29 Jun Question Course name: Foundations of Fina
Question
Course name: Foundations of Financial Management (10248) – Fall I, 2013
Assignment name: Week 2 Questions/Problems
1. Which of the following statements is CORRECT?
a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
b. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
c. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
d. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
e. The statement of cash flows shows how much the firm’s cash?the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)?increased or decreased during a given year.
2. Personal After-Tax Yield
Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 5.5%. At what tax rate would an investor be indifferent between these two bonds? Round your answer to two decimal places.
%
Problem 2-9
Corporate After-Tax Yield
3. The Shrieves Corporation has $5,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 4.5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 40%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities. Round your answers to two decimal places.
A-T rate of return on AT&T bond %
A-T rate of return on Florida muni bonds %
A-T rate of return on AT&T preferred stock %
Problem 2-3
Income statement
4. Little Books Inc. recently reported $3.75 million of net income. Its EBIT was $7.75 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement and then fill in the known values. Then divide $3.75 million net income by (1 – T) = 0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this same procedure to work some of the other problems.) Round your answer to the nearest whole dollar and enter your answer as a dollar amount.
$
Problem 2-5
Net Cash Flow
5. Kendall Corners Inc. recently reported net income of $4.5 million and depreciation of $765,000. What was its net cash flow? Assume it had no amortization expense.
$
Problem 3-11
Balance Sheet Analysis
6. Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data:
Debt ratio: 45%
Quick ratio: 0.90
Total assets turnover: 1.2
Days sales outstanding: 36 days*
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 3.0
* Calculation is based on a 365-day year.
Round your answers to the nearest whole dollar.
Balance Sheet
Cash $
Accounts payable $
Accounts receivable $
Long-term debt $ 60,000
Inventories $
Common stock $
Fixed assets $
Retained earnings $ 97,500
Total assets $ 300,000 Total liabilities and equity $
Sales $
Cost of goods sold $
7. Which of the following statements is CORRECT?
a. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
b. The income statement for a given year, say 2007, is designed to give us an idea of how much the firm earned during that year.
c. The focal point of the income statement is the cash account, because that account cannot be manipulated by “accounting tricks.”
d. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
e. If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.
8. Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?
a. Company HD has a higher fixed assets turnover than Company LD.
b. Company HD has a lower total assets turnover than Company LD.
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