Q: A company has 36 million shares outstanding, with a current share price of $$14.25 per share. If the firm's book value of equity is 80 $$million, what is its market-to-book ratio?

$$\frac{36,000,000 \times 14.25}{80,000,000} = 6.41$$

Q: Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7, and an equity multiplier of 4.7. Manufacturer B has a profit margin of 2.3% and an equity multiplier of 4.7. If both manufacturers have the same ROE, what is the asset turnover for Manufacturer B?

$$\text{ROE}_A = 2.0\% \times 1.7 \times 4.7 = 15.98\%$$; $$\text{Asset Turnover}_B = \frac{15.98\%}{2.3\% \times 4.7} = 1.51$$

Q: A firm has ROE of 15% and a net profit margin of 4.5%. If the firm has $6.5 dollars in assets per dollar of equity, what is the firm's asset turnover ratio?

$$\text{ROE} = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}$$; $$15\% = 4.5\% \times \text{Asset Turnover} \times 6.5$$; $$\text{Asset Turnover} = \frac{15\%}{4.5\% \times 6.5} = 0.51$$

Q: Toronto Cheesecake had sales of $$100 million in 2018. Its cost of sales were 70 $$million. If sales are expected to grow at 20% in 2019, compute the forecasted cost of sales using the percent of sales method.

$$70 \text{ million} \times 1.20 = 84 \text{ million}$$

Q: Harvest Inc. has $$200 million in equity and 25 $$million of debt at the beginning of the year. It pays dividends of 20% of net income, and projects a net income of $5 million. What is the firm's sustainable growth rate?

$$\text{Sustainable Growth Rate} = \text{ROE} \times \text{Retention Ratio}$$; $$\text{ROE} = \frac{5}{200} = 2.5\%$$; $$\text{Retention Ratio} = 1 - 0.2 = 0.8$$; $$2.5\% \times 0.8 = 2\%$$

Question 1

Which of the following best describes the purpose of capital budgeting in financial accounting?

Accepted Answer

To evaluate and select long-term investment projects that maximize shareholder value.

Question 2

You own 100 shares in a company that earns $4.00 per share before taxes, has a corporate tax rate of 30%, and pays out 60% of its after-tax earnings as dividends. The tax rate on dividend income is 15%. What is the total after-tax income you receive from your dividends?

Accepted Answer

$142.80

Question 3

Which of the following items is considered an asset on the statement of financial position?

Accepted Answer

Money owed for goods sold on credit

Question 4

A company has 36 million shares outstanding, with a current share price of $$14.25 per share. If the firm's book value of equity is 80 $$million, what is its market-to-book ratio?

Accepted Answer

$$\frac{36,000,000 	imes 14.25}{80,000,000} = 6.41$$

Question 5

Ryerson Corporation has a book value of total debt of $500,000 and a book value total debt-to-total equity ratio of 0.55. What is the value of the total assets?

Accepted Answer

$$500,000 + \frac{500,000}{0.55} = 1$$,409,091$

Question 6

Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7, and an equity multiplier of 4.7. Manufacturer B has a profit margin of 2.3% and an equity multiplier of 4.7. If both manufacturers have the same ROE, what is the asset turnover for Manufacturer B?

Accepted Answer

$$	ext{ROE}_A = 2.0\% 	imes 1.7 	imes 4.7 = 15.98\%$$; $$	ext{Asset Turnover}_B = \frac{15.98\%}{2.3\% 	imes 4.7} = 1.51$$

Question 7

A firm has ROE of 15% and a net profit margin of 4.5%. If the firm has $6.5 dollars in assets per dollar of equity, what is the firm's asset turnover ratio?

Accepted Answer

$$	ext{ROE} = 	ext{Net Profit Margin} 	imes 	ext{Asset Turnover} 	imes 	ext{Equity Multiplier}$$; $$15\% = 4.5\% 	imes 	ext{Asset Turnover} 	imes 6.5$$; $$	ext{Asset Turnover} = \frac{15\%}{4.5\% 	imes 6.5} = 0.51$$

Question 8

All else being equal, which one of the following will increase the internal growth rate?

Accepted Answer

An increase in the retention ratio

Question 9

Toronto Cheesecake had sales of $$100 million in 2018. Its cost of sales were 70 $$million. If sales are expected to grow at 20% in 2019, compute the forecasted cost of sales using the percent of sales method.

Accepted Answer

$$70 	ext{ million} 	imes 1.20 = 84 	ext{ million}$$

Question 10

A firm projects net income of $$5,000, ending assets of 500$$,000, and a payout ratio of 50%. Beginning stockholders' equity is $$300,000, and beginning total liabilities are 100$$,000. Non-debt liabilities are forecasted to increase by $10,000. What is the net new financing needed for next year?

Accepted Answer

$$500,000 - (300,000 + 100,000 + 10,000 + 2,500) = 87$$,500$

Question 11

Harvest Inc. has $$200 million in equity and 25 $$million of debt at the beginning of the year. It pays dividends of 20% of net income, and projects a net income of $5 million. What is the firm's sustainable growth rate?

Accepted Answer

$$	ext{Sustainable Growth Rate} = 	ext{ROE} 	imes 	ext{Retention Ratio}$$; $$	ext{ROE} = \frac{5}{200} = 2.5\%$$; $$	ext{Retention Ratio} = 1 - 0.2 = 0.8$$; $$2.5\% 	imes 0.8 = 2\%$$

Question 12

A firm has $$40 million in total equity and 20 $$million of total liabilities at the beginning of the year. Its net income is projected to be $10 million. It pays dividends of 20% of net income. What will be the firm's internal growth rate?

Accepted Answer

$$	ext{Retention Ratio} = 1 - 0.2 = 0.8$$; $$	ext{ROA} = \frac{10}{60} = 16.67\%$$; $$	ext{Internal Growth Rate} = \frac{ROA 	imes \, Retention}{1 - ROA 	imes \, Retention} = \frac{0.1667 	imes 0.8}{1 - 0.1667 	imes 0.8} = 15.7\%$$

Question 13

Which of the following statements is true concerning the present value of a single sum?

Accepted Answer

The larger the present value factor, the larger the present value.

Question 14

What is the present value of $5,000 received in 5 years, when interest rates are 3% per year?

Accepted Answer

$$5,000 	imes (1 + 0.03$$)^{-5}$$ = 4$$,310.19$

Question 15

A business is deciding whether to give an end-of-year bonus of $5,000 each year for the next four years to an employee, in order to increase the number of sales that employee makes. What is the minimum extra profit the employee must generate this year for the bonus to be worthwhile over the next four years, if the discount rate is 7%?

Accepted Answer

$$5,000 	imes \frac{1 - (1 + 0.07$$)^{-4}$$}{0.07} = 16$$,256$

Question 16

You are interested in purchasing a new automobile that costs $35,000. The dealership offers you a special financing rate of 0.5% per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments at the end of each month would be closest to:

Accepted Answer

$$35,000 	imes \frac{0.005}{1 - (1 + 0.005$$)^{-48}$$} = 789$

Question 17

You owe $$20,000 in student loans that charge 6.3% annual interest. If you plan to pay back 2$$,500 at the end of each year, how long will it take to pay off these loans?

Accepted Answer

$$n = \frac{\ln(1 - \frac{20,000 	imes 0.063}{2,500})}{\ln(1 + 0.063)} = 12.4 	ext{ years}$$

Financial Accounting and Finance: Midterm Exam Study Guide

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