FINANCE MID TERM

  

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Part 1 Critical Thinking (5 points each)

Chapter 1

1. What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.

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2. What are the four primary disadvantages of a sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organizations as opposed to the corporate form?

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3. What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.

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4. What goal should always motivate the actions of a firm’s financial manager?

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5. Who owns a corporation? Describe the process whereby the owner’s control the firm’s management. What is the main reason an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

ANSWER: 

Critical Thinking Questions 

Chapter 2

1. What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.

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2. Why might the revenue and cost figures shown on a standard income statement not be representative of the actual cash inflows and outflows that occurred during a period?

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3. In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?

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4. Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owner’s equity is negative. Can this happen with market values? Why or why not?

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5. Could a company’s change in NWC be negative in a given year? (hint, yes). Explain how this might come about. What about net capital spending?

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Critical Thinking Questions 

Chapter 3

1. In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company changed?

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2. Explain what it means for a firm to have a current ratio equal to .50. Would the firm be better off if the current ratio were 1.50? What if it were 15.0? Explain your answers.

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3. Fully explain the kind of information the following financial ratios provide about a firm:

a. Quick Ratio

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b. Cash Ratio

Answer:

c. Total Asset turnover

Answer:

d. Equity multiplier

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e. Long-term debt ratio

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f. Times Interest earned ratio

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g. Profit Margin 

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h. Return on Assets

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i. Return on Equity

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j. Price Earnings Ratio

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Critical Thinking Questions 

Chapter 5

1. The basic present value equation has four parts. What are they?

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2. What is compounding? What is discounting? 

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3. Would you be willing today $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?

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Part 2 Problems (4 points each)

1. SDJ, Inc., has a net working capital of $1,920, current liabilities of $4,380, and inventory of $3,750. What is the Current Ratio? What is the Quick Ratio?

Calculations:

Answers: 

Current Ratio: ____

 Quick Ratio: ____

2. Shelton, Inc., has sales of $17.5 million, total assets of $13.1 million, and total debt of $5.7 million. If the profit margin is 6 percent, what is net income? What is ROA? What is ROE?

Calculations:

Answers: 

Net Income: ____

 ROA: ____

ROE: ____

3. Aguilera Corp. has a current accounts receivable balance of $438,720. Credit sales for the year just ended were $5,173,820. What is the receivables turnover? The days’ sales in receivables? How long did it take on average for credit customers to pay off their accounts during the past year?

Calculations:

Answers: 

Receivables turnover: ____

 Days’ sales in receivables: ____

Average number of days for credit customers to pay off their accounts: ____

4. The Green Corporation has ending inventory of $417,381, and cost of goods sold for the year just ended was $4,682,715. What is the inventory turnover? The days’ sales in inventory? How long on average did a unit of inventory sit on the shelf before it was sold?

Calculations:

Answers: 

Inventory turnover: ____

 Days sales inventory: ____

Number of days’ inventory sat on shelf: ____

5. Levine, Inc., has a total debt ratio of 0.53. What is the debt-equity ratio? What is the equity multiplier?

Calculations:

Answers: 

Debt-equity ratio: ____

 Equity multiplier: ____