Financial assets have value because they are..

Full Solutions to 39 exam problem, Connect Week 2 Exam 1 Finance BUS 530 Text: McGraw Hill, Fundamentals of Corporate Finance, Brealy, 7th edition. Full Solutions, work shown…

 

TF Qu. 8 Financial assets have value because they are…

Financial assets have value because they are claims on the firm’s real assets and the cash that those assets will produce.

 

TF Qu. 17 While control of large public companies in…

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market, in many other countries the stock market is less important and control shifts to major stockholders, typically banks and other companies.

 

TF Qu. 23 Ethical decision making in business can be…

Ethical decision making in business can be viewed as a long-term investment in reputation.

 

MC Qu. 33 Long-term financing arrangements occur in…

Long-term financing arrangements occur in the:

secondary markets.
tertiary markets.
capital markets.
money markets.

 

 

MC Qu. 35 Firms can alter their capital structure by:

Firms can alter their capital structure by:

not accepting any capital budgeting projects.
investing in intangible assets.
becoming a limited liability company.
MC Qu. 49 Which of the following would correctly…

Which of the following would correctly differentiate general partners from limited partners in a limited partnership?

General partners have unlimited personal liability.
General partners have more job experience.
General partners are subject to double taxation.
General partners have an ownership interest.
issuing stock to repay debt.

MC Qu. 53 Which of the following is not an advantage…

Which of the following is not an advantage to incorporating a business?

 

 

MC Qu. 54 Unlimited liability is faced by the owners…

Unlimited liability is faced by the owners of:

 

MC Qu. 63 A common problem for closely held…

A common problem for closely held corporations is:

 

MC Qu. 64 Which of the firm s financial managers…

Which of the firm’s financial managers is most likely to be involved with obtaining financing for the firm?

 

TF Qu. 12 The stocks of major corporations trade in…

The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis.

 

TF Qu. 15 The key to the banks ability…

The key to the banks’ ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.

 

TF Qu. 21 Financial markets and intermediaries allow…

Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.

 

TF Qu. 23 The rates of return on investments outside…

The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation.

 

TF Qu. 29 The effects of the financial crisis of…

The effects of the financial crisis of 2007-2009 were confined to the U.S. and domestic companies.

 

MC Qu. 33 Reinvestment means:

“Reinvestment” means:

 

additional investment in existing operations.
new investment by new shareholders.
new investment in new operations.
additional investment by existing shareholders.

 

 

 

MC Qu. 61 Long-term financing decisions commonly…

Long-term financing decisions commonly occur in the: 

 

MC Qu. 66 In 2010, U.S. corporate and foreign bonds…

In 2010, U.S. corporate and foreign bonds totaled:

 

MC Qu. 67 In 2010, U.S. corporate equities totaled:

In 2010, U.S. corporate equities totaled:

 

MC Qu. 71 Which of the following is least liquid?

Which of the following is least liquid?

 

MC Qu. 78 Who was responsible for the financial…

Who was responsible for the financial crisis of 2007-2009?

 

MC Qu. 50 Which of the following statements is true…

Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock?

 

MC Qu. 57 Accrual accounting, which attempts to match…

Accrual accounting, which attempts to match sales revenues and the expenses associated with the production of the goods, is conducted in an attempt to:

 

MC Qu. 71 Which of the following is more likely to…

Which of the following is more likely to be correct if market value of equity is less than book value of equity?

 

MC Qu. 78 An increase in depreciation expense will…

An increase in depreciation expense will (other things equal):

 

 

MC Qu. 94 For a corporation in the 25% marginal tax…

For a corporation in the 25% marginal tax bracket that incurs $70.00 in labor and materials expense, plus $15.00 in depreciation expense while generating an incremental revenue of $100.00, tax liability will increase by:

 

MC Qu. 100 What is the marginal impact on taxes for a…

What is the marginal impact on taxes for a profitable corporation in the 35% marginal tax bracket that incurs an additional dollar of depreciation expense?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TF Qu. 8 ROE is equal to ROA when the firm has no…

ROE is equal to ROA when the firm has no debt.

 

MC Qu. 33 Which of the following statements is…

Which of the following statements is correct for a firm in which depreciation expense exceeds EBIT? The firm:

 

MC Qu. 35 If ROC is less than a firm s cost…

If ROC is less than a firm’s cost of capital, which of the following must be true?

 

MC Qu. 54 How would you interpret an inventory…

How would you interpret an inventory turnover ratio of 10.7?

 

MC Qu. 75 An example of liquid assets would be:

An example of liquid assets would be:

 

MC Qu. 93 Net Corp. has an ROE of…

Net Corp. has an ROE of 30% and would like to see earnings grow at a 18% annual rate. What percentage of earnings can it afford to pay out as dividends?

 

Problem 3-14 Market versus Book Values (LO2)

The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested $3,300,000 in setting up a production plant. He believes that he could sell his patent for $75 million.
a. What are the book value and market value of the firm? (Enter your answers in dollars not in millions.)

b.

If there are 3 million shares of stock in the new corporation, what would be the price per share and the book value per share? (Round your answers to 2 decimal places.)

 

 

Problem 3-18 Profits versus Cash Flow (LO3)

During the last year of operations, accounts receivable increased by $10,900, accounts payable increased by $5,900, and inventories decreased by $2,900. What is the total impact of these changes on the difference between profits and cash flow? (Input the amount as a positive value.)

 

 

 

 

Problems 3-27 Earnings per Share (LO1)

The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during the year ending in either 2010 or 2011. All values are in thousands of dollars.
2010 2011
  Revenue $4,200 $4,300
  Cost of goods sold 1,700 1,800
  Depreciation 520 540
  Inventories 310 370
  Administrative expenses 520 570
  Interest expense 170 170
  Federal and state taxes* 420 440
  Accounts payable 310 370
  Accounts receivable 412 470
  Net fixed assets 5,200 6,020
  Long-term debt 2,200 2,600
  Notes payable 1,010 620
  Dividends paid 450 450
  Cash and marketable securities 820 320

* Taxes are paid in their entirety in the year that the tax obligation is incurred.
Net fixed assets are fixed assets net of accumulated depreciation since the asset was installed.

Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share? (Round your answers to 2 decimal places.)

 

 

 

Problem 4-3 EVA (LO2)

Here are simplified financial statements of Phone Corporation from a recent year:
INCOME STATEMENT
(Figures in millions of dollars)
  Net sales 12,700
  Cost of goods sold 3,810
  Other expenses 4,112
  Depreciation 2,368

  Earnings before interest and taxes (EBIT) 2,410
  Interest expense 660

  Income before tax 1,750
  Taxes (at 30%) 525

  Net income 1,225
  Dividends 826



BALANCE SHEET
(Figures in millions of dollars)
End of Year Start of Year
  Assets
     Cash and marketable securities 84 153
     Receivables 2,132 2,390
     Inventories 162 213
     Other current assets 842 907


        Total current assets 3,220 3,663
     Net property, plant, and equipment 19,923 19,865
     Other long-term assets 4,166 3,720


        Total assets 27,309 27,248




  Liabilities and shareholders’ equity
     Payables 2,514 2,990
     Short-term debt 1,394 1,548
     Other current liabilities 786 762


        Total current liabilities 4,694 5,300
     Long-term debt and leases 8,263 7,728
     Other long-term liabilities 6,128 6,099
     Shareholders’ equity 8,224 8,121


        Total liabilities and shareholders’ equity 27,309 27,248





Phone Corp.’s cost of capital was 7.8%.

What was Phone Corp.’s economic value added?(Enter your answer in millions rounded to 2 decimal places.)

 

 

 

 

Problem 4-6 Sustainable Growth (LO5)

Consider the following information:
  Davis
Chili’s
Bagwell Company
  Return on equity (ROE) 15.70% 10.60%
  Plowback ratio 0.50 0.85
  Sustainable growth 7.20% 8.40%

a. What would the sustainable growth rate be if Davis Chili’s plowback ratio rose to the same value as Bagwell Company? (Round your answer to 2 decimal places.)

 

b.

What would the sustainable growth rate be if Davis Chili’s return on equity were only 14.7%? (Round your answer to 2 decimal places.)

 

 

Problem 4-23 Times Interest Earned (LO3)

In the past year, TVG had revenues of $2.96 million, cost of goods sold of $2.46 million, and depreciation expense of $95,300. The firm has a single issue of debt outstanding with book value of $1.14 million on which it pays an interest rate of 10%. What is the firm’s times interest earned ratio? (Round your answer to 2 decimal places.)

 

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