FI3300: CORPORATE FINANCE. Problem Set 2 Chapters 1-5

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1 FI3300: CORPORATE FINANCE Problem Set 2 Chapters What are the two things corporations can do with net income? a. buy bonds and stocks is the most common b. pay dividends or reinvest it in the company c. issue new stock in that amount and buy new computers d. improve the company s facilities and pay bills e. buy stock in another company and sell bonds 2. Which of the following items would have NO effect on the current ratio? a. increasing the average collection period b. paying down long-term debt with cash c. the sale of inventory to pay off accounts payable d. issuing new stock and placing the proceeds in the cash account e. purchase of inventory with cash 3. Why is profit maximization not the goal of financial management? a. profit maximization is the goal of financial management b. since profits are after taxes, management needs to lower profits c. seeking profit alone doesn t consider risk in obtaining profits d. profits are based on historical costs not market values e. financial managers are supposed to increase dividends 4. Which of the following is INCORRECT? a. an increase in an asset account is a use of funds b. an increase in total stockholders equity is a use of funds c. a decrease in liabilities is a use of funds d. an increase in total stockholders equity is a source of funds e. An increase in Accounts Payable is a source of funds. 5. Which of the following are the financing decision variables used when determining Outside Funds Needed (OFN)? a. common stock, notes payable, long term debt b. accounts receivable, cash, inventory c. land, owner s equity and accrued taxes d. accounts payable, accrued wages, and accrued expenses e. sales, ending inventory, wages payable, interest expense Use the following to prepare a multi-step income statement for Paws, Inc. and answer Repairs and maintenance costs 3,000 Ending inventory 90,000 Advertising expenditures 9,000 Depreciation expense 25,000

2 Beginning inventory 100,000 Interest expense 30,000 Taxes 19,950 Gross sales 600,000 Management salaries 40,000 Returns and allowances 30,000 Materials purchases 210,000 Lease payments 50,000 R&D expenditures 8,000 Accumulated depreciation(prior year) 300, Paws COGS is $. a. 295,000 b. 250,000 c. 220,000 d. 280, Paws gross profit is $. a. 215,000,000 b. 220,000 c. 570,000 d. 350, Paw s operating profit is $. a. 215,000 b. 240,000 c. 250,000 d. 220, Panther s net profit margin is %. a b c d Panther s accumulated depreciation for this year is $. a. 25,000 b. 300,820 c. 275,820 d. 325,820 Use the following to prepare a balance sheet for the Panther Company and answer Common Stock (Par US$1.5) 300,000

3 Accounts payable 140,000 Net Account receivables (2-3) 200,000 Retained Earnings 300,000 Current portion of Long-term debt 10,000 Accumulated depreciation 150,000 Cash??????? Notes Payable 50,000 Long Term Debt (excluding current 300,000 portion) Additional paid-in capital 150,000 Gross Fixed Assets 400,000 Inventories 700,000 Accrued expenses 20,000 Net Income 154,000 Retained Earnings (Prior year) 200,000 Depreciation (Current Year) 100,000 Net fixed assets (prior year) 300, Panther s cash balance is $. a. 120,000 b. 12,000 c. 100,000 d. 90, Panther s net fixed assets are $. a. 220,000 b. 230,000 c. 250,000 d. 260, Panther s dividend per share is $. a b c d Panther s Earnings per share are $. a b. 0.61

4 c d Panther s spent $ on fixed assets in the current year. a. 55,000 b. 100,000 c. 65,000 d. 50, Steeler s total liabilities are $. a. 220,000 b. 300,000 c. 520,000 d. 750,000 Use the following information of Big Kahuna Burger Inc. to answer questions BALANCE SHEET Big Kahuna Burger Inc. For the 12-month Period ending December, Cash Net Account receivables Inventories Current Assets Net Fixed assets Long Term Investments in stocks of other companies Total Assets Short term Bank loans (Notes Payable) Accounts payable Accrued expenses Current portion of Long-term debt Total Current Liabilities Long Term Debt (excluding current portion) Common Stock (Par US$1.5) Additional paid-in capital Retained Earnings Total Liabilites and Equity

5 INCOME STATEMENT Big Kahuna Burger Inc. For the 12-month Period ending December Net Sales COGS Gross Profit Operating Expenses (Excluding depreciation) Depreciation Operating Profit or EBIT Interest Expense Profit before taxes (EBT) Taxes (35%) Net Income Accumulated depreciation in 2008 was 231, Cash flow from operations is $. a. 43,900 b. 74,900 c. 75,900 d. 80, Cash flow from investing is $. a. -94,000 b. 94,000 c. -125,000 d. 125, Cash flow from financing is $. a. -30,000 b. 30,000 c. -69,150 d. 69, Total change in cash flow is $. a. 119,250

6 b. -119,250 c. 22,750 d. -22,750 For questions use the information in the Balance Sheets and the Income Statements of Big Kahuna Burger, Inc. Also, suppose that the Net Profit Margin in 2009 will remain the same as in 2008, Net Sales will increase 20% and the dividends that will be paid are projected to be 45% of Net Income in Retained earnings are $. a. 280,000 b. 300,000 c. 335,490 d. 370, Total outside funds needed will be $. a. 253,910 b. 289,400 c. 299,000 d. 353,910 For questions use the following information: Balance Sheet Cash Notes Payable 50 Inventory Accrued Expenses Net Fixed Assets 300 Long Term Debt 200 Total Assets Common Stock (US$1) Retained Earnings 100 Total Debt and Equity 600 Equity Ratio = 0.5, Current Ratio=3, Quick Ratio =1 23. Accrued Expenses are $. a. 25 b. 50 c. 100 d Common Stock is $. e. 100

7 f. 150 g. 200 h Inventory is $. a. 100 b. 150 c. 200 d Assume you are given the following relationships for the Tim s Inc.: Return on assets (ROA) 12% Return on equity (ROE) 30% Tim s debt ratio is: a. 40% b. 60% c. 4% d. 6% 27. Jameston Inc. has just issued 100,000 new shares of common stock and paid down the company s long-term debt. Assuming all else unchanged, which of the following is (or are true)? a. Return on Assets remains constant b. Debt Ratio decreases c. Return on Assets increases d. Debt ratio remains constant e. Statements a and b are correct f. Statements c and d are correct. 28. Hatori Corp. has sales of $50,000, total assets of $40,000, and a debt ratio of.40. If its return on equity is 15%, what is its profit margin? a. 7.2% b. 1.25% c. 20% d. 15% e. 72% 29. A fire destroyed a large percentage of the financial records of the Mickey&Mallory, Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 16%. The total debt ratio was 40% and total debt was $200,000. What is the return on assets? a. 9.6% b. 8.0% c. 6.4% d. 4.6%

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