Finance Problem Set

(Use the attached files to solve the final part)

Fundamentals of Finance (FIN305) Spring 17 Problem Set II Take your time to work through the questions presented below to make sure you have a solid understanding of the concepts and ideas presented. You will submit your problems sets for grading by entering your answers to these questions in quiz format in Canvas. Please note: the question numbers should remain the same, however, questions and answer choices may be scrambled. Be sure to carefully read your selections as you will not be able to make changes once the quiz has been submitted. You will receive your grade immediately after submission. Once the quiz has closed, the correct answers will be made available to aid you in studying for the exam. No late submissions will be accepted under any circumstances, so plan accordingly!!!!!! 1. Which of the following is a use of cash that would appear on the statement of cash flows? A) increase in accumulated depreciation B) purchase of marketable securities C) receipt of interest income D) decrease in accounts receivable 2. If the stock market return increases by 10% and an individual stock's return increases by 20% in response to the change in the stock market, beta for that particular stock will be__________. A) less than 1 B) equal to 1 C) greater than 1 D) negative 3. According to the article "Are Dow Transports a Dark Signal for the Economy" earnings of S&P500 companies have been declining, while P/E ratios have increased. This means that: A) The stock market is more vulnerable to unexpected economic weakness. B) Investors have been willing to pay more per dollar of earnings than they were before. C) Both of the above statements are true. D) Neither of the above statements are true because P/E ratios cannot increase if corporate profits are declining. 4. Which of the following statements is false? A) MACRS depreciation rates are higher than straight line depreciation rates for each year. B) Depreciation is the allocation of the asset's cost over time. C) MACRS is an accelerated depreciation method method. D) Assets are assumed to be purchased mid-year using the MACRS depreciation rules. FIN305\tProblem\tSet\tII\tSP17 5. A Debt/Assets ratio of 25% and a ROE of 12% means: A) the owners of XYZ are financing 75% of the firm's assets in order to receive an average return of 12% per dollar that the stockholders invested in the firm. B) 12% of the firm's profits are financed with equity C) the firm can cover interest payments with $0.25 of every dollar left for profit D) 25% of assets are financed with owners' equity 6. The beta of the market is: A) 0 B) 1 C) 2 D) -1 7. Why do financial managers use ratios? A) Financial managers use ratios to interpret the raw numbers on financial statements. B) Ratios are relative measures that allow comparison over time C) Ratios are relative measures that allow comparison to other firms. D) For all of the above reasons E) For none of the above reasons 8. In terms of risk, labor union disputes, entry of a new competitor, and embezzlement by management are all examples of factors affecting: A) diversifiable risk B) market risk C) systematic risk D) company specific risk that cannot be diversified away 9. The CAPM risk measure reflects: A) nonsystematic risk B) diversifiable risk C) nondiversifiable risk D) total risk 10. Common stock dividends are tax deductible. A) True B) False 11. Which of the following equations describes net working capital? A) total assets - total liabilities B) total assets - fixed assets - current liabilities C) cash + inventory-accounts payables D) fixed assets - long-term liabilities E) none of the above FIN305\tProblem\tSet\tII\tSP17 12. Why are retained earnings important? A) They represent cash available to be distributed to shareholders. B) They represent amounts that were reinvested in a company on behalf of its owners. C) They represent income the owners received in the form of dividends. D) They give investors and idea of how profitable a company is because they represent earnings that were not paid out in the last time period. 13. Currently Dexter's Bully Solutions Corp. has a required return of 16% and a beta of 0.75. According to the CAPM, Dexter's is: A) more risky than the market B) less risky than the market C) has an equal risk to the market D) can't be compared since the risk free rate is not known 14. The slope of the characteristic line is the coefficient of variation. A) True B) False 15. Why are retained earnings important? A) They represent cash available to be distributed to shareholders. B) They represent amounts that were reinvested in a company on behalf of its owners. C) They represent income the owners received in the form of dividends. D) They give investors and idea of how profitable a company is because they represent earnings that were not paid out in the last time period. 16. A Net Profit Margin of 3.76% means: A) for every dollar of sales, income of $3.76 is generated B) for every dollar of sales, income of $.0376 is generated C) for every dollar of equity, income of $.0376 is generated D) for every dollar of assets, income of $3.76 is generated 17. What is the market return given the following information? The investment's required return 12% Risk free rate is 7% Investment's beta 1 A) 5% B) 12% C) 19% D) 10% FIN305\tProblem\tSet\tII\tSP17 18. What is the excess return required for a stock given the following information? The investor's required return 12% Risk free rate is 7% Investment's beta 1 A) 5% B) 12% C) 7% D) 10% 19. Return on Assets can best be explained as: A) how many dollars of sales each dollar of assets generates B) how much income each dollar of assets generates C) how much income each dollar of working capital assets generates D) how much working capital is provided by the stockholders 20. A Current Ratio of 0.9 means: A) the firm has $0.90 of current liabilities for every $1.00 of current assets B) the firm has $0.90 of fixed assets for every $1.00 of current assets C) the firm has $0.90 of current assets for every $1.00 of current liabilities D) the firm has a debt ratio of 90% 21. Common equity includes all of the following except: A) common stock B) preferred stock C) capital in excess of par D) retained earnings 22. What does the industry comparison suggest about Company A? A) Company A's investors are not willing to pay as much per dollar of earnings as they are for shares in other firms in the industry. B) Company A's investors consider the firm's prospects to be worse than average. C) Company A is selling for more than its accounting book value. D) All of the above FIN305\tProblem\tSet\tII\tSP17 Use the following to answer questions 23-27. You hold a fully diversified portfolio of stocks and are considering investing in the XYZ Company. The firm's prospects look good and you estimate the following probability distribution of possible returns: Probability Return 70% 15% 20% 9% 10% 20% The return on the market is 13.5% and the risk free rate is 7%. You have calculated XYZ's beta from past returns as 1.3 and you believe this will be the future beta. 23. What is the expected return for XYZ? A) 14.30% B) 14.67% C) 33.33% D) 13.50% 24. What is the required return for XYZ according to the CAPM? A) 8.45% B) 13.50% C) 15.45% D) 24.55% 25. If the standard deviation of XYZ's distribution of possible returns is 3.03%, what is the coefficient of variation? A) 3.03% B) 4.72% C) 14.3% D) 21.2% 26. What is the excess return required for this stock? A) 6.5% B) 7% C) 8.45% D) 1.95% 27. Based on the information and calculations in the three questions above, should you buy stock in XYZ Company? A) Yes B) No FIN305\tProblem\tSet\tII\tSP17 28. A fully diversified investor is only exposed to market risk. A) True B) False Use the following to answer questions 29-37. Use the information and your calculations from the Balance Sheet and Statement of Cash Flows exercise posted on Canvas to answer the following questions: 29. Net fixed assets are: A) $68,000 B) $211,000 C) $237,000 D) $279,000 30. Long-term liabilities equal: A) $29,000 B) $64,000 C) $79,000 D) $149,000 31. Shareholder's equity is equal to: A) $25,000 B) $105,000 C) $130,000 D) $279,000 32. The firm uses more debt than equity to finance their business. A) True B) False 33. The firm's net working capital was: A) $85,000 B) $211,000 C) $209,000 D) $126,000 34. The corporation had cash flow from operating activities of: A) $9,000 B) $21,000 C) $33,000 D) $59,000 FIN305\tProblem\tSet\tII\tSP17 35. The corporation had cash outflow from investing activities of: A) $38,000 B) $35,000 C) $3,000 D) $0 36. The corporation had cash flow from financing activities of: A) $35,000 B) $32,000 C) $3,000 D) $49,000 37. The corporation's cash _______________ by __________________. A) increased, $30,000 B) increased, $18,000 C) decreased, $30,000 D) decreased $18,000 Use the following to answer questions 38-50. Use the information and your calculations from the Calculating Income Tax and Constructing Income Statements exercise posted on Canvas to answer the following questions: 38. The depreciation expense for Duff's bottling equipment in year 3 (using MACRS) was: A) $40,000 B) $38,400 C) $142,400 D) $25,000 39. The total amount of depreciation for the bottling equipment (using the straight-line method) was: A) $40,000 B) $120,000 C) $200,000 D) $320,000 40. Under the MACRS depreciation method, the bottling equipment was depreciated over ______ years. A) 8 years B) 6 years C) 5 years D) 11 years FIN305\tProblem\tSet\tII\tSP17 41. Under the straight-line depreciation method, the bottling equipment was depreciated over ______ years. A) 8 years B) 6 years C) 5 years D) 11 years 42. What was Duff Beer's depreciation expense in year 3 using the straight-line depreciation method? A) $40,000 B) $38,400 C) $142,400 D) $25,000 43. The marginal tax rate for Duff beer was: A) 15% B) 25% C) 31% D) 34% E) 35% 44. The average tax rate for Duff Beer was: A) 24.67% B) 30.62% C) 30.97% D) 34.00% 45. How much did Duff Beer save in taxes by investing in the bottling equipment? A) $13,600 B) $38,400 C) $40,000 D) Duff did not save anything on taxes because they didn't finance the equipment. 46. How much net income did Duff Beer make on a per share basis? A) $0.16 B) $0.30 C) $0.44 D) $1.82 FIN305\tProblem\tSet\tII\tSP17 47. Referring to the income statement you constructed, what is Duff Beer's dividend payout ratio? A) $0.13 B) $72,000 C) 26.92% D) $26.92 48. The operating profit margin for Duff Beer is: A) 42.2% B) 30.5% C) 34.5% D) 24.1% 49. The net profit margin for Duff beer is: A) 24.1% B) 42.2% C) 25.84% D) 30.5% 50. Duff Beer is distributing most of their earnings to shareholders. A) True B) False FIN305\tProblem\tSet\tII\tSP17 Balance\tSheet\tand\tStatement\tof\tCash\tFlows\tExercise Green\tMountain\tCoffee\tRoasters\tis\ta\tspecialty\tcoffee\troaster\tand\tmanufacturer\tof\tcoffee makers. Using\tthe\tfollowing\tinformation,\tclass\tnotes,\tand\tthe\tposted\tPowerPoint\tslides\tas resources\tcomplete\tthe\tfollowing: I. Constructing\ta\tBalance\tSheet 1. Use\tthe\tinformation\tbelow\tto\tconstruct\tand\tbalance\tsheet\tand\ta\tcommon\tsized\tbalance sheet\tfor\tthe\tcorporation\t(note\tthe\tinformation\there\tis\tnot\tnecessarily\tprovided\tin\tthe order\tin\twhich\tit\tshould\tappear\ton\ta\tbalance\tstatement. a. Gross\tfixed\tassets:\t$110,000 b. Cash\t$100,000 c. Accounts\tpayable:\t$43,000 d. Retained\tearnings:\t$25,000 e. Accumulated\tdepreciation\t$42,000 f. Accounts\treceivable\t$75,000 g. Long-term\tbank\tloan\t$29,000;\t$15,000\tof\twhich\twill\tbe\tdue\twithin\tthe\tnext\t12 months. h. Mortgage\t(long-term)\t$50,000 i. Common\tStock\t$105,000 j. Inventories\t$36,000 k. Notes\tpayable\t(short-term)\t$27,000 2. What\tis\tthe\tfirm's\tnet\tworking\tcapital?\t(the\tdifference\tbetween\tcurrent\tassets\tand current\tliabilities). 3. Does\tthe\tfirm\tuse\tmore\tequity\tor\tdebt\t(as\ta\tpercent\tof\ttotal\tassets)\tto\tfinance\tits business? A\tcommon-sized\tbalance\tsheet\tis\ta\tbalance\tsheet\tin\twhich\ta\tfirm's\tassets\tand\tsources\tof debt\tand\tequity\tare\texpressed\tas\ta\tpercentage\tof\tits\ttotal\tassets. The\tdebt\tratio-\tis\ta\tfirm's\ttotal\tliabilities\tdivided\tby\tits\ttotal\tassets. It\tis\ta\tratio\tthat measures\tthe\textent\tto\twhich\ta\tfirm\thas\tbeen\tfinanced\twith\tdebt. Spring\t2017 Balance\tSheet\tand\tStatement\tof\tCash\tFlows\tExercise II. Measuring\tCash\tFlows: 1. Use\tthe\tinformation\tand\ttemplate\tbelow\tto\tprepare\ta\tstatement\tof\tcash\tflows: a. The\tcorporation\tsold\t$27,000\tof\tproduct\tto\ta\tloyal\tcustomer\tbut\thas\tnot\tyet received\tpayment. b. Anticipating\tan\tincrease\tin\tdemand\tfor\ttheir\tproduct,\tthe\tfirm\tincreased inventory\tby\t$20,000. c. Net\tincome\t$40,000 d. Beginning\tcash\t$25,000 e. The\tfirm\thired\ta\tcontractor\tto\tremodel\ttheir\toffice\tspace. The\tbill\tfor\tthe\twork was\t$17,000\tand\tis\tdue\tbut\tnot\tyet\tpaid. f. The\tfirm\tpurchased\ta\tnew\tprinter\tfor\t$3,000\ton\tcredit\tfrom\ttheir\tlocal\tXerox representative.\tThe\tprinter\tis\theavily\tused\tand\tthe\tfirm\tanticipates\tneeding\tto replace\tit\tby\tthe\tend\tof\tthe\tyear. g. Employees\thave\tsubmitted\ttime\tsheets\tfor\twork\tperformed\tbut\thave\tnot\tyet been\tpaid. In\ttotal\tthese\taccrued\twages\tadd\tup\tto\t$8,000. h. The\tcorporation\ttook\tout\ta\tfive\tyear\tloan\tin\tthe\tamount\tof\t$35,000\tto\tfinance their\tupcoming\texpansion. i. The\tcompany\tpaid\tout\t$3,000\tin\tdividends. j. There\twas\tno\tchange\tin\tcommon\tstock k. The\tcompany\tspent\t$35,000\ton\tnew\tmachinery l. Depreciation\texpense\tduring\tthe\trelevant\ttime\tperiod\twas\t$12,000 Spring\t2017 Calculating\tIncome\tTax\tand\tConstructing\tIncome\tStatements I. Using\tthe\tfollowing\tinformation,\tclass\tnotes,\tand\tthe\tposted\tPowerPoint\tslides\tas\tresources complete\tthe\tfollowing: \"Can't\tget\tenough\tof\tthat\twonderful\tDuff!\" Duff\tBeer\tis\ta\tbrand\tof\tbeer\tthat\tbegan\tas\ta\tfictional\tbeverage\ton\tthe\ttelevision\tshow\tThe Simpsons. In\t2016\tTime\tmagazine\tincluded\tDuff\tBeer\tin\tits\tlist\tof\tthe\tmost\tinfluential fictional\tcompanies\tof\tall\ttime. The\tbeer\tis\tnow\tcommercially\tavailable\tand\tsold\tin\ta handful\tof\tlocations. Use\tthe\tinformation\tbelow\tto\tanswer\tthe\tfollowing\tproblems. a. Interest\texpense:\t$17,000 b. Cost\tof\tgoods\tsold:\t$578,000 c. Selling\tand\tmarketing\texpenses:\t$55,000 d. Administrative\texpenses:\t$22,000 e. Number\tof\tshares\toutstanding:\t550,000 f. Interest\tincome\t$60,000 g. Sales:\t$1,000,000 h. Dividends\tpaid:\t$72,000 Calculating\tDepreciation Duff\tpurchased\t$200,000\tworth\tof\tbottling\tequipment\tlast\tyear. The\tequipment\tis expected\tto\tlast\tfor\t8\tyears,\tbut\tfalls\tin\tthe\tMACRS\t5-year\tasset\tclass\tfor\tdepreciation purposes.\tCalculate\tthe\tMACRS\tdepreciation\texpense\tfor\tthe\tequipment\tthat\tshould\tbe recorded\tfor\teach\tyear. Use\tthe\tMACRS\ttable\tprovided\ton\tpage\t69\tin\tthe\ttext. 1. If\tDuff\tBeer\tdecides\tto\tuse\tthe\tstraight-line\tdepreciation\tmethod\tinstead,\twhat\twill their\tdepreciation\texpense\tbe\teach\tyear? Computing\ta\tCorporation's\tIncome\tTaxes Answer\tthe\tfollowing\tquestions\tusing\tthe\ttable\tbelow\tand\trelevant\tinformation\tfrom\t(I) above. II. III. 2. 3. 4. 5. What\tis\tthe\tcompany's\ttaxable\tincome? How\tmuch\tincome\ttax\twill\tDuff\tpay? What\tis\tthe\tfirm's\tmarginal\ttax\trate? Average\ttax\trate? How\tmuch\tdid\tDuff\tsave\tin\ttaxes\tby\tinvesting\tin\tthe\tbottling\tequipment? Spring\t2017 Calculating\tIncome\tTax\tand\tConstructing\tIncome\tStatements IV. V. Constructing\tan\tIncome\tStatement Use\tthe\tinformation\tfrom\t(I)\tand\t(II)\tabove\tto\tconstruct\tan\tincome\tstatement\t(note\tthe information\there\tis\tnot\tnecessarily\tprovided\tin\tthe\torder\tin\twhich\tit\tshould\tappear\ton\tan income\tstatement). Then\tanswer\tthe\tfollowing\tquestions. 6. How\tmuch\tnet\tincome\tdid\tthe\tfirm\tmake\ton\ta\tper\tshare\tbasis? 7. The\tdividend-payout\tratio-\tis\tthe\trate\tof\tdividends\tto\tearnings\t(calculated\tas dividendset\tincome).\tBased\ton\tyour\tcalculations,\tdoes\tit\tappear\tthat\tDuff\tBeer Company\tis\tretaining\tmost\tof\ttheir\tearnings\tor\tdistributing\tthem\tto\tshareholders? 8. If\ta\tfirm\tis\tretaining\tmost\tof\ttheir\tearnings\twhat\tdoes\tthis\tsuggest\tabout\ttheir\tplans\tfor expansion? Are\tthey\tmost\tlikely\ta\tmature,\twell-established\tfirm,\tor\ta\tgrowing\tfirm? Constructing\tA\tCommon-Sized\tIncome\tStatement A\tcommon-sized\tincome\tstatement\tis\tan\tincome\tstatement\tin\twhich\ta\tfirm's\texpenses\tand profits\tare\texpressed\tas\ta\tpercentage\tof\tits\tsales. The\tconstruction\tof\ta\tcommon-sized income\tstatement\tallows\tus\tto\texpress\texpenses\tand\tprofits\ton\ta\trelative\tbasis,\tso\tthat\twe can\tmore\teasily\tcompare\ta\tfirm's\tincome\tperformance\tacross\ttime\tand\twith\tcompetitors. When\tyou\thear\tsomeone\tuse\tthe\tterm\t\"profit\tmargin,\"\tthey\tare\treferring\tto\tthis\ttype\tof income\tstatement. a. Gross\tprofit\tmargin-\tis\ta\tratio\tdenoting\tthe\tgross\tprofit\tearned\tby\tthe\tfirm\tas\ta percentage\tof\tits\tnet\tassets. = b. operating\tprofit\tmargin- a\tratio\tthat\tserves\tas\tan\toverall\tmeasure\tof\tthe company's\toperating\teffectiveness. = c. Net\tprofit\tmargin-\ta\tratio\tthat\tmeasure\tthe\tnet\tincome\tof\ta\tfirm\tas\ta\tpercent\tof sales. = 9. Using\tthe\tinformation\tfrom\tpart\tI\tabove,\tcalculate\tthe\tthree\tprofit\tmargins\tfor\tDuff\tBeer Company. Spring\t2017