Corporate Finance

Topic

Corporate Finance

Instructions

Are the following statements True or False?

  1. A general partnership must have at least 2 members with each having their potential financial loss in the partnership limited to their individual investment.
  2. The owner of a sole proprietorship has unlimited liability for the company’s debt.
  3. A corporation is considered a separate legal entity from its shareholders.
  4. Once a corporation has paid taxes on its income, it can be passed on as tax-free dividends to its shareholders.
  5. Which business types among the following (Sole proprietorship, Limited Liability company, Corporation, General partnership) is best suited to raise the most capital?

A corporation’s pretax net income of $1,000,000 is taxable based on 30% of the first $400,000, 35% of the next $400,000, and 40% of the balance:

  1. What is the corporation’s average tax rate? (Show calculation)
  2. What is the corporation’s marginal tax rate?

Do the following events INCREASE or DECREASE or have NO EFFECT on net working capital?

  1. Inventory is purchased on credit.
  2. A $100 account receivable is discounted and sold for $97 cash.
  3. The company has an open invoice for $100 but then chooses to take the 2% discount offered and pay $98 if paid within 10 days.

A firm’s balance sheet contains $320 of cash, $2,000 of fixed assets, $1,580 of accounts receivable, $840 of accounts payable, $500 of inventory, and $1,060 on a revolving line of credit. Assuming that list contains all of the company’s assets and liabilities:

  1. How much are current assets? (Show calculation)
  2. What is the company’s quick ratio? (Show calculation)
  3. What is the company’s book value? (Show calculation)
  4. A company began the year with retained earnings of $1,000. Net income for the year was $350, it repaid $350 of its line of credit balance, and it paid dividends to its shareholders of $200. What was the company’s retained earnings at the end of the year? (Show calculation)

Are the following events SOURCES or USES of cash?

  1. Increase in Accounts Receivable
  2. Increase in Notes Payable
  3. Decrease in Accounts Payable
  4. Decrease in Inventory
  5. Installment Loan payment
  6. Which three of the following list describe accurately the three parts of the DuPont formula?

A – Operating Efficiency

B – Equity Multiplier

C – Profit Margin

D – Debt-Equity Ratio

E – Financial Leverage

F – Total Asset Turnover

G – Return on Assets

  1. Eagle Sports had sales in 2016 of $750,000, cost of sales of $500,000, average accounts receivable of $100,000 and average inventory of $240,000. How many days, on average, does it take Eagle Sports to sell its inventory assuming that all sales are on credit? (Show calculation)

A company computes its earnings retention ratio, dividend yield, and capital intensity ratio:

  1. Which figure represents the amount of assets the company needs in order to generate a $1 of earnings?
  2. Which figure represents the percentage of earnings a company reinvests in its business?
  3. Which figure represents the relationship between a company’s dividend payout and its market value?
  4. A company can usually increase sales without increasing which one of the following (accounts receivable, cost of sales, accounts payable, inventory, or fixed assets)?
  5. The Cookie Shoppe expects sales of $500,000 next year at a 6% pretax profit margin and an average tax rate of 33%. If it chooses to pay out 30% of its earnings as dividends, what is the projected increase in retained earnings? (Show calculation)
  6. You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire (there could be more than one answer)?
  7. Invest in a different account paying a higher rate of interest.
  8. Invest in a different account paying a lower rate of interest.
  9. Retire later.
  10. Retire sooner.
  11. In calendar 2016, you earned a salary of $60,000. You expect to be given 5% annual merit increases on January 1 of each year for the foreseeable future. What is your projected annual salary in 2021? (Show calculation)
  12. You have won a contest that will pay you $10,000 a year at the end of each of the next 5 years. Based on a discount rate of 8% per year, what is the annuity worth to you today? (Show calculation)
  13. You would like to contribute $50,000 towards your grandchild’s college education 15 years from now. How much money must you set aside today for this purpose if you believe you can earn 7% per annum on your investment? (Show calculation)

You are considering purchasing a 15-year 8% unsecured bond at a price of $960:

  1. How much is the bond’s face value?
  2. How much is the bond’s coupon?
  3. What is the bond’s current yield?

Are the following statements about bonds True or False:

  1. Bonds provide tax benefits to issuers.
  2. A company’s risk increases when a firm issues bonds.
  3. The current yield on a bond is higher than its coupon rate when the bond sells at a premium.
  4. Callable bonds are generally called when market interest rates increase.
  5. How much should you be willing to pay for one share of stock if the company just paid a $1 dividend, you expect the dividends to increase by 4% annually, and you need a 12% return on your investment? (Show calculation)
  6. Which of the following is an underlying assumption of the dividend growth model (one answer only)?

A – A stock’s value changes in direct relation to the required return on the stock.

B – A stock has the same value to every investor.

C – Stocks that pay the same dividend have equal market values.

D – A stock’s value is equal to the discounted present value of the future cash flows it generates.

  1. What is the net present value of a project that has an upfront cash outlay of $30,000, and generates cash inflows of $15,000 in year 1, $25,000 in year 2, and $20,000 in year 3 assuming that the company’s cost of capital is 15% per year? (Show calculation)

For a specific project, a financial manager computes the accounting return, payback, discounted cash flow valuation, profitability index, and internal rate of return:

  1. Which measure refers to the discount rate that causes the net present value of the project to equal zero?
  2. Which measure examines the length of time it will take for the company to recoup its investment?
  3. Which measure refers to the ratio of the project’s future cash flows to the project’s initial cash outlay?
  4. Which measure is the easiest to compute due to the easy availability of information needed?
  5. You are depositing $20,000 in a retirement account today and expect to earn an average return of 6% per year on this money. How much additional income will you earn if you leave the money invested for 30 years instead of just 25 years?

Answer preview

Are the following statements True or False?

  1. A general partnership must have at least 2 members with each having their potential financial loss in the partnership limited to their individual investment. True
  2. The owner of a sole proprietorship has unlimited liability for the company’s debt. True
  3. A corporation is considered a separate legal entity from its shareholders. True
  4. Once a corporation has paid taxes on its income, it can be passed on as tax-free dividends to its shareholders. False
  5. Which business types among the following (Sole proprietorship, Limited Liability company, Corporation, General partnership) is best suited to raise the most capital? Corporation

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