Missouri Southern State University ECON 350 Financial Management Exam Chapters 1 Multiple Choice 1)Under which of the following legal forms of organization, is ownership readily transferable? limited partnerships partnerships sole proprietorships corporations Agency costs include all of the following EXCEPT cost of goods sold

Question

Missouri Southern State University

ECON 350

Financial Management Exam

Chapters 1

Multiple Choice

1)Under which of the following legal forms of organization, is ownership readily transferable?

1. limited partnerships
2. partnerships
3. sole proprietorships
4. corporations

Agency costs include all of the following EXCEPT
1. cost of goods sold.
2. monitoring expenditures.
3. bonding and structuring expenses.
4. opportunity costs.

By definition, the money market involves the buying and selling of
1. stocks and bonds.
2. flows of funds.
3. funds that mature in more than one year.
4. short-term funds.

The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is
1. 46 percent.
2. 15 percent.
3. 34 percent.
4. 23 percent.

In a corporation, the members of the board of directors are elected by the
1. creditors.
2. employees.
3. chief executive officer.
4. stockholders.

The financial manager is interested in the cash inflows and outflows of the firm, rather than the accounting data, in order to ensure

1. the ability to acquire new assets.
2. the ability to pay dividends.
3. solvency.
4. profitability.

The primary goal of the financial manager is
1. minimizing risk.
2. maximizing profit.
3. minimizing return.
4. maximizing wealth.

Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to
1. avoid double taxation on dividends.
2. encourage corporations to invest in each other.
3. increase tax revenue.
4. lower the cost of equity financing for corporations.

Operating profits are defined as
1. sales revenue minus cost of goods sold.
2. gross profits minus operating expenses.
3. sales revenue minus depreciation expense.
4. earnings before depreciation and taxes.

Candy Corporation has pretax profits of $1.2 million, an average tax rate of 34 percent, and it pays preferred dividends of $50,000. There are 100,000 shares outstanding and no interest expenses. What is Candy Corporation's earnings per share?

A) $7.59

B) $7.42

C) $3.91

D) $4.52

To analyze the firm's financial performance, the following types of ratio analyses EXCEPT may be used.

cross-section analysis
marginal analysis
time-series analysis
combined analysis

ratios are a measure of the speed with which various accounts are converted into sales or cash.

Profitability
Liquidity
Activity
Debt

Balance Sheet Cole Eagan Enterprises

December 31, 2002

Cash	$4,500	Accounts Payable	$10,000
Accounts Receivable		Notes Payable
Inventories		Accruals	1,000
Total Current Assets		Total Current Liab.
Net Fixed Assets		Long-Term Debt
Total Assets		Stockholders' Equity
		Total Liab. & S.E.

Information (2002 values)

1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.

Total liabilities and stockholders’ equity for CEE in 2002 were . (See Figure 2.1.) A) $45,895

B) $97,345

C) $58,603

D) $124,300

A firm with an operating profit margin which meets industry standard and a gross profit margin which is below industry standard must have excessive

principal payments.
general and administrative expenses.
cost of goods sold.
dividend payments.

An increase in financial leverage will result in in the return on equity.

an increase
an undetermined change
a decrease
no change

Dana Dairy Products Key Ratio

	Industry	Actual	Actual
	Average	2001	2002
Current Ratio	1.3	1.0
Quick Ratio	0.8	0.75
Average collection Period	23 days	30 days
Inventory Turnover	21.7	19
Debt Ratio	64.7%	50%
Times Interest Earned	4.8	5.5
Gross Profit Margin	13.6%	12.0%
Net Profit Margin	1.0%	0.5%
Return on total assets	2.9%	2.0%
Return on Equity	8.2%	4.0%

Income Statement Dana Dairy Products

For the Year Ended December 31, 2002

Sales Revenue		$100,000
Less: Cost of Goods Sold		87,000
Gross Profits		$ 13,000
Less: Operating Expenses		11,000
Operating Profits		$ 2,000
Less: Interest Expense		500
Net Profits Before Taxes		$ 1,500
Less: Taxes (40%)		600
Net Profits After Taxes		$ 900
ASSETS	Balance Sheet Dana Dairy Products December 31, 2002
Cash		$ 1,000
Accounts Receivable		8,900
Inventories		4,350
Total Current Assets		$14,250
Gross Fixed Assets		$35,000
Less: Accumulated Depreciation		13,250
Net Fixed Assets		21,750
Total Assets		$36,000
Liabilities & Stockholders' Equity
Accounts Payable		$ 9,000
Accruals		6,675

Total Current Liabilities	$15,675
Long-term Debts	4,125
Total Liabilities	$19,800
Common Stock	1,000
Retained Earnings	15,200
Total Stockholders' Equity	$16,200
Total Liab. & S.E.	$36,000

The debt ratio for Dana Dairy Products in 2002 is (See Figure 2.2.)

55 percent.
44 percent.
11 percent.
50 percent.

Given the financial manager's preference for faster receipt of cash flows,

the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.
a longer depreciable life is preferred to a shorter one.
the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
a shorter depreciable life is preferred to a longer one.

All of the following are sources of cash EXCEPT

a decrease in accounts receivable.
dividends.
net profits after taxes.
an increase in accruals.

For the year ended December 31, 2003, a corporation had cash flow from operating activities of $30,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The Statement of Cash Flows would show a

net decrease of $5,000 in cash and marketable securities.
net increase of $25,000 in cash and marketable securities.
net decrease of $15,000 in cash and marketable securities.
net increase of $5,000 in cash and marketable securities.

Cash disbursements may include all of the following EXCEPT

rent payments.
tax payments.
fixed asset outlays.
depreciation expense.

The method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while others are calculated. In this method, the firm's external financing is used as a balancing, or plug, figure.

accrual
percent-of-sales
judgmental
cash

Under MACRS, an asset which originally cost $50,000 is being depreciated using a 5-year normal recovery period. The depreciation expense in year 5 is .

A) $6,000

B) $10,000

C) $16,000

D) $2,500

FIGURE 3.1

RUFF SANDPAPER CO.

Balance Sheets

For the Years Ended 2002 and 2003

			2003		2002
Assets	Cash		800		600
	Marketable securities		200		200
	Accounts receivable		1,200		1,000
	Inventories		2,000		1,800
	Gross fixed assets		3,000		2,800
	Less Accumulated Depreciation		1,000		800
	Net fixed assets		2,000		2,000
	Total assets		6,200 =====		5,600 =====
Liabilities Accounts payable			200		100
Notes payable			800		900
Accruals			100		100
Long-term debt			2,000		1,500
Stockholders' equity
Common stock at par		500		500
Paid-in capital in excess of par		2,000		2,000
Retained earnings		600		500
Total liabilities and equity		6,200 =====		5,600 =====
Net profits after taxes for 2003: $150.00
23) Common stock dividends paid in 2003 amounted to A) $600 B) $50 C) $150 D) $100		.		(See Figure 3.1.)

A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January

A) are $1,900.

B) are $2,100.

are $700.
cannot be determined with the information provided.

FIGURE 3.4

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Hennesaw Lumber, Inc.

Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at

$105,000 and the firm plans to pay cash dividends of $150,000 during 2004. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2003 is shown below.

Income Statement Hennesaw Lumber, Inc.

For the Year Ended December 31, 2003

Sales Revenue	$4,200,000
Less: Cost of goods sold	3,570,000
Gross profits	$ 630,000
Less: Operating expenses	210,000
Operating profits	$ 420,000
Less: Interest expense	105,000
Net profits before taxes	$ 315,000
Less: Taxes (40%)	126,000
Net profits after taxes	$ 189,000
Less: Cash dividends	120,000
To: Retained earnings	$ 69,000

The pro forma cost of goods sold for 2004 is . (See Figure 3.4.) A) $3,825,000

B) $4,000,000

C) $3,500,000

D) $3,750,000

SHORT ANSWER

Given the following balance sheet, income statement, historical ratios and industry averages, calculate the Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the most recent year. Analyze its overall financial situation from both a cross-sectional and time-series viewpoint.

Income Statement

Pulp, Paper and Paperboard, Inc.

For the Year Ended December 31, 2008

Sales Revenue	$2,080,976
Less: Cost of Goods Sold	1,701,000
Gross Profits	$ 379,976
Less: Operating Expenses	273,846
Operating Profits	$ 106,130
Less: Interest Expense	19,296
Net Profits Before Taxes	$ 86,834
Less: Taxes (40%)	34,810
Net Profits After Taxes	$ 52,024

Balance Sheet

Pulp, Paper and Paperboard, Inc.

December 31, 2008

ASSETS

Cash	$ 95,000
Accounts receivable	237,000
Inventories	243,000
Total current assets	$ 575,000
Gross fixed assets	500,000
Less: Accumulated depreciation	75,000
Net fixed assets	$ 425,000
Total assets	$1,000,000

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable	$ 89,000
Notes payable	169,000
Accruals	87,000
Total current liabilities	$ 345,000
Long-term debts	188,000
Total liabilities	$ 533,000
Stockholders' equity
Common stock	255,000
Retained earnings	212,000
Total stockholders' equity	$ 467,000
Total liabilities and stockholders' equity	$1,000,000

Historical and Industry Average Ratios Pulp, Paper and Paperboard, Inc.

Industry average

Ratio	2006	2007	2008	2008
Current Ratio	1.6	1.7		1.6
Quick Ratio	0.9	1.0		0.9
Inventory Turnover	8.1	9.3		8.4
Total Asset Turnover	2.3	2.2		2.2
Debt Ratio	60%	56%		58%
Return on total assets	4.1%	3.5%		3.08%
Return on Equity	10.3%	7.9%		7.3%

Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following sales and cash disbursement estimates for the period August through December of the current year.

Month	Sales	Cash disbursements
August	$400	$300
September	500	500

October	500	700
November	600	400
December	700	500

Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance for October is $25. Prepare a cash budget for the month of October only, noting any needed financing or excess cash available.

Magna Fax, Inc.

Income Statement For the Year Ended December 31, 2008

Sales revenue		$150,000
Cost of goods sold		$117,500
Gross Profits		32,500
Selling expense	4,500
General and administrative expense	4,000
Depreciation expense	4,000
Operating profits		$ 20,000
Interest expense		2,500
Net profit before taxes		$ 17,500
Taxes (40%)		7,000
Net profit after taxes		$ 10,500

Magna Fax, Inc.

Balance Sheet For the Years Ended December 31, 2007 and 2008

Assets	2008	2007
Cash	$24,000	$21,000
Accounts receivable	45,000	39,000
Inventory	30,000	27,000
Gross fixed assets	$42,000	$40,000
Acc. depreciation	22,000	18,000
Net fixed assets	20,000	22,000
Total assets	$119,000	$109,000
Liabilities and Equity Accounts payable	$25,000	$30,000
Notes payable	50,000	40,000
Accruals	1,000	2,000
Long-term debts	10,000	8,000
Common stock at par	1,000	1,000
Paid-in capital in excess of par	4,000	4,000
Retained earnings	28,000	24,000
Total liabilities and equity	$119,000	$109,000

Prepare the cash flow from operating activities section of the statement of cash flows for the year ended December 31, 2008 for Magna Fax, Inc.

Income Statement Huddleston Manufacturing Company For the Year Ended December 31, 2008

Sales	$2,800,000
Less: Cost of goods sold	1,820,000
Gross profits	$ 980,000
Less: Operating expenses	240,000
Operating Profits	$ 740,000
Less: Interest expense	70,000
Net profits before taxes	$ 670,000
Less: Taxes (40%)	268,000
Net profits after taxes	$ 402,000
Less: Cash Dividends	132,000
To: Retained earnings	$ 270,000

Huddleston Manufacturing estimates its sales in 2009 will be $3 million. Interest expense is expected to remain unchanged at $70,000, and the firm plans to pay cash dividends of $140,000 during 2009. Cost of goods sold includes $200,000 in fixed costs, and operating expenses include $50,000 in fixed costs. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2009, based on the 2008 income statement shown above.