fin 323 exam 1 ODU

The three parts of the Dupont equation are:

Profit margin, Total asset turnover, & Equity Multiplier.

Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?

ROE = ROA × (1 + Debt − Equity Ratio).

Davis Company has provided the following financial data:



Total Asset Turnover = .245

Net Income = $400,000

Equity Multiplier = 1.20

Net Sales = $1,300,000



What is the Return on Equity?

ROE = 9.1%


******Explanation
Given:

Total Asset Turnover = .245

Net Income = $400,000

Equity Multiplier = 1.20

Net Sales = $1,300,000



Profit Margin = Net Income/Net Sales

Profit Margin = $400,000/$1,300,000 = .31



ROE = Profit Margin × Total Asset Turnover × Equity Multiplier

ROE = .31 × .245 × 1.20 = .0911

The Statement of Cash Flows has all of the following categories, except:

Standard

****The Statement of Cash Flows has Operating, Financing, and Investment activities.

You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information:

Beginning Cash:

Ending Cash: $285

Net cash increase: $102



Calculate the Beginning Cash.

Beginning Cash: $183

***Ending Cash: $285 + Net cash increase: $102

You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information:

Beginning Cash: $220

Operating Activity: $497

Investment Activity $598

Financing Activity: −$212



Calculate the Net cash increase/decrease:

Net Increase in cash: $883

****Explanation
The Beginning cash amount is not part of the calculation.

Operating Activity: $497

Investment Activity$598

Financing Activity: − $212

497 + 598 - 212 = 883

Which one of the following is a working capital management decision?

Should the firm pay cash for a purchase or use the credit offered by the supplier?

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

Capital structure

Which one of the following questions is least likely to be addressed by financial managers?

How should a product be marketed?

The most recent financial statements for Bello Co. are shown here:


Income Statement Balance Sheet
Sales $20,000 Current assets $43,126 Debt $42,504
Costs
12,000

Fixed assets 30,178 Equity 30,800
Taxable income $8,000 Total
$73,304

Total
$73,304

Taxes (24%) 1,920
Net income
$6,080



Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 18 percent dividend payout ratio.


What is the sustainable growth rate?

19.31%

***Explanation

To calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE = NI / TE
ROE = $6,080 / $30,800
ROE = 0.1974, or 19.74%
The plowback ratio, b, is one minus the payout ratio, so:
b = 1 - 0.18
b = 0.82
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]
Sustainable growth rate = [0.1974(0.82)] / [1 - 0.1974(0.82)]
Sustainable growth rate = 0.1931, or 19.31%

Assume the following ratios are constant.



Total asset turnover 1.29
Profit margin 8.3%
Equity multiplier 1.2
Payout ratio 61%

What is the sustainable growth rate?

5.28%

**Explanation

We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate.

The ROE is:
ROE = (PM)(TAT)(EM)
ROE = (0.083)(1.29)(1.2)
ROE = 0.1285, or 12.85%

The plowback ratio is one minus the dividend payout ratio, so:
b = 1 - 0.61
b = 0.39

Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]
Sustainable growth rate = [0.1285(0.39)] / [1 - 0.1285(0.39)]
Sustainable growth rate = 0.0528, or 5.28%

The variables in a future value of a lump sum problem include all of the following, except:

Payments

*** Explanation
Since this is a future value of a lump sum, there are no payments to be considered

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value.

***Explanation
A decrease in the interest rate would mean that the money invested would earn less interest and therefore, be a smaller amount in the future.

What is the future value of $1,000 invested for 15 years at a rate of 5%?

$2,079

***Explanation
Financial calculator key strokes:



N = 15

I/YR = 5

PV = $1,000

PMT = $0

FV = ??? = $2,079

The variables in a future value of a lump sum problem include all of the following, except:

Payments

***Explanation
Since this is a future value of a lump sum, there are no payments to be considered.

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value.

What is the future value of $1,000 invested for 15 years at a rate of 5%?

$2,079

***Explanation
Financial calculator key strokes:



N = 15

I/YR = 5

PV = $1,000

PMT = $0

FV = ??? = $2,079

The variables in a present value of a lump sum problem include all of the following, except:

Payments

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?

Increase the present value.

What is the present value of $1,200 to be received in 18 years invested at a rate of 5%?

$499

***Explanation
Financial calculator key strokes:



N = 18

I/YR = 5

PMT = $0

FV = $1,200

PV= ??? = $499

The variables in a future value of a lump sum problem include all of the following, except:

Usage

A common error made when solving a future value of an annuity problem is:

Multiplying the annual deposit and the number of years before calculating the problem.

What is the future value of $400 invested each year for 15 years at a rate of 6%?

$9,310

****Explanation
Financial calculator key strokes:



N = 15

I/YR = 6

PV = $0

PMT = $400

FV = ??? = $9,310