Contemporary Financial Management Ch 1-4

According to the Small Business Administration, what percent of all businesses are considered small businesses?
Subchapter S and LLCs
Sole proprietorships, partnerships and corporations are the three main forms of business organization. There
are other types which are referred to as hybrids. Examples of hybrid business forms are:
General partnership
There are three forms of business organization. Which of the following has unlimited liability?
There are problems with using the “profit maximization” criterion.
Profit maximization has an ambiguous definition of “maximizing profits”.
Profit maximization fails to consider risk.
Total shareholder wealth
____ equals the number of shares outstanding times the market price per share.
decrease dividends
One method of decreasing the cash outflows of a firm is to
separation of ownership and control
There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued
by management. The primary reason for this is ____.
tax rates
currency exchange rates
All of the following economic environment factors affect stock prices
market value of the shareholders’ common stock holdings
Shareholder wealth is measured by the ____.
accounting functions
managing interest rate risk
trading foreign currencies
The chief financial officer (CFO) normally has responsibility for?
collect all the facts bearing on the problem
clarify the parameters of the problem seek equity for those who may be affected
Techniques identified by John Casey that managers could keep in mind when addressing the ethical
dimensions of a business problem include
increase, decline
When KKR acquired RJR Nabisco, the ____ in the debt ratio, resulted in a(n) ____ in the value of the firm’s
outstanding bonds.
Agency problems
____ arise from the divergent objectives between owners and managers.
maximize shareholder wealth
The most widely accepted objective of the firm is to
Present value
The shareholder wealth maximization goal states that management should seek to maximize the ____ of the
expected future returns to the owners of the firm.
market efficiency
In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.
In an efficient capital market, stock prices reflect the present value of the firm’s expected cash flows.
Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six
months for $36 per share. The stock paid no dividend. What was Maher’s holding period return?
HPR = (3600 – 3000)/3000 × 100% = 20%
You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12.
The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was
your holding period return?
HPR = ($12 – $14 + $0.24)/$14 = -0.1257 or -12.57%
If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the
$10,000 face value at maturity, what is the percentage holding period return?
($10,000 – $9,450 + $850)/$9,450 = 0.148 or 14.8%
For the financial manager, taxes have important implications for?
dividend policy
financial restructurings
capital structure policy
In an efficient capital market, corporate diversification is ____.
a NPV of zero
In an efficient capital market, all security investments will have:
Ex post returns differ from ____ returns in that they represent ____ values rather than ____ values.
ex ante; actual; estimated
Over the past decade there has been a major shift in the mix of the suppliers of funds in the U.S. capital
markets with ____ now providing proportionately more funds.
insurance companies, pension funds, foreign banks, and investors
____ markets deal in long-term securities having maturities greater than one year.
If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the
Yen is trading at a(n) ____.
If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate
from Canadian dollars to U.S. dollars is?
$1.20 Canadian $/US dollar
Foreign currency futures are?
futures contracts have a standardized maturity date futures contracts are an exchange-traded agreement futures contracts are “marked to market” daily
An exchange rate quoted as $1.47 per British pound is known as a ____ quote.
The difference between merchandise exports and imports is known as the ____.
difference in purchasing power
Price-to-earnings ratio
Market based ratios can be
Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal
$200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current ratio
is 1.3 and the quick ratio is 0.625. What is the balance in the cash account?
ACP = Rec./2500 = 20, so Rec = 20(2500) = 50,000
CR = CA/CL = 1.3, so CA = 1.3(200,000) =260,000
QR = (CA – Inv)/CL = 0.625, so Inv = $135,000
Cash = 260,000 – 50,000 – 135,000 = $75,000
Stepping Out Shoe Mfg. has inventory purchases of $2,200 during the month of June. If the June 1 accounts
payables were $1,700 and June 30 accounts payables were $1,900, what was the cash payment?
Cash payment = $1,700 + $2,200 – $1,900 = $2,000
If a firm has a total asset turnover of 8 times and a return on total assets of 15%, its net profit margin must be?
NPM = 15% / 8 = 1.875%
What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of
$740,000, and a total asset turnover of 4?
Return on investment = Total asset turnover times net profit margin = 4(6.5%) = 26%
Nuking Gnats Pest Service, Inc. has a debt ratio of 50% and an equity multiplier of 2. What is Nuking Gnats’
stockholders’ equity if total debt is $100,000?
Debt/T.A = 0.5; T.A = $100,000/0.5 = $200,000
Equity = T.A – Debt = $200,000 – $100,000 = $100,000
A component of earnings that recognizes the return that the firm is expected to earn on assets that have not
been placed in services is called ____.
allowance for funds used during construction
Stocks with ____ dividend yield often indicate ____ expected future growth.
low, high
Deferred taxes may occur due to the use of?
different depreciation methods for taxes and financial reporting
fixed charge coverage
The ____ ratio is a more severe measure of a firm’s ability to meet fixed financial obligations than is the times
interest earned ratio.
Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better
chance of obtaining a working capital loan. Which of the following options would improve her current ratio?
purchase additional inventory on credit
Financial ratio analysis is most often performed as a?
comparative analysis and a trend analysis
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
The quick ratio is the same as current ratio except it does not consider
accounts receivable
Financial leverage ratios
____ indicate the firm’s capacity to meet its debt obligations, both short-term and long-term.
In the percent-of-sales forecasting method, all of the following balance sheet and income statement items are
assumed to increase proportionately with sales?
accounts payable
long-term debt
show the results of some assumed event
Pro forma financial statements
Cash budgeting can be employed effectively by management to?
identify potential cash flow problems in advance
determination of estimated receipts
The first step in cash budget preparation
Computerized financial planning models may be classified as any of the following except:
Pro forma financial statements show the results of some ____ event rather than a (an) ____ event.
assumed; actual
Peerless believes that its sales next year will increase 20 percent from the current level of $800,000.
Management calculates that assets must increase $110,000 to support the new sales level, and current
liabilities will increase $70,000. What total financing will be needed?
TFN = $110,000 -$70,000 = $40,000
Calculate United’s total assets if the firm expects sales to grow 15 percent this year and the earnings after tax
will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this
year. The firm will need additional financing of $25,000 to finance the expected growth. United started the
year with $40,000 in accounts payable; $30,000 in notes payable; and $100,000 in long-term debt. The
company is operating at full capacity.
$25,000 = (A/S)(.15S) – ($40,000/S)(.15S) – ($50,000 – $22,000)
A = $393,333
statement of cash flows
The financial statement that shows the effects of a company’s operating, investing, and financing activities on
its cash balance is known as the:
a. indirect method
b. direct method
c. reconciliation method
d. none of the above
The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of cash
flows using the:
statement of cash flows
Which of the following shows the effects of a company’s operating, investing, and financing activities on its
cash flows?
Full capacity sales = $148,750/0.85 = $175,000
New Sales = $148,750(1.25) = $185,938
$50,000 net fixed assets will support $175,000 in sales. Hence net fixed assets must increase by 50/175, or
0.2857 times sales in excess of capacity, or 0.2857($185,938 – $175,000) = $3,125
AFN = $65,000(0.25) + $3,125 – $15,000(0.25) – ($16,000 – $5,000)
= $16,250 + $3,125 – $3,750 – $11,000 = $4,625
The Hudson River Line Company has a balance sheet as of the end of the year as follows:Cash $ 5,000 Accounts Payable $ 15,000
Accounts Receivable 20,000 Notes Payable 10,000
Inventories 40,000 Total Current Liab. 25,000
Total Current Assets $ 65,000 Long-term Debt 30,000
Fixed Assets, net 50,000 Stockholder’s Equity 60,000
Total Assets $115,000 Total Liabilities & Equity $115,000
What additional financing will be needed to support the sales increase?
budget simulator
Is an example of a deterministic model?
Short-term operational plans are generally conducted over what time frame?
8 – 12 months
Estimation of cash receipts
The first step in the preparation of a cash budget is: