FIN331.007 Spring 2011 Exam #1Dr. RheeNAME__________________ ID#__________________1. Identify which financial statements are appropriate to use for each event listed below.Event 1: Can the firm meet all its short-term obligations?Event 2: How much of the firm’s earnings are put back into the company for reinvestment, and how much is paid out as dividend?a. Balance Sheet, Income Statement b. Balance Sheet, Statement of Cash Flowc. Balance Sheet, Statement of Stockholders’ Equity d. Income Statement, Statement of Cash Flowse. Income Statement, Statement of Stockholder’s EquityAnswer: c Event 1: can be checked using B/S, Event 2: can be checked using Statement of Stockholders’ Equity (or Statement of Retained Earnings)2. If the ROAs are the same, but the ROEs are different between the two firms, what is causing this disparity?a. Profits b. Revenues c. Debt d. Dividends e. TaxesAnswer: cROE = PM * TAT * m = ROA * m (m is equity multiplier; TA/TE). Equity multiplier shows leverage effect on return.3. I checked the Microsoft stock price at 9:12am this morning. It was $24.88. The last 12 month trailing (ttm) net earnings is $14.58 billion with 9billion shares. What is the 12 month trailing P/E ratio?a. 15.36 b. 13.31 c. 17.88 d. 12.21 e. 20.33 Answer: aP/E = Price per share / Earnings per share = $24.88 / ($14.58 billion / 9 billion) = 15.364. Which of the following statements is CORRECT?a. Dividends paid reduce the net income that is reported on a company’s income statement.b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.c. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year.d. Accounts receivable are reported as a current liability on the balance sheet.e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline fromthe previous year's balance.Answer: ea. Incorrect as net income (=net earnings) is already given when dividends are paid.b. Incorrect as current assets have both marketable securities and bank deposits (as cash). Therefore, the total current assets would not change.c. Long-term bonds and fixed assets are not current liabilities and current assets.d. A/R are current asset. 5. On 12/31/08, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/07, the company had reported $445,000 of retained earnings. No shares were repurchased during 2008. How much in dividends did the firm pay during 2008?a. $49,638 b. $52,250 c. $55,000 d. $57,750 e. $60,638Answer: c12/31/08 RE $525,00012/31/07 RE 445,000Change in RE $ 80,000Net income for 2008 $135,000Dividends = Net income − Change $ 55,0006. C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have?Sales $2,850.00Costs 1,850.00Depreciation 192.00EBIT $ 808.00Interest expense 285.00EBT $ 523.00Taxes (35%) 183.05Net income $ 339.95a.$427.78 b. $450.29 c.$473.99 d. $498.94 e. $525.20Answer: eSales $2,850.00Costs 1,850.00Depreciation 192.00EBIT $ 808.00Interest expense 285.00EBT $ 523.00Taxes: rate = 35% 183.05Net income $ 339.95EBIT $808.00Tax rate 35%EBIT(1 − T) = $525.207. Hartzell Inc. had the following data for 2007, in millions: after-tax operating income [EBIT (1-T)] = $400; and cumulative depreciation = $200. Information for 2008 is as follows: after-tax operating income [EBIT (1-T)] = $466; and cumulative depreciation = $210. How much free cash flow did the firm generate during 2008 if there is no change in capital expenditure and net working capital?a. $383 b. $425 c. $476 d. $514 e. $676Answer: bFCF = EBIT * (1 – Tax Rate) + Depreciation –Capital Expenditures – Changes in Net Working Capital = $466 + ($210 – 200) – 0 – 0 = $4258. Moose Industries faces the following tax schedule: Percentage on Taxable Income Tax Base of Bracket Excess above BaseUp to $50,000 $0 15%$50,000-$75,000 7,500 25$75,000-$100,000 13,750 34$100,000-$335,000 22,250 39Last year the company realized $500,000 in operating income (EBIT). Its annual interest expense is $200,000. What was the company’s net income for the year?a. $9,874 b. $63,025 c. $199,750 d. $560,000 e. $890,500Answer: cOperating income $500,000Interest expense $200,000Taxable income = Operating income – Interest expenseTaxable income = Operating income – Interest expenseTaxable income = $300,000Taxable Tax on Base % on Income of Bracket Excess above Base$0 $0 15%$50,000 7,500 25%$75,000 13,750 34%$100,000 22,250 39%Tax on base = $22,250Tax on excess base = ($30,000 – $100,000) * 0.39 = 78,000 Tax liability = $22,250 + $78,000 = $100,250Net income = Taxable income – TaxesNet income = $ 199,7509. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.b. Issue new common stock and use the proceeds to increase inventories.c. Speed up the collection of receivables and use the cash generated to increase inventories.d. Use some of its cash to purchase additional inventories.e. Issue new common stock and use the proceeds to acquire additional fixed assets.Answer: aa. You need to think about increasing either cash, marketable securities, or A/Rb ~ d. Increasing new inventories will decrease quick ratioe. Acquiring additional fixed assets will have no effect on quick ratio. That is, the company can’t increase its quick ratio10. Cook, Inc. has a current ratio of 1.8x on current liabilities of $200,000. The firm has $36,000 of inventories. Cook, Inc is considering an expansion which would require a rapid increase in its inventories. The firm will issue notes payable and use those funds to buy new inventories tomeet the inventory requirement for the expansion. Cook’s debt holders specifies that it must maintain a quick ratio at least 1.20x,
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