Quiz (Solutions)

INTRODUCTION TO FINANCE (FIN60104/BUS1204)

Financial Management Decisions

1. Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: A. capital structure management.B. asset allocation.C. risk management.D. capital budgetingE. working capital management.The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing.

Financial Management Decisions

2. Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's: A. capital structure.B. capital budget.C. asset allocation.D. working capital.E. risk structure.

Financial Management Decisions

3. Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's: A. capital structure.B. cash equivalents.C. working capital.D. net assets.E. fixed accounts.

Financial Statements4. The financial statement that summarizes a firm's accounting value as of a particular date is called the:

A. income statement.B. cash flow statement.C. liquidity position.D. balance sheet.E. periodic operating statement.

Income Statement: A financial statement that measures a company's financial performance over a specific accounting period. Balance sheet: A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.

Taxes

5. Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A. Average tax rateB. Variable tax rateC. Marginal tax rateD. Absolute tax rateE. Contingent tax rate

Working with Financial Statements: Figure 1

Assets Liabilities

Cash 193,000 Account Payable 296,000

Account Receivables

253,000 Notes payable 189,000

Inventory 538,000 Long-term debt 1,250,000

Fixed Assets 5,947,000

Working with Financial Statements

Use Figure 1 to calculate Questions 6 and 7:

6. Calculate current ratio and net working capital. (Answer: current ratio 984/485 = 2.03 times; NWC = $499,000).

7. Compute the owners’ equity? (Answer: $5,196,000)

Working with Financial Statements

8. The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

Answer: Net income = ($398,600 - $254,800 - $26,400 -

$1,600) (1 - 0.34) = $76,428

Working with Financial Statements9. Keyser Materials paid $7,500 in dividends and $28,311 in

interest over the past year while net working capital increased from $13,506 to $18,219. The company

purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $11,000 in long-term debt. What is the amount of the cash flow from assets?

Answer: Cash flow from assets = ($28,311 + $11,000) + ($7,500 - $25,000) = $21,811

Working with Financial Statements10. The Paper Moon has an operating cash flow of $187,000

and a cash flow to creditors of $61,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $48,900. What is the amount of the cash flow to stockholders for the last year?

CF from Assets = OCF – NCS – ΔNWCCF2C+CF2S= OCF – NCS – ΔNWCCF2S = OCF – NCS – ΔNWC – CF2C = 187000-48900-28000-61400CF2S = 48700

Answer: Cash flow to stockholders = ($187,000 - $28,000 - $48,900) - $61,400 = $48,700