Inventory and its effect on net income

1.Nachman Inc. has the following balance sheet:

Cash

$18,750

Accounts payable

$62,500

Receivables

106,250

Other current liabilities

56,250

Inventories

325,000

Long-term debt

193,750

Net fixed assets

300,000

Common equity

437,500

Total assets

$750,000

Total liabilities & equity

$750,000

Last year the firm had $40,000 of net income on $600,000 of sales.However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.5, without affecting either sales or net income.Assume inventories are sold off and not replaced to get the current ratio to 2.5, and the funds generated are used to buy back common stock at book value without changing anything else.What is the ROE after these changes are made?

a.9.14%

b.11.60%

c.14.07%

d.15.33%

e.16.25%

Statement of cash flows

2.Gonzalez Associates Inc. had $200,000 in cash on the balance sheet at the beginning of the year.At year-end, the company had $100,000 in cash.We know cash flow from operating activities totaled $525,000, and cash flow from long-term investing activities totaled -$1,150,000.Furthermore, Gonzalez issued $450,000 in long-term debt during the year to fund new projects and increase liquidity.If dividends paid to stockholders equaled $300,000, how much common stock did Gonzalez issue during the year?(Assume that the only financing activities in which Gonzalez engaged involved long-term debt, payment of dividends, and common stock.)

a.$290,000

b.$375,000

c.$420,000

d.$485,000

e.$510,000

Income statement

3.Van Auken Industries is forecasting the following income statement for the upcoming year:

Sales$5,074,073

Operating Costs (excluding depreciation)2,790,740

Depreciation 725,000

EBIT$1,558,333

Interest225,000

EBT$1,333,333

Taxes (40%)533,333

Net Income$800,000

Assume that operating costs (excluding depreciation) are always 55% of sales.Also assume that depreciation, interest expense, and the companys tax rate of 40% (not total taxes paid), will remain the same, even if sales change.

The companys president is disappointed with the forecast and would like to see Van Auken generate higher sales and a forecasted net income of $1,000,000.What level of sales would Van Auken have to obtain in order to generate $1,000,000 in net income?

a.$5,814,816

b.$6,333,450

c.$7,222,100

d.$8,000,000

e.$ 9,775,125

Free cash flow

4.Ingram Industries recently reported $150,000 of sales, $90,000 of operating costs other than depreciation, and $3,000 of depreciation.The company had no amortization charges, it had $50,000 of bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 40%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $10,000 of capital expenditures on new fixed assets and to invest $2,000 in net operating working capital. What is the firms free cash flow?

a.$22,425

b.$25,200

c.$30,500

d.$32,700

e.$35,350

Financial markets

5.Which of the following statements is CORRECT?

a.Capital market instruments include short-term, highly liquid debt securities.

b.The NYSE does not exist as a physical location.Rather it represents a loose collection of dealers who trade stock electronically.

c.An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

d.While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

e.If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a secondary market transaction.

EVA

6.Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation).The company has $20,500 of investor-supplied capital, the weighted average cost of that capital (the WACC) was 10%, and the federal-plus-state income tax rate was 40%.What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?

a.$1,670

b.$1,758

c.$1,850

d.$1,943

e.$2,040

Net oper. working capital

7.Plano Company's balance sheet showed operating current assets of $3,000.Its current liabilities consisted of $600 of accounts payable, $500 of 5% short-term notes payable to the bank, and $400 of accrued wages and taxes.What was its net operating working capital?

a.$1,500

b.$1,650

c.$1,800

d.$2,000

e.$2,500

Profit margin and ROE

8.Hampton Housewares Company (HHC) has $1,250,000 of assets, and it uses only common equity capital (zero debt).Its sales for the last year were $1,000,000, and its net income was $75,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 12%.What profit margin would HHC need in order to achieve the 12% ROE?Assume that the new actions will have no effect on total assets and sales, and it will not change the companys determination to use 100% equity to finance its operations.

a. 9.00%

b.10.50%

c.12.25%

d.13.66%

e.15.00%

Net income

9.Davis Industries recently reported $100,000 of sales, $65,000 of operating costs other than depreciation, and $1,500 of depreciation.The company had no amortization charges, it had $40,000 of bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $8,000 of capital expenditures on new fixed assets and to invest $1,000 in net operating working capital. What is the firms net income?

a.$8,222

b.$11,025

c.$14,275

d.$17,198

e.$20,475

Max. debt ratio for a given TIE ratio

10.Elliott Enterprises is developing its business plan.It will require $500,000 of assets, and it projects $150,000 of sales and $120,000 of operating costs (including depreciation) for the first year.The firm is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 5%, but the bank requires it to have a TIE of at least 3.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt ratio (Total debt/Total assets) the firm can use?

a.33.3%

b.38.3%

c.40.0%

d.45.0%

e.47.5%