will grow in size at the maximum possible rate doing so increases employee salaries because they have been hired to represent the interests of the current shareholders because this will increase the current dividends per share because managers often receive shares of stock as part of their compensation Refer to section 1.3
Billy’s Exterminators, Inc., has sales of $592,000, costs of $284,000, depreciation expense of $36,000, interest expense of $28,000, and a tax rate of 35 percent. What is the net income for this firm?
Net income
$
158,600 ± 0.1%
Explanation:
The income statement for the company is: Sales Costs Depreciation
Income Statement $
EBIT Interest EBT Taxes (35%)
592,000 284,000 36,000
$
272,000 28,000
$
244,000 85,400
Net income
$
158,600
The Anberlin Co. had $291,000 in 2011 taxable income. Use the tax rates from Table 2.3. Calculate the company’s 2011 income taxes. Taxes
$
96,740 ± 0.1%
Explanation:
Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($291,000 – 100,000) = $96,740
Papa Roach Exterminators, Inc., has sales of $654,000, costs of $225,000, depreciation expense of $44,000, interest expense of $25,000, and a tax rate of 30 percent. If the firm paid out $74,000 in cash dividends. What is the addition to retained earnings? rev: 09_17_2012 $222,000 $203,000 $247,000 $178,000 $160,200
The income statement for the company is: Income Statement Sales
$654,000
Costs Depreciation EBIT Interest EBT Taxes(30%) Net income
225,000 44,000 $385,000 25,000 $360,000 108,000 $252,000
One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income − Dividends = $252,000 − 74,000 = $178,000
Papa Roach Exterminators, Inc., has sales of $644,000, costs of $225,000, depreciation expense of $42,000, interest expense of $27,000, and a tax rate of 35 percent. What is the net income for firm? rev: 09_17_2012 $254,500 $269,500 $124,600 $227,500 $296,500
The income statement for the company is: Income Statement Sales Costs Depreciation EBIT Interest EBT Taxes (35%) Net income
$644,000 225,000 42,000 $377,000 27,000 $350,000 122,500 $227,500
A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? $710 $780 $990 $2,430
$2,640 Current assets = $520 + $190 + $70 = $780
Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360?
28.25 percent 31.09 percent 33.62 percent 35.48 percent 39.00 percent Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($211,360) = $104,680.40 Average tax rate = $104,680.40/$311,360 = 33.62 percent Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? income statement creditor's statement balance sheet statement of cash flows dividend statement Refer to section 2.1
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? income statement balance sheet statement of cash flows tax reconciliation statement
market value report Refer to section 2.2
A firm has a return on equity of 24 percent. The total asset turnover is 2.3 and the profit margin is 7 percent. The total equity is $7,600. What is the amount of the net income? $532 $793 $1,224 $1,824 $4,195
Net income = 0.24 × $7,600 = $1,824
Jupiter Explorers has $5,600 in sales. The profit margin is 3 percent. There are 4,000 shares of stock outstanding. The market price per share is $1.20. What is the price-earnings ratio? 14.29 6.12 28.57 5.04 28.00
Earnings per share = ($5,600 × 0.03) / 4,000 = $0.04200 Price-earnings ratio = $1.20 / $0.04200 = 28.57
A firm has total debt of $1,360 and a debt-equity ratio of 0.21. What is the value of the total assets? $2,856.00 $1,645.60 $7,836.19 $2,100.00 $6,476.19
$1,360 / Total equity = 0.21; Total equity = $6,476.19 Total assets = $1,360 + $6,476.19 = $7,836.19
Financial planning:
focuses solely on the short-term outlook for a firm. is a process that firms employ only when major changes to a firm's operations are anticipated. is a process that firms undergo once every five years. considers multiple options and scenarios for the next two to five years. provides minimal benefits for firms that are highly responsive to economic changes. Refer to section 4.1
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: accounts payable. long-term debt. fixed assets. retained earnings. common stock. Refer to section 4.3
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: accounts payable. long-term debt. fixed assets. retained earnings. common stock. Refer to section 4.3 The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? $16,231 $17,500 $18,300 $20,600 $21,000
Change in retained earnings = $437,500 × .053 × (1 - 0.30) = $16,231
Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? $303.33 $327.18 $405.60 $438.70 $441.10 Net income = $6,000 × .065 × (1 + .04) = $405.60
award:
2.50 out of 2.50 points Which one of the following terms is defined as the management of a firm's long-term investments? working capital management financial allocation agency cost analysis capital budgeting capital structure Refer to section 1.1 Multiple Choice
Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.
Difficulty: Easy
Section: 1.1
Which one of the following terms is defined as the mixture of a firm's debt and equity financing? working capital management cash management cost analysis capital budgeting capital structure Refer to section 1.1 Multiple Choice
Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.
Difficulty: Easy
Section: 1.1
A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: generally partner. sole proprietor. limited partner. corporate shareholder. zero partner. Refer to section 1.2
Multiple Choice
Learning Objective: 01-03 The financial implications of the different forms of business organization.
Difficulty: Easy
Section: 1.2
A business created as a distinct legal entity and treated as a legal "person" is called a: corporation. sole proprietorship. general partnership. limited partnership. unlimited liability company. Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? I and IV only II and III only I, II, and III only II, III, and IV only I, II, III, and IV Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? The vice president of finance reports to the chairman of the board. The chief executive officer reports to president. The controller reports to the president. The treasurer reports to the vice president of finance. The chief operations officer reports to the vice president of production. Refer to section 1.1 Which one of the following is a capital budgeting decision? determining how many shares of stock to issue deciding whether or not to purchase a new machine for the production line deciding how to refinance a debt issue that is maturing determining how much inventory to keep on hand determining how much money should be kept in the checking account
Refer to section 1.1 Which of the following should a financial manager consider when analyzing a capital budgeting project? I. project start up costs II. timing of all projected cash flows III. dependability of future cash flows IV. dollar amount of each projected cash flow I and IV only I, II, and IV only I, II, and III only II, III, and IV only I, II, III, and IV Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory I and II only I and III only II and IV only I, II, and IV only II, III, and IV only Which one of the following is a working capital management decision? determining the amount of equipment needed to complete a job determining whether to pay cash for a purchase or use the credit offered by the supplier determining the amount of long-term debt required to complete a project determining the number of shares of stock to issue to fund an acquisition determining whether or not a project should be accepted Refer to section 1.1 Multiple Choice
Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager.
Difficulty: Easy
Section: 1.1
Which of the following individuals have unlimited liability based on their ownership interest? I. general partner II. sole proprietor
III. stockholder IV. limited partner II only I and II only II and IV only I, II, and III only I, II, and IV only Refer to section 1.2 hich one of the following best describes the primary advantage of being a limited partner instead of a general partner? tax-free income active participation in the firm's activities no potential financial loss greater control over the business affairs of the partnership maximum loss limited to the capital invested Refer to section 1.2 A general partner: is personally responsible for all the partnership debts. has no say over a firm's daily operations. faces double taxation whereas a limited partner does not. has a maximum loss equal to his or her equity investment. receives a salary in lieu of a portion of the profits. Refer to section 1.2 Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life I and II only III and IV only I, III, and IV only II, III, and IV only I, II, III, and IV Refer to section 1.2
Which one of the following business types is best suited to raising large amounts of capital? sole proprietorship limited liability company corporation general partnership limited partnership Refer to section 1.2 Which of the following represent cash outflows from a corporation? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes I and III only II and IV only I and IV only I, II, and IV only II, III, and IV only Refer to section 1.5 Which one of the following is a primary market transaction? sale of currently outstanding stock by a dealer to an individual investor sale of a new share of stock to an individual investor stock ownership transfer from one shareholder to another shareholder gift of stock from one shareholder to another shareholder gift of stock by a shareholder to a family member Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: took place in the primary market. occurred in a dealer market. was facilitated in the secondary market. involved a proxy. was a private placement.
28.
award:
2.50 out of 2.50 points Which one of the following statements concerning NASDAQ is FALSE? It is easier to be listed on NASDAQ than on the NYSE. NASDAQ is an electronic market. NASDAQ is a dealer market. NASDAQ is an OTC market. NASDAQ is an auction market. Refer to section 1.5
1.
Penguin Pucks, Inc., has current assets of $5,125, net fixed assets of $25,600, current liabilities of $4,500, and long-term debt of $9,900.
What is the value of the shareholders’ equity account for this firm?
Shareholders' equity
$
16,325 ± 0.1%
How much is net working capital?
Net working capital
$
625 ± 1%
Explanation:
To find owners' equity, we must construct a balance sheet as follows: Balance Sheet CA $ 5,125 CL $ NFA 25,600 LTD OE TA
TL 30,725 & OE
$
$
4,500 9,900 ?? 30,725
We know that total liabilities and owners' equity (TL & OE) must equal total assets of $30,725. We also know that TL & OE is equal to current liabilities plus long-term debt plus owners' equity, so owners' equity is: OE = $30,725 – 9,900 – 4,500 = $16,325 NWC = CA – CL = $5,125 – 4,500 = $625
2.
Billy’s Exterminators, Inc., has sales of $740,000, costs of $288,000, depreciation expense of $40,000, interest expense of $30,000, and a tax rate of 35 percent.
What is the net income for this firm?
Net income
$
248,300 ± 0.1%
Explanation:
The income statement for the company is: Income Statement Sales $ 740,000 Costs 288,000
Depreciation
40,000
EBIT Interest
$
412,000 30,000
EBT Taxes (35%)
$
382,000 133,700
Net income
$
248,300
3.
You are given the following information for Calvani Pizza Co.: sales = $50,000; costs = $21,800; addition to retained earnings = $10,700; dividends paid = $1,000; interest expense = $4,200; tax rate = 35 percent. Calculate the depreciation expense. (Do not round intermediate calculations and round your final answer to nearest whole dollar amount.)
Depreciation expense
$
6,000 ± 0.1%
Explanation:
The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to retained earnings = $1,000 + 10,700 = $11,700 Now, looking at the income statement: EBT − EBT × Tax rate = Net income Recognize that EBT × Tax rate is simply the calculation for taxes. Solving this for EBT yields: EBT = NI / (1 − Tax rate) = $11,700 / (1 − 0.35) = $18,000 Now you can calculate: EBIT = EBT + Interest = $18,000 + 4,200 = $22,200 The last step is to use: EBIT = Sales − Costs − Depreciation $22,200 = $50,000 − 21,800 − Depreciation Solving for depreciation, we find that depreciation = $6,000 4.
Prepare a 2011 balance sheet for Cornell Corp. based on the following information: cash = $146,000; patents and copyrights = $630,000; accounts payable = $222,500; accounts receivable = $165,000; tangible net fixed assets = $1,665,000; inventory = $302,500; notes payable = $135,000; accumulated retained earnings = $1,240,000; long-term debt = $864,000. (Be sure to list the accounts in order of their liquidity.)
CORNELL COP. Balance Sheet Assets Cash
$
146,000
Accounts receivable
165,000
Inventory
302,500
Current assets Tangible net fixed assets Intangible net fixed assets
$
613,500 ± 0.1% 1,665,000 630,000
Total assets
2,908,500 ± 0.01%
$
Liabilities Accounts payable
$
222,500 135,000
Notes payable Current liabilities
$
357,500 ± 0.1% 864,000
Long-term debt Total liabilities
$
1,221,500 ± 0.01% 447,000
Common stock
1,240,000
Accumulated retained earnings Total liabilities & owners' equity
$
2,908,500 ± 0.01%
Explanation:
Total liabilities and owners’ equity is: TL & OE = CL + LTD + Common stock + Retained earnings Solving for this equation for equity gives us: Common stock = $2,908,500 − 1,221,500 − 1,240,000 = $447,000 5.
Penguin Pucks, Inc., has current assets of $4,300, net fixed assets of $25,500, current liabilities of $3,800, and long-term debt of $7,300.
(a) What is the value of the shareholders' equity account for this firm? 18,700 (b) How much is net working capital? 500 rev: 09_17_2012 Explanation:
To find owner's equity, we must construct a balance sheet as follows:
CA NFA TA
Balance Sheet $4,300CL 25,500LTD OE $29,800TL & OE
$3,800 7,300 ?? $29,800
We know that total liabilities and owner's equity (TL & OE) must equal total assets of $29,800. We also know that TL & OE is equal to current liabilities plus long-term debt plus owner's equity, so owner's equity is: (a) OE = $29,800 − 7,300 − 3,800 = $18,700 (b) NWC = CA − CL = $4,300 − 3,800 = $500 6.
, Inc., has sales of $634,000, costs of $355,000, depreciation expense of $37,000, interest expense of $26,000, and a tax rate of 40 percent. What is the net income for firm?
rev: 09_17_2012 $166,600 $-37,600 $192,600 $155,600 $129,600
The income statement for the company is: Income Statement Sales Costs Depreciation EBIT Interest EBT Taxes (40%) Net income
7.
$634,000 355,000 37,000 $242,000 26,000 $216,000 86,400 $129,600
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $6.7 million. The machinery can be sold to the Romulans today for $3.95 million. Klingon's current balance sheet shows net fixed assets of $3.05 million, current liabilities of $1.8 million, and net working capital of $580,000. If all the current assets were liquidated today, the company would receive $1.7 million cash.
Required: (a) What is the book value of Klingon's assets today? 5,430,000 (b) What is the market value? 5,650,000 rev: 09_17_2012 Explanation: (a)
To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get: CA = NWC + CL = $580,000 + 1,800,000 = $2,380,000 The market value of current assets and fixed assets is given, so: Book value CA Book value NFA Book value assets
$2,380,000 $3,050,000 $5,430,000
(b)
Market value CA Market value NFA Market value assets
8.
$1,700,000 $3,950,000 $5,650,000
The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $950,000 in the common stock account and $6.1 million in the additional paid-in surplus account. The 2009 balance sheet showed $865,000 and $7.75 million in the same two accounts, respectively. If the company paid out $640,000 in cash dividends during 2009, What was the cash flow to stockholders for the year?
rev: 09_17_2012 $-925,000 $310,000 $225,000 $925,000 $7,975,000
Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = Dividends paid – [(Commonend + APISend) – (Commonbeg + APISbeg)] Cash flow to stockholders = $640,000 – [($865,000 + 7,750,000) – ($950,000 + 6,100,000)] Cash flow to stockholders = $-925,000 Note, APIS is the additional paid-in surplus 9.
Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales = $212,000; costs = $92,000; other expenses = $5,300; depreciation expense = $8,900; interest expense = $14,700; taxes = $31,885; dividends = $10,200. In addition, you're told that the firm issued $7,900 in new equity during 2009 and redeemed $9,500 in outstanding long-term debt.
(a) What is the 2009 operating cash flow? 82,815
(b) What is the 2009 cash flow to creditors? 24,200 (c) What is the 2009 cash flow to stockholders? 2,300 (d) If net fixed assets increased by $22,000 during the year, what was the addition to NWC? 25,415 rev: 09_17_2012 Explanation:
(a) To find the OCF, we first calculate net income. Income Statement Sales Costs Other expenses Depreciation EBIT Interest Taxable income Taxes Net income Dividends Additions to RE
$212,000 92,000 5,300 8,900 $105,800 14,700 $91,100 31,885 $59,215 $10,200 $49,015
OCF = EBIT + Depreciation – Taxes = $105,800 + 8,900 – 31,885 = $82,815 (b) CFC = Interest – Net new LTD = $14,700 – (–9,500) = $24,200 (c) CFS = Dividends – Net new equity = $10,200 – 7,900 = $2,300 (d) We know that CFA = CFC + CFS, so: CFA = $24,200 + 2,300 = $26,500 CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation = $22,000 + 8,900 = $30,900 Now we can use: CFA = OCF – Net capital spending – Change in NWC $26,500 = $82,815 – 30,900 – Change in NWC Solving for the change in NWC gives $25,415, meaning the company increased its NWC by $25,415. 10. Papa Roach Exterminators, Inc., has sales of $694,000, costs of $295,000, depreciation expense of $56,000, interest expense of $24,000, and a tax rate of 35 percent. The firm paid out $109,000 in cash dividends, and has 20,000 shares of common stock outstanding.
(a) What is the earnings per share, or EPS, figure? 10.37 (b) What is the dividends per share figure? 5.45 rev: 09_17_2012 Explanation:
The income statement for the company is: Income Statement Sales Costs Depreciation EBIT Interest EBT Taxes (35%) Net income
$694,000 295,000 56,000 $343,000 24,000 $319,000 111,650 $207,350
EPS = Net income / Shares = $207,350 / 20,000 = $10.37 per share DPS = Dividends / Shares = $109,000 / 20,000 = $5.45 per share 11. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders? $5,100 $7,830 $18,020 $19,998 $20,680 Cash flow from assets = $48,450 - (-$1,330) − $24,000 = $25,780 Cash flow to creditors = $2,480 - (-$2,620) = $5,100 Cash flow to stockholders = $25,780 − $5,100 = $20,680
12. What is the operating cash flow for 2011? $2,114 $2,900 $2,985 $3,536 $4,267 Operating cash flow = $3,396 + $1,611 − $740 = $4,267
13. What is the operating cash flow for 2011? $1,226 $1,367 $1,644 $1,766 $1,823 Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644 14. What is the cash flow to creditors for 2011? -$1,020 -$1,100 $280 $1,580 $1,760 Net new borrowing = $1,100 − $2,400= -$1,300 Cash flow to creditors = 280 - (-$1,300) = $1,580
15. What is the taxable income for 2011? $1,051.00 $1,367.78 $1,592.42 $2,776.41 $3,091.18 Net income = $420 + $631 = $1,051 Taxable income = $1,051/(1 − .34) = $1,592.42 16. The 2010 balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, and the 2011 balance sheet showed long-term debt of $2.3 million. The 2011 income statement showed an interest expense of $250,000. What was the cash flow to creditors for 2011? -$200,000 -$150,000 $50,000 $200,000 $450,000 Cash flow to creditors = $250,000 - ($2,300,000 - $2,100,000) = $50,000 17. The 2010 balance sheet of The Sports Store showed $800,000 in the common stock account and $6.7 million in the additional paid-in surplus account. The 2011 balance sheet showed $872,000 and $8 million in the same two accounts, respectively. The company paid out $600,000 in cash dividends during 2011. What is the cash flow to stockholders for 2011? -$1,372,000 -$772,000 -$628,000 $372,000
$1,972,000 Cash flow to stockholders = $600,000 - [($872,000 + $8,000,000) - ($800,000 + $6,700,000) = -$772,000 18. The tax rates are as shown.
Taxable Income $0 – 50,000
Tax Rate 15%
50,001 – 75,000
25%
75,001 – 100,000
34%
100,001 – 335,000
39%
What is the average tax rate for a firm with taxable income of $122,013? 25.27% 36.17% 27.76% 39.00% 20.00% Taxes paid = 0.15($50,000) + 0.25($75,000 – 50,000) + 0.34($100,000 – 75,000) + 0.39($122,013 – 100,000) = $30,835.07 Average tax rate = $30,835.07 / $122,013 = 25.27%
19. Your firm has net income of $273 on total sales of $1,240. Costs are $690 and depreciation is $130. The tax rate is 35 percent. The firm does not have interest expenses. What is the operating cash flow? $693 $420 $273 $403 $550
EBIT = $1,240 – $690 – $130 = $420 (Sales – Costs – Depreciation) Taxes = 0.35 × $420 = $147 (Tax rate × EBIT) OCF = $420 + $130 – $147 = $403 (EBIT + Depreciation – Taxes)
20. At the beginning of the year, a firm has current assets of $325 and current liabilities of $229. At the end of the year, the current assets are $487 and the current liabilities are $269. What is the change in net working capital? $162 $202
$0 $122 –$122 Change in net working capital = ($487 – 269) – ($325 – 229) = $122
A firm has total debt of $1,510 and a debt-equity ratio of 0.36. What is the value of the total assets? →
$5,704.44 $3,600.00 $5,436.00 $2,053.60 $4,194.44
$1,510 / Total equity = 0.36; Total equity = $4,194.44 Total assets = $1,510 + $4,194.44 = $5,704.44
Jupiter Explorers has $8,600 in sales. The profit margin is 4 percent. There are 4,300 shares of stock outstanding. The market price per share is $1.90. What is the price-earnings ratio? 11.88 23.75 33.68 15.20 12.92
Earnings per share = ($8,600 × 0.04) / 4,300 = $0.08000 Price-earnings ratio = $1.90 / $0.08000 = 23.75 A firm has a return on equity of 17 percent. The total asset turnover is 2.5 and the profit margin is 9 percent. The total equity is $5,800. What is the amount of the net income? $986 $522 $1,305 $394 $2,465
Net income = 0.17 × $5,800 = $986 Use the following information to answer this question. Windswept, Inc. 2010 Income Statement ($ in millions) Net sales $ 9,200 Less: Cost of goods sold 7,550 430 Less: Depreciation Earnings before interest and taxes $ 1,220 92 Less: Interest paid Taxable Income $ 1,128 395 Less: Taxes $ 733 Net income
Windswept, Inc. 2009 and 2010 Balance Sheets ($ in millions) 2009 2010 2009 Cash $ 200 $ 235 Accounts payable $ 1,370 Accounts rec. 950 850 Long-term debt 1,050 1,620 1,625 Common stock Inventory $ 3,200 510 Total $ 2,770 $ 2,710 Retained earnings 3,360 3,820 Net fixed assets $ 6,130 $ 6,530 Total liab. & equity $ 6,130 Total assets
2010 $ 1,505 1,315 $ 2,950 760 $ 6,530
What is the return on equity for 2010? 24.85 percent 23.84 percent 32.88 percent 19.76 percent 41.36 percent
Return on equity = $733 million / ($2,950 million + $760 million) = 19.76 percent
net use of cash of $37 net use of cash of $83 net source of cash of $83 net source of cash of $132 net source of cash of $135
A firm has total debt of $4,850 and a debt-equity ratio of 0.57. What is the value of the total assets? $6,128.05 $7,253.40 $9,571.95 $11,034.00 $13,358.77 Total equity = $4,850/0.57 = $8,508.77 Total assets = $4,850 + $8,508.77 = $13,358.77 Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity? 17.14 percent 18.63 percent 19.67 percent 21.69 percent 22.30 percent Return on equity = 12.5 percent × 1.49 = 18.63 percent, using the Du Pont Identity Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of $41,300, and total debt of $206,300. What is the return on equity? 7.79 percent 8.41 percent 8.74 percent 9.09 percent 9.16 percent
Return on equity = $41,300/($206,300/0.42) = 8.41 percent A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent. The total equity is $511,640. What is the amount of the net income? $28,079 $35,143 $44,084 $47,601 $52,418 Return on equity = .049 × 1.12 × (1 + 0.57) = .0861616 Net income = $511,640 × .0861616 = $44,084
Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total equity is $560,000. What is the net income? $105,616 $148,309 $157,136 $161,008 $164,909 Equity multiplier = 1 + 2.05 = 3.05 Return on equity = .092 × 3.05 = .2806 Net income = .2806 × $560,000 = $157,136
Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes): Income Statement Sale
$
s
Balance Sheet 32,000
Cost
Asset
$
s
25,300 Debt
Net incom e
$
7,600
5,800
Equit
24,400
s
$
19,500
y Tot
$
al
25,300
Tot
$
al
25,300
The company has predicted a sales increase of 15 percent. Assume Fire pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements. Pro forma income statement Sales
$
Costs
Pro forma balance sheet
36,800 ± 0.1%
Assets
$
29,095 ± 0.1%
$
$
Equity
28,060 ± 0.1%
Net income
Debt
8,740 ± 0.1%
Total
$
29,095 ± 0.1%
Total
5,800 ± 0.1% 23,870 ± 0.1%
$
29,670 ± 0.1%
Determine the external financing needed. (Negative amount should be indicated by a minus sign.) External financing needed
$
-575 ± 1%
Explanation:
Dividends = $4,370 Add. to RE = $4,370 Note that the balance sheet does not balance. This is due to EFN. The EFN for this company is: EFN = Total assets – Total liabilities and equity EFN = $29,095 – 29,670 EFN = –$575 Which one of the following correctly defines the retention ratio? one plus the dividend payout ratio addition to retained earnings divided by net income addition to retained earnings divided by dividends paid
net income minus additions to retained earnings net income minus cash dividends Refer to section 4.3 A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by: accounts payable. long-term debt. fixed assets. retained earnings. common stock. Refer to section 4.3 If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the: maximum capacity level will have to increase at the same rate as sales growth. total assets will have to increase at the same rate as sales growth. debt-equity ratio will increase.
→
retained earnings will increase. number of common shares outstanding will increase
Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income? $303.33 $327.18 $405.60 $438.70 $441.10 Net income = $6,000 × .065 × (1 + .04) = $405.60 The Cookie Shoppe expects sales of $437,500 next year. The profit margin is 5.3 percent and the firm has a 30 percent dividend payout ratio. What is the projected increase in retained earnings? $16,231 $17,500 $18,300 $20,600
$21,000 Change in retained earnings = $437,500 × .053 × (1 - 0.30) = $16,231 Designer's Outlet has a capital intensity ratio of 0.92 at full capacity. Currently, total assets are $48,900 and current sales are $51,200. At what level of capacity is the firm currently operating? 89.1 percent 91.6 percent 96.3 percent 96.8 percent 98.2 percent Total capacity sales = $48,900/0.92 = $53,152.17 Current capacity utilization = $51,200/$53,152.17 = 96.3 percent Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? 17.23 percent 17.47 percent 18.03 percent 18.87 percent 19.05 percent Full capacity sales = $550,000/0.84 = $654,761.90 Maximum sales growth = (654,761.90/$550,000) - 1 = 19.05 percent
Assume the total cost of a college education will be $300,000 when your child enters college in 18 years. You presently have $65,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Annual rate of interest
8.87 ± 1%
%
Explanation:
We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 r = ($300,000 / $65,000)1/18 – 1 = 0.0887, or 8.87% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter
18
$65,000
N Solve for
I/Y
PV
±$300,000
PMT
FV
8.87%
Suppose you are committed to owning a $190,000 Ferrari. If you believe your mutual fund can achieve a 12 percent annual rate of return and you want to buy the car in 9 years on the day you turn 30, how much must you invest today? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Investment
$
68,515.90 ± 0.1%
Explanation:
To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV = $190,000 / (1.12)9 = $68,515.90 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter Solve for
9
12%
N
I/Y
$190,000
PV
PMT
FV
$68,515.90
You are scheduled to receive $15,000 in two years. When you receive it, you will invest it for six more
years at 7.1 percent per year. How much will you have in eight years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Future value
$
22,637.48 ± 0.1%
Explanation:
We need to find the FV of a lump sum. However, the money will only be invested for six years, so the number of periods is six. FV = PV(1 + r)t FV = $15,000(1.071)6 = $22,637.48 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter
6
7.10%
$15,000
N
I/Y
PV
Solve for
PMT
FV $22,637.48
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? simplifying compounding aggregation accumulation discounting Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? current yield effective rate compound rate simple rate discount rate Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? $15,929.47 $16,500.00
$17,444.86 $17,500.00 $17,999.45 Present value = $51,480.79 × [1/(1 + .0425)26] = $17,444.86
One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn? 6.59 percent 6.67 percent 6.88 percent 6.92 percent 7.01 percent $1,924.62 = $1,800 × (1 + r)1; r = 6.92 percent
Your coin collection contains fifty-four 1941 silver dollars. Your grandparents purchased them for their face value when they were new. These coins have appreciated at a 10 percent annual rate. How much will your collection be worth when you retire in 2060? $3,611,008 $3,987,456 $4,122,394 $4,421,008 $4,551,172 FV = $54 × (1.10)119 = $4,551,172
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning? free interest complex interest
simple interest interest on interest compound interest Refer to section 5.1 Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? $12,650 $12,967 $13,020 $13,256 $13,500 Ending value = $10,500 + ($10,500 × .06 × 4) = $13,020 references
Wainright Co. has identified an investment project with the following cash flows. Year 1 2 3 4
Cash Flow $ 760 1,010 1,270 1,375
If the discount rate is 11 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value
$
3,338.79 ± 0.1%
What is the present value at 18 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value
$
2,851.60 ± 0.1%
What is the present value at 24 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Present value
$
2,517.46 ± 0.1%
Explanation:
To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV@11% = $760 / 1.11 + $1,010 / 1.112 + $1,270 / 1.113 + $1,375 / 1.114 = $3,338.79 PV@18% = $760 / 1.18 + $1,010 / 1.182 + $1,270 / 1.183 + $1,375 / 1.184 = $2,851.60 PV@24% = $760 / 1.24 + $1,010 / 1.242 + $1,270 / 1.243 + $1,375 / 1.244 = $2,517.46 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.
CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 11 NPV CPT $3,338.79
$0 $760 1 $1,010 1 $1,270 1 $1,375 1
CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 18 NPV CPT $2,851.60
$0 $760 1 $1,010 1 $1,270 1 $1,375 1
CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 24 NPV CPT $2,517.46
$0 $760 1 $1,010 1 $1,270 1 $1,375 1
nvestment X offers to pay you $5,800 per year for eight years, whereas Investment Y offers to pay you $7,900 per year for five years. Calculate the present value for Investment X and Y if the discount rate is 5 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Present value Investment X
$
Investment Y
$
37,486.63 ± 0.1% 34,202.87 ± 0.1%
Calculate the present value for Investment X and Y if the discount rate is 15 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Present value Investment X
$
Investment Y
$
26,026.46 ± 0.1% 26,482.03 ± 0.1%
Explanation:
To find the PVA, we use the equation: PVA = C({1 − [1/(1 + r)t]} / r) At a 5 percent interest rate: X@5%: PVA = $5,800{[1 − (1/1.05)8 ] / 0.05 } = $37,486.63 Y@5%: PVA = $7,900{[1 − (1/1.05)5 ] / 0.05 } = $34,202.87 And at a 15 percent interest rate: X@15%: PVA = $5,800{[1 − (1/1.15)8 ] / 0.15 } = $26,026.46 Y@15%: PVA = $7,900{[1 − (1/1.15)5 ] / 0.15 } = $26,482.03 Notice that the PV of cash flow X has a greater PV at a 5 percent interest rate, but a lower PV at a 15 percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger cash flows. At the higher interest rate, these bigger cash flows early are more important since the cost of waiting (the interest rate) is so much greater. Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter
8
5%
N
I/Y
Solve for Enter
PV
PMT
FV
$37,486.63 5
5%
N
I/Y
Solve for Enter
$5,800
$7,900
PV
PMT
$34,202.87 8
15%
$5,800
FV
N
I/Y
Solve for Enter
PV
PMT
FV
$26,026.46 5
15%
N
I/Y
Solve for
$7,900
PV
PMT
FV
$26,482.03
Dinero Bank offers you a $53,000, four-year term loan an annual interest rate of 7 percent. What will your annual loan payment be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Annual loan payment
$
15,647.09 ± 0.1%
Explanation:
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation: PVA = C({1 − [1/(1 + r)t]} / r) $53,000 = C{[1 − (1/1.07004)] / 0.0700} We can now solve this equation for the annuity payment. Doing so, we get: C = $53,000 / 3.38721 = $15,647.09 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter
4
7.00%
$53,000
N
I/Y
PV
Solve for
PMT
FV
$15,647.09
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. Suppose a sales associate told you the policy costs $480,000. At what interest rate would this be a fair deal? (Round your answer to 2 decimal places. (e.g., 32.16)) Interest rate
7.29 ± 1%
%
Explanation:
Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows. Using the PV of a perpetuity equation: PV = C / r $480,000 = $35,000 / r We can now solve for the interest rate as follows: r = $35,000 / $480,000 = 0.0729, or 7.29%
Which one of the following accurately defines a perpetuity? a limited number of equal payments paid in even time increments payments of equal amounts that are paid irregularly but indefinitely varying amounts that are paid at even intervals forever unending equal payments paid at equal time intervals unending equal payments paid at either equal or unequal time intervals Refer to section 6.2 Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? amortized loan modified loan balloon loan pure discount loan interest-only loan Refer to section 6.4 Phil can afford $200 a month for 5 years for a car loan. If the interest rate is 7.5 percent, how much can he afford to borrow to purchase a car? $8,750.00 $9,348.03 $9,981.06 $10,266.67 $10,400.00
What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding. $301,115 $306,492 $310,868 $342,908 $347,267
Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years? $1,806,429 $1,838,369 $2,211,407 $2,333,572 $2,508,316
You are borrowing money today at 8.48 percent, compounded annually. You will repay the principal plus all the interest in one lump sum of $12,800 two years from today. How much are you borrowing? $9,900.00 $10,211.16 $10,877.04 $11,401.16 $11,250.00
This morning, you borrowed $9,500 at 8.9 percent annual interest. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today. How much will you have to repay? $13,360.88 $13,808.13 $13,911.89 $14,006.08 $14,441.20
Downtown Bank is offering 2.2 percent compounded daily on its savings accounts. You deposit $8,000 today. How much will you have in your account 11 years from now? $10,190.28 $10,714.06 $11,204.50 $11,336.81 $11,414.14 FV = $8,000 × [1 + (0.022/365)]11 × 365 = $10,190.28
Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond? 10
Coupon rate
%
What is the YTM on the bond? 8
YTM
%
Explanation:
The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of return are interchangeable terms. Unlike YTM and required return, the coupon rate is not a return used as the interest rate in bond cash flow valuation, but is a fixed percentage of par over the life of the bond used to set the coupon payment amount. For the example given, the coupon rate on the bond is still 10 percent, and the YTM is 8 percent.
Say you own an asset that had a total return last year of 10.7 percent. If the inflation rate last year was 3.7 percent, what was your real return? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Real return
6.75 ± 1%
%
Explanation:
The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R) = (1 + r)(1 + h) r = [(1 + 0.107) / (1.037)] – 1 = 0.0675, or 6.75%
The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.4 percent. The current rate of inflation is 2.0 percent. What is the nominal rate of return on these bonds? 1.05 percent 1.01 percent 5.40 percent 5.47 percent 1.40 percent
1 + R = (1 + 0.034) × (1 + 0.020) R = 5.47 percent The MerryWeather Firm wants to raise $18 million to expand its business. To accomplish this, the firm
plans to sell 10-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 5 percent. What is the minimum number of bonds the firm must sell to raise the $18 million it needs? Use annual compounding. 14,660 29,320 43,319 18,000 86,638
PV = $1,000 / 1.0510 = $613.91 Number of bonds = $18,000,000 / $613.91 = 29,320 bonds
A bond's coupon rate is equal to the annual interest divided by which one of the following? call price current price face value clean price dirty price Refer to section 7.1 Multiple Choice
Learning Objective: 07-01 Important bond features and types of bonds.
Difficulty: Easy
Section: 7.1
A bond that is payable to whomever has physical possession of the bond is said to be in: new-issue condition. registered form. bearer form. debenture status. collateral status. Refer to section 7.2 Multiple Choice
Learning Objective: 07-01 Important bond features and types of bonds.
Difficulty: Easy
Section: 7.2
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? dirty price redemption value call premium original-issue discount redemption discount Refer to section 7.2 Multiple Choice
Learning Objective: 07-01 Important bond features and types of bonds.
Difficulty: Easy
Section: 7.2
A bond that has only one payment, which occurs at maturity, defines which one of the following? debenture callable floating-rate junk zero coupon Refer to section 7.4 Multiple Choice
Learning Objective: 07-01 Important bond features and types of bonds.
Difficulty: Easy
Section: 7.4
You want to buy a bond from a dealer. Which one of the following prices will you pay? call price auction price bid price asked price bid-ask spread Refer to section 7.5 Multiple Choice
Learning Objective: 07-02 Bond values and yields and why they fluctuate.
Difficulty: Easy
Section: 7.5
Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the: quoted price. spread price. clean price. dirty price. call price. Refer to section 7.5 Multiple Choice
Learning Objective: 07-02 Bond values and yields and why they fluctuate.
Difficulty: Easy
Section: 7.5
An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. a current yield that equals the coupon rate III. a yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value I and III only I and IV only II and III only II and IV only III and IV only Refer to section 7.1 Multiple Choice
Learning Objective: 07-02 Bond values and yields and why they fluctuate.
Difficulty: Easy
Section: 7.1
Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate II only I and III only I and IV only II and III only
II and IV only Refer to section 7.1 Multiple Choice
Learning Objective: 07-02 Bond values and yields and why they fluctuate.
Difficulty: Easy
Section: 7.1
Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? semi-annual coupon discount bond note trust deed collateralized Refer to section 7.2 Multiple Choice
Learning Objective: 07-01 Important bond features and types of bonds.
Difficulty: Easy
Section: 7.2
The outstanding bonds of Winter Time Products provide a real rate of return of 5.6 percent. The current rate of inflation is 4.68 percent. What is the actual nominal rate of return on these bonds? 8.58 percent 9.33 percent 9.71 percent 9.76 percent 10.54 percent (1 + 0.056) × (1 + 0.0468) - 1 = 10.54 percent Multiple Choice
Learning Objective: 07-04 The impact of inflation on interest rates.
Difficulty: Easy
Section: 7.6
Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill? 9.50 percent 11.30 percent
11.47 percent 11.56 percent 11.60 percent (1 + R) = (1 + 0.095) × (1 + 0.018); R = 11.47 percent Multiple Choice
Learning Objective: 07-04 The impact of inflation on interest rates.
Difficulty: Easy
Section: 7.6
