Solutions to homework 1, acc chapters 1, 2 & 3


Solutions to Homework 1, Chapters 1, 2 & 3




1 The division of profits and losses among the members of a partnership is formalized in the:


A. indemnity clause.


B. indenture contract.


C. statement of purpose.


D. partnership agreement.


E. group charter.




2. Agency costs refer to:


A. corporate income subject to double taxation.


B. the costs of any conflicts of interest between stockholders and management.


C. the total dividends paid to stockholders over the lifetime of a firm.


D. the costs that result from default and bankruptcy of a firm.


E. the total interest paid to creditors over the lifetime of the firm.




3. Working capital management includes decisions concerning which of the following?


I. accounts payable


II. accounts receivable


III. long-term debt


IV. inventory


A. I and II only


B. I and III only


C. II and IV only


D. I, II, and IV only


E. I, III, and IV only




4. Working capital management:


A. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.


B. ensures that long-term debt is acquired at the lowest possible cost.


C. ensures that dividends are paid to all stockholders on an annual basis.


D. balances the amount of company debt to the amount of available equity.


E. is concerned with managing day to day cash flow.




5. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?


A. No potential financial loss


B. Liability for firm debts limited to the capital invested


C. Entitlement to a larger portion of the partnership’s income


D. Greater management responsibility


E. Ability to manage the day-to-day affairs of the business






6. A general partner:


A. cannot lose more than the amount of his/her equity investment.


B. has less legal liability than a limited partner.


C. faces double taxation whereas a limited partner does not.


D. has more management responsibility than a limited partner.


E. is the term applied only to corporations which invest in partnerships.




7. A partnership:


A. has less of an ability to raise capital than a proprietorship.


B. agreement defines whether the business income will be taxed like a partnership or a corporation.


C. allows for easy transfer of interest from one general partner to another.


D. is taxed the same as a corporation.


E. terminates at the death of any general partner.




8. Which of the following are disadvantages of a partnership?


I. limited life of the firm


II. personal liability for firm debt


III. greater ability to raise capital than a sole proprietorship


IV. lack of ability to transfer partnership interest


A. I and II only


B. III and IV only


C. II and III only


D. I, II, and IV only


E. I, III, and IV only




9. Which of the following are advantages of the corporate form of business ownership?


I. limited liability for firm debt


II. double taxation


III. ability to raise capital


IV. unlimited firm life


A. I and II only


B. III and IV only


C. I, II, and III only


D. II, III, and IV only


E. I, III, and IV only




10. Which one of the following statements is correct?


A. All types of business formations have limited lives.


B. Partnerships are the most complicated type of business to form.


C. Both sole proprietorships and partnerships are taxed in a similar fashion.


D. Both partnerships and corporations have limited liability for general partners and shareholders.


E. Both partnerships and corporations incur double taxation.






11. The owners of a limited liability company prefer:


A. being taxed like a corporation.


B. having liability exposure similar to that of a sole proprietor.


C. being taxed personally on all business income.


D. having liability exposure similar to that of a general partner.


E. being taxed like a corporation with liability like a partnership.




12. Which type of business organization has all the respective rights and privileges of a legal person?


A. Sole proprietorship


B. Corporation


C. General partnership


D. Limited partnership


E. Limited liability company




13. Which one of the following actions by a financial manager creates an agency problem?


A. Increasing current costs in order to increase the market value of the stockholders’ equity


B. Agreeing to expand the company at the expense of stockholders’ value


C. Refusing to lower selling prices if doing so will reduce the net profits


D. Agreeing to pay bonuses based on the book value of the company stock


E. Refusing to borrow money when doing so will create losses for the firm




14. Which of the following help convince managers to work in the best interest of the stockholders?


I. compensation based on the value of the stock


II. stock option plans


III. threat of a proxy fight


IV. threat of conversion to a partnership


A. I and II only


B. II and III only


C. I, II and III only


D. I and III only


E. I, II, III, and IV




15. A proxy fight occurs when


A. the board solicits renewal of current members


B. a group solicits proxies to replace the board of directors


C. a competitor offers to sell their ownership in the firm


D. the firm files for bankruptcy


E. the firm is declared insolvent




16. Which of the following are key requirements of the Sarbanes-Oxley Act?


I. Officers of the corporation must review and sign annual reports.


II. Officers of the corporation must now own more than 5% of the firm’s stock.


III. Annual reports must list deficiencies in internal controls.


IV. Annual reports must be filed with the SEC within 30 days of year end.


A. I only


B. II only


C. I and III only


D. II and III only


E. II and IV only




17. Insider trading is:


A. legal.


B. impossible to have in our efficient market.


C. illegal.


D. discouraged, but legal.


E. list only the securities of the largest firms.




18. The Securities Exchange Act of 1934 focuses on:


A. insider trading.


B. issuance of new securities.


C. sales of existing securities.


D. all stock transactions.


E. Federal Deposit Insurance Corporation (FDIC) insurance.




19. The basic regulatory framework in the United States was provided by:


A. the Securities Act of 1933.


B. the monetary system.


C. the Securities Exchange Act of 1934.


D. A and C.


E. All of the above.




20. Accounting profits and cash flows are:


A. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.


B. generally the same since accounting profits reflect when the cash flows are received.


C. generally the same since they reflect current laws and accounting standards.


D. generally not the same because cash inflows occur before revenue recognition.


E. Both c and d.






21. Martha’s Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $2,000 on today’s balance sheet but could actually be sold for $2,000. Net working capital is $300 and long-term debt is $900. Assuming the equipment is the firm’s only fixed asset, what is the book value of shareholders’ equity?


A. $200


B. $800


C. $1,200


D. $1,400


E. The answer cannot be determined from the information provided.




Book value of shareholders’ equity = $2,000 + $300 – $900 = $1,400




22. Art’s Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income?


A. $20,400


B. $39,600


C. $50,400


D. $79,600


E. $99,600




Taxable income = $640,000 – $480,000 – $40,000 – $60,000 = $60,000; Tax = .34($60,000) = $20,400; Net income = $60,000 – $20,400 = $39,600




23. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?




A. 21.38%


B. 23.88%


C. 25.76%


D. 34.64%


E. 39.00%


Tax = .15($50,000) + .25($25,000) + .34($25,000) +.39($126,500 – $100,000) = $32,585; Average tax rate = $32,585  $126,500 = .2576 = 25.76 percent


 24. The tax rates are as shown. Your firm currently has taxable income of $74,000. How much additional tax will you owe if you increase your taxable income by $20,000?




A. $6,460


B. $6,710


C. $6,940


D. $7,160


E. $7,174


25. Teddy’s Pillows has beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50. What is the amount of net capital spending?


A. $130


B. $150


C. $165


D. $180


E. $330




26. At the beginning of the year, long-term debt of a firm is $270 and total debt is $340. At the end of the year, long-term debt is $290 and total debt is $390. The interest paid is $40. What is the amount of the cash flow to creditors?


A. -$50


B. -$20


C. $20


D. $50


E. $60


27. Peggy Grey’s Cookies has net income of $360. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders?


A. $64


B. $136


C. $144


D. $224


E. $296






 28. What is the change in the net working capital from 2009 to 2010?


A. $1,235


B. $1,035


C. $1,335


D. $3,405


E. $4,740




Change in net working capital = ($7,310 – $2,570) – ($6,225 – $2,820) = $1,335


29. What is the amount of the non-cash expenses for 2010?


A. $570


B. $630


C. $845


D. $1,370


E. $2,000


30. What is the amount of the net capital spending for 2010?


A. -$290


B. $795


C. $1,080


D. $1,660


E. $2,165




31. What is the operating cash flow for 2010?


A. $845


B. $1,930


C. $2,215


D. $2,845


E. $3,060


32. What is the cash flow of the firm for 2010?


A. $405


B. $430


C. $1,340


D. $2,590


E. $3,100




33. What is the amount of net new borrowing for 2010?


A. -$225


B. -$25


C. $0


D. $25


E. $225




34. What is the cash flow to creditors for 2010?


A. -$405


B. -$225


C. $225


D. $385


E. $405






Topic: Cash Flow To Stockholders


35. What is the taxable income for 2010?


A. $360


B. $520


C. $640


D. $780


E. $800


36. What is the operating cash flow for 2010?


A. $520


B. $800


C. $1,015


D. $1,110


E. $1,390


37. What are the sales for 2010?


A. $4,225


B. $4,385


C. $4,600


D. $4,815


E. $5,000




38. Calculate net income based on the following information: sales are $300; cost of goods sold is $190, depreciation expense is $45, interest paid is $20, and the tax rate is 34%.


A. $11.90


B. $15.30


C. $29.70


D. $36.30


E. $45.00




 39. What is the operating cash flow for 2010?


A. $940.52


B. $985.71


C. $1,075.50


D. $1,230.00


E. $1,354.55


40. What are the sales for 2010?


A. $4,000.00


B. $4,385.50


C. $5,435.71


D. $5,525.50


E. $5,680.00


41. The only difference between Joe’s and Moe’s is that Joe’s has old, fully depreciated equipment. Moe’s just purchased all new equipment which will be depreciated over eight years. Assuming all else equal:


A. Joe’s will have a lower profit margin.


B. Joe’s will have a lower return on equity.


C. Moe’s will have a higher net income.


D. Moe’s will have a lower profit margin.


E. Moe’s will have a higher return on assets.


42. The three parts of the Du Pont identity can be generally described as:


I. operating efficiency, asset use efficiency and firm profitability.


II. financial leverage, operating efficiency and asset use efficiency.


III. the debt-equity ratio, the capital intensity ratio and the profit margin.


IV. the equity multiplier, the profit margin and the total asset turnover.


A. I and II only


B. II and III only


C. I and IV only


D. II and IV only


E. III and IV only




 43. A firm has sales of $3,600, costs of $2,800, interest paid of $100, and depreciation of $400. The tax rate is 34%. What is the value of the cash coverage ratio?


A. 2


B. 4


C. 6


D. 8


E. 10


44. Mario’s Home Systems has sales of $2,800, cost of goods sold of $2,100, inventory of $500, and accounts receivable of $400. How many days, on average, does it take Mario’s to sell its inventory?


A. 65.2 days


B. 85.2 days


C. 86.9 days


D. 96.9 days


E. 117.3 days


45. Syed’s Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and cost of goods sold of $3,400. How long does it take Syed’s to both sell its inventory and then collect the payment on the sale?


A. 128 days


B. 146 days


C. 163 days


D. 190 days


E. 211 days


46. A firm has net working capital of $400, net fixed assets of $2,400, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?


A. $1.33


B. $1.67


C. $1.88


D. $2.33


E. $2.50




47. Rosita’s Restaurant has sales of $4,500, total debt of $1,300, total equity of $2,400, and a profit margin of 5%. What is the return on assets?


A. 5.00%


B. 6.08%


C. 7.39%


D. 9.38%


E. 17.31%


48. Lee Sun’s has sales of $3,000, total assets of $2,500, and a profit margin of 5%. The firm has a total debt ratio of 40%. What is the return on equity?


A. 6%


B. 8%


C. 10%


D. 12%


E. 15%




49. Patti’s has net income of $2400, a price-earnings ratio of 16, and earnings per share of $1.60. How many shares of stock are outstanding?


A. 1,200


B. 1,400


C. 1,500


D. 1,600


E. 1,800


50. A firm has 6,000 shares of stock outstanding, sales of $7,000, net income of $900, a price-earnings ratio of 12, and a book value per share of $.60. What is the market-to-book ratio?


A. 1.6


B. 2.4


C. 3.0


D. 3.2


E. 3.6


51. A firm has 5,000 shares of stock outstanding, sales of $6,000, an enterprise value of $5 million and an EBITDA of 1 million. What is the enterprise value multiple?


A. 2.2


B. 2.4


C. 3.0


D. 4.0


E. 5.0


52. A firm has a market capitalization of $3 million, market value of interest bearing debt of $1.5 million, book value of interest bearing debt of $500,000 and cash of $200,000. What is the enterprise value?


A. $3.5 million


B. $3.9 million


C. $4.0 million


D. $4.3 million


E. $4.7 million




53. Frederico’s has a profit margin of 5%, a return on assets of 9%, and an equity multiplier of 1.5. What is the return on equity?


A. 6.7%


B. 8.4%


C. 11.2%


D. 13.5%


E. 19.6%


54. Samuelson’s has a debt-equity ratio of 50%, sales of $8,000, net income of $700, and total debt of $2,500. What is the return on equity?


A. 8.25%


B. 9.50%


C. 10.75%


D. 12.00%


E. 14.00%


55. A firm has a return on equity of 15%. The debt-equity ratio is 50%. The total asset turnover is 1.25 and the profit margin is 8%. The total equity is $3,200. What is the amount of the net income?


A. $480


B. $500


C. $540


D. $600


E. $620




 56. What is the days’ sales in receivables in 2010?


A. 31.8 days


B. 32.5 days


C. 33.7 days


D. 41.9 days


E. 47.4 days


57. What is the equity multiplier for 2010?


A. 1.6


B. 1.8


C. 2.0


D. 2.3


E. 2.5


58. What is the cash coverage ratio for 2010?


A. 11.6


B. 12.8


C. 13.7


D. 17.3


E. 18.8


59. What is the return on equity for 2010?


A. 10.7%


B. 13.0%


C. 14.0%


D. 15.3%


E. 16.0%


60. Windswept, Inc. has 90 million shares of stock outstanding. Its price-earnings ratio for 2010 is 12. What is the market price per share of stock?


A. $57.12


B. $59.94


C. $64.13


D. $66.13


E. $67.03

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