Exam 1 Key - FIN 470 Exam 1 1 NAME What are the three types...

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FIN 470 Exam 1 NAME________________________ 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. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s credit collection policy with its customers). 2. Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false. 3. 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? The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; it’s the way accountants have chosen to do it. 4. Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales $ 196,000; costs $104,000; other expenses $6,800; depreciation expense $9,100; interest expense $14,800; taxes $21,455; dividends $10,400. In addition, you’re told that the firm issued $5,700 in new equity during 2009 and redeemed $7,300 in outstanding long-term debt. a. What is the 2009 operating cash flow? OCF = EBIT + Depreciation – Taxes = $76,100 + 9,100 – 21,455 = $63,745 b. What is the 2009 cash flow to creditors? CFC = Interest – Net new LTD = $14,800 – (–7,300) = $22,100 c. What is the 2009 cash flow to stockholders? CFS = Dividends – Net new equity = $10,400 – 5,700 = $4,700
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d. If net fixed assets increased by $27,000 during the year, what was the addition to NWC? We know that CFA = CFC + CFS, so: CFA = $22,100 + 4,700 = $26,800 CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation = $27,000 + 9,100 = $36,100 Now we can use: CFA = OCF – Net capital spending – Change in NWC $26,800 = $63,745 – 36,100 – Change in NWC Solving for the change in NWC gives $845, meaning the company increased its NWC by $845 . 5. 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. A current ratio of 0.50 means that the firm has twice as much in current liabilities as it does in current
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Exam 1 Key - FIN 470 Exam 1 1 NAME What are the three types...

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