Solutions to Homework 1, Acc Chapters 1, 2 & 3

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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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