FIN 470 Exam1 - KEY
1. What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.
The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, and unlimited life.
2. Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long- term profits.
Presumably, the current stock value reflects the risk, timing, and magnitude of all ...view middle of the document...
OCF = EBIT + Depreciation – Taxes = $76,100 + 9,100 – 21,455 = $63,745
b. CFC = Interest – Net new LTD = $14,800 – (–7,300) = $22,100
Note that the net new long-term debt is negative because the company repaid part of its long-
c. CFS = Dividends – Net new equity = $10,400 – 5,700 = $4,700
5. In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
The firm has increased inventory relative to other current assets; therefore, assuming current liability levels remain unchanged, liquidity has potentially decreased.
6. Y3K, Inc., has sales of $ 5,276, total assets of $ 3,105, and a debt– equity ratio of 1.40. If its return on equity is 15 percent, what is its net income?
This is a multi-step problem involving several ratios. The ratios given are all part of the DuPont Identity. The only DuPont Identity ratio not given is the profit margin. If we know the profit margin, we can find the net income since sales are given. So, we begin with the DuPont Identity:
ROE = 0.15 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E)
Solving the DuPont Identity for profit margin, we get:
PM = [(ROE)(TA)] / [(1 + D/E)(S)]
PM = [(0.15)($3,105)] / [(1 + 1.4)( $5,726)] = .0339
Now that we have the profit margin, we can use this number and the given sales figure to solve for net income:
PM = .0339 = NI / S
NI = .0339($5,726) = $194.06
7. Why do you think most long- term financial planning begins with sales forecasts? Put differently, why are future sales the key input?
The reason is that, ultimately, sales are the driving force behind a business. A firm’s assets, employees, and, in fact, just about every aspect of its operations and financing exist to directly or indirectly support sales. Put differently, a firm’s future need for things like capital assets, employees, inventory, and financing are determined by its future sales level.
8. The most recent financial statements for Zoso, Inc., are shown here (assuming no income taxes): Income Statement Balance Sheet
Sales $ 6,300 Assets $ 18,300 Debt $ 12,400
Costs 3,890 Equity 5,900
Net income $ 2,410 Total $ 18,300 Total $ 18,300
Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $ 7,434. What is the external financing needed?
An increase of sales to $7,424 is an increase of:
Sales increase = ($7,424 – 6,300) / $6,300
Sales increase = .18 or 18%
Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:
Pro forma income statement Pro forma balance sheet
Sales $ 7,434 Assets $ 21,594 Debt $ 12,400
Costs 4,590 Equity 8,744