FIN 231 - Test 1 Study Guide

Round 89.79531 to the nearest hundredth

89.80

Compute ln(4*(5+1)/2) and round the answer to the nearest hundredth.

2.48

Compute 120*(1+4%)^3/5 and round to the nearest hundredth.

27.00

Compute ln(30)*2 and round to the nearest hundredth.

6.80

The consumer price index (CPI) was $299.2 in January 2023 and became $306.7 in December 2023. That means, inflation, i.e., the growth rate in CPI, has increased (306.7-299.2)/299.2 from January to December. How much has it increased? Choose the closest answer below.

2.51%

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Easton Markets is financed with 55 percent debt and 45 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

Mom's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership.

Given the tax rate table below. For a person who has a taxable income of $10,000, what is the tax rate this person will be charged for a $10,000 increase in the taxable income?

12%

Given the tax rate table below. For a person who has a taxable income of $180,000, what is the average tax rate this person will be charged? 

 

22%

The GAAP recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

The market value:

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

You are given the following information for Maple Leaf Bakery: sales = $82,400; costs = $60,200; addition to retained earnings = $5,600; dividends paid = $3,100; interest expense = $2,800; tax rate = 24 percent. Calculate the depreciation expense for the company.

$7,952.63

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity

Financial ratios are computed using only balance sheet information.

False

A common-size income statement expresses accounts as a percentage of ______.

Sales

Assuming the following ratios are constant, what is its ROE?
Total asset turnover 2.15
Profit margin 4.3%
Equity multiplier 1.62
Rentation ratio 40%

Net income $469

14.98%

If Levine, Inc., has an ROA of 8 percent, ROE of 13 percent, and a payout ratio of 40 percent, what is its internal growth rate? 

5%

Mom's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management.

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised.

Net working capital is defined as:

current assets minus current liabilities

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

Which one of the following is not a component of ROE in the Dupont identity?

Debt ratio

Common-size financial statements present all balance sheet account values as a percentage of:

total assets

Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal growth rate

Which one of these statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

If Levine, Inc., has an ROA of 8 percent, ROE of 13 percent, and a payout ratio of 40 percent, what is its internal growth rate? 

5%

Future value refers to the amount of money an investment is worth today.

False

If you invest for a single period at an interest rate of r, your money will grow to ______ in total for each dollar you invest.

1+r

The variable that you are solving for in a future value of a lump sum problem is:

Future value

The concept of the time value of money is based on the principle that a dollar today is worth ______ a dollar promised at some time in the future.

more than

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

Which one of these statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grow significantly.

Given the tax rate table below. For a person who has a taxable income of $70,000, what is the average tax rate this person will be charged? Round your answer to the nearest choice.

16%

A firm has a return on equity of 17.8 percent, a return on assets of 11.3 percent, and a 55 percent dividend payout ratio. What is the sustainable growth rate?

8.71 percent

If you earn an annual interest rate of 8.7 percent, how many years will it take to quadruple your money?

16.62 years

Tony’s Machinery has total equity of $815,280, long-term debt of $391,900, net working capital of $49,500, and total assets of $1,392,485. What is the debt-equity ratio?

.71

Securities and stocks are the same concept. 

False

During the year, Belyk Paving Company had sales of $2,495,000. Cost of goods sold, depreciation expense and other expenses were $1,325,000, $444,000 and $5,000, respectively. In addition, the company had an interest expense of $269,000 and a tax rate of 21 percent. The company paid out $394,000 in cash dividends. Assume that net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year. (Ignore any tax loss carryforward provision and assume interest expense is fully deductible.) Calculate the firm's net new borrowing during the year.

a. What's the operating cash flow?

b. What are the cash flow from assets and cash flow to stockholders?

c. What's the net new borrowing (derive it from cash flow to creditors)?

a. OCF = $1,070,080

b. CFFA = $1,070,080, CFS = $394,000

c. NNB = -$407,080

Bombyat Inc. has 100 million shares outstanding, a net income of $95 million, sales of $200 million, total equity of $2000 million, and total assets of $4500 million for fiscal year 2020. Its stock price on average is $50 per share. Aero Inc. has 8 million shares outstanding, a net income of $9 million, sales of $18 million, total equity of $50 million, and total assets of $450 million for fiscal year 2020. Its stock price on average is $5 per share.

a. Calculate profit margin, total asset turnover, equity multiplier and return on equity for the two companies, respectively. (16 pts)

b. Using Dupont analysis, explain what is the main driver of the difference in the ROE of the two companies. (4 pts)

a.

Profit margin = Net Income / Sales

Bombyat Inc. = 95 mil/200 mil = 47.5%

Aero Inc. = 9 mil/18 mil = 50%

 

Total asset turnover = Sales / Total assets

Bombyat Inc. = 200 mil/ 4500 mil = 0.0444

Aero Inc. = 18 mil/450 mil = 0.04

 

Equity Multiplier = Total assets/Total equity

Bombyat Inc. = 4500 mil/2000 mil = 2.25 times

Aero Inc. = 450 mil/50 mil = 9 times

 

Return on Equity = Net Income / Total Equity

Bombyat Inc. = 95 mil/2000 mil = 4.75%

Aero Inc. = 9 mil/50 mil = 18%

 

b.

The main driver of the differences in ROE of the two companies is the equity multiplier. Comparing both results from above, both profit margins and total asset turnovers are very similar, however, Aero Inc's 9x Equity Multiplier is much larger than Bombyat Inc's 2.5x. Lastly, Aero Inc's ROE is much higher at 18% than Bombyat's 4.75%. This shows that Aero Inc has more financial leverage than Bombyat Inc, which explains their significant difference. 

Your great grandfather deposited $100 for you in a bank in 1917. In 2017, you received $1,400,000.

a. At what interest rate were you paid? (10 pts)

b. If you decide to continue to leave it in the bank and the bank will pay you at the same interest rate, how much will you receive in 2025? (10 pts)

a. r = 10.01737546%

b. Future Value for 2025 = $3,004,818.74