My Finance Lab 1-2

1 MyFinanceLab 1-2 for chapter 1-2 1 There are three basic questions that are addressed by the study of finance. They are: (Select all that apply.) A How can the firm best manage its cash flows as they arise in its day-to-day operations (working capital management? B Which parts of the company should receive less capital (capital rationing) C How should the firm raise money to fund new investments (capital structure decisions) D What long-term investments should the firm undertake (capital budgeting decisions) 2 Even if you are not planning a career in finance, a working knowledge of finance can be useful in both your personal and professional life for the following reasons: (Select the best choice below.) A As an individual you will be faced with numerous financial decisions throughout your life. Knowledge of financial principles will help you make the right decisions. B Financial management is a key component of other academic disciplines such as management, marketing, production and operations management, and accounting. C Even if you do not pursue a career in finance, you may find yourself working closely with finance managers. D For those who plan to be entrepreneurs, managing company finances is crucial to the survival of the firm. E All of the above are correct. 3 Which of the following statements regarding a sole proprietorship are correct? (Select all that apply.) A Sources of funds for a sole proprietorship typically include personal savings, as well as raising funds from a bank or personal loans from friends and family. B Sole proprietorships are easy to set up with no paperwork required before the business can be opened. C One advantage of the sole proprietorship is that the survival of the firm does not depend upon just one person. D The sole proprietor is personally responsible for all debt of the sole proprietorship. 4 The typical business organization for large companies is the corporation. Advantages of the corporate form of business organization include: (Select all that apply.) A The life of the business is not tied to the status of the corporate owners. B The owners' liability is limited to the amount of their investment in the company. 2 C Corporations have a greater ease in raising large sums of money than other forms of business organization. D The corporation is owned by the board of directors who share in the profits and the liabilities of the company. 5 One attractive alternative to the corporation for a small business is the __________ because it combines the tax benefits of a partnership with the limited liability of a corporation. (Select the best choice below.) A limited partnership B sole proprietorship C limited liability company D general partnership 6 The true owners of the corporation are the A preferred stockholders. B holders of debt issues of the firm. C board of directors of the firm. D common stockholders. 7 There are four basic principles of finance. Which principle correctly describes the following statement: "A dollar today is worth more than a dollar received in the future. Conversely, a dollar received in the future is worth less than a dollar received today"? (Select the best choice below.) A Principle 1: Money has a time value. B Principle 2: There is a risk-return tradeoff. C Principle 3: Cash flows are the source of value. D Principle 4: Market prices reflect information. 8 Working capital management refers to A capital structure. B the management of cash flows. C investing in product development. D long term financing decisions. 9 Finance managers need to interact constantly with A marketing managers. B management information systems staff. C accounting staff. D all of the above. 10 The area of finance that deals with long term investment decisions is known as 3 A B C D financial strategy. capital structure. working capital management. capital budgeting. 11 Managers of corporations need to act in an ethical manner A because ethics violations will be punished by the law. B because a business must be trusted by investors, customers and the public if it is to succeed. C because business managers must answer to a higher authority. D because ethical behavior is its own justification. 12 Serious ethical violations by corporations such as Enron led to the passage of A the Insider Trading Act of 1988. B The Sarbanes-Oxley Act. code of ethics C The Dodd-Frank Act. D All of the above. _________________________________________ MyFinanceLab 2 financial calculation for chapter 3-4 1. (Working with the income statement) If the Marifield Steel Fabrication Company earned $500,000 in net income and paid a cash dividend of $300,000 to its stockholders, what are the firm's earnings per share if the firm has 100,000 shares of stock outstanding? The company's earnings per share are $5. (Round to the nearest cent.) Earnings per share = Net income / Shares outstanding 2. (Related to Checkpoint 3.2) (Working with the balance sheet) The Caraway Seed Company grows heirloom tomatoes and sells their seeds. The heirloom tomato plants are preferred by many growers for their superior flavor. At the end of the most recent year the firm had current assets of $51,300, net fixed assets of $251,300, current liabilities of $28,800, and long-term debt of $98,900. a. Calculate Caraway's stockholders' equity. 4 Equity = total assets - total liability Caraway's stockholders' equity is $ 174900 . (Round to the nearest dollar.) b. What is the firm's net working capital? (net) Working capital = current asset - current liability The firm's net working capital is $ 22500 . (Round to the nearest dollar.) c. If Caraway's current liabilities consist of $21,400 in accounts payable and $7,400 in short-term debt (notes payable), what is the firm's net working capital? (Select the best choice below.) A. The firm's net working capital will change by $7,400 , i.e., net working capital = $29,900. B. The firm's net working capital will not change, i.e., net working capital = $22,500. C. The firm's net working capital will change by $21,400 , i.e., net working capital = $43,900. D. The firm's net working capital will change by $21,400 + $7,400 , i.e., net working capital = $51,300. 3. (Related to Checkpoint 3.3) (Analyzing the cash flow Statement) Google, Inc. (GOOG), is one of the most successful Internet firms, and it experienced very rapid growth in revenues from 2011 through 2014. The cash flow statements for Google, Inc. spanning the period are found here: . Answer the following questions using the information found in these statements: a. Is Google generating positive cash flow from its operations? (Select the best choice below.) A. Google has generated positive cash flow from its operations during the years 2011, 2012, and 2014. B. Google has generated positive cash flow from its operations during the years 2012, 2013, and 2014. C. Google has generated positive cash flow from its operations during the years 2011, 2012, 2013, and 2014. D. Google has generated positive cash flow from its operations during the years 2011, 2013, and 2014. 5 b. How much did Google invest in new capital expenditures over the period? Total Capital expenditure is the total 4 years capital expenditure Capital expenditures = $10,963 million + $7,378 million + $3,280 million + $3,430 million = $25,051 million The amount that Google invested in new capital expenditures over the period is $ 25051 million. (Round to the nearest integer.) c. Describe Google's sources of financing in the financial markets over the period? (Select the best choice below.) Total 4 years if issuance of debt A. Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of 1550 million. B. Google's main source of financing in the financial markets over the period was the issuance of common stock for the -1748million C. Google's main source of financing in the financial markets over the period was the issuance of debt for the amount of -1748million D. Google's main source of financing in the financial markets over the period was the issuance of common stock for the 15million d. Based solely on the cash flow statements for 2011 through 2014, write a brief narrative that describes the major activities of Google's management team over the period. (Select the best choice below.) A. Google's management team has been investing heavily in capital expenditures and financing them with the issuance of debt and internally generated funds. B. Google's management team has been investing heavily in capital expenditures and financing them with the issuance of stocks and internally generated funds. C. Google's management team has been spending heavily in paying cash dividends and financing them with the issuance of stocks and internally generated funds. D. Google's management team has been investing heavily in working capital and financing them with the issuance of stocks and internally generated funds. 4. (Using common-size financial statements) The S&H Construction Company expects to have total sales next year totaling $15,200,000. In addition, the firm pays taxes at 35 6 percent and will owe $312,000 in interest expense. Based on last year's operations the firm's management predicts that its cost of goods sold will be 55 percent of sales and operating expenses will total 25 percent. What is your estimate of the firm's net income (after taxes) for the coming year? Complete the pro-forma income statement below: Pro-Forma Income Statement Sales Cost of goods sold Gross profit Operating expenses Net operating income Interest expense Earnings before taxes Taxes Net income (Round to the nearest dollar.) $ 15200,000 (8,360,000) $6840,000 (3,800,000) $3040,000 (312,000) 2728,000$ (954,800) 1773,200 5. (Liquidity Analysis) The King Carpet Company has $3,120,000 in cash and a total of $12,290,000 in current assets. The firm's current liabilities equal $6,760,000 such that the firm's current ratio equals 1.8. The company's managers want to reduce the firm's cash holdings down to $1,030,000 by paying $597,000 in cash to expand the firm's truck fleet and using $1,493,000 in cash to retire a short-term note. If they carry this plan through, what will happen to the firm's current ratio? Current ratio = ( old assets - decreasing in cash ) / (old liability - decrease in short term) The new current ratio is 1.9 . (Round to one decimal place.) The liabilities and owners' equity for Campbell Industries is found here: Accounts payable $ 460 000 Notes payable $246,000 Current liabilities $706,000 Long-term debt $1,191,000 Common equity $4,728,000 Total liabilities and equity $6,625,000 a. What percentage of the firm's assets does the firm finance using debt (liabilities)? 7 Debt ratio = total liability / total assets The fraction of the firm's assets that the firm finances using debt is 28.6 %. b. If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? Debt ratio = total liability + new long term debt / total assets + warehouse cost The new debt ratio will be 38.8 %. (Round to one decimal place.) 7. (Capital structure analysis) The Karson Transport Company currently has net operating income of $498,000 and pays interest expense of $190,000. The company plans to borrow $1.14 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $399,000 a year. a. What is Karson's time interest earned ratio before the loan is taken out and the investment is made? Time interest earned = operating income / interest expense The times interest earned ratio is 2.62 times. (Round to two decimal places.) b. What effect will the loan and the investment have on the firm's times Time interest earned = new operating income / interest expense (new) interest earned ratio? The new times interest earned ratio is 2.95 times. 8. (Related to Checkpoint 4.3) (Analyzing Profitability) In 2016, the Allen Corporation had sales of $65 million, total assets of $47 million, and total liabilities of $16 million. The interest rate on the company's debt is 5.7 percent, and its tax rate is 35 percent. The operating profit margin is 11 percent. a. Compute the firm's 2016 net operating income and net income. Gross Profit margin ratio = profit / sales or revenue Net income = operating income - interest expense -tax expense The firm's 2016 net operating income is $ 7.15 million. (Round to two decimal places.) The firm's 2016 net income is $ 4.05 million. (Round to two decimal places.) b. Calculate the firm's operating return on assets and return on equity. 8 Return on assets = operating income / total assets Return on equity = net income / equity The operating return on assets is 15.21 %. (Round to two decimal places.) The return on equity is 13.06 % 9. (Related to Checkpoint 4.3) (Profitability analysis) Last year the P. M. Postem Corporation had sales of $427,000 , with a cost of goods sold of $113,000. The firm's operating expenses were $128,000 , and its increase in retained earnings was $82,020. There are currently 24,000 shares of common stock outstanding, the firm pays a $1.62 dividend per share, and the firm has no interest-bearing debt. a. Assuming the firm's earnings are taxed at 35 percent, construct the firm's income statement. Revenues $ 427,000 Cost of Goods Sold Gross Profit Operating Expenses Net Operating Income Interest Expense Earnings before Taxes Income Taxes Net Income (113,000) $ 314,000 (128,000) $ 186,000 0 $ 186,000 (65,100) $ 120,900 b. Compute the firm's operating profit margin. Gross Profit margin ratio = profit / sales or revenue The operating profit margin is 43.6 %. (Round to one decimal place.) 10. (DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of 75 percent. What is the firm's equity multiplier? How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. The equity multiplier is given by: 1 Equity Multiplier =_________________ 9 The equity multiplier is 4 . (Round to two decimal places.) How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. (Select the best choice below.) A. If the company decreases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier B. If the company increases its debt financing it will increase its debt ratio, therefore it will decrease its equity multiplier C. If the company increases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier. D. If the company increases its debt financing it will decrease its debt ratio, therefore it will decrease its equity multiplier 11. (DuPont analysis) Triangular Chemicals has total assets of $106 million, a return on equity of 45 percent, a net profit margin of 4.9 percent, and an equity multiplier of 2.27. How much are the firm's sales? Sales = (return on equity * assets) / (net profit margin * equity multiplier) The company's total sales are $ 428.8 million. 12. (Market value analysis) The balance sheet for Larry Underwood Motors shows a book value of stockholders' equity (book value per share total shares outstanding) of $1,356,000. Furthermore, the firm's income statement for the year just ended has a net income of $569,000, which is $0.256 per share of common stock outstanding. The price-earnings ratio for firms similar to Underwood Motors is 20.36. a.What price would you expect Underwood Motors shares to sell for? Price earnings ratio = market price per share / earning per share The market price per share is $ 5.21 . (Round to the nearest cent.) b. What is the book value per share for Underwood's shares? Earning per share = net income / outstanding share The book value per share is $ 0.61 . (Round to the nearest cent.) 10 13. Calculating financial ratios) The balance sheet and income statement for the J. P. Robard Mfg. Company are as follows: Calculate the following ratios: Current ratio = current assets / current liability The company's current ratio is 1.78 . (Round to two decimal places.) Time interest earned = operating income / interest expense The company's times interest earned is 5.07 times. (Round to two decimal places.) Inventory turnover = COGS / inventory The company's inventory turnover is 3.57 times. (Round to two decimal places.) Total assets turnover = sales / total assets The company's total asset turnover is 1.03 . (Round to two decimal places.) Operating profit margin = net operating income/ sale or revenue The company's operating profit margin is 22.9 %. (Round to one decimal place.) Operating return on assets = net operating income / total assets The company's operating return on assets is 23.5 %. (Round to one decimal place.) The company's debt ratio is 51.2 %. (Round to one decimal place.) Debt ratio = total liability or (assets- equity) / total assets The company's average collection period is 87.1 days. (Round to one decimal place.) Average collection period = AR / (annual sales /365 days) The company's fixed asset turnover is 1.08 . (Round to two decimal places. F Return on equity = net income / equity = / The company's return on equity is 25.1 %. (Round to one decimal place.)