answer all the questions and show the steps(include the formulate)

answer all the questions and show the steps(include the formulate)

Multiple Choice/Short Answer Questions: Please circle the letter corresponding to your answer for
each question. Select the single BEST answer. (4 points each)
1. Apple has a current ratio of 2.10 and a quick ratio of 1.30. Samsung has a current ratio of 1.70 and a

quick ratio of 0.90. Which of the following statements is correct?
Since the difference between the current ratio and quick ratio for each firm is 0.80, their
liquidities are the same
B.
Samsung has more liquidity than Apple
C.
Apple has more liquidity than Samsung
D.
Both firms have low liquidity and could have difficulty meeting their financial
obligations
E.
Which firm is more liquid cannot be determined from these ratios.
A.

2. Which one of the following is included in a firm’s market value, but is excluded from the firm’s

accounting (book) value?
A.
B.
C.
D.
E.

Land owned for future use
Long-term debt
Equipment owned by the firm
The firm’s brand image
Work in process inventory

3. Net income:
A.
B.
C.
D.
E.

Equals earnings before interest and taxes
Does not equal cash flow from assets
Is the increase or decrease in cash flow during the period
Is the cash flow from operations during the period
Is the increase or decrease in net working capital during the period

4. Which one of the following will decrease the cash flow from assets, all else being equal?
A.
B.
C.
D.
E.

Increase in cash flow to stockholders
Decrease in operating cash flow
Decrease in the change of net working capital
Increase in cash flow to creditors
Decrease in new capital spending

5. The external financing need:
A.
B.
C.
D.
E.

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Considers only the required increase in fixed assets
Is unaffected by the retention ratio
Must be funded by long-term debt
Does not take into consideration any changes in retained earnings
Will limit growth if unfunded

6. Which of the following will decrease the value of a firm’s net working capital?
A.
B.
C.
D.
E.

Purchasing inventory on credit
Decrease in notes payable
Buyback of common stock, which is funded by issuing long-term debt
Using cash to repay long-term debt
Increase in inventory

7. An increase in which of the following will increase the return on equity, all else constant?

I. Sales
II. Net income
III. Equity multiplier
IV. Total equity
A.
B.
C.
D.
E.

I only
II only
I and II only
II and III only
I, II and IV only

8. From the list of financial ratios below, which set of ratios indicate a firm’s ability to meet its long-

term financial obligations?
A.
B.
C.
D.
E.

Leverage ratios
Asset management ratios
Profitability ratios
Market value ratios
Liquidity ratios

9. The internal growth rate of a firm is the:

A.
B.
C.
D.
E.

Minimum growth rate achievable with unlimited debt financing
Maximum rate achievable assuming a 100% retention ratio
Minimum growth rate achievable if the firm maintains a constant equity multiplier
Maximum growth rate achievable excluding external financing of any kind
Maximum growth rate achievable excluding any external equity financing

10. What is the difference between the Feds Funds Rate and the Discount Rate? What are the

advantages and risks of keeping these rates historically low?

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Numerical Problems: Answer the questions in the space provided. Show your work to receive credit
(4 points each)
11. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of

$260,000? What is the firm’s marginal tax rate?

12. During the year, Grant Furnitures decreased its accounts receivable by $250, increased its inventory

by $90, increased its notes payable by $150 and decreased its accounts payable by $40. What is the
overall cash impact of these transactions? (State total dollar amount and whether source or use)

13. A firm has total debt of $6,500 and an equity multiplier of 2.47. What is the value of the total

assets?

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14. Jones Motors Inc. has sales of $55 million, total assets of $120 million, and total debt of $64 million.

The profit margin is 12%. What is the Return on Equity?

15. Burlington Industries has accounts receivable of $68,000, inventory of $55,000, sales of $850,000

and cost of goods sold of $540,000. How long does it take the firm to sell its inventory and collect
the payment, assuming all sales are on credit?

16. Smith Company has sales of $325,000, costs of $160,000, depreciation expense of $40,000, interest

expense of $12,000 and a tax rate of 40%. The firm has a 30% dividend payout ratio. What is the
addition to retained earnings?

Multi-part Numerical Problems: Answer the questions in the space provided. Show your work to
receive credit (12 points each)
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Problem 17.
Nordstrom (2013)
Target (2013)
Target (2012)
(Income statement and balance sheet numbers are in millions)
Sales
$12,540
Net Income
734
Cash
1,194
Accounts Receivable
2,416
Total Assets
8,574
Accounts Payable
1,658
Total Liabilities
6,494
Shares Outstanding 193 million
Stock Price
$69

$72,596
1,971
695
5,220
44,553
11,617
28,322
634 million
$63

$73,301
2,999
784
5,841
48,163
11,037
31,605
634 million

17a. Compute the 2013 Market Value to Book Value ratios for Nordstrom and Target. On which
company does the market look more favorably?

17b. How do accounts receivable and accounts payable affect the 2013 Statement of Cash Flows for
Target (give amount and state source or use)?

17c. Compute the 2013 DuPont Identity for Nordstrom and Target (show each ratio). Which firm is
more operationally efficient, which uses their assets more effectively, and which firm has the most
leverage? Support your answers with the DuPont Identity ratios you computed.

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Problem 18. Note: The forecast component is for 18c..
Universal Exports
2013 Income Statement
Revenue
Cost of Goods Sold
Depreciation
EBIT
Interest Expense
Taxable Income
Taxes
Net Income

Current Assets
Net Fixed Assets
Total Assets

2014 Forecast

$27,100
13,200
3,650
10,250
2,350
$ 7,900
2,765
$ 5,135
2013 Balance Sheet
2013
2014
$14,240
Accounts Payable
16,400
Long-term Debt
Com Stock & RE
$30,640
Total Liab & Equity

2013 Retention Rate = 60%

2013
$ 5,350
5,780
19,510
$30,640

2014

18a. Universal Exports does not want to incur any additional financing. The dividend payout rate is
constant. What is the firm’s maximum rate of growth?

18b. If Universal Exports decides to maintain a constant debt-equity ratio, what rate of growth can it
maintain assuming that no additional equity financing is available?

18c. All Universal Exports costs, assets, and current liabilities vary directly with sales. The tax rate,
dividend payout ratio and interest expense remain constant. How much additional debt is required if no
new equity is raised and sales are projected to increase by 10% in 2014? (First do a forecast 2014)

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Problem 19. Show your work/calculations to receive credit (12 points).
Crystal Winery, Inc.
2013 Income Statement
($ in millions)
Net sales
Cost of goods sold
Depreciation
EBIT
Interest paid
Taxable income
Less: Taxes
Net income

$45,675
16,565
2,555
26,555
5,350
$21,205
7,423
$13,782

2012
Cash
$
750
Accounts receivable 1,345
Inventory
3,076
Total CA
5,171
Net fixed assets
18,450
Total assets

$23,621

Crystal Winery, Inc.
2013 and 2012 Balance Sheets
($ in millions)
2013
2012
$ 1,050
Accounts payable
$ 1,350
1,285
Notes payable
2,345
2,956
Total CL
3,695
5,291
Long-term debt
6,776
21,005
Common stock
7,500
Retained earnings
5,650
$26,296
Total liab. & equity $23,621

19a. What is the change in the net working capital from 2012 to 2013?

19b. What is the operating cash flow in 2013?

19c. What is the cash flow from assets?

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2013
$ 1,567
2,005
3,572
7,534
7,000
8,190
$26,296

19d. What amount of dividends were paid in 2013?

19e. What is the cash flow to creditors 2013?

19f. What is the cash flow to stockholders in 2013?

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