Reference no: EM131402168

Corporate Finance Quiz 

1. If a company has sales of $500,000, a tax rate of 25%, a profit margin of 12% and earnings before interest and taxes (EBIT) of $110,000, what is its times-interest-earned ratio?

a) 1.667

b) 2.0000

c) 2.6667

d) 3.6667

2.  If a company has a return on assets (ROA; the gross return) of 12.5%, a profit margin of 10%, cost of goods sold of $500,000 (cost of goods sold are stable at 40% of sales), interest expense of $25,000 and taxes of $15,000, what is the company's total asset turnover ratio?

a) 0.694

b) 0.845

c) 0.947

d) 1.250

3. An investor is considering investing in Red Ltd., and has gathered the following data on the company (all the figures except for the percentages and dividends per share are in thousands):

	Red Ltd.
Net income - current year	$1,500
Dividend per share - current year	$0.75
Expected annual growth in dividends	3%
Expected free cash flows (in one year)	$800
Expected annual growth in free cash flows	2%
Number of common shares outstanding	1,000
Weighted average cost of capital	5%
Cost of equity capital	7%
Current value of long-term debt	$7,500

Based on this information, what should the current price of Red shares be under the capitalization of future cash flows approach and under the discounting of future free cash flows, respectively?

a) $11.04; $8.50 

b) $18.75; $19.17

c) $19.31; $19.17 

d) $19.31; $26.67

4. A company has sales of $10 million and a gross profit margin of 65%. It has $1.2 million in current assets that consist of cash, marketable securities, accounts receivable and inventory. Its current ratio is 1.50, its quick (acid test) ratio is 1.10 and its beginning inventory balance is $280,000. What is its inventory turnover ratio?

a) 6.034

b) 10.938

c) 11.667

d) 21.667

5. The balance sheet of Lever Inc. is as follows (in thousands):

Current assets                                                       $92

Property, plant and equipment                                 600

Total assets                                                            $692

Current liabilities                                                     $60

Long-term liabilities                                                 80

Total liabilities                                                         140

Shareholders' equity:

Common shares (40 shares)                                    320

Preferred shares                                                     80

Retained earnings                                                   152

Total shareholders' equity                                        552

Total shareholders' equity and liabilities                    $692

Other information (the dollar amounts are in thousands):

Current assets include inventories with a cost of $52. These inventories could be sold for $80 less a 12% commission. The replacement cost of the inventories is $60. Property, plant and equipment includes a building and land with a net book value of $480. The building and land have a fair market value of $800 and a replacement cost of $840.

What is the estimated value of one share of Lever Inc. using the liquidation method?

a) $20.26

b) $20.50

c) $21.00

d) $22.26

Intermediate Financial Reporting Quiz

1. Golden Lab Inc. (GLI) uses the direct method to prepare the operating activities section of its statement of cash flows. GLI's policy is to report the receipt of interest and dividends as investing activities, and the payment of interest and dividends as financing activities.  

Following are extracts from the company's financial statements for its year ended December 31, 20X4:

Cash paid to fund the settlement of a decommissioning obligation - $ 16,000

Cash paid to purchase an investment at amortized cost - 17,000

Cash paid to purchase at fair value through profit or loss securities designated as cash equivalents - 15,000

Cash paid to suppliers and employees - 393,000

Cash receipts from customers - 812,000

Cash received from the sale of equipment (net book value: $40,000) - 49,000

Cash remitted to pension trust - 62,000

Depreciation expense - 91,000

Income taxes paid - 92,000

Issuance of common shares in exchange for equipment - 68,000

Payment to settle lawsuit - 38,000

Pension expense - 74,000

Proceeds from issuing bonds - 100,000

What was GLI's cash flow from operating activities for the year ended December 31, 20X4?

a) $120,000 inflow

b) $211,000 inflow

c) $227,000 inflow

d) $249,000 inflow

2. Fashion Forward Inc. (FFI) is a public company that has a December 31 year end. FFI's policy is to report the receipt of interest and dividends as investing activities, and the payment of interest and dividends as financing activities.

Following are extracts from the company's financial statements for its year ended December 31, 20X4:

Cash dividends paid - $60,000

Distribution of property dividend - 5,000

Payment on lease liability - 10,000

Proceeds from issuing bonds - 95,000

Right-of-use asset acquired under a lease contract - 115,000

What was FFI's cash flow from financing activities for the year ended December 31, 20X4?

a) $25,000 inflow

b) $35,000 inflow

c) $85,000 inflow

d) $95,000 outflow

3. On Tan Inc.'s 20X5 statement of cash flows, net cash provided by operating activities was $70,000. For 20X5, depreciation on plant assets was $30,000, impairment of goodwill was $5,000, and cash dividends paid on ordinary shares was $36,000. The cash dividends paid were reported as a financing activity. Based only on the information given above, what was Tan's net income for 20X5?

 a) $35,000 

b) $70,000  

c) $71,000

d) $105,000

Use the following information to answer questions 4 and 5.

Following is select financial information for Enough Already Corp. (EAC) for its year ending December 31, 20X5, together with comparative information:

Enough Already Corp. Statement of profit or loss For the year ended December 31, 20X5 (in '000s)

	20X5	20X4
Sales	$132,500	$125,000
Cost of goods sold	76,200	72,600
Gross profit	$56,300	$52,400
Expenses:
Operating expense	$27,500	$25,700
Depreciation expense	6,850	6,850
Advertising expense	4,92	4,850
Interest expense	5,950	6,500
Total expenses	$45,220	$43,900
Profit or loss before tax	$11,080	$8,500
Income tax expense	4,400	3,000
Profit or loss	$6,680	$5,500

Enough Already Corp. Statement of financial position As at December 31, 20X5 (in '000s)

	20X5	20X4	20X3
Current assets:
Cash	$13,290	$10,700	$101,395
Accounts receivables	34,500	33,800	28,900
Inventory	21,200	19,800	16,550
Total current assets	$68,990	$64,300	$55,845
Capital assets	92,300	99,150	106,000
Total assets	$161,290	$163,450	$161,845
Current liabilities:
Accounts payable	$15,690	$16,145	$14,155
Unearned revenue	9,200	8,900	8,400
Current portion of long-term debt	8,500	8,500	8,500
Total current liabilities	$33,390	$33,545	$31,055
Long-term liabilities	68,000	76,500	85,000
Total liabilities	$101,390	$110,045	$116,055
Shareholders' equity	59,900	53,405	45,790
Total liabilities and shareholders' equity	$161,290	$163,450	$161,845

Industry averages

Gross margin - 44.5%

Return on equity (ROE) - 12.9%

Current ratio - 1.8:1

Quick ration - 1.2:1

4. Which of the following statements regarding EAC's change in profitability from the previous year is true? (Hint: Calculate gross margin and return on equity for your analysis.)  

a) EAC's profitability has deteriorated, but the organization is more efficient at generating income from its equity base.

b) EAC's profitability has deteriorated, and the organization is less efficient at generating income from its equity base. 

c) EAC's profitability has improved, but the organization is less efficient at generating income from its equity base. 

d) EAC's profitability has improved, and the organization is more efficient at generating income from its equity base.

5. Which of the following statements regarding EAC's liquidity is true? (Hint: Calculate the current ratio and quick ratio for your analysis.)

a) EAC's ability to meet its short-term obligations has improved from the prior year, and is better than similar companies in the industry.

b) EAC's ability to meet its short-term obligations has improved from the prior year, but is still worse than similar companies in the industry.

c) EAC's ability to meet its short-term obligations has worsened from the prior year, but is still better than similar companies in the industry.

d) EAC's ability to meet its short-term obligations has worsened from the prior year, and is worse than similar companies in the industry.