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# 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 EBIT Interest EBT Taxes (35%) Net income Income Statement $ 592,000 284,000 36,000 272,000 28,000 244,000 85,400 $ 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

20.600.19 Total assets = $1.19 $1. The total equity is $7. What is the value of the total assets? $2.29 6.04 28.60 $7. The profit margin is 3 percent.57 A firm has total debt of $1.12 28.3 and the profit margin is 7 percent.20 / $0.824 Jupiter Explorers has $5.360 + $6.600 = $1.195 Net income = 0.19 $2.57 5.00 $6. What is the amount of the net income? $532 $793 $1.19 Financial planning: .2 A firm has a return on equity of 24 percent.476.00 $1.476. Total equity = $6.836.21.04200 Price-earnings ratio = $1. The total asset turnover is 2.03) / 4.19 = $7.600 in sales.21.836.824 $4.856.market value report Refer to section 2.360 and a debt-equity ratio of 0. What is the price-earnings ratio? 14.100.24 × $7.04200 = 28.360 / Total equity = 0.000 = $0.00 Earnings per share = ($5.000 shares of stock outstanding. The market price per share is $1.645. There are 4.224 $1.476.600 × 0.

500 next year.500 $18. fixed assets.231 $17.300 $20.3 percent and the firm has a 30 percent dividend payout ratio.1 A firm is currently operating at full capacity.focuses solely on the short-term outlook for a firm. The dividend payout ratio is constant at 40 percent.600 $21. provides minimal benefits for firms that are highly responsive to economic changes. Refer to section 4. that need will be met by: accounts payable. considers multiple options and scenarios for the next two to five years. If the firm has a positive external financing need.3 The Cookie Shoppe expects sales of $437. The firm does not wish to obtain any additional equity financing. fixed assets. is a process that firms undergo once every five years. The dividend payout ratio is constant at 40 percent. is a process that firms employ only when major changes to a firm's operations are anticipated. Refer to section 4. The firm does not wish to obtain any additional equity financing.000 . Refer to section 4. and all assets vary directly with sales. Net working capital. costs. The profit margin is 5. long-term debt. retained earnings. common stock. retained earnings. What is the projected increase in retained earnings? $16. costs.3 A firm is currently operating at full capacity. and all assets vary directly with sales. common stock. long-term debt. that need will be met by: accounts payable. Net working capital. If the firm has a positive external financing need.

60 . The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales.10 Net income = $6.0.Change in retained earnings = $437.33 $327.000 and a profit margin of 6.5 percent.18 $405.60 $438.30) = $16.04) = $405.000 × .70 $441.500 × .065 × (1 + .053 × (1 .231 Fresno Salads has current sales of $6. What is the pro forma net income? $303.

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 1.2 . zero partner.1 Multiple Choice Difficulty: Easy Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager. 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. Refer to section 1. sole proprietor.award: 2. limited partner.1 Multiple Choice Difficulty: Easy Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager. 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. corporate shareholder.50 out of 2.

II.2 A business created as a distinct legal entity and treated as a legal "person" is called a: corporation.Multiple Choice Difficulty: Easy Learning Objective: 01-03 The financial implications of the different forms of business organization. Which of the following questions are addressed by financial managers? I. Should the firm acquire new equipment? I and IV only II and III only I.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 . Section: 1. The chief operations officer reports to the vice president of production. The controller reports to the president. general partnership. Refer to section 1. 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 treasurer reports to the vice president of finance. The chief executive officer reports to president. unlimited liability company. III. III. II. and IV only I. and III only II. limited partnership. How should a product be marketed? II. Should the firm borrow more money? IV. Should customers be given 30 or 45 days to pay for their credit purchases? III. sole proprietorship.

accounts receivable III. fixed assets IV. general partner II.Refer to section 1. II.1 Which of the following individuals have unlimited liability based on their ownership interest? I. dollar amount of each projected cash flow I and IV only I. III. II. dependability of future cash flows IV. inventory I and II only I and III only II and IV only I.1 Which of the following should a financial manager consider when analyzing a capital budgeting project? I. II. 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. sole proprietor . III. and IV only I. accounts payable II. and IV only I. Section: 1. III.1 Multiple Choice Difficulty: Easy Learning Objective: 01-01 The basic types of financial management decisions and the role of the financial manager. timing of all projected cash flows III. and IV only II. and IV Which of the following accounts are included in working capital management? I. project start up costs II. II. and III only II.

II. limited liability for firm debt II. faces double taxation whereas a limited partner does not.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. limited partner II only I and II only II and IV only I. unlimited firm life I and II only III and IV only I. II. has no say over a firm's daily operations.III. Refer to section 1. III. III. and III only I. III.2 A general partner: is personally responsible for all the partnership debts. stockholder IV. and IV only II. receives a salary in lieu of a portion of the profits. II.2 . and IV Refer to section 1.2 Which of the following are advantages of the corporate form of business ownership? I. and IV only I. ability to raise capital IV. and IV only Refer to section 1. has a maximum loss equal to his or her equity investment. double taxation III.

payment of dividends III. was a private placement. This transaction: took place in the primary market. new loan proceeds IV. was facilitated in the secondary market. issuance of securities II. II. payment of government taxes I and III only II and IV only I and IV only I. 28.5 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. III. occurred in a dealer market.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. . involved a proxy. and IV only II.2 Which of the following represent cash outflows from a corporation? I. and IV only Refer to section 1.

50 out of 2.award: 2. NASDAQ is an OTC market. NASDAQ is an electronic market. Refer to section 1.5 .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 auction market. NASDAQ is a dealer market.

900 – 4.125 – 4. we must construct a balance sheet as follows: Balance Sheet CA $ 5.725 – 9.000. interest expense of $30. We also know that TL & OE is equal to current liabilities plus long-term debt plus owners' equity. What is the net income for this firm? Net income $ 248.300 ± 0. and a tax rate of 35 percent. Billy’s Exterminators. What is the value of the shareholders’ equity account for this firm? Shareholders' equity $ 16.125. Penguin Pucks.000 ..325 ± 0.725.725 We know that total liabilities and owners' equity (TL & OE) must equal total assets of $30.600 LTD OE TA $ TL 30.1% Explanation: The income statement for the company is: Income Statement Sales $ 740. net fixed assets of $25. has current assets of $5.1% How much is net working capital? Net working capital $ 625 ± 1% Explanation: To find owners' equity.1. so owners' equity is: OE = $30. Inc. Inc.600.125 CL $ NFA 25. and long-term debt of $9.000 Costs 288.000.000.500 = $16.900.900 ?? 30. has sales of $740. depreciation expense of $40.. costs of $288.325 NWC = CA – CL = $5. current liabilities of $4.500.725 & OE $ 4.500 9.500 = $625 2.000.

000 4.000 Now you can calculate: EBIT = EBT + Interest = $18.700.665.) Depreciation expense $ 6.1% Explanation: The solution to this question works the income statement backwards.700 = $11.000 630. dividends paid = $1.240.200 = $22.500.700 Now.300 You are given the following information for Calvani Pizza Co.000 412. Prepare a 2011 balance sheet for Cornell Corp.200 The last step is to use: EBIT = Sales − Costs − Depreciation $22. long-term debt = $864. Balance Sheet Assets Cash Accounts receivable Inventory Current assets Tangible net fixed assets Intangible net fixed assets $ $ 146. tax rate = 35 percent.000 + 4.Depreciation EBIT Interest EBT Taxes (35%) Net income 3.000 302.000.700 / (1 − 0. Starting at the bottom: Net income = Dividends + Addition to retained earnings = $1. $ $ $ 40.000. Solving this for EBT yields: EBT = NI / (1 − Tax rate) = $11.200.000.800.000 165. accounts receivable = $165.000 + 10.000. patents and copyrights = $630.000.000 133.000 382. addition to retained earnings = $10.500 ± 0.665.800 − Depreciation Solving for depreciation. accumulated retained earnings = $1.1% 1. interest expense = $4.000 ± 0. we find that depreciation = $6.000.000. notes payable = $135.700 248. accounts payable = $222.000 .500 613. looking at the income statement: EBT − EBT × Tax rate = Net income Recognize that EBT × Tax rate is simply the calculation for taxes. inventory = $302. costs = $21.000.200 = $50.000 30.35) = $18. (Do not round intermediate calculations and round your final answer to nearest whole dollar amount. (Be sure to list the accounts in order of their liquidity. tangible net fixed assets = $1.: sales = $50.000.) CORNELL COP. based on the following information: cash = $146. Calculate the depreciation expense.500.000 − 21.

300.221.500 ± 0.700 (b) How much is net working capital? 500 rev: 09_17_2012 Explanation: To find owner's equity.Total assets $ 2.500 ± 0.01% Liabilities Accounts payable Notes payable Current liabilities Long-term debt Total liabilities Common stock Accumulated retained earnings Total liabilities & owners' equity $ $ $ $ 222.000 = $447.800TL & OE CA NFA TA $3.01% 447. net fixed assets of $25.500.000 1.800..500 − 1.300.000 1. and long-term debt of $7.500 ± 0.300 ?? $29.500 135. Inc. has current assets of $4. Penguin Pucks.800 7.908. we must construct a balance sheet as follows: Balance Sheet $4.908.800 . current liabilities of $3.300CL 25.000 5.240.000 2.500 ± 0.000 357.908.1% 864.240.221.500LTD OE $29.01% 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. (a) What is the value of the shareholders' equity account for this firm? 18.500 − 1.

8 million. The machinery can be sold to the Romulans today for $3.000 $242.800 − 7. costs of $355.000.600 $192.430..800 = $18. Inc.000.000.800 = $500 6.05 million.000 rev: 09_17_2012 Explanation: (a) .000 355.We know that total liabilities and owner's equity (TL & OE) must equal total assets of $29.000 26.95 million..000 $216. the company would receive $1. purchased new cloaking machinery three years ago for $6.300 − 3. Klingon Widgets.7 million. so owner's equity is: (a) OE = $29. What is the net income for firm? rev: 09_17_2012 $166. Required: (a) What is the book value of Klingon's assets today? 5.700 (b) NWC = CA − CL = $4. has sales of $634.000 86. interest expense of $26. Inc. Klingon's current balance sheet shows net fixed assets of $3. We also know that TL & OE is equal to current liabilities plus long-term debt plus owner's equity. depreciation expense of $37. If all the current assets were liquidated today.600 7.400 $129.600 $129.650. and a tax rate of 40 percent.300 − 3. current liabilities of $1.7 million cash. and net working capital of $580. .600 $155.600 The income statement for the company is: Income Statement Sales Costs Depreciation EBIT Interest EBT Taxes (40%) Net income $634.800.600 $-37.000 37.000.000.000 (b) What is the market value? 5.

000 = $2.700.000 $7.000 and $7.000 The market value of current assets and fixed assets is given.000.500 in outstanding long-term debt.1 million in the additional paid-in surplus account.050. dividends = $10.000 $225.. Jetson Spacecraft Corp.380.900 in new equity during 2009 and redeemed $9.300. In addition. respectively.975. shows the following information on its 2009 income statement: sales = $212.000) – ($950.800.000 8.750. we get: CA = NWC + CL = $580. you're told that the firm issued $7.000 $310. If the company paid out $640. (a) What is the 2009 operating cash flow? 82.900.000.000 – [($865.000 + 7. so: Book value CA Book value NFA Book value assets (b) $2.000 in the common stock account and $6. The 2008 balance sheet of Maria's Tennis Shop.200. APIS is the additional paid-in surplus 9.430. Inc. taxes = $31.100.650. costs = $92. interest expense = $14. other expenses = $5. showed $950. Rearranging to solve for current assets.000 $925. The 2009 balance sheet showed $865.815 . What was the cash flow to stockholders for the year? rev: 09_17_2012 $-925.380.000 Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = Dividends paid – [(Commonend + APISend) – (Commonbeg + APISbeg)] Cash flow to stockholders = $640. depreciation expense = $8.To find the book value of current assets.700. we use: NWC = CA – CL.000)] Cash flow to stockholders = $-925.000 in cash dividends during 2009.950.000 Note.000 Market value CA Market value NFA Market value assets $1.75 million in the same two accounts.000 $3.000 $5.000 $5.000 $3.000 + 6.885.000 + 1.

815 – 30. what was the addition to NWC? 25.000.800 + 8.900 = $2. and a tax rate of 35 percent. Income Statement Sales Costs Other expenses Depreciation EBIT Interest Taxable income Taxes Net income Dividends Additions to RE $212.900 = $30.000 shares of common stock outstanding. we first calculate net income.900 – Change in NWC Solving for the change in NWC gives $25.000 in cash dividends.000 5.700 $91.300 8.500 = $82. Papa Roach Exterminators.000.200 + 2.800 14. costs of $295. We already know OCF.885 = $82.300 (d) We know that CFA = CFC + CFS.300 = $26.000 92. so: CFA = $24. 10.200 (c) CFS = Dividends – Net new equity = $10.415.015 OCF = EBIT + Depreciation – Taxes = $105.000.200 $49.(b) What is the 2009 cash flow to creditors? 24. interest expense of $24..500) = $24.900 $105.200 – 7.000 + 8.885 $59. Inc.200 (c) What is the 2009 cash flow to stockholders? 2.000. depreciation expense of $56.700 – (–9.415.215 $10.500 CFA is also equal to OCF – Net capital spending – Change in NWC.300 (d) If net fixed assets increased by $22. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation = $22.900 Now we can use: CFA = OCF – Net capital spending – Change in NWC $26. . meaning the company increased its NWC by $25.100 31.815 (b) CFC = Interest – Net new LTD = $14. The firm paid out $109.900 – 31. and has 20.415 rev: 09_17_2012 Explanation: (a) To find the OCF. has sales of $694.000 during the year.

000 56.680 .000 $343. or EPS.020 $19.45 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.(a) What is the earnings per share.000 24.000 $319.450 .780 − $5.000 / 20. A net total of $2.780 Cash flow to creditors = $2.450.000 111.000 = $10.(-$2.830 $18.330.480 . What is the amount of the cash flow to stockholders? $5.000 = $25.998 $20.620 was paid on long-term debt.350 / 20.000 on fixed assets and decreased net working capital by $1.(-$1.480.000 = $5.650 $207. The firm spent $24.680 Cash flow from assets = $48.350 EPS = Net income / Shares = $207.620) = $5.37 (b) What is the dividends per share figure? 5.37 per share DPS = Dividends / Shares = $109.700 and interest paid was $2. Depreciation was $6. figure? 10.100 $7.100 = $20.330) − $24.100 Cash flow to stockholders = $25. The Lakeside Inn had operating cash flow of $48.45 per share 11.

267 .267 Operating cash flow = $3.985 $3.114 $2.12.396 + $1.611 − $740 = $4.536 $4.900 $2. What is the operating cash flow for 2011? $2.

226 $1.423 .$670 = $1.760 Net new borrowing = $1.$4.109 .020 -$1.100 $280 $1.(-$1.300) = $1. What is the operating cash flow for 2011? $1.$122) + $122 .644 14.400= -$1.100 − $2.367 $1.300 Cash flow to creditors = 280 .580 .644 $1.13.580 $1.823 Operating cash flow = ($6. What is the cash flow to creditors for 2011? -$1.766 $1.

000 17.051.000 $200.091.372.000 .592.000) = $50. What was the cash flow to creditors for 2011? -$200.000 -$150.42 16. respectively.$2.00 $1. What is the taxable income for 2011? $1.100.42 $2. The 2011 balance sheet showed $872.34) = $1.000 in cash dividends during 2011.($2.000 $450.3 million.000 and $8 million in the same two accounts.000 Cash flow to creditors = $250.1 million.000 . The 2010 balance sheet of The Beach Shoppe showed long-term debt of $2.000 $50.300.367.000 -$628.000.15.7 million in the additional paid-in surplus account.78 $1.000 in the common stock account and $6. The 2011 income statement showed an interest expense of $250.051/(1 − . What is the cash flow to stockholders for 2011? -$1.051 Taxable income = $1.592.18 Net income = $420 + $631 = $1.776. and the 2011 balance sheet showed long-term debt of $2.41 $3. The company paid out $600.000 .000 -$772. The 2010 balance sheet of The Sports Store showed $800.000 $372.

000 – 50.001 – 335.000) = $30.000 50. a firm has current assets of $325 and current liabilities of $229.001 – 75.000 + $6. What is the change in net working capital? $162 $202 .76% 39. The tax rate is 35 percent.240 – $690 – $130 = $420 (Sales – Costs – Depreciation) Taxes = 0.000 Tax Rate 15% 25% 34% 39% What is the average tax rate for a firm with taxable income of $122. The tax rates are as shown.25($75.[($872.000 100.240.000) + 0.27% 19.001 – 100. Your firm has net income of $273 on total sales of $1.000 + $8.000) . Costs are $690 and depreciation is $130.35 × $420 = $147 (Tax rate × EBIT) OCF = $420 + $130 – $147 = $403 (EBIT + Depreciation – Taxes) 20.39($122.013 – 100.000) = -$772.07 / $122.700.972. the current assets are $487 and the current liabilities are $269. Taxable Income $0 – 50.$1.000) + 0.835.07 Average tax rate = $30.($800.34($100.000 75.00% 20.17% 27. At the beginning of the year.27% 36.000 18.000 – 75.000.000 .013? 25.835. At the end of the year. What is the operating cash flow? $693 $420 $273 $403 $550 EBIT = $1.000) + 0. The firm does not have interest expenses.013 = 25.00% Taxes paid = 0.15($50.000 Cash flow to stockholders = $600.

$0 $122 –$122 Change in net working capital = ($487 – 269) – ($325 – 229) = $122 .

550 430 Less: Depreciation Earnings before interest and taxes $ 1.44 = $5.5 and the profit margin is 9 percent.510 / Total equity = 0.75 A firm has a return on equity of 17 percent.600 in sales. What is the value of the total assets? → $5.90 / $0.300 = $0.704.68 15. 2010 Income Statement ($ in millions) Net sales $ 9.00 $5.20 12. There are 4.08000 = 23.300 shares of stock outstanding. Windswept.194. Total equity = $4. What is the amount of the net income? $986 $522 $1.510 + $4. What is the price-earnings ratio? 11. The market price per share is $1.704.800.88 23.17 × $5.305 $394 $2.194.90.00 $2.600 × 0.60 $4. The total asset turnover is 2. The profit margin is 4 percent.44 Total assets = $1.220 92 Less: Interest paid Taxable Income $ 1.128 395 Less: Taxes $ 733 Net income .053.194.92 Earnings per share = ($8.A firm has total debt of $1.36.75 33.510 and a debt-equity ratio of 0.465 Net income = 0. The total equity is $5.600.08000 Price-earnings ratio = $1.200 Less: Cost of goods sold 7.04) / 4.800 = $986 Use the following information to answer this question. Inc.436.44 $1.44 $3.44 Jupiter Explorers has $8.36.

130 $ 6. Inc.770 $ 2.76 percent 41.505 1.625 Common stock Inventory $ 3.370 Accounts rec.85 percent 23.76 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 .820 Net fixed assets $ 6.315 $ 2.36 percent 2010 $ 1. 2009 and 2010 Balance Sheets ($ in millions) 2009 2010 2009 Cash $ 200 $ 235 Accounts payable $ 1.710 Retained earnings 3.950 million + $760 million) = 19.950 760 $ 6.530 Return on equity = $733 million / ($2. 950 850 Long-term debt 1.130 Total assets What is the return on equity for 2010? 24.620 1.84 percent 32.360 3.530 Total liab.050 1. & equity $ 6.200 510 Total $ 2.Windswept.88 percent 19.

000.63 percent 19.77 = $13.05 $7.30 percent Return on equity = 12.57 = $8. and an equity multiplier of 1.253.128.5 percent.74 percent 9.16 percent .41 percent 8.69 percent 22. What is the return on equity? 17. and total debt of $206.300.14 percent 18.358.49 = 18.49. a return on assets of 12.850 and a debt-equity ratio of 0. net income of $41.79 percent 8.57.09 percent 9. using the Du Pont Identity Taylor's Men's Wear has a debt-equity ratio of 42 percent.508.A firm has total debt of $4.77 Oscar's Dog House has a profit margin of 5.00 $13.95 $11. What is the value of the total assets? $6.5 percent × 1.850 + $8.571.6 percent.63 percent.77 Total equity = $4.034. sales of $749.850/0.358.40 $9.300.77 Total assets = $4. What is the return on equity? 7.67 percent 21.508.

57) = .41 percent A firm has a debt-equity ratio of 57 percent.2 percent.084 Charlie's Chicken has a debt-equity ratio of 2. and total equity is $560.12 × (1 + 0. Return on assets is 9.136 $161. What is the net income? $105.300/($206.601 $52.300/0.2806 Net income = .12. a total asset turnover of 1. What is the amount of the net income? $28. and a profit margin of 4.9 percent.05 = .092 × 3.616 $148.084 $47.049 × 1.008 $164.05 Return on equity = .0861616 Net income = $511.0861616 = $44.05 = 3.000 = $157.143 $44.640.Return on equity = $41.418 Return on equity = . The total equity is $511.309 $157.640 × .42) = 8.909 Equity multiplier = 1 + 2.000.2806 × $560.079 $35.136 .05.

370 Note that the balance sheet does not balance.) External financing needed $ -575 ± 1% Explanation: Dividends = $4.740 ± 0. Assume Fire pays out half of net income in the form of a cash dividend.300 Debt Equit y Tot al Tot al $ 5.095 ± 0.1% Debt Equity $ 5.370 Add.Consider the following simplified financial statements for the Fire Corporation (assuming no income taxes): Income Statement Sale s Cost s Net incom e $ 32.095 ± 0. This is due to EFN.1% Total $ 29.1% Total $ 29.1% $ 8.400 Asset s $ Balance Sheet 25.000 24.1% 28. to RE = $4.300 $ 25.095 – 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 .800 ± 0. but debt and equity do not.870 ± 0.500 $ 7.1% Pro forma balance sheet Assets $ 29.800 19.1% 23. The EFN for this company is: EFN = Total assets – Total liabilities and equity EFN = $29.1% Determine the external financing needed. Costs and assets vary with sales. (Negative amount should be indicated by a minus sign.670 ± 0.800 ± 0.300 The company has predicted a sales increase of 15 percent. Pro forma income statement Sales Costs Net income $ 36.600 $ 25. Prepare the pro forma statements.060 ± 0.

500 next year. number of common shares outstanding will increase Fresno Salads has current sales of $6. that need will be met by: accounts payable.500 $18.300 $20.18 $405.33 $327.04) = $405. fixed assets.3 A firm is currently operating at full capacity. long-term debt. common stock. and all assets vary directly with sales. What is the pro forma net income? $303. costs.60 $438. The dividend payout ratio is constant at 40 percent.3 percent and the firm has a 30 percent dividend payout ratio. total assets will have to increase at the same rate as sales growth. Refer to section 4.600 . then the: maximum capacity level will have to increase at the same rate as sales growth. → retained earnings will increase. What is the projected increase in retained earnings? $16.5 percent. The firm does not wish to obtain any additional equity financing. debt-equity ratio will increase. The profit margin is 5.60 The Cookie Shoppe expects sales of $437.10 Net income = $6. Net working capital.231 $17. If the firm has a positive external financing need. retained earnings.000 × .000 and a profit margin of 6.net income minus additions to retained earnings net income minus cash dividends Refer to section 4. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales.3 If a firm equates its pro forma sales growth to the rate of sustainable growth.70 $441. and has positive net income and excess capacity.065 × (1 + .

231 Designer's Outlet has a capital intensity ratio of 0.84 = $654.3 percent 96.6 percent 96. At what level of capacity is the firm currently operating? 89.. total assets are $48.1 percent 91.2 percent Total capacity sales = $48.500 × .30) = $16.05 percent Full capacity sales = $550.90 Maximum sales growth = (654.152. What is the maximum rate at which sales can grow before any new fixed assets are needed? 17.92 = $53.900/0.000/0.17 Current capacity utilization = $51.152.03 percent 18.23 percent 17.053 × (1 .1 = 19.3 percent Seaweed Mfg.8 percent 98.761.05 percent .000 Change in retained earnings = $437.$21.761. Inc.200. Current sales are $550. Currently.200/$53.000.17 = 96.000) .47 percent 18.0.900 and current sales are $51.90/$550.87 percent 19. is currently operating at only 84 percent of fixed asset capacity.92 at full capacity.

We will use the FV formula. or 8.000)1/18 – 1 = 0. (e. Enter Solve for 18 $65.16)) Investment $ 68. we use: PV = FV / (1 + r)t PV = $190. you will invest it for six more .87% Calculator Solution: Note: Intermediate answers are shown below as rounded. (e.515.16)) Annual rate of interest 8. 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 30.90 PMT FV You are scheduled to receive $15. we get: r = (FV / PV)1 / t – 1 r = ($300.87% PV PMT FV Suppose you are committed to owning a $190.000 / (1.000 Ferrari.1% Explanation: To find the PV of a lump sum.000 ±$300. that is: FV = PV(1 + r)t Solving for r.000 N I/Y PV $68.. 32.000 / $65.87 ± 1% % Explanation: We can use either the FV or the PV formula.g.000 N I/Y 8.515. Enter Solve for 9 12% $190. You presently have $65. how much must you invest today? (Do not round intermediate calculations and round your final answer to 2 decimal places. When you receive it.12)9 = $68.. 32. 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.Assume the total cost of a college education will be $300.000 in two years.000 when your child enters college in 18 years.90 Calculator Solution: Note: Intermediate answers are shown below as rounded.000 to invest. Both will give the same answer since they are the inverse of each other.0887.90 ± 0. but the full answer was used to complete the calculation.515. but the full answer was used to complete the calculation.g.

FV = PV(1 + r)t FV = $15.79.48 ± 0.25 percent interest. Today.929.000(1. he gave you the proceeds of that investment which totaled $51.48 Tracy invested $1.1% Explanation: We need to find the FV of a lump sum.637.g. the money will only be invested for six years. (e..1 percent per year.16)) Future value $ 22.000 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. she increases the amount of interest she earns each year. By leaving her interest earnings in her account.48 Calculator Solution: Note: Intermediate answers are shown below as rounded.years at 7. How much will you have in eight years? (Do not round intermediate calculations and round your final answer to 2 decimal places.480. How much did your father originally invest? $15. but the full answer was used to complete the calculation.637. so the number of periods is six.47 $16.071)6 = $22. However. Enter Solve for 6 7.000 five years ago and earns 4 percent interest on her investment.637.10% $15. 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 $10.00 . 32.500.000 N I/Y PV PMT FV $22.

0425)26] = $17. 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 .551.45 Present value = $51.172 Sara invested $500 six years ago at 5 percent interest. How much will your collection be worth when you retire in 2060? $3.62 = $1.86 $17.444.551.444.500. you invested $1.79 × [1/(1 + .480.$17.800.924. These coins have appreciated at a 10 percent annual rate.456 $4. Today it is worth $1.92 percent Your coin collection contains fifty-four 1941 silver dollars.924.62.01 percent $1.92 percent 7.59 percent 6.88 percent 6. Your grandparents purchased them for their face value when they were new.800 × (1 + r)1. r = 6.008 $3.172 FV = $54 × (1.67 percent 6. What rate of interest did you earn? 6.86 One year ago.394 $4.122.10)119 = $4.008 $4.421.00 $17.999.611.987.

967 $13.020 references .256 $13.500 + ($10.500 × . How much money will he have at the end of four years? $12.650 $12.1 Alex invested $10.020 $13.500 in an account that pays 6 percent simple interest.06 × 4) = $13.simple interest interest on interest compound interest Refer to section 5.500 Ending value = $10.

338.11 + $1.18 + $1.60 ± 0.1% What is the present value at 18 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places.010 1 $1. has identified an investment project with the following cash flows.79 PV@18% = $760 / 1. 32.851.270 / 1. (e.375 1 CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 18 NPV CPT $2. CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 11 NPV CPT $3.16)) Present value $ 2.375 1 . (e.338.184 = $2.183 + $1. 32..010 / 1.79 ± 0..46 $0 $760 1 $1.010 1 $1.114 = $3.Wainright Co. we use: PV = FV / (1 + r)t PV@11% = $760 / 1.243 + $1.242 + $1.270 / 1.270 1 $1.244 = $2.60 PV@24% = $760 / 1.851.46 Calculator Solution: Note: Intermediate answers are shown below as rounded.270 / 1.010 1 $1.338.16)) Present value $ 3.375 / 1. (e.60 $0 $760 1 $1.g. what is the present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places.16)) Present value $ 2.g. Year 1 2 3 4 Cash Flow $ 760 1.010 / 1.g.851.46 ± 0.113 + $1.517.1% Explanation: To find the PV of a lump sum.010 1.010 / 1.182 + $1.24 + $1. 32. but the full answer was used to complete the calculation.375 / 1.375 / 1.112 + $1.1% What is the present value at 24 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places.270 1 $1.517.270 1 $1.375 If the discount rate is 11 percent.375 1 CFo C01 F01 C02 F02 C03 F03 C04 F04 I = 24 NPV CPT $2.270 1.79 $0 $760 1 $1..517.

900{[1 − (1/1. Enter Solve for Enter Solve for Enter 8 15% 5 5% 8 5% $5.15 } = $26.05 } = $37.026.202.g.800 per year for eight years.486. 32.482.900 per year for five years..05 } = $34.03 Notice that the PV of cash flow X has a greater PV at a 5 percent interest rate..87 ± 0.nvestment X offers to pay you $5.63 Y@5%: PVA = $7. Calculate the present value for Investment X and Y if the discount rate is 5 percent.900 FV N I/Y PV $34.1% Explanation: To find the PVA.87 PMT $5. (Do not round intermediate calculations and round your final answers to 2 decimal places.900{[1 − (1/1.15 } = $26.05)8 ] / 0.15)8 ] / 0. Calculator Solution: Note: Intermediate answers are shown below as rounded. 32.46 Y@15%: PVA = $7.486.800{[1 − (1/1.800 FV . these bigger cash flows early are more important since the cost of waiting (the interest rate) is so much greater.800{[1 − (1/1.800 N I/Y PV $37.202.63 ± 0. Y is more valuable since it has larger cash flows. At the higher interest rate. but a lower PV at a 15 percent interest rate.1% 26.486.g.87 And at a 15 percent interest rate: X@15%: PVA = $5.1% 34. At a lower interest rate.16)) Present value Investment X Investment Y $ $ 26. we use the equation: PVA = C({1 − [1/(1 + r)t]} / r) At a 5 percent interest rate: X@5%: PVA = $5. (e.1% Calculate the present value for Investment X and Y if the discount rate is 15 percent. At a higher interest rate. The reason is that X has greater total cash flows. (Do not round intermediate calculations and round your final answers to 2 decimal places.482. whereas Investment Y offers to pay you $7.05)5 ] / 0.202. (e. the total cash flow is more important since the cost of waiting (the interest rate) is not as great.16)) Present value Investment X Investment Y $ $ 37.46 ± 0.15)5 ] / 0.026. but the full answer was used to complete the calculation.03 ± 0.63 PMT $7.

At what interest rate would this be a fair deal? (Round your answer to 2 decimal places.09 Calculator Solution: Note: Intermediate answers are shown below as rounded.46 PMT $7.00% $53. We want to calculate the annuity payment.000 N I/Y PV PMT $15.900 FV N I/Y PV $26.07004)] / 0. What will your annual loan payment be? (Do not round intermediate calculations and round your final answer to 2 decimal places.647.0700} We can now solve this equation for the annuity payment. Using the PV of a perpetuity equation: PV = C / r $480. Suppose a sales associate told you the policy costs $480.29 ± 1% % Explanation: Here we need to find the interest rate that equates the perpetuity cash flows with the PV of the cash flows.647. (e. but the full answer was used to complete the calculation. or 7. we get: C = $53. four-year term loan an annual interest rate of 7 percent.647.000 = $35.g. Doing so.000 / $480.03 PMT FV Dinero Bank offers you a $53.16)) Interest rate 7. 32. Enter Solve for 4 7.000.1% Explanation: Here we have the PVA.000 / r We can now solve for the interest rate as follows: r = $35. 32..000 / 3.026.000 = 0. is trying to sell you an investment policy that will pay you and your heirs $35.. the length of the annuity.482.N Solve for Enter Solve for 5 I/Y 15% PV $26.000.38721 = $15.09 ± 0.09 FV The Maybe Pay Life Insurance Co.000 = C{[1 − (1/1. (e.g.29% . and the interest rate. Using the PVA equation: PVA = C({1 − [1/(1 + r)t]} / r) $53.000 per year forever.16)) Annual loan payment $ 15.0729.

348.400.00 .67 $10. how much can he afford to borrow to purchase a car? $8.03 $9.06 $10.4 Phil can afford $200 a month for 5 years for a car loan.981.5 percent. If the interest rate is 7.2 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 6.00 $9.750.266.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.

407 $2.25 percent.508.838.333.908 $347.115 $306.316 .000 a year and expects to earn an annual rate of 10.806.211.492 $310. $301.572 $2. How much will she have in her account at the end of 45 years? $1.200 a year for 40 years at 8 percent interest? Assume annual compounding.429 $1.369 $2.What is the future value of $1.868 $342.267 Alexa plans on saving $3.

401.You are borrowing money today at 8.04 $11.800 two years from today.16 $11. compounded annually. How much are you borrowing? $9.441.911.9 percent annual interest.89 $14. you borrowed $9.20 .88 $13. How much will you have to repay? $13.808.250.13 $13.900.360.006. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today.08 $14.500 at 8. You will repay the principal plus all the interest in one lump sum of $12.00 This morning.877.48 percent.00 $10.211.16 $10.

28 $10.336.06 $11.714.204.50 $11.28 .14 FV = $8.022/365)]11 × 365 = $10.190. How much will you have in your account 11 years from now? $10.000 today.190.414.81 $11. You deposit $8.2 percent compounded daily on its savings accounts.Downtown Bank is offering 2.000 × [1 + (0.

40 percent 1 + R = (1 + 0.75 ± 1% % Explanation: The Fisher equation. the yield to maturity and required rate of return are interchangeable terms. real interest rates. Inc. Say you own an asset that had a total return last year of 10. which shows the exact relationship between nominal interest rates.05 percent 1. the firm .034) × (1 + 0. 32.40 percent 5.0675. the coupon rate on the bond is still 10 percent.16)) Real return 6.7 percent. Two years from now. To accomplish this. or 6.. Unlike YTM and required return. (e. For noncallable bonds.7 percent. but is a fixed percentage of par over the life of the bond used to set the coupon payment amount. What is the nominal rate of return on these bonds? 1. If the inflation rate last year was 3.0 percent.47 percent The MerryWeather Firm wants to raise $18 million to expand its business. and the YTM is 8 percent.107) / (1. provide a real rate of return of 3.g.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. What is the coupon rate on the bond? Coupon rate What is the YTM on the bond? YTM 8 10 % % Explanation: The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate.47 percent 1. For the example given. and inflation is: (1 + R) = (1 + r)(1 + h) r = [(1 + 0.4 percent.75% The outstanding bonds of Roy Thomas.020) R = 5. what was your real return? (Do not round intermediate calculations and round your final answer to 2 decimal places. The current rate of inflation is 2.01 percent 5.037)] – 1 = 0. the coupon rate is not a return used as the interest rate in bond cash flow valuation. the required return on the same bond is 8 percent.

registered form. Section: 7.660 29. collateral status. bearer form.320 43.plans to sell 10-year.0510 = $613.91 = 29.1 A bond that is payable to whomever has physical possession of the bond is said to be in: new-issue condition.1 Multiple Choice Difficulty: Easy Learning Objective: 07-01 Important bond features and types of bonds.000 / 1. $1. 14.000 / $613.91 Number of bonds = $18.000 face value zero-coupon bonds. What is the minimum number of bonds the firm must sell to raise the $18 million it needs? Use annual compounding. Refer to section 7. Section: 7.2 Multiple Choice Difficulty: Easy Learning Objective: 07-01 Important bond features and types of bonds.000.000 86. debenture status.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 7.638 PV = $1. The bonds will be priced to yield 5 percent.319 18.2 .

2 A bond that has only one payment. which occurs at maturity. The additional $30 is called which one of the following? dirty price redemption value call premium original-issue discount redemption discount Refer to section 7.4 You want to buy a bond from a dealer.5 .4 Multiple Choice Difficulty: Easy Learning Objective: 07-01 Important bond features and types of bonds. plus any accrued interest.5 Multiple Choice Difficulty: Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. defines which one of the following? debenture callable floating-rate junk zero coupon Refer to section 7. Section: 7. Section: 7. Section: 7.A $1. Which one of the following prices will you pay? call price auction price bid price asked price bid-ask spread Refer to section 7.000 face value bond can be redeemed early at the issuer's discretion for $1.030.2 Multiple Choice Difficulty: Easy Learning Objective: 07-01 Important bond features and types of bonds.

increase in time to maturity II. dirty price. decrease in coupon rate II only I and III only I and IV only II and III only . 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 7.5 Multiple Choice Difficulty: Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate.5 An 8 percent corporate bond that pays interest semi-annually was issued last year.1 Which of the following increase the price sensitivity of a bond to changes in interest rates? I. spread price. Refer to section 7. call price. This price is referred to as the: quoted price. a current yield that equals the coupon rate III. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I.Pete paid $1. increase in coupon rate IV. Section: 7.032 as his total cost of purchasing a bond.1 Multiple Choice Difficulty: Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7. a structure as an interest-only loan II. decrease in time to maturity III. clean price. a yield-to-maturity equal to the coupon rate IV.

Section: 7. Section: 7.020.0468) .056) × (1 + 0.000 and the market price is $1. The face value is $1. The current rate of inflation is 4.6 Suppose the real rate is 9.33 percent 9. What rate would you expect to see on a Treasury bill? 9.1 Last year. What is the actual nominal rate of return on these bonds? 8.30 percent . Lexington Homes issued $1 million in unsecured.1 Multiple Choice Difficulty: Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate.2 Multiple Choice Difficulty: Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.2 The outstanding bonds of Winter Time Products provide a real rate of return of 5.76 percent 10.8 percent.50 percent 11.71 percent 9.II and IV only Refer to section 7. This debt pays an annual interest payment of $55 and matures 6 years from now.54 percent (1 + 0. non-callable debt.58 percent 9.6 percent.5 percent and the inflation rate is 1. Which one of these terms correctly describes a feature of this debt? semi-annual coupon discount bond note trust deed collateralized Refer to section 7.1 = 10.68 percent.54 percent Multiple Choice Difficulty: Easy Learning Objective: 07-04 The impact of inflation on interest rates.

018).56 percent 11.6 . Section: 7.095) × (1 + 0.11. R = 11.47 percent 11.60 percent (1 + R) = (1 + 0.47 percent Multiple Choice Difficulty: Easy Learning Objective: 07-04 The impact of inflation on interest rates.