FIN5063 Week 2 Quizes Chapter 1, 2

 Lemmon Inc. lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity.

Select one:

a.

$104.50

b.

$144.50

c.

$156.50

d.

$112.50

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The correct answer is: $104.50

Question 2

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All of the following are cash flows associated with financing activities EXCEPT:

Select one:

a.

Stock Repurchases

b.

Paying dividends

c.

Increase in accounts payable

d.

Issuing stock

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The correct answer is: Increase in accounts payable

Question 3

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negative free cash flows would be the biggest worry for investors of

Select one:

a.

A start-up company.

b.

An all-equity company.

c.

A company in a highly cyclical industry.

d.

A mature company.

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The correct answer is: A mature company.

Question 4

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GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $0.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?

Select one:

a.

$725 million

b.

$917 million

c.

$807 million

d.

$882 million

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The correct answer is: $917 million

Question 5

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What are the consequences of paying additional dividends?

Select one:

a.

The firm will have a lower amount of internally generated cash to support firm growth.

b.

The firm will end up paying higher income taxes to the government.

c.

The firm will end up paying lower income taxes to the government.

d.

The firm will be making higher interest payments.

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The correct answer is: The firm will have a lower amount of internally generated cash to support firm growth.

Question 6

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The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends is referred to as _______________.

Select one:

a.

Institutional investment

b.

Restricted earnings

c.

Retained earnings

d.

Venture capital

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The correct answer is: Retained earnings

Question 7

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These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets.

Select one:

a.

Net change in cash and cash equivalents

b.

Cash flows from financing activities

c.

Cash flows from investing activities

d.

Cash flows from operations

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The correct answer is: Cash flows from investing activities

Question 8

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Which of the assets below is typically the most liquid?

Select one:

a.

Accounts Receivable

b.

Land

c.

Equipment

d.

Inventories

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The correct answer is: Accounts Receivable

Question 9

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All of the following are reasons that one should be cautious in interpreting financial statements EXCEPT:

Select one:

a.

It is difficult to compare two firms that use different depreciation methods.

b.

Firms can take steps to over- or understate earnings at various times.

c.

Financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings.

d.

All of these are reasons to be cautious in interpreting financial statements.

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The correct answer is: All of these are reasons to be cautious in interpreting financial statements.

Question 10

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For which of the following would one expect the book value of the asset to differ widely from its market value? 

Select one:

a.

Accounts receivable

b.

Fixed assets

c.

Cash

d.

Inventory

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The correct answer is: Fixed assets

Question 1

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Assume that a company had a net income equal to $500,000, and paid out $200,000 in dividends. The balance in the retained earnings account at the beginning of the year was $800,000. What is the balance in the retained earnings account at the end of the year?

Select one:

a.

$1,300,000

b.

$1,100,000

c.

$700,000

d.

$1,500,000

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The correct answer is: $1,100,000

Question 2

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Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million. Crew Cut's gross fixed assets increased by $10 million from 2007 to 2008. The firm's current assets increased by $6 million and spontaneous current liabilities increased by $4 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2013, respectively in millions?

Select one:

a.

$27, $12, $15

b.

$23, $10, $13

c.

$23, $12, $11

d.

$27, $10, $17

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The correct answer is: $27, $12, $15

Question 3

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Market Value versus Book Value Acme Bricks balance sheet lists net fixed assets as $40 million. The fixed assets could currently be sold for $50 million. Acme's current balance sheet shows current liabilities of $15 million and net working capital of $12 million. If all the current accounts were liquidated today, the company would receive $77 million cash after paying $15 million in liabilities. What is the book value of Acme's assets today? What is the market value of these assets?

Select one:

a.

$27 million, $92 million

b.

$40 million, $50 million

c.

$12 million, $77 million

d.

$67 million, $142 million

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The correct answer is: $67 million, $142 million

Question 4

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Income Statement You have been given the following information for Fina's Furniture Corp.:
Net sales = $25,500,000;
Cost of goods sold = $10,250,000;
Addition to retained earnings = $305,000;
Dividends paid to preferred and common stockholders = $500,000;
Interest expense = $2,000,000.
The firm's tax rate is 30 percent. What is the depreciation expense for Fina's Furniture Corp.?

Select one:

a.

$14,400,000

b.

$14,100,000

c.

$12,400,000

d.

$12,100,000

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The correct answer is: $12,100,000

Question 5

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Assume a company acquires a new building for the price of $7.5 million. Using straight line depreciation, and setting the useful life of the building to 30 years, the annual depreciation expense associated with the building will be equal to

Select one:

a.

$750,000.

b.

$250,000.

c.

$1,500,000.

d.

$500,000.

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The correct answer is: $250,000.

Which ratio assesses how efficiently a firm uses its fixed assets?

Select one:

a.

Current ratio

b.

Capital intensity ratio

c.

Average collection period

d.

Fixed asset turnover

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The correct answer is: Fixed asset turnover

Question 2

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Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt?

Select one:

a.

Fixed charge coverage ratio

b.

Cash coverage ratio

c.

ROA

d.

Times interest earned

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The correct answer is: Times interest earned

estion 1

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Statement of Cash Flows In 2013, Upper Crust had cash flows from investing activities of ($250,000) and cash flows from financing activities of ($150,000). The balance in the firm's cash account was $90,000 at the beginning of 2013 and $105,000 at the end of the year. What was Upper Crust's cash flow from operations for 2013?

Select one:

a.

$415,000

b.

$105,000

c.

$15,000

d.

$400,000

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The correct answer is: $415,000

Question 2

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Income Statement Barnyard, Inc.'s 2013 income statement lists the following income and expenses: EBIT = $500,000, interest expense = $45,000, and taxes = $152,000. Barnyard's has no preferred stock outstanding and 200,000 shares of common stock outstanding. What are its 2013 earnings per share?

Select one:

a.

$2.50

b.

$1.74

c.

$1.515

d.

$2.275

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The correct answer is: $1.515

Question 3

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Income Statement Bullseye, Inc.'s 2013 income statement lists the following income and expenses: EBIT = $900,000, interest expense = $85,000, and net income = $570,000. What are the 2013 taxes reported on the income statement?

Select one:

a.

$330,000

b.

There is not enough information to calculate 2013 taxes.

c.

$245,000

d.

$815,000

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The correct answer is: $245,000

Question 4

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Income Statement You have been given the following information for Fina's Furniture Corp.:
Net sales = $25,500,000;
Cost of goods sold = $10,250,000;
Addition to retained earnings = $305,000;
Dividends paid to preferred and common stockholders = $500,000;
Interest expense = $2,000,000.
The firm's tax rate is 30 percent. What is the depreciation expense for Fina's Furniture Corp.?

Select one:

a.

$12,100,000

b.

$12,400,000

c.

$14,100,000

d.

$14,400,000

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The correct answer is: $12,100,000

Question 5

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Free Cash Flow Catering Corp. reported free cash flows for 2013 of $8 million and investment in operating capital of $2 million. Catering listed $1 million in depreciation expense and $2 million in taxes on its 2008 income statement. What was Catering's 2013 EBIT?

Select one:

a.

$10 million

b.

$7 million

c.

$11 million

d.

$13 million

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The correct answer is: $11 million

Question 1

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Which type of ratio measures a firm's ability to pay off short-term obligations without relying on inventory sales?

Select one:

a.

Cash

b.

Quick or acid test

c.

Internal-growth

d.

Current

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The correct answer is: Quick or acid test

Question 2

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Which of the following statements is correct?

Select one:

a.

A high average payment period and a low accounts payable turnover are a sign of good management.

b.

A low average payment period and a high accounts payable turnover are a sign of good management.

c.

A high average payment period and a high accounts payable turnover are a sign of good management.

d.

A low average payment period and a low accounts payable turnover are a sign of good management.

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The correct answer is: A high average payment period and a low accounts payable turnover are a sign of good management.

Question 3

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Assume inventory turnover ratio is equal to 10. What is the Days’ sales in inventory equal to?

Select one:

a.

36.5 days

b.

73 days

c.

7.3 days

d.

3.65 days

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The correct answer is: 36.5 days

Question 4

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The difference between ROE and ROA is that

Select one:

a.

ROE takes into account depreciation expense.

b.

ROA takes into account the impact of financial leverage.

c.

ROE takes into account the impact of financial leverage.

d.

ROA takes into account depreciation expense.

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The correct answer is: ROE takes into account the impact of financial leverage.

Question 5

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Which of the statements below is correct?

Select one:

a.

Higher debt ratio is better for a company unless the industry is going through a recession.

b.

Companies with lower debt ratios are more risky to shareholders.

c.

Having a higher debt ratio is neither good nor bad.

d.

Financial leverage rises with a lower debt ratio.

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The correct answer is: Having a higher debt ratio is neither good nor bad.

Question 6

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Assume that company X had accounts receivable turnover equal to 12 in 2014, and equal to 14 in 2015. Further assume that the relevant industry average for this ratio is 20. Based on this information we would most likely conclude that company X

Select one:

a.

Should be more careful with awarding credit to its customers, or should improve its collecting of accounts receivable.

b.

Should cut the cost of its materials in production in order to improve its profitability.

c.

Should increase its gross profit margin by raising the price of the product it sells.

d.

Should repay some of its debt in order to lower its interest expense.

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The correct answer is: Should be more careful with awarding credit to its customers, or should improve its collecting of accounts receivable.

Question 7

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Assume that companies A and B both have the same dollar value of total assets and both have return on assets equal to 16%. Further assume that company A has a return on equity also equal to 16%, while company B has a return on equity equal to 22%. Based on this information we would most likely conclude that

Select one:

a.

Company B is a better investment than company A.

b.

Company A is a better investment than company B.

c.

Company A has more debt than company B.

d.

Company B has more debt than company A.

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The correct answer is: Company B has more debt than company A.

Question 8

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Which ratio measures the number of dollars of operating earnings available to meet each dollar of interest obligations on the firm's debt?

Select one:

a.

Fixed charge coverage ratio

b.

Cash coverage ratio

c.

Times interest earned

d.

ROA

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The correct answer is: Times interest earned

Question 9

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Which ratio measures the number of dollars of sales produced per dollar of inventory?

Select one:

a.

Cash

b.

Inventory turnover

c.

Asset management

d.

Internal-growth

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The correct answer is: Inventory turnover

Question 10

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Assume a company’s total asset turnover is equal to 4.75. What is the correct interpretation of this ratio?

Select one:

a.

Each dollar of total assets generates $4.75 of sales.

b.

Total assets are kept on average for 47.5 years.

c.

Total assets are kept on average for 4.75 years.

d.

Total assets are kept on average for 4.75 days.

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The correct answer is: Each dollar of total assets generates $4.75 of sales.