FI3300: CORPORATE FINANCE

Problem Set 2 Chapters 1-5

1. 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 6 – 10.

Repairs and maintenance costs 3,000

Ending inventory 90,000

Advertising expenditures 9,000

Depreciation expense 25,000

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) 300,820

6. Paws’ COGS is $________. a. 295,000 b. 250,000 c. 220,000 d. 280,000

7. Paws’ gross profit is $_________. a. 215,000,000 b. 220,000 c. 570,000 d. 350,000

8. Paw’s operating profit is $_______. a. 215,000 b. 240,000 c. 250,000 d. 220,000

9. Panther’s net profit margin is ______%. a. 61.40 b. 28.96 c. 32.46 d. 37.72

10. 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 11-15.

Common Stock (Par US$1.5) 300,000

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 portion)

300,000

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) 300,000

11. Panther’s cash balance is $_______.

a. 120,000 b. 12,000 c. 100,000 d. 90,000

12. Panther’s net fixed assets are $_______. a. 220,000 b. 230,000 c. 250,000 d. 260,000

13. Panther’s dividend per share is $______.

a. 0.18 b. 0.37 c. 0.27 d. 0.10

14. Panther’s Earnings per share are $______. a. 0.51 b. 0.61

c. 0.77 d. 1.00

15. Panther’s spent $______ on fixed assets in the current year.

a. 55,000 b. 100,000 c. 65,000 d. 50,000

16. 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 17-20.

BALANCE SHEET Big Kahuna Burger Inc. For the 12-month Period ending December, 31

2007 2008 Cash 156.000 36.750 Net Account receivables 95.000 108.000 Inventories 100.000 106.250 Current Assets 351.000 251.000 Net Fixed assets 1.050.000 1.144.000 Long Term Investments in stocks of other companies 100.000 100.000

Total Assets 1.501.000 1.495.000 Short term Bank loans (Notes Payable) 12.000 13.000 Accounts payable 37.000 39.000 Accrued expenses 7.000 9.000 Current portion of Long-term debt 50.000 49.000 Total Current Liabilities 106.000 110.000 Long Term Debt (excluding current portion) 750.000 700.000 Common Stock (Par US$1.5) 300.000 310.000 Additional paid-in capital 65.000 75.000 Retained Earnings 280.000 300.000 Total Liabilites and Equity 1.501.000 1.495.000

INCOME STATEMENT Big Kahuna Burger Inc. For the 12-month Period ending December 2007 2008 Net Sales 260.000 226.000 COGS 100.000 25.000 Gross Profit 160.000 201.000 Operating Expenses (Excluding depreciation) 59.000 54.000

Depreciation 25.000 31.000 Operating Profit or EBIT 76.000 116.000 Interest Expense 20.000 25.000 Profit before taxes (EBT) 56.000 91.000 Taxes (35%) 19.600 31.850 Net Income 36.400 59.150

Accumulated depreciation in 2008 was 231,000

17. Cash flow from operations is $_____.

a. 43,900 b. 74,900 c. 75,900 d. 80,900

18. Cash flow from investing is $______.

a. -94,000 b. 94,000 c. -125,000 d. 125,000

19. Cash flow from financing is $______.

a. -30,000 b. 30,000 c. -69,150 d. 69,150

20. Total change in cash flow is $_______.

a. 119,250

b. -119,250 c. 22,750 d. -22,750

For questions 21-22 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 2009.

21. Retained earnings are $____.

a. 280,000 b. 300,000 c. 335,490 d. 370,980

22. Total outside funds needed will be $_____.

a. 253,910 b. 289,400 c. 299,000 d. 353,910

For questions 23-25 use the following information: Balance Sheet

Cash Notes Payable 50Inventory Accrued Expenses Net Fixed Assets 300 Long Term Debt 200

Total Assets Common Stock (US$1) Retained Earnings 100Total 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. 150

24. Common Stock is $______.

e. 100

f. 150 g. 200 h. 250

25. Inventory is $_____.

a. 100 b. 150 c. 200 d. 250

26. 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%