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Exam 3: Cash Flows and Financial Analysis

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Question 61

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The repayment of debt is:

A) an operating activity.
B) an investing activity no matter how the money from the loan was allocated.
C) a financing activity.
D) an investing activity assuming the debt was used for the purchase of a fixed asset.

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Question 62

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What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and pays its shareholders dividends equal to 40% of earnings?

A) $16.80
B) $42
C) $3
D) $28

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Question 63

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Belvedere, Inc. has an annual payroll of $250,000. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed at the end of business on the Monday before payday. How much is the payroll accrual at the end of the month? (Use 260 days a year. Round to nearest dollar.)

The Ragin Cajun had an operating income (EBIT) of $260,000 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses, and $60,000 in selling, general, and administrative expenses. If the Cajun has a marginal tax rate of 40 percent, what was its cash flow from operating activities last year?

Because the statement of cash flows derives its information from the balance sheets of the firm, it can be referred to more formally as the statement of changes in net working capital.

If the debt ratio is 40.00%, then the equity multiplier is:

To evaluate a firm's debt capacity effectively, the analyst should construct both the debt ratio and the debt to equity ratio, because they are mutually exclusive indicators of the firm's capacity to assume additional debt.

Cash flow from operating activities is increased by:

Which of the following ratios is least controllable by management?

A debt to equity ratio of 2:1 suggests that for every dollar the firm has in equity, it has two dollars of long-term debt.

Ratios are typically compared with similar figures from history, the competition, and budget.

The market to book value ratio, or price to book ratio, as it is sometimes called, is an indication of the market's perception of the company's value as a "going concern." Generally, when the market "prices" the firm's stock below the book value of its common equity, the market is said to be:

The fixed charge coverage ratio is a more comprehensive version of the times interest earned ratio.

Muggles Manufacturing has asked you to calculate the company's current ratio. All you have is the partial balance sheet below, the year's sales revenue, and two ratios also shown below. Using that information, calculate Muggles' current ratio. Sales = $3,000 Cost Ratio = 45% Inventory Turnover (COGS/Inv) = 5.0 $\begin{array}{llll}\text { Asssets }&&\text { Liabilities \& Equity }\\\text { Cash } & ? ? ? ? ? & \text { Accounts Payable } & \$ 50 \\\text { AR } & \$ 40 & \text { Accruals } & ? ? ? ? ? ? \\\text { Inventory } & ? ? ? ? ? & \text { Longterm Debt } & \$ 380 \\\text { Net Fixed Assets } & \$ 500 & \text { Equity } & \$ 250\\\text { Total Assets }&\$830&\text { Total Liabilities \& Equity }&??????\end{array}$

The quick ratio is the same as current ratio except it does not consider:

The significance of a price/earnings ratio, lies in its comparative and predictive qualities. Specifically, when a company has an earnings multiple of 15 and the industry has an earnings multiple of 12, the company's stock is viewed as outperforming the industry.

An increase in an asset or a liability account represents a source of funds.

Cash flow from operating activities is decreased by:

The following is the income statement of a firm. $\begin{array}{lr}\text { Sales } & \$ 100,000 \\\text { COGS } & 80,000\\\text { GrossProfit } & 20,000 \\\text { Cash Expenses } & 8,000 \\\text { Depreciation } & 1,600\\\text { EBIT } & 10,400 \\\text { Interest } & 800\\\text { EBT } & 9,600 \\\text { Taxes } & 3,600\\\text { Net Income }&\$6,000\end{array}$ Its return on sales is:

Accounting and finance each have significant responsibilities related to the firm's financial performance; however, the accountant's role is informational, while the financial analyst's role is critical and investigative. Therefore, we can say that: