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Assignment 2
Assignment 2
1. Which statement is most true?
a.
b.
c.
d. The annual report is created primarily for the use of lenders and creditors of the firm.
The income statement provides data that is often described as a snapshot in time.
The balance sheet provides data that is often described as a snapshot in time..
The balance sheet of the annual report provides data that is more accurately described
as dollar amounts over a unit of time.
e. You can calculate the free cash flow using strictly the data from the income
statement. 2. Below are the 2014 and 2015 balance sheets for ABC Incorporated:
Assets:
Cash
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets 2015
$ 200,000
800,000
2,000,000
$3,000,000
6,000,000
$9,000,000 2014
$ 170,000
700,000
1,400,000
$2,270,000
5,600,000
$7,870,000 Liabilities and equity:
Accounts payable
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total common equity
Total liabilities and equity $1,400,000
1,600,000
$3,000,000
2,400,000
3,000,000
600,000
$3,600,000
$9,000,000 $1,090,000
1,800,000
$2,890,000
2,400,000
2,000,000
580,000
$2,580,000
$7,870,000 ABC did not retire old debt during the period between these two balance sheets (fiscal
2015) nor did it pay dividends during the same period. Which statement is most true?
a.
b.
c.
d.
e. The firm increased its short-term bank borrowing during fiscal 2015.
The firm issued more long-term debt during fiscal 2015.
The firm repurchased some common stock during fiscal 2015.
The firm issued new common stock during fiscal 2015.
The firm had negative net income during fiscal 2015. Financial Management Steven Freund 1 Assignment 2
3. On its 12/31/15 balance sheet, Nashua Inc. showed $333 million of retained earnings, which
was also the amount shown in the 12/31/14 balance sheet. Which statement is most true?
a. Nashua Inc. must have had zero net income during 2015.
b. Nashua had negative net income during 2015 and it paid dividends.
c. Nashua could have had positive earnings during 2015, but it paid all of it out as
dividends.
d. The company must have paid out half of its 2015 earnings as dividends.
e. The company must have paid no dividends in 2015. 4. Which statement is most true?
a. Given the same sales, operating costs, interest rates, and tax rates, greater
depreciation will lead to a greater tax bill.
b. Operating income is not affected by interest paid or taxes paid.
c. The bottom line of an income statement is the firm’s cash flow.
d. Depreciation reduces EBIT, therefore it will reduce the firm’s cash flow.
e. Depreciation is not a cash expense, so it does not have any effect on net income. 5. Lowell Inc.’s total common equity is $5,000,000. The company has 530,000 shares of
stock outstanding, and they sell at a price of $27.60 per share. By how much do the
firm’s market and book values per share differ?
a.
b.
c.
d.
e. 6. ABC Inc.’s December 31, 2010 balance sheet showed total common equity of
$4,000,000 and 200,000 shares of stock outstanding. During 2011, the firm had
$450,000 of net income, and it paid out $150,000 as dividends. Suppose no new
common stock was issued or retired during 2011. The book value per share at the end of
fiscal 2011 should be:
a.
b.
c.
d.
e. 7. $18.72
$18.17
$19.99
$20.64
$21.76 $21.50
$22.00
$23.10
$24.26
$25.47 XYZ Company’s balance sheet indicates current assets of $4,575; it also has $1,000
accounts payable, $800 notes payable and $600 accrued wages and taxes. The net
operating working capital is:
a.
b.
c.
d.
e. $2,875
$2,975
$3,175
$3,335
$3,500 Financial Management Steven Freund 2 Assignment 2 8. Nashua Inc.’s income statement shows $20.4 million of sales, $12.6 million of operating
costs, and $3.0 million of depreciation. It also has $7.5 million of bonds at 7.0% interest
rate, and its total income tax rate is 40%. Its EBIT, in millions, would then be:
a.
b.
c.
d.
e. 9. Lowell Inc. had an operating income of $2.65 million, depreciation of $1.30 million, and
had a tax rate of 40%. The firm’s expenditures on fixed assets were $0.4 and its
expenditure to increase net operating working capital was $0.2 million. How much was
its free cash flow, in millions?
a.
b.
c.
d.
e. 10. $1.93
$2.03
$2.14
$2.29
$2.36 Weston Inc. had sales of $150,000 of sales, $75,000 of operating costs, and $10,000 of
depreciation. The company borrowed long term $17,000 at a 7.0% interest rate, and its
total tax rate was 35%. How much was the firm’s net income?
a.
b.
c.
d.
e. 11. $3.2
$3.6
$3.9
$4.4
$4.8 $35,167.33
$37,018.24
$38,966.57
$41,476.50
$43,068.31 Select the choice below that will make the current ratio go up:
a.
b.
c.
d. Decrease days’ sales outstanding (DSO) and use the money to buy more fixed assets.
Issue additional shares and use the cash to increase DSO.
Use cash to buy back some of the firm’s stock owned by shareholders.
Borrow using short-term debt and use the proceeds to repay debt that has a maturity
of more than one year.
e. Use cash to increase inventory. 12. Which statement is always true?
a.
b.
c.
d. Increasing debt will tend to increase the basic earning power ratio.
Decreasing debt will tend to increase ROE
Increasing debt will tend to increase the equity multiplier.
Increasing debt and using the proceeds to buy back some of the firm’s shares will
tend to increase the operating margin.
e. Increasing debt will tend to increase the ROA. Financial Management Steven Freund 3 Assignment 2
13. Select the choice below that will make the quick ratio go up:
a.
b.
c.
d.
e. 14. Firm XYZ will issue more shares and use the proceeds to lower its debt. Suppose that
this does not change operating income, interest rates, tax rates, or total assets. Which
statement is most true?
a.
b.
c.
d.
e. 15. Sell inventory and use the proceeds to increase the DSO.
Issue more shares and use the proceeds to increase inventories.
Reduce DSO and keep the proceeds in the cash account.
Use some cash to purchase additional inventories.
Issue more shares and use the proceeds to acquire additional fixed assets. The ROA will decrease.
The EBIT will increase.
Taxable income will decline.
The tax bill will increase.
Net income will decrease. ABC Corp.’s sales last year were $32,000, and its total assets were $17,000. What was
its total assets turnover ratio?
a.
b.
c.
d.
e. 16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and raise the
debt ratio to 0.40 from 0.0 without changing total assets. It plans to use the proceeds of
the debt issue to retire some equity using a share repurchase. How much cash should
Lowell borrow?
a.
b.
c.
d.
e. 17. 1.88
0.53
2.26
2.38
2.49 $228,000
$288,000
$328,000
$388,000
$492,000 Nashua Inc.’s debt ratio is .25. That is, for every $100 of total assets, it has borrowed
$25. What would be the value of its equity multiplier to use in a DuPont equation? Hint:
You might need to work out the equation for equity multiplier from the debt ratio
equation!
a.
b.
c.
d.
e. 0.25
1.00
1.25
1.33
4.00 Financial Management Steven Freund 4 Assignment 2 18. XYZ Corp.’s sales last year were $300,000, and its net income was $20,000. What was
its profit margin?
a.
b.
c.
d.
e. 19. 6.67%
7.66%
8.21%
8.63%
9.06% ABC Corp. is an all-equity firm with total assets of $400,000, with sales of $600,000 and
net income of $25,000. Management wants to lower costs to increase ROE to around
15%. They do not plan on changing sales or issuing debt. What profit margin would be
needed to achieve this higher ROE? Hint: DuPont Equation – What is equity multiplier
here?
a. 9.45%
b. 9.85%
c. 10.00%
d. 10.45%
e. 10.85% 20. Weston Industries had sales of $300,000, assets of $175,000, a profit margin of 5.2%, and
an equity multiplier of 1.2. The CFO believes that the company could reduce its assets
by $50,000 without affecting either sales or costs. Had it reduced its assets by this
amount, and had the debt/assets ratio, sales, and costs remained constant, how much
would the ROE have changed? Hint: First Calculate ROE for the present amount of
assets – Does the profit margin change after the reduction in assets?
a.
b.
c.
d.
e. 4.28%
4.56%
5.01%
5.52%
6.07% Financial Management Steven Freund 5

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