Statement of cash flows
1. Smythe Associates Inc. had $175,000 in cash on the balance sheet at the beginning of the year. At year-end, the company had $250,000 in cash. We know cash flow from operating activities totaled $480,000, and cash flow from long-term investing activities totaled -$1,025,000. Furthermore, Smythe issued $275,000 in long-term debt during the year to fund new projects and increase liquidity. If dividends paid to stockholders equaled $140,000, how much common stock did Smythe issue during the year? (Assume that the only financing activities in which Smythe engaged involved long-term debt, payment of dividends, and common stock.)
2. Which of the following statements is CORRECT?
a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.
b. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
c. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.
d. Capital market instruments include both short-term and long-term debt.
e. While the two frequently perform similar functions, commercial banks generally specialize in lending money, whereas investment banks generally help companies raise large blocks of capital from investors.
3. Grandling Supermarkets Inc. reported $1,500,000 of sales and $900,000 of operating costs (including depreciation). The company has $2,450,000 of investor-supplied capital, the after-tax cost of capital was 8%, and the federal-plus-state income tax rate was 35%. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?
Inventory and its effect on net income
4. Nachman Inc. has the following balance sheet:
Cash $18,750 Accounts Payable $62,500
Receivables $106,250 Other Current Liabilities $56,250
Inventories $325,000 Long-Term Debt $193,750
Net Fixed Assets $300,000 Common Equity $437,500
Total Assets $750,000 Total Liabilities & Equity $750,000
Last year the firm had $40,000 of net income on $600,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.5, without affecting either sales or net income. Assume inventories are sold off and not replaced to get the current ratio to 2.5, and the funds generated are used to buy back common stock at book value without changing anything else. What is the ROE after these changes are made?
5. Grunewald Industries recently reported $510,000 of sales, $357,000 of operating costs other than depreciation, and $20,000 of depreciation. The company had no amortization charges, it had $100,000 of bonds that carry an 8% interest rate, and its federal-plus-state income tax rate was 40%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $100,000 of capital expenditures on new fixed assets and to invest $2,000 in net operating working capital. What is the firm's net income?
a. $ 75,000
b. $ 88,250
Net oper. working capital
6. Beranek Company's balance sheet showed operating current assets of $25,000. Its total current liabilities consisted of $8,500 of accounts payable, $4,500 of 5% short-term notes payable to the bank, and $7,000 of accrued wages and taxes. What was its net operating working capital?
a. $ 5,000
b. $ 7,500
c. $ 9,500
Max. debt ratio for a given TIE ratio
7. Ferri Enterprises is developing its business plan. It will require $1,500,000 of capital, and it projects $500,000 of sales and $425,000 of operating costs (including depreciation) for the first year. The firm is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 6%, but the bank requires it to have a TIE of at least 2.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio (measured as Total debt/Total capital) the firm can use?
8. Van Auken Industries is forecasting the following income statement for the upcoming year:
Operating Costs (excluding depreciation)
Assume that operating costs (excluding depreciation) are always 55% of sales. Also assume that depreciation, interest expense, and the company's tax rate of 40% (not total taxes paid), will remain the same, even if sales change.
The company's president is disappointed with the forecast and would like to see Van Auken generate higher sales and a forecasted net income of $1,000,000. What level of sales would Van Auken have to obtain in order to generate $1,000,000 in net income?
a. $ 5,814,816
b. $ 6,333,450
c. $ 7,222,100
d. $ 8,000,000
e. $ 9,775,125
Free cash flow
9. Kalogeras Industries recently reported $280,000 of sales, $150,000 of operating costs other than depreciation, and $25,000 of depreciation. The company had no amortization charges, it had $100,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $50,000 of capital expenditures on new fixed assets and to invest $8,000 in net operating working capital. What is the firm's free cash flow?
a. $ 5,000
Profit margin and ROE
10. Hindelang Housewares Company (HHC) has $2,000,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $1,600,000, and its net income was $160,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would HHC need in order to achieve the 15% ROE? Assume that the new actions will have no effect on total assets and sales, and it will not change the company's determination to use 100% equity to finance its operations.