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Shop-Til-You-Drop Inc.


20. Shop-Til-You-Drop Inc. recently reported net income of $5.2 million and depreciation of $600,000. What is its net cash flow? Assume it has no amortization expense.

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a) $5,400,000

b) $5,600,000

c) $5,800,000

d) $6,000,000

e) $6,200,000

21. Companies generate income from their “regular” operations and from things like interest on securities they hold, which is call non-operating income. Mitel Metals recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges and no non-operating income. It had issued $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. What was the firm’s operating income, or EBIT?

a) $1,100

b) $1,200

c) $1,300

d) $1,400

e) $1,500

22. Temple Square Inc. reported that its retained earning for 2005 were $490,000. In its 2006 financial statements, it reported $60,000 of net income, and it ended 2006 with $510,000 of retained earnings, How much were paid as dividends to shareholders during 2006?

a) $20,000

b) $25,000

c) $30,000

d) $35,000

e) $40,000

23. Which of the following statements is CORRECT?

a) Four key financial statements are the balance sheets, the income statement, the statement of cash flows, the statements of retained earning.

b) The balance sheet gives us a picture of the firm’s financial situation over a period of time.

c) The income statement gives us a snapshot of what is happening at a point in time.

d) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

e) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

24. Which of the following items is NOT included in current assets?

a) Accounts payable.

b) Inventory

c) Accounts receivable

d) Cash.

e) Short-term highly liquid, marketable securities.

25. A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

a) The firm’s tax payments would increase.

b) The firm’s reported net income would increase.

c) The firm’s taxable income would increase.

d) The firm’s net cash flow would increase.

e) The firm’s operating income (EBIT) would increase.

26. Ramala Corp’s sales last year were $48,000, and its total assets were $25,500. What was its total assets turnover ratio (TATO)?

a) 1.88

b) 1.99

c) 1.10

d) 1.21

e) 1.32

27. Ruby Corp’s sales last year were $435,500, its operating costs were $350,000, and its interest charges were $10,000. What was the firm’s times interest earned (TIE) ratio?

a) 8.29

b) 8.42

c) 8.55

d) 8.68

e) 8.81

28. Roberts Corp’s sales last year were $300,000, and its net income after taxes was $25,000. What was its profit margin on sales?

a) 7.65%

b) 7.82%

c) 7.99%

d) 8.16%

e) 8.33%

29. Reynolds Corp’s total assets at the end of last year were $300,000 and its net income after taxes was $25,000. What was its return on total assets?

a) 8.15%

b) 8.33%

c) 8.51%

d) 8.69%

e) 8.87%

30. Rollins Corp’s total assets at the end of last year were $300,000 and its EBIT was $75,000. What was its basic earning power (BEP)

a) 17.50%

b) 20.00%

c) 22.50%

d) 25.00%

e) 27.50%

31. Raleigh Corp’s total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE?

a) 18.33%

b) 18.67%

c) 19.00%

d) 19.33%

e) 19.67%

32. Rutland Corp’s stock price at the end of last year was $30.25 and its earnings per share for the year were $2.45. What was its P/E ratio?

a) 11.65

b) 12.00

c) 12.35

d) 12.70

e) 13.05

33. Rand Corp’s stock price at the end of last year was $40.00, and its book value per share was $24.50. What was its Market/Book ratio?

a) 1.03

b) 1.18

c) 1.33

d) 1.48

e) 1.63

34. Midwest Lumbar had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firm’s ROE?

a) 14.39%

b) 14.69%

c) 14.99%

d) 15.29%

e) 15.59%

35. An investor is considering starting a new business. The company would require $500,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 15.0% return on the invested capital, which means that the firm must have an ROE of 15.0%. How much net income must be expected to warrant starting the business?

a) $45,000

b) $55,000

c) $65,000

d) $75,000

e) $85,000

36. Which of the following would indicate an improvement in a company’s financial position, holding other things constant?

a) The current and quick ratios both decline.

b) The EBITDA coverage ratio increases.

c) The total assets turnover decreases.

d) The TIE declines.

e) The DSO increases.

37. A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?

a) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

b) Reduce the company’s day’s sales outstanding ratio to the industry average and use the resulting cash savings to purchase plant and equipment.

c) Use cash to increase inventory holdings.

d) Use cash to repurchase some of company’s own stock.

e) Issue new stock and use some of the proceeds to purchase additional inventory and hold the remainder of the funds received as cash.

38. If 10-year T-bonds have yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default premium on the corporate bond?

a) 1.0%

b) 1.1%

c) 1.2%

d) 2.0%

e) 2.1%

39. The real risk-free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?

a) 4.90%

b) 5.00%

c) 5.10%

d) 5.20%

e) 5.30%

40. Suppose 1-year Treasury bonds yield 3.0% while 2-year T-bonds yield 4.5%. Assuming the pure expectations theory is correct and thus the maturity risk premium is zero, what should the yield be on a 1-year T-bond one year from now?

a) 5.91%

b) 6.02%

c) 6.13%

d) 6.24%

e) 6.35%

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