FIN 3312 TXST EXAM 1 review

The Leo Garza Corporation has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

A. capital structure.
B. cash equivalents.
C. working capital.
D. net assets.
E. fixed accounts.

C. working capital.

Formula sheet

Balance Sheet Identity Total Assets = Total Liabilities + Stockholders' Equity

Net Working Capital (NWC) = Current Assets - Current Liabilities

Financial Cash Flow Identity CF from Assets = CF to Creditors + CF to Stockholders

Financial Cash Flow is also defined as OCF - Capital Spending - Additions to NWC

Operating Cash Flow (OCF) EBIT + Depreciation & Amortization - Taxes

Capital Spending (CapEx) (Ending net Fixed Assets - Beginning net Fixed Assets) + Depreciation

Additions to NWC Most Recent Year's NWC minus Previous Year's NWC

Each Year's NWC equals (Current Assets minus Current Liabilities)

Note: All calculations will be as per the book formulas so if you follow those the positive versus negative issue is as defined in the book. Keep in mind, for example, if the firm acquires more new assets then it sells, this means the firm "spent" money (used cash) for this component of its cash flow calculation.

Cash Flow to Creditors Interest Paid minus Net New Borrowing

Net New Borrowing (Ending Long-Term Debt) minus (Beginning Long-term Debt)

Cash Flow to Stockholders Dividends Paid minus Net New Equity

Net New Equity (Ending Common Stock) minus (Beginning Common Stock)

Remember the change in retained earnings is not part of calculating Net New Equity!

𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠× 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 /𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 PM TAT EM

Pm= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑆𝑎𝑙𝑒𝑠

TAT= 𝑆𝑎𝑙𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

EM = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 /𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

𝑅𝑂𝐴= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Capital Intensity Ratio = 1/(TAT) ROE = ROA x EM

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =(𝑇𝐴−𝑇𝐸)𝑇𝐴 𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =𝑇𝐷𝑇𝐸 𝐸𝑀 =𝑇𝐴𝑇𝐸 =1+ 𝑇𝐷 𝑇𝐸⁄

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠/𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

𝐷𝑎𝑦𝑠′𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = 365 𝑑𝑎𝑦𝑠𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

Sustainable Growth 𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑔 = 𝑅𝑂𝐸×𝑏1−(𝑅𝑂𝐸×𝑏) where b is the retention rate Internal Growth 𝐼𝑛𝑡𝑒𝑟𝑛𝑎𝑙 𝑔= 𝑅𝑂𝐴×𝑏1−(𝑅𝑂𝐴×𝑏) where b is the retention rate

Retention Rate is the proportion of net income not paid out as dividends = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑚𝑖𝑛𝑢𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

Maddison U. has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: What is the amount of the change in net working capital? Ending NWC minus Begiterm-6nning NWC.

Beginning balance Ending balance
Current Assets: $141,680. $138,509
Net fixed Assets. $687,810. $703,411
Current liabilities. $87,340. $91,516
Long-term Debt. $267,000. $248,000

A. A decrease of $7,347
B. An increase of $7,347
C. Net working capital did not change
D. An increase of $4,176
E. A decrease of $3,171

A. A decrease of $7,347

NWC = (End assets - end liab) - (Beg assets-end liab)

(138,509-91516)-(141,680-87340) = -7,347

NWC means a source of funds

Kyon BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500. What is the retention rate? Hint: You can figure out net income knowing PM = NI/Sales.....so NI = PMxSales.

A. 46.32%
B. 49.78%
C. 50.23%
D. 58.09%
E. 63.00%

E. 63.00%

1) NI = 0.039 X 311,800 =12,160.2

To find out how much is RETAINED : NI - DIV
12,160.2 - 4,500 = $7660.2

2) Retention Rate = NI minus the div / NI
7660.2/12,160.2 = 0.6299

Garza, Inc. has sales of $521,000, net income of $78,150, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on assets?

A. 42.12%
B. 32.40%
C. 38.28%
D. 32.11%
E. 41.56%

B. 32.40%

𝑅𝑂𝐴= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
OR
ROA= PM x TAT

1) So find PM -> PM = 78,150/521,000 = 0.15
2) ROA= PM x TAT ---> 0.15 * 2.16 = 0.324

WildLife Corp. has total assets of $693,926, sales of $936,800, a profit margin of 15.93%, and an equity multiplier of 1.5. What is the return on equity?
A. 6.67%
B. 15.93%
C. 32.26%
D. 42.21%
E. 44.09%

C. 32.26%

ROE = PM TAT EM

1) TAT = Sales / Total Assets
936,800/693,926 = 1.34

2) ROA = 0.1593 x 1.34 x 1.5 = 0.3225

If a firm has a 100 percent dividend payout ratio, then the internal growth rate of the firm is:

A. Zero percent
B. 100 percent.
C. equal to the ROA.
D. negative.
E. infinite.

A. Zero percent

Financial leverage:
A. increases as the net working capital increases.
B. is equal to the market value of a firm divided by the firm's book value.
C. is inversely related to the level of debt.
D. is the ratio of a firm's revenues to its fixed expenses.
E. Increases or magnifies the potential return to the shareholders.

E. Increases or magnifies the potential return to the shareholders.

8. Which one of the following statements related to the income statement is correct?
A. Net income is distributed either to dividends or retained earnings.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Depreciation has no effect on taxes.
E. Taxable income minus interest and depreciation equals earnings before interest and taxes.

A. Net income is distributed either to dividends or retained earnings.

Interest paid can be a cash item
taxable income doesnt have to be positve
Depreciation has a effect on taxes

Which of the following will decrease the sustainable rate of growth for a firm?
I. Decreasing the profit margin
II. Increasing the dividend payout ratio
III. Increasing the asset turnover
IV. Increasing financial leverage

A. I and II only
B. III and IV only
C. II and IV only
D. I, III, and IV only
E. I, II, III, and IV

A. I and II only

I. Decreasing the profit margin
II. Increasing the dividend payout ratio

Which of the following are determinants of a firm's sustainable rate of growth?
I. Amount of sales generated from each dollar invested in assets
II. Amount of debt per dollar of equity
III. Amount of new common stock the firm issues
IV. Percentage of net income distributed as dividends

A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. II and III only

C. I, II, and IV only

I. Amount of sales generated from each dollar invested in assets
II. Amount of debt per dollar of equity
IV. Percentage of net income distributed as dividends

The concept of marginal taxation is best exemplified by which one of the following?
A. Erika A. paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B. Kendall H. paid only $45,000 on total revenue of $570,000 last year.
C. Suarez Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.
D. Nerad Centre paid no taxes last year due to carry-forward losses. E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

C. Suarez Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?
A. Decrease in the total asset turnover
B. Decrease in the profit margin C. Increase in days' sales in receivables
D. Decrease in the capital intensity ratio
E. Decrease in the inventory turnover rate

D. Decrease in the capital intensity ratio

or increase TAT

Garbelotti Sales Corporation has total assets of $589,900 and total debt of $318,000. What is the equity multiplier? Hint: Total Assets = Total Debt + Total Equity
A. 0.46
B. 0.54
C. 1.21
D. 1.85
E. 2.17

E. 2.17

EM = Total Assets / Total Equity

1) to find total equity --> 589,900 - 318000 = 271,900

2) Now find EM --> 589,900 / 271,900 = 2.16

A Chambless, Inc. has adopted a policy whereby it will not seek ANY additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $12,480, total equity of $94,000, total assets of $156,000, and a 40 percent dividend payout ratio? Hint: ROA equals Net Income divided by Total Assets
A. 5.88 percent
B. 5.04 percent
C. 4.65 percent
D. 7.72 percent
E. 12.87 percent

B. 5.04 percent

𝑅𝑂𝐴= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
ROA keep percentage
1) find ROA
12,480 / 156,000 = 8%

2) Find b --> 1 -.40 = .6

3) ROA * b / 100 - (ROA x b)
8% x .6/100 - (8% x .6) = 5.04%

Assuming a firm is profitable (has positive net income), what is the only reason ROE ≠ ROA?
A. The ROE never equals the ROA
B. The firm is 100% equity financed
C. The firm uses financial leverage
D. The firm is growing assets
E. The firm is shrinking assets

C. The firm uses financial leverage

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?
A. An increase in net capital spending
B. A decrease in revenues
C. An increase in depreciation
D. An increase in the change in net working capital
E. An increase in cost of goods sold

C. An increase in depreciation

A negative cash flow to stockholders indicates a firm:
A. Must have had a negative cash flow from assets.
B. Must have had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. repurchased more shares than it sold.
E. received more from selling stock than it paid in dividends.

E. received more from selling stock than it paid in dividends.

Anjelica Industries has a total asset turnover rate of 1.4, an equity multiplier of 1.6, a profit margin of 5%, a retention ratio of .6, and total assets of $300,000. What is return on assets and return on equity?
A. 2.16%; 9.98%
B. 7.00%; 11.20%
C. 11.09%; 15.12%
D. 12.60%; 15.12%
E. 8.40%; 15.12%

B. 7.00%; 11.20%

ROA = pm * tat
ROE = pm x tat x em

The DuPont identity can be totally defined by which one of the following?
A. Return on debt, total asset turnover, and equity multiplier
B. Equity multiplier, total asset turnover and profit margin
C. Profit margin and return on equity
D. Total asset turnover, profit margin, and debt-inventory ratio
E. Equity multiplier, return on assets, and profit margin

B. Equity multiplier, total asset turnover and profit margin

I recently read a report that stated Curds Hadley, Inc. had an ROE of 12%.
A. This number must be compared to something to say whether it is bad or good
B. This firm is doing a relatively good job generating a return
C. This firm is doing a relatively bad job generating a return
D. This firm must use a great deal of debt financing
E. This tmn is doing a good job managing its assets

A. This number must be compared to something to say whether it is bad or good

To find TE on a balance sheet?

Common stock + Net fixed Assets

Which one of the following is not a correct statement?
A. Growth is positively related to profitability.
B. If a firm is 100% equity financed, its ROE=ROA.
C. Sustainable growth will increase if financial leverage is decreased. D. Internal growth will increase if retention increases.
E. Cash flow from assets is also referred to as free cash flow.

C. Sustainable growth will increase if financial leverage is decreased.

Which of the following is a working capital decision?
A. What accounts receivable policy to implement
B. How the firm should raise additional capital to fund its expansion C. What debt-to-equity ratio is best suited for the firm
D. Estimating the cost of debt financing
E. Evaluating a potential common stock repurchase

A. What accounts receivable policy to implement

ivrey-Davis, Inc. has net income of $26,530, total equity of $102,700, and total assets of $189,500. The dividend payout ratio is 0.30. What is the internal growth rate?
A. 4.38 percent
B. 10.86 percent
C. 13.93 percent
D. 25.71 percent
E. 18.00 percent

B. 10.86 percent

1) ROA = NI / Total Assets
26,530/189500 = .14 --> make into percentage 14%

2) find b --> 1-0.30 = .7

3) 14(.7)/100 - (14 * .7)

last year, a firm earned $29,000 in net income on sales of $195,000. For the same period, the company retained 22.50% of its income. What is the dividend payout ratio?
A. 22.50%
B. 77.50%
C. 14.87%
D. 3.35%
E. 4.44%

B. 77.50%

100% - 22.50% = 77.50%

Assume the following ROA PM TAT
Firm A 18% 9% 2
Firm B 24% 6% 4
A. Firm B is doing a better job efficiently managing its assets.
B. Firm B is doing a better job effectively controlling its expenses.
C. Firm A is doing a better job efficiently managing its assets.
D. Firm B must be using more debt to finance its asset base.
E. Firm A must be using more debt to finance its asset base.

A. Firm B is doing a better job efficiently managing its assets.

TAT is larger

Maddison U. has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: What is the amount of the change in net working capital? Ending NWC minus Begiterm-6nning NWC.

Beginning balance Ending balance
Current Assets: $141,680. $138,509
Net fixed Assets. $687,810. $703,411
Current liabilities. $87,340. $91,516
Long-term Debt. $267,000. $248,000
What is the firm's net capital spending? Hint: ending minus beginning. A. $8,960
B. $24,561
C. $5,789
D. $56,870
E. Cannot be determined without more information

B. $24,561

Capital Spending (CapEx) (Ending net Fixed Assets - Beginning net Fixed Assets) + Depreciation

(703,411-687,810) + 8960 = 24,561

The productivity of assets (the efficiency with which assets are employed by management in the generation of sales) is best measured by which financial ratios?
A. Payables turnover ratio and days payables outstanding
B. Profit margin, EPS and dividends per share (DPS)
C. Total assets turnover and fixed assets turnover
D. Debt ratio and times interest earned
E. Dividend payout ratio

C. Total assets turnover and fixed assets turnover

According to the Du Font methodology, if a firm's total assets turnover and debt ratios are reasonable compared to industry averages^ you conclude that low ROE and low ROA are most likely due to:
A. A good TIE ratio
B. Poor current and quick ratios
C. A low inventory turnover ratio
D. A poor profit margin
E. A low dividend payout ratio

D. A poor profit margin

Ayba Dance Supply has totli assets of $750,000 and total debt of $450,000. What is the firm's equity multiplier (EM)? Hint
Total Assets - Total Debt + Total Equity.
A. 1.67
B. 67
C. 2.50
E. Cannot be determined without more information

C. 2.50

Total Equity = Total assets - Total debt
750,000-450,000 = 300,000

2) EM = total assets / total Equity
750,000/300,000 =2.50

bobcat Finance Geeks has sales of $521,000, a profit margin of 15%, total assets of $241,204, and an equity multiplier of 1.30. What is the return on equity?
A. 42.12 percent
B. 32.40 percent
C. 38.28 percent
D. 32.11 percent
E. 41.56 percent

A. 42.12 percent
1) sales / total assets = TAT
521,000/241,204 = 2.16

2) ROE = PM x TAT x EM
0.15 x 2.16 x 1.30 = 42.12

Kyon BBQ has sales of $311,800, a profit margin of 3.9 percent, and dividends of $4,500, What is the payout rate? Hint:You can figure out net income knowing PM = NI/Sales.....so N1 = PMxSales. Remember that a firm either pays income as dividends, or retains it!
A. 46.32 percent
B. 37.00 percent
C. 50.23 percent
D. 58.09 percent
E. 63.00 percent

B. 37.00 percent

1) so find the ni
0.039 * 311,800 = 12,160.2

2) find PAYOUT RATE : div/ni
4,500/12,160.2 =.3700

Moontopia has net income of $149,200, sales of $936,800, a capital intensity ratio of .8, and an equity multiplier of .5. What is the return on assets'?
A. 6.67 percent
B. 32.26 percent
C. 29.87 percent
D. 19.91 percent
E. 44.09 percent

D. 19.91 percent
1) find TAT
1/.8 = 1.25

2) Find PM
NI/sales = .1592

3) FIND ROA PM * TAT
.1592 * 1.25 = .1991

Financial leverage:

directly related to the level of debt,

Which of the following will increas^the sustainable rate of growth for a firm?

Increasing financial leverage
Increasing the asset turnover
Decreasing the dividend payout ratio

Which one of the following best indicates a firm is utilizing its assets less efficiently than it has in the past?

decrease in the total asset turnover

Demings' Wake-Boarding has a total asset turnover of 1.25, an equity multiplier of 1.4, a profit margin of 5 percent, a retention ratio of 0.6, and total assets of$120,000. What is the sustainable growth rate?
A.5.54 percent
B. 7.53 percent
C. 3,63 percent
D. 8,75 percent
E. 7.91 percent

A.5.54 percent

1) first find ROE PM x TAT x EM
0.05 x 1.25 x 1.4 = .0875

3) FIND ROE
.0875 x 0.6/ 1 - (.0875 x 0.6) = .0554

Assuming a firm is profitable (has positive net income), what is the only reason ROE = ROA?
A_The ROE never equals the ROA
B. firm is 100% equity financed
C. The firm uses financial leverage
D, The firm is growing assetsE, The firm is shrinking assets

B. firm is 100% equity financed

Which one of the following is not a correct statement?
A. Growth is positively related to profitability.
B. If a firm is 100% equity financed, its ROE-ROA
C .Sustainable growth will increase if financial leverage is decreased.
D. Internal growth will increase if retention increases.
E. Cash flow from assets is also referred to as free cash flow.

C .Sustainable growth will increase if financial leverage is decreased.

As discussed in class, if a company uses long term debt to finance a portion of its assets and it is profitable, then:
A. its ROE-ROA
B. its EM = 1
C.its ROE<ROA
D. its ROE>ROA
E. itsPM<0

D. its ROE>ROA

If a firm has positive free cash flow (CFFA), then
A. it generated more operating cash flow then it spent on assets
B. It generated less operating cash flow then it spent on assets
C. On net, it received cash from investors
D. Must have had negative operating cash How
E. Must have shrunk its asset base

A. it generated more operating cash flow then it spent on assets

A firm has sales of $975,000 and an accounts receivables balance of$81,250. Based solely on this information, what is the firm's days sales in receivables?

1)𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠/𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
975,000/81,250 = 12

2) 𝐷𝑎𝑦𝑠′𝑆𝑎𝑙𝑒𝑠 𝑖𝑛 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = 365 𝑑𝑎𝑦𝑠 / 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
365/12

A negative cash flow to stockholders indicates a firm:

A. Must have had a negative cash flow from assets.
B. Must have had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. sold more shares than it repurchased, assuming no Dividends were paid
E. paid dividends & had no change in net new equity.

D. sold more shares than it repurchased, assuming no Dividends were paid