1. A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?
A) 32%
B) 20%
C) 16%
D) Not enough information to tell
Use the following to answer questions 2-5:
2. The Degree of Combined Leverage (D.C.L.) is
A)3.08x
B)5.45x
C)2.73x
D)6.83x
3. The Degree of Financial Leverage (DFL) is
A)3.50x
B)1.40x
C)1.95x
D)1.58x
4.The Degree of Operating Leverage (DOL) is
A)1.58x
B)1.95x
C)3.50x
D)1.40x
5. This firm's break-even point is
A)4,800 units
B)14,634 units
C)7,142 units
D)18,000 units
6. A firm has $400,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital?
A)$120,000
B)$320,000
C)$520,000
D)none of the above
Working Capital = $400,000 - $80,000
= $320,000
7. A firm has total current liabilities of $100,000. It has $900,000 in long-term debt. The stockholders equity is $1,500,000. What is the total debt to asset ratio?
A)45%
B)40%
C)55%
D)none of the above
Total Liabilities = $100,000 + $900,000
= $1,000,000
Total Assets = Liabilities + Equity
= $1,000,000 + $1,500,000
= $2,500,000
Debt-to-Assets ratio = $1,000,000 / $2,500,000
= 0.4
8. Joe Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:
A)$1,558
B)$658
C)$742
D)$885
Calculations are on the attached excel sheet
9. Given the following, what is free cash flow? Cash flow from operating activities $175,000; capital expenditures $35,000 and dividends $25,000
A)$115,000.
B)$235,000.
C)$185,000.
D)$165,000.
Free Cash Flow = Cash Flow from Operating Activities – Capital Expenditures – Dividends
= $175,000 – ($35,000 + $25,000)
= $115,000
10. If a firm has fixed costs of $30,000, a price of $4.00, and a breakeven point of 15,000 units, the variable cost per unit is:
A)$5.00
B)$2.00
C)$.50
D)$4.00
Breakeven Point = Fixed Costs ÷ Unit Contribution Margin
15,000 = $30,000 ÷ Unit Contribution Margin
Unit Contribution Margin = $30,000 ÷ 15,000
= $2
Variable Cost per Unit = Sales Price – Unit Contribution Margin
= $4 - $2
= $2
11. A firm has $1,000,000 in its common stock account and $2,500,000 in its paid-in capital account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold?
A)$35 per share
B)$25 per share
C)$10 per share
D)Not enough information to tell
Total Proceeds from issuing 100,shares = $1,000,000 + $2,500,000
= $3,500,000
Price per share = $3,500,000 ÷ 100,000
= $35
12. A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock?
A)$40 per share
B)$44 per share
C)$4 per share
D)$3.00 per share
Par value = $2,000,000 ÷ 500,000
= $4
13. A firm has forecasted sales of $3,000 in April, $4,500 in May and $6,500 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be balance in accounts receivable at the beginning of July?
A)$1,950
B)$6,500
C)$4,550
D)$5,100
Calculations are on the attached excel sheet
Balance in Accounts Receivable in July would equal 70% of June Sales = $6,500 × 70%
= $4,550
14. Assuming a tax rate of 40%, the after-tax cost of a $200,000 dividend payment is
A)$200,000
B)$70,000
C)$130,000
D)none of the above.
The After-tax cost of equity is the same as the before tax cost of equity.
15. Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:
A)$61, 450
B)$42,185
C)$46,149
D)$50,757
Calculations are on the attached excel sheet
16. You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be:
A)$2,340
B)$4,332
C)$797
D)$1,085
FV of the $2,000 annuity = $2,000 × (1.05)12
= $3,591.71
This amount represents the present value of the 4 year withdrawals
Therefore:
$3,591.71 = 3.31213C
C = $3,591.71 ÷ 3.31213
= $1,084.41
17. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?
A)1100 units
B)-0- units
C)500 units
D)400 units
Calculations are on the attached excel sheet
18. John Doeber borrowed $125,000 to buy a house. His loan cost was 11% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?
A)$121,367
B)$123,088
C)$107,617
D)None of the above
Calculations are on the attached excel sheet
19. A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage?
A)6.00x
B)2.33x
C)2.00x
D)3.00x
Fixed Charge Coverage =
Income before Fixed Charges and Taxes = $120,000 + $20,000 = $140,000
Fixed Charges = $20,000 + $40,000 = $60,000
Fixed Charge Coverage = $140,000 ÷ $60,000
= 2.33
20. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.
A)60%
B)20%
C)26%
D)not enough information
Debt to Assets Ratio =
Total Assets = $240,000 ÷ 0.75
= $320,000
Return on Assets = Net Income ÷ Total Assets
= $48,000 ÷ $320,000
= 0.15
ROE = 0.15 ÷ (1-0.75)
= 0.6
21. Assuming a tax rate of 35%, depreciation expenses of $400,000 will
A) reduce income by $140,000.
B) reduce taxes by $140,000.
C) reduce taxes by $400,000.
D) have no effect on income or taxes, since depreciation is not a cash expense.
Depreciation Tax Shield = Depreciation × Tax Rate
= $400,000 × 35%
= $140,000
22. A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a stock price of
A)$20.00
B)$75.00
C)$3.00
D)the market assigns a stock price independent of EPS and the P/E ratio.
Price = PE × EPS
= 15 × $5
= $75
23. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is
A)60%
B)15%
C)30%
D)not enough information
Debt to equity ratio = Total Debt÷ Total Equity
0.5 = $300,000 ÷ Total Equity
Total Equity = $300,000 ÷ 0.5
= $600,000
Return on Equity = Net Income ÷ Total Equity
= $90,000 ÷ $600,000
= 0.15
24. A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
A)$9,000
B)$8,000
C)$7,700
D)$8,100
Cost of Goods Sold (FIFO) = (300 × $11) + (400 × $12)
= $8,100
25. BHS Inc. determines that sales will rise from $300,000 to $500,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A)$50,000
B)$20,000
C)$100,000
D) BHS is in balance and no new funds are needed.
= $50,000