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39 terms

*In order to estimate production requirements, we...

add beginning inventory to projected sales in units and subract desired ending inventory.

*Gross profit is equal to...

sales minus (selling and administrative expenses).

*If sales volume exceeds the break-even point, the firm will experience...

an operating profit.

*The Bubba Corp. had earning before taxes of $400,000 and sales of $2,000,000. If it is in the 40% tax bracket its after-tax profit margin is _______, which means _________.

12%; the company earned $0.12 for every $1 of SALES!!!!!!!!!********

*In developing the pro forma income statement we follow four important steps in THIS particular order:

1. establish a sales projection

2. determine a production schedule

3. compute other expenses

4. determine profit by completing the actual pro forma statement

2. determine a production schedule

3. compute other expenses

4. determine profit by completing the actual pro forma statement

*Compute the net increase or decrease in cash flows if Star Corporation had $250,000 in net income, $30,000 in depreciation expense, a decrease of $20,000 in A/R and an increase in bonds payable of $50,000

$350,000 (Net income + depreciation + AR + Bonds Payable)

*Sales (100,000 Units) - $1,000,000

Variable costs + 300,000

Contribution Margin = 700,000

Fixed manufacturing costs - 200,000

Operating Income = 500,000

Interest - 75,000

Earnings Before Taxes = 425,000

Taxes (30%) - 127,500

Net Income = 297,500

The Degree of Operating Leverage is _____, which means ______.

Variable costs + 300,000

Contribution Margin = 700,000

Fixed manufacturing costs - 200,000

Operating Income = 500,000

Interest - 75,000

Earnings Before Taxes = 425,000

Taxes (30%) - 127,500

Net Income = 297,500

The Degree of Operating Leverage is _____, which means ______.

1.40x; a 1% change in VOLUME (or sales) will produce a 1.4% change in OPERATING income.

*Which of the following is an inflow of cash?

a. funds spent in normal business operations

b. purchase of a new factory

c. sale of the firm's bonds

d. retirement of the firm's bonds

a. funds spent in normal business operations

b. purchase of a new factory

c. sale of the firm's bonds

d. retirement of the firm's bonds

c. sale of the firm's bonds

*The concept of operating leverage involves the use of ________ to magnify returns at high levels of operation.

fixed costs

*Assuming a tax rate of 40%, depreciation expenses of $500,000 will...

a. reduce income by $200,000

b. reduce taxes by $200,000

c. reduce taxes by $500,000

d have no effect on income or taxes since depreciation is not a cash expense

a. reduce income by $200,000

b. reduce taxes by $200,000

c. reduce taxes by $500,000

d have no effect on income or taxes since depreciation is not a cash expense

b. reduce TAXES by $200,000

*At the break-even point, a firm's profits are...

equal to zero.

*In examining the liquidity ratios, the primary emphasis is the firm's...

ability to pay short-term obligations on time.

*Ratio analysis can be useful for:

a. historical trend analysis within a firm

b. comparison of ratios within a single industry

c. measuring the effects of financing

d. all of these are true

a. historical trend analysis within a firm

b. comparison of ratios within a single industry

c. measuring the effects of financing

d. all of these are true

all of these are true.

*A quick ratio that is much smaller than the current ratio reflects

a large portion of current assets is in inventory.

*What is the primary goal of financial management?

maximizing shareholder wealth

*The need for an increase or decrease in short-term borrowing can be predicted by

a cash budget

*Allen Lumber Co had earnings after taxes of $750,000 in the year 2009 with 300,000 shares outstanding on Dec 31, 2009. On January 1, 2010, the firm issued 50,000 new shares. Because of the proceeds from these new shares and other operating improvements, 2010 earnings after taxes were 25% higher than in 2009. Earnings per share for the year 2010 were...

*******$2.68********

*How do you calculate Operating Profit?

Sales - COGS = Gross Profit

Gross Profit - S & A Exp - Depreciation = EBIT (or Operating Profit)

Gross Profit - S & A Exp - Depreciation = EBIT (or Operating Profit)

* 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis.

Over $1,100

*A dollar today is worth more than a dollar to be received in the future because

the dollar can be invested today and earn interest

*A firm's cost of financing, in an overall sense, is equal to its...

weighted average cost of capital.

required yield that investors seek for various kinds of securities.

required rate of return that investors seek for various kinds of securities.

*******ALL OF THE ABOVE!!!!!*******

required yield that investors seek for various kinds of securities.

required rate of return that investors seek for various kinds of securities.

*****

*An issue of common stock is expected to pay a dividend of $5.15 at the end of the year. Its growth rate is equal to 6%. If the required rate of return is 10%, what is its current price?

$128.75

*An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32 assuming a constant growth rate of 4%. What is the required rate of return?

8.1%

*An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm's common stock is 5%. What is the preferred stock price if the required rate of return is 7%?

$21.43

*Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?

$70,900

*Capital budgeting is primarily concerned with

evaluating investment alternatives.

*Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

Between 7% and 8%

*Financial capital does not include

working capital

*For many firms, the cheapest and most important source of equity capital is in the form of

retained earnings

*How much must you invest at 8% interest in order to see your investment grow to $8,000 in 10 years?

= $3,704

*If a firm's bonds are currently yielding 6% in the marketplace, why would the firm's cost of debt be lower?

Interest is tax-deductible

*If you invest $10,000 at 10% interest, how much will you have in 10 years?

$25,940

*If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?

Future value of an annuity of $1

*In a general sense, the value of any asset is the

present value of the cash flows received from the asset.

*Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500 and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 9%, what is the net present value of the project?

More than $800

*The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of

the existence of flotation costs.

*The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt in the weighted average cost of capital if the firm's tax rate is 34%?

5.94%;

**The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with

rates of return greater than or equal to the WACC.

*You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?

6%