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8/26/14

The Fundamentals of Corporate Finance by Colin Firer, Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan - 5, test bank 0077134524

Firer - fundamentals of corporate finance - 5, test bank 0077134524

The Fundamentals of Corporate Finance by Colin Firer, Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan - 5, test bank 0077134524

ch2 Key

1.

The financial statement showing a firm's accounting value on a particular date is the: 

A.

Income statement.

B.

Statement of financial position.

C.

Statement of cash flows.

D.

Tax reconciliation statement.

E.

Shareholders' equity sheet.

Firer - Chapter 02 #1
Topic: Statement of Financial Position

2.

A current asset is: 

A.

An item currently owned by the firm.

B.

An item that the firm expects to own within the next year.

C.

An item currently owned by the firm that will convert to cash within the next 12 months.

D.

The amount of cash on hand the firm currently shows on its statement of financial position.

E.

The market value of all items currently owned by the firm.

Firer - Chapter 02 #2
Topic: Current Assets

3.

The long-term debts of a firm are liabilities: 

A.

That come due within the next 12 months.

B.

That do not come due for at least 12 months.

C.

Owed to the firm's suppliers.

D.

Owed to the firm's shareholders.

E.

The firm expects to incur within the next 12 months.

Firer - Chapter 02 #3
Topic: Long-Term Debt

4.

Net working capital is defined as: 

A.

Total liabilities minus shareholders' equity.

B.

Current liabilities minus shareholders' equity.

C.

Non-current assets minus long-term liabilities.

D.

Total assets minus total liabilities.

E.

Current assets minus current liabilities.

Firer - Chapter 02 #4
Topic: Net Working Capital

5.

A(n) ____ asset is one which can be quickly converted into cash without significant loss in value. 

A.

Current

B.

Non-current

C.

Intangible

D.

Liquid

E.

Long-term

Firer - Chapter 02 #5
Topic: Liquid Assets

6.

Financial leverage refers to the: 

A.

Amount of debt used in a firm's capital structure.

B.

Ratio of retained profits to shareholders' equity.

C.

Ratio of share premium to shareholders' equity.

D.

Ratio of cost-of-goods-sold to total sales.

E.

Amount of receivables present in the firm's asset structure.

Firer - Chapter 02 #6
Topic: Financial Leverage

7.

The common set of standards and procedures by which audited financial statements are prepared is known as the: 

A.

Matching principle.

B.

Cash flow identity.

C.

Generally Accepted Accounting Principles (GAAP).

D.

Freedom of Information Act (FOIA).

E.

International Accounting Standards.

Firer - Chapter 02 #7
Topic: GAAP

8.

The financial statement summarizing a firm's performance over a period of time is the: 

A.

Income statement.

B.

Statement of financial position.

C.

Statement of cash flows.

D.

Tax reconciliation statement.

E.

Shareholders' equity sheet.

Firer - Chapter 02 #8
Topic: Income Statement

9.

Non-cash items refer to: 

A.

Accrued expenses.

B.

Inventory items purchased using credit.

C.

The ownership of intangible assets such as patents.

D.

Expenses charged against revenues that do not directly affect cash flow.

E.

Sales which are made using store credit.

Firer - Chapter 02 #9
Topic: Non-Cash Items

10.

Your _____ tax rate is the amount of tax payable on the next taxable rand you earn. 

A.

Deductible

B.

Residual

C.

Total

D.

Average

E.

Marginal

Firer - Chapter 02 #10
Topic: Marginal Tax Rate

11.

Your _____ tax rate measures the total taxes you pay divided by your net profit after tax. 

A.

Deductible

B.

Residual

C.

Total

D.

Average

E.

Marginal

Firer - Chapter 02 #11
Topic: Average Tax Rates

12.

_____ refers to the cash flow resulting from the firm's ongoing, normal business activities. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to lenders

Firer - Chapter 02 #12
Topic: Operating Cash Flow

13.

_____ refers to the net expenditures by the firm on non-current asset purchases. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to lenders

Firer - Chapter 02 #13
Topic: Capital Spending

14.

_____ refers to the difference between a firm's current assets and its current liabilities. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to lenders

Firer - Chapter 02 #14
Topic: Net Working Capital

15.

_____ refers to the net total cash flow of the firm available for distribution to its lenders and shareholders. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to creditors

Firer - Chapter 02 #15
Topic: Cash Flow from Assets

16.

_____ refers to the firm's interest payments less any net new borrowing. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to lenders

Firer - Chapter 02 #16
Topic: Cash Flow to Lenders

17.

_____ refers to the firm's dividend payments less any net new equity raised. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to shareholders

Firer - Chapter 02 #17
Topic: Cash Flow to Shareholders

18.

Cash flow from assets is also known as the firm's: 

A.

Capital structure.

B.

Equity structure.

C.

Hidden cash flow.

D.

Free cash flow.

E.

Historical cash flow.

Firer - Chapter 02 #18
Topic: Free Cash Flow

19.

Earnings per share is equal to: 

A.

Net profit after tax divided by the total number of shares outstanding.

B.

Net profit after tax divided by the par value of the ordinary shares

C.

Gross income multiplied by the par value of the ordinary shares

D.

Operating profit divided by the par value of the ordinary shares.

E.

Net profit after tax divided by total shareholders' equity.

Firer - Chapter 02 #19
Topic: Earnings Per Share

20.

Dividends per share is equal to dividends paid: 

A.

Divided by the par value of ordinary shares

B.

Divided by the total number of shares outstanding.

C.

Divided by total shareholders' equity.

D.

Multiplied by the par value of the ordinary shares

E.

Multiplied by the total number of shares outstanding.

Firer - Chapter 02 #20
Topic: Dividends Per Share

21.

A computer used in a business office by the office manager is classified as: 

A.

A current asset.

B.

An intangible asset.

C.

Net working capital.

D.

A tangible asset.

E.

An inventory item.

Firer - Chapter 02 #21
Topic: Tangible Asset

22.

Which of the following are included in current assets?
I. Equipment
II. Inventory
III. Accounts payable
IV. Cash 

A.

II and IV only

B.

I and III only

C.

I, II, and IV only

D.

III and IV only

E.

II, III, and IV only

Firer - Chapter 02 #22
Topic: Current Assets

23.

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? 

A.

Real estate investment

B.

Good reputation of the company

C.

Equipment owned by the firm

D.

Money due from a customer

E.

An item held by the firm for future sale

Firer - Chapter 02 #23
Topic: Market Value

24.

Which of the following are included in current liabilities?
I. Note payable to a supplier in eighteen months
II. Debt payable to a mortgage company in nine months
III. Accounts payable to suppliers
IV. Loan payable to the bank in fourteen months 

A.

I and III only

B.

II and III only

C.

III and IV only

D.

II, III, and IV only

E.

I, II, and III only

Firer - Chapter 02 #24
Topic: Current Liabilities

25.

Which one of the following statements concerning net working capital is correct? 

A.

Net working capital is negative when current assets exceed current liabilities.

B.

Net working capital includes cash, accounts receivables, non-current assets, and accounts payable.

C.

Inventory is a part of net working capital.

D.

The change in net working capital is equal to the beginning net working capital minus the ending net working capital.

E.

Net working capital includes accounts from the income statement.

Firer - Chapter 02 #25
Topic: Net Working Capital

26.

Which one of the following statements concerning net working capital is correct? 

A.

The greater the net working capital, the greater the ability of a firm to meet its short-term obligations.

B.

The change in net working capital is equal to current assets minus current liabilities.

C.

Depreciation must be added back to current assets when computing the change in net working capital.

D.

Net working capital is equal to long-term assets minus long-term liabilities.

E.

Net working capital is a part of the operating cash flow.

Firer - Chapter 02 #26
Topic: Net Working Capital

27.

An increase in total assets: 

A.

Means that net working capital is also increasing.

B.

Requires an investment in non-current assets.

C.

Means that shareholders' equity must also increase.

D.

Must be offset by an equal increase in liabilities and shareholders' equity.

E.

Can only occur when a firm has positive net profits.

Firer - Chapter 02 #27
Topic: Statement of Financial Position

28.

Which one of the following accounts is the most liquid? 

A.

Inventory

B.

Building

C.

Accounts receivable

D.

equipment

E.

patent

Firer - Chapter 02 #28
Topic: Liquidity

29.

Which of the following accounts generally increase in value when a firm sells shares of its ordinary shares at a price in excess of par value?
I. retained profits
II. share premium
III. ordinary shares
IV. preference shares 

A.

I and II only

B.

II and III only

C.

III and IV only

D.

I, II, and III only

E.

II, III, and IV only

Firer - Chapter 02 #29
Topic: Statement of Financial Position

30.

Which one of the following statements concerning liquidity is correct? 

A.

If you can sell an asset today, it is a liquid asset.

B.

If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.

C.

Trademarks and patents are highly liquid.

D.

The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.

E.

Statement of financial position accounts are listed in order of decreasing liquidity.

Firer - Chapter 02 #30
Topic: Liquidity

31.

Liquidity is: 

A.

A measure of the use of debt in a firm's capital structure.

B.

Equal to current assets minus current liabilities.

C.

Equal to the market value of a firm's total assets minus its current liabilities.

D.

Valuable to a firm even though liquid assets tend to be less profitable to own.

E.

Generally associated with intangible assets.

Firer - Chapter 02 #31
Topic: Liquidity

32.

Which of the following accounts are included in shareholders' equity?
I. Interest paid
II. Retained profits
III. Share premium
IV. Long-term debt 

A.

I and II only

B.

II and IV only

C.

I and IV only

D.

II and III only

E.

I and III only

Firer - Chapter 02 #32
Topic: Shareholders Equity

33.

The higher the degree of financial leverage employed by a firm, the: 

A.

Higher the probability that the firm will encounter financial distress.

B.

Lower the amount of debt incurred.

C.

Less debt a firm has per rand of total assets.

D.

Higher the number of shares in issue.

E.

Lower the balance in accounts payable.

Firer - Chapter 02 #33
Topic: Leverage

34.

Shareholders' equity: 

A.

Includes ordinary shares, share premium, retained profits, and long-term debt.

B.

On a statement of financial position is equivalent to the market value of the outstanding shares.

C.

Includes all of a firm's profits retained by the firm to date.

D.

Increases, all else equal, when the dividends paid are greater than the net profit for a year.

E.

Includes the book value of any bonds issued by the firm.

Firer - Chapter 02 #34
Topic: Shareholders Equity

35.

The higher the degree of financial leverage employed by a firm, the: 

A.

Lower the probability that the firm will encounter financial distress.

B.

Greater the amount of debt incurred.

C.

Greater the number of ordinary shares issued.

D.

Greater the cash flow to lenders each year.

E.

Lower the potential gains to shareholders.

Firer - Chapter 02 #35
Topic: Financial Leverage

36.

The book value of a firm: 

A.

Is equivalent to market value for firms with non-current assets.

B.

Is based on historical cost.

C.

Generally tends to exceed market value when non-current assets are included.

D.

Is more of a financial than an accounting valuation.

E.

Is adjusted to market value whenever the market value exceeds the stated book value.

Firer - Chapter 02 #36
Topic: Book Value

37.

Which of the following are included in the market value of a firm but are excluded from the firm's book value?
I. Value of management skills
II. Value of a copyright
III. Value of the firm's reputation
IV. Value of employee's experience 

A.

I only

B.

II only

C.

III and IV only

D.

I, II, and III only

E.

I, III, and IV only

Firer - Chapter 02 #37
Topic: Market Value

38.

When making financial decisions related to assets, you should: 

A.

Always consider market values.

B.

Place more emphasis on book values than on market values.

C.

Rely primarily on the value of assets as shown on the statement of financial position.

D.

Place primary emphasis on historical costs.

E.

Only consider market values if they are less than book values.

Firer - Chapter 02 #38
Topic: Market Value

39.

As seen on an income statement: 

A.

Interest is deducted from income and increases the total taxes incurred.

B.

The tax rate is applied to the profits before interest and taxes when the firm has both depreciation and interest expenses.

C.

Depreciation is shown as an expense but does not affect the taxes payable.

D.

Depreciation reduces both the taxable profits and the net profit after tax.

E.

Interest expense is added to profits before interest and taxes to get taxable profits.

Firer - Chapter 02 #39
Topic: Income Statement

40.

The earnings per share will: 

A.

Increase as net profits after tax increases.

B.

Increase as the number of shares outstanding increase.

C.

Decrease as the total revenue of the firm increases.

D.

Increase as the tax rate increases.

E.

Decrease as the costs decrease.

Firer - Chapter 02 #40
Topic: Earnings Per Share

41.

Dividends per share: 

A.

Increase as the net profit after tax increases as long as the number of shares in issue remains constant.

B.

Decrease as the number of shares in issue decrease, all else constant.

C.

Are inversely related to the earnings per share.

D.

Are based upon the dividend requirements established by Generally Accepted Accounting Practice.

E.

Are equal to the amount of net profit after tax distributed to shareholders divided by the number of shares outstanding.

Firer - Chapter 02 #41
Topic: Dividends Per Share

42.

According to Generally Accepted Accounting Principles, 

A.

Revenues are recorded based on the matching principle.

B.

Revenues are recorded based on the realization principle.

C.

Costs are recorded based on the liquidity principle.

D.

Net profit after tax is recorded based on the realization principle.

E.

Depreciation is recorded as it affects the cash flows of a firm.

Firer - Chapter 02 #42
Topic: Realization Principle

43.

According to Generally Accepted Accounting Principles, costs are: 

A.

Recorded as incurred.

B.

Recorded when paid.

C.

Matched with revenues.

D.

Matched with production levels.

E.

Expensed as management desires.

Firer - Chapter 02 #43
Topic: Matching Principle

44.

Depreciation: 

A.

Is a non-cash expense that is recorded on the income statement.

B.

Increases the net non-current assets as shown on the statement of financial position.

C.

Reduces both the net non-current assets and the costs of a firm.

D.

Is a non-cash expense which increases the net operating profit.

E.

Decreases net non-current assets, net profit after tax, and operating cash flows.

Firer - Chapter 02 #44
Topic: Non-Cash Items

45.

Fixed costs in the short-run generally include which of the following?
I. Manufacturing wages
II. Cost of materials used in production
III. Property insurance
IV. Contractually determined management salaries 

A.

I and II only

B.

II and III only

C.

III and IV only

D.

I and IV only

E.

II and IV only

Firer - Chapter 02 #45
Topic: Fixed Costs

46.

When you are making a financial decision, the most relevant tax rate is the _____ rate. 

A.

Average

B.

Fixed

C.

Marginal

D.

Total

E.

Variable

Firer - Chapter 02 #46
Topic: Marginal Tax Rate

47.

The cash flow from assets is equal to: 

A.

Operating cash flow minus the change in net working capital plus net capital spending.

B.

Cash flow to lenders minus the cash flow to shareholders.

C.

Profits before interest and taxes plus depreciation plus taxes.

D.

Profits before interest and taxes plus depreciation plus taxes minus net capital spending minus the change in net working capital.

E.

Profits before interest and taxes plus depreciation minus taxes minus net capital spending minus the change in net working capital.

Firer - Chapter 02 #47
Topic: Cash Flow from Assets

48.

An increase in which one of the following will cause the cash flow from assets to increase? 

A.

Depreciation

B.

Change in net working capital

C.

Net working capital

D.

Taxes

E.

Costs

Firer - Chapter 02 #48
Topic: Cash Flow from Assets

49.

Which one of the following is NOT included in cash flow from assets? 

A.

Accounts payable

B.

Inventory

C.

Sales

D.

Interest expense

E.

Cash account

Firer - Chapter 02 #49
Topic: Cash Flow from Assets

50.

Cash flow from assets must be negative when: 

A.

The firm has a taxable loss for the year.

B.

The cash flow from lenders and the cash flow from shareholders are both negative.

C.

The cash flow from lenders is negative and the cash flow from shareholders is positive.

D.

The change in net working capital exceeds the net capital spending.

E.

Operating cash flow is less than the change in net working capital.

Firer - Chapter 02 #50
Topic: Cash Flow from Assets

51.

Assume a firm has depreciation, taxes, and interest expense. In this case, operating cash flow: 

A.

Is the same as net profit after tax.

B.

Is the same as net profit after tax plus depreciation.

C.

Must be positive because depreciation is added to the taxable profit.

D.

Can be positive, negative, or equal to zero.

E.

Is equal to the cash flow to lenders.

Firer - Chapter 02 #51
Topic: Operating Cash Flow

52.

A firm starts its year with a positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that: 

A.

The ending net working capital will be negative.

B.

Both accounts receivable and inventory decreased during the year.

C.

The beginning current assets were less than the beginning current liabilities.

D.

Accounts payable increased and inventory decreased during the year.

E.

The ending net working capital can be positive, negative, or equal to zero.

Firer - Chapter 02 #52
Topic: Change in Net Working Capital

53.

Net capital spending: 

A.

Is negative if the sale of non-current assets is greater than the acquisition of current assets.

B.

Is equal to zero if the decrease in the non-current assets account is equal to the depreciation expense for the period.

C.

Reflects the net changes in total assets over a stated period of time.

D.

Is equivalent to the cash flow from assets.

E.

Is equal to the ending net non-current assets minus the beginning net non-current assets.

Firer - Chapter 02 #53
Topic: Net Capital Spending

54.

The cash flow to lenders includes the cash: 

A.

Received by the firm when payments are paid to suppliers.

B.

Outflow of the firm when new debt is acquired.

C.

Outflow when interest is paid on outstanding debt.

D.

Inflow when accounts payable decreases.

E.

Received when long-term debt is paid off.

Firer - Chapter 02 #54
Topic: Cash Flow to Creditors

55.

Cash flow to shareholders must be positive when: 

A.

The dividends paid exceed the net new equity raised.

B.

The net sale of ordinary shares exceeds the amount of dividends paid.

C.

No profits are distributed but new shares are sold.

D.

Both the cash flow to assets and the cash flow to lenders are negative.

E.

Both the cash flow to assets and the cash flow to lenders are positive.

Firer - Chapter 02 #55
Topic: Cash Flow to Shareholders

56.

A firm has R520 in inventory, R1 860 in non-current assets, R190 in accounts receivables, R210 in accounts payable, and R70 in cash. What is the amount of the current assets? 

A.

R710

B.

R780

C.

R990

D.

R2 430

E.

R2 640

Current assets = R520 + R190 + R70 = R780

Firer - Chapter 02 #56
Topic: Current Assets

57.

A firm has net working capital of R350. Long-term debt is R600, total assets are R950 and non-current assets are R400. What is the amount of the total liabilities? 

A.

R200

B.

R400

C.

R600

D.

R800

E.

R1 200

Current assets = R950 - R400 = R550; Current liabilities = R550 - R350 = R200; Total liabilities = R200 + R600 = R800

Firer - Chapter 02 #57
Topic: Total Liabilities

58.

A firm has share capital of R6 200, share premium of R9 100, total liabilities of R8 400, current assets of R5 900, and non-current assets of
R21 200. What is the amount of the shareholders' equity? 

A.

R6 900

B.

R15 300

C.

R18 700

D.

R23 700

E.

R35 500

Shareholders' equity = R5 900 + R21 200 - R8 4000 = R18 700 (Note: The amount of retained profits is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

Firer - Chapter 02 #58
Topic: Shareholders Equity

59.

The total assets are R4 900, the non-current assets are R3 200, long-term debt is R2 900, and short-term debt is R1 400. What is the amount of net working capital? 

A.

R100

B.

R300

C.

R600

D.

R1 700

E.

R1 800

Net working capital = R4 900 - R3 200 - R1 400 = R300

Firer - Chapter 02 #59
Topic: Net Working Capital

60.

Shareholders' equity in a firm is R500. The firm owes a total of R400 of which 75 per cent is payable within the next year. The firm has net non-current assets of R600. What is the amount of the net working capital? 

A.

-R200

B.

-R100

C.

R0

D.

R100

E.

R200

Current liabilities = 0,75 × R400 = R300; Total assets = R500 + R400 = R900; Current assets = R900 - R600 = R300; Net working capital = R300 - R300 = R0

Firer - Chapter 02 #60
Topic: Net Working Capital

61.

Brad's Co. has equipment with a book value of R500 that could be sold today at a 50 per cent discount. Their inventory is valued at R400 and could be sold to a competitor for that amount. The firm has R50 in cash and customers owe them R300. What is the accounting value of their liquid assets? 

A.

R50

B.

R350

C.

R700

D.

R750

E.

R1 000

Liquid assets = R400 + R50 + R300 = R750

Firer - Chapter 02 #61
Topic: Liquidity

62.

Martha's Enterprises spent R2 400 to purchase equipment three years ago. This equipment is currently valued at R1 800 on today's statement of financial position but could actually be sold for R2 000. Net working capital is R200 and long-term debt is R800. What is the book value of shareholders' equity? 

A.

R200

B.

R800

C.

R1 200

D.

R1 400

E.

The answer cannot be determined from the information provided.

Book value of shareholders' equity = R1 800 + R200 - R800 = R1 200

Firer - Chapter 02 #62
Topic: Book Value

63.

Jake owns The Corner Market which he is trying to sell so that he can retire and travel. The Corner Market owns the building in which it is located. This building was built at a cost of R647 000 and is currently appraised at R819 000. The counters and fixtures originally cost R148 000 and are currently valued at R65 000. The inventory is valued on the statement of financial position at R319 000 and has a retail market value equal to 1, 2 times its cost. Jake expects the store to collect 98 per cent of the R21 700 in accounts receivable. The firm has R26 800 in cash and has total debt of R414 700. What is the market value of this firm? 

A.

R857 634

B.

R900 166

C.

R919 000

D.

R1 314 866

E.

R1 333 700

Market value of firm = R819 000 + R65 000 + 1,2(R319 000) + 0,98(R21 700) +
R 26 800 - R414 700 = R 900 166

Firer - Chapter 02 #63
Topic: Book Value

64.

Ivan's, Inc. paid R500 in dividends and R600 in interest this past year. Ordinary shares increased by R200 and retained profit decreased by R100. What is the net profit after tax for the year? 

A.

R400

B.

R500

C.

R600

D.

R800

E.

R1 000

NPAT = R500 + (-R100) = R400

Firer - Chapter 02 #64
Topic: Net Profit After Tax

65.

Art's Boutique has sales of R640 000 and costs of R480 000. Interest expense is R40 000 and depreciation is R60 000. The tax rate is 34%. What is the net profit after tax? 

A.

R20 400

B.

R39 600

C.

R50 400

D.

R79 600

E.

R99 600

PBT = R640 000 - R480 000 - R40 000 - R60 000 = R60 000; Tax = 0,34(R60 000) = R20 400; NPAT = R60 000 - R20 400 = R39 600

Firer - Chapter 02 #65
Topic: Net Profit After Tax

66.

Given the tax rates as shown, what is the average tax rate for an individual with net profit after tax of R126 500?
clip_image002

A.

21,38 per cent

B.

23,88 per cent

C.

25,76 per cent

D.

34,64 per cent

E.

39,00 per cent

Tax = 0,15(R50 000) + 0,25(R25 000) + 0,34(R25 000) + 0,39(R126 500 - R100 000) = R32 585; Average tax rate = R32 585 ÷ R126 500 = 0,2576 = 25,76 percent

Firer - Chapter 02 #66
Topic: Marginal Tax Rate

67.

The tax rates are as shown. You currently have net profit after tax of R79 400. How much additional tax will you owe if you increase your net profit after tax by
R21 000?
clip_image004

A.

R7 004

B.

R7 014

C.

R7 140

D.

R7 160

E.

R7 174

Additional tax = 0,34(R100 000 - R79 400) + 0,39(R79 400 + R21 000 - R100 000) =
R7 160

Firer - Chapter 02 #67
Topic: Taxes

68.

Tim's Playhouse paid R155 in dividends and R220 in interest expense. The addition to retained profits is R325 and net new equity is R50. The tax rate is 25 per cent. Sales are R1 600 and depreciation is R160. What are the profits before interest and taxes? 

A.

R480

B.

R640

C.

R860

D.

R1 020

E.

R1 440

NPAT = R155 + R325 = R480; PBT = R480 ÷ (1 - 0,25) = R640; Profit before interest and taxes = R640 + R220 = R860

Firer - Chapter 02 #68
Topic: Profit Before Interest and Taxes

69.

Your firm has total sales of R1 349 800. Costs are R903 500 and depreciation is R42 700. The tax rate is 34 per cent. The firm does not have interest expenses. What is the operating cash flow? 

A.

R129 152

B.

R171 852

C.

R179 924

D.

R309 074

E.

R309 076

Earnings before interest and taxes = R1 349 800 - R903 500 - R42 700 = R403 600
Tax = R403 600 x 0,34 = R137 224
Operating cash flow = R403 600 + R42 700 - R137 224 = R309 076

Firer - Chapter 02 #69
Topic: Operating Cash Flow

70.

Teddy's Pillows has beginning net non-current assets of R480 and ending net non-current assets of R530. Assets valued at R300 were sold during the year. Depreciation was R40. What is the amount of net capital spending? 

A.

R10

B.

R50

C.

R90

D.

R260

E.

R390

Net capital spending = R530 - R480 + R40 = R90

Firer - Chapter 02 #70
Topic: Net Capital Spending

71.

At the beginning of the year, a firm has current assets of R380 and current liabilities of R210. At the end of the year, the current assets are R410 and the current liabilities are R250. What is the change in net working capital? 

A.

-R30

B.

-R10

C.

R0

D.

R10

E.

R30

Change in net working capital = (R410 - R250) - (R380 - R210) = -R10

Firer - Chapter 02 #71
Topic: Change in Net Working Capital

72.

At the beginning of the year, long-term debt of a firm is R280 and total debt is R340. At the end of the year, long-term debt is R260 and total debt is R350. The interest paid is R30. What is the amount of the cash flow to lenders? 

A.

-R50

B.

-R20

C.

R20

D.

R30

E.

R50

Cash flow to lenders = R30 - (R260 - R280) = R50

Firer - Chapter 02 #72
Topic: Cash Flow to Lenders

73.

Pete's Boats has beginning long-term debt of R180 and ending long-term debt of R210. The beginning and ending total debt balances are R340 and R360, respectively. The interest paid is R20. What is the amount of the cash flow to lenders? 

A.

-R10

B.

R0

C.

R10

D.

R40

E.

R50

Cash flow to lenders = R20 - (R210 - R180) = -R10

Firer - Chapter 02 #73
Topic: Cash Flow to Lenders

74.

Peggy Grey's Cookies has a net profit after tax of R360. The firm pays out 40 per cent of the net profit after tax to its shareholders as dividends. During the year, the company sold R80 worth of ordinary shares. What is the cash flow to shareholders? 

A.

R64

B.

R136

C.

R144

D.

R224

E.

R296

Cash flow to shareholders = 0,40(R360) - R80 = R64

Firer - Chapter 02 #74
Topic: Cash Flow to Shareholders

75.

Thompson's Jet Skis has operating cash flow of R218. Depreciation is R45 and interest paid is R35. A net total of R69 was paid on long-term debt. The firm spent R180 on non-current assets and increased net working capital by R38. What is the amount of the cash flow to shareholders? 

A.

-R104

B.

-R28

C.

R28

D.

R114

E.

R142

Firer - Chapter 02 #75
Topic: Cash Flow to Shareholders

 

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Feedback: Cash flow from assets = R218 - R38 - R180 = R0; Cash flow to lenders = R35 - (-R69) = R104; Cash flow to shareholders = R0 - R104 = -R104

Firer - Chapter 02

76.

What is the change in the net working capital from 2012 to 2013? 

A.

R1 235

B.

R1 035

C.

R1 335

D.

R3 405

E.

R4 740

Change in net working capital = (R7 310 - R2 570) - (R6 225 - R2 820) = R1 335

Firer - Chapter 02 #76
Topic: Change in Net Working Capital

77.

What is the amount of the non-cash expenses for 2013? 

A.

R570

B.

R630

C.

R845

D.

R1 370

E.

R2 000

The non-cash expense is depreciation in the amount of R1 370.

Firer - Chapter 02 #77
Topic: Non-Cash Expenses

78.

What is the amount of the net capital spending for 2013? 

A.

-R290

B.

R795

C.

R1 080

D.

R1 660

E.

R2 165

Net capital spending = R10 670 - R10 960 + R1 370 = R1 080

Firer - Chapter 02 #78
Topic: Net Capital Spending

79.

What is the operating cash flow for 2013? 

A.

R845

B.

R1 930

C.

R2 215

D.

R2 845

E.

R3 060

Operating cash flow = R1 930 + R1 370 - R455 = R2 845

Firer - Chapter 02 #79
Topic: Operating Cash Flow

80.

What is the cash flow from assets for 2013? 

A.

R430

B.

R485

C.

R1 340

D.

R2 590

E.

R3 100

Operating cash flow = R1 930 + R1 370 - R455 = R2 845; Change in net working capital = (R7 310 - R2 570) - (R6 225 - R2 820) = R1 335; Net capital spending = R10 670 - R10 960 + R1 370 = R1 080; Cash flow from assets = R2 845 - R1 335 - R1 080 = R430

Firer - Chapter 02 #80
Topic: Cash Flow from Assets

81.

What is the amount of net new borrowing for 2013? 

A.

-R225

B.

-R25

C.

R0

D.

R25

E.

R225

Net new borrowing = R8 100 - R7 875 = R225

Firer - Chapter 02 #81
Topic: Net New Borrowing

82.

What is the cash flow to lenders for 2013? 

A.

-R405

B.

-R225

C.

R225

D.

R405

E.

R630

Cash flow to lenders = R630 - (R8 100 - R7 875) = R405

Firer - Chapter 02 #82
Topic: Cash Flow to Lenders

83.

What is the amount of dividends paid in 2013? 

A.

R25

B.

R275

C.

R570

D.

R625

E.

R845

Dividends paid = R845 - (R2 060 - R1 490) = R275

Firer - Chapter 02 #83
Topic: Dividends Paid

84.

What is the cash flow to shareholders for 2013? 

A.

-R250

B.

-R25

C.

R25

D.

R250

E.

R275

Cash flow to shareholders = R845 - (R2 060 - R1 490) - (R5 250 - R5 000) = R25

Firer - Chapter 02 #84
Topic: Cash Flow to Shareholders

 

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Firer - Chapter 02

85.

What is the net working capital for 2013? 

A.

R345

B.

R405

C.

R805

D.

R812

E.

R1 005

Net working capital = R75 + R502 + R640 - R405 = R812

Firer - Chapter 02 #85
Topic: Net Working Capital

86.

What is the change in net working capital from 2012 to 2013? 

A.

-R93

B.

-R7

C.

R7

D.

R85

E.

R97

Change in net working capital = (R75 + R502 + R640 - R405) - (R70 + R563 + R662 - R390) = -R93

Firer - Chapter 02 #86
Topic: Change in Net Working Capital

87.

What is net capital spending for 2013? 

A.

-R250

B.

-R57

C.

R0

D.

R57

E.

R477

Net capital spending = R1,413 - R1,680 + R210 = -R57

Firer - Chapter 02 #87
Topic: Net Capital Spending

88.

What is the operating cash flow for 2013? 

A.

R143

B.

R297

C.

R325

D.

R353

E.

R367

Profit before interest and taxes = R785 - R460 - R210 = R115; PBT = R115 - R35 = R80; Taxes = 0,35(R80) = R28; Operating cash flow = R115 + R210 - R28 = R297

Firer - Chapter 02 #88
Topic: Operating Cash Flow

89.

What is the cash flow from assets for 2013? 

A.

R50

B.

R247

C.

R297

D.

R447

E.

R517

Cash flow from assets = R297 - (-R93) - (-R57) = R447 (See problems 82 to 84)

Firer - Chapter 02 #89
Topic: Cash Flow from Assets

90.

What is net new borrowing for 2013? 

A.

-R70

B.

-R35

C.

R35

D.

R70

E.

R105

Net new borrowing = R410 - R340 = R70

Firer - Chapter 02 #90
Topic: Net New Borrowing

91.

What is the cash flow to lenders for 2013? 

A.

-R170

B.

-R35

C.

R135

D.

R170

E.

R205

Cash flow to lenders = R35 - (R410 - R340) = -R35

Firer - Chapter 02 #91
Topic: Cash Flow to Lenders

92.

What is the cash flow to shareholders for 2013? 

A.

R408

B.

R417

C.

R452

D.

R482

E.

R503

Cash flow to shareholders = R447 - (-R35) = R482 (See problems 85 and 87); or, Cash flow to shareholders = R17 - (R235 - R700) = R482

Firer - Chapter 02 #92
Topic: Cash Flow to Shareholders

 

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Firer - Chapter 02

93.

What is the net profit before tax for 2013? 

A.

R1 051,00

B.

R1 367,78

C.

R1 592,42

D.

R2 776,41

E.

R3 091,18

NPAT = R631 + R420 = R1 051; NPBT = R1 051/(1 - 0,34) = R1 592,42

Firer - Chapter 02 #93
Topic: Net Profit After Tax

94.

What is the operating cash flow for 2013? 

A.

R2 078,00

B.

R2 122,42

C.

R2 462,58

D.

R2 662,00

E.

R2 741,42

PBIT = R1 592,42 + R328 = R1 830,42; OCF = R1 830,42 + R789 - 0,34(R1 592,42) = R2 078,00

Firer - Chapter 02 #94
Topic: Operating Cash Flow

95.

What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets? 

Liquid assets are those that can be sold quickly with little or no loss in value. A firm that has sufficient liquidity will be less likely to experience financial distress.

Firer - Chapter 02 #95
Topic: Liquid Assets

96.

Why is interest expense excluded from the operating cash flow calculation? 

Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities. Interest expense arises out of a financing choice and thus should be considered as a cash flow to creditors.

Firer - Chapter 02 #96
Topic: Operating Cash Flow

97.

Explain why the income statement is not a good representation of cash flow. 

Most income statements contain some non-cash items, so these must be accounted for when calculating cash flows. More importantly, however, since GAAP is used to create income statements, revenues and expenses are booked when they accrue, not when their corresponding cash flows occur.

Firer - Chapter 02 #97
Topic: Cash Flow and Accounting Statements

98.

Discuss the difference between book values and market values on the statement of financial position and explain which is more important to the financial manager and why. 

The accounts on the statement of financial position are generally carried at historical cost, not market values. Although the book value of current assets and current liabilities may closely approximate market values, the same cannot be said for the rest of the statement of financial position accounts. Ultimately, the financial manager should focus on the firm's share price, which is a market value measure. Hence, market values are more meaningful than book values.

Firer - Chapter 02 #98
Topic: Book Value and Market Value

99.

Note that in all of our cash flow computations to determine cash flow from assets, we never include the addition to retained profits. Why not? Is this an oversight? 

The addition to retained profits is not a cash flow. It is simply an accounting entry that reconciles the statement of financial position. Any additions to retained profits will show up as cash flow changes in other balance sheet accounts.

Firer - Chapter 02 #99
Topic: Addition to Retained Profits

100.

Note that we added depreciation back to operating cash flow and to additions to non-current assets. Why add it back twice? Isn't this double-counting? 

In both cases, depreciation is added back because it was previously subtracted when obtaining ending balances of net profit after tax and non-current assets. Also, since depreciation is a non-cash expense, we need to add it back in both instances, so there is no double counting.

Firer - Chapter 02 #100
Topic: Depreciation and Cash Flow

101.

Sometimes when businesses are critically delinquent on their tax liabilities, the tax authority comes in and literally seizes the business by chasing all of the employees out of the building and changing the locks. What does this tell you about the importance of taxes relative to our discussion of cash flow? Why might a business owner want to avoid such an occurrence? 

Taxes must be paid in cash, and in this case, they are one of the most important components of cash flow. The reputation of a business can undergo irreparable harm if word gets out that the tax authorities have confiscated the business, even if only for a couple of hours until the business owner can come up with the money to clear up the tax problem. The bottom line is if the owner can't come up with the cash, the tax authority has effectively put them out of business.

Firer - Chapter 02 #101
Topic: Tax Liabilities and Cash Flow

102.

Interpret, in words, what cash flow from assets represents by discussing operating cash flow, changes in net working capital, and additions to fixed assets. 

Operating cash flow is the cash flow a firm generates from its day-to-day operations. In other words, it is the cash inflow generated as a result of putting the firm's assets to work. Changes in net working capital and fixed assets represent investments a firm makes in these assets. That is, a firm typically takes some of the cash flow it generates from using assets and reinvests it in new assets. Cash flow from assets, then, is the cash flow a firm generates by employing its assets, net of any acquisitions.

Firer - Chapter 02 #102
Topic: Cash Flow from Assets

103.

Assume you are the financial officer of a major firm. The CEO of the firm has just stated that she wishes to reduce the firm's investment in current assets since those assets provide little, if any, return to the firm. How would you respond to this statement? 

While it is true that current assets provide a low rate of return, those assets are essential to the firm's liability. Should the liquid assets be reduced too low, the firm could face a much greater problem than a low rate of return. The problem would be the inability to meet the firm's obligations which could even result in a bankruptcy due to a lack of cash flow.

Firer - Chapter 02 #103
Topic: Liquidity

104.

As long as a firm maintains a positive cash balance, why is it essential to review the firm's cash flows? 

Firms can have positive cash balances because they are using borrowed funds or equity investments. For a firm to be financially healthy over the long-term, it must be able to generate cash internally. Cash flow analysis enables you to determine the sources, and uses, of a firm's cash to evaluate the financial health of the firm and ensure that the firm is generating positive cash flows from its operations.

Firer - Chapter 02 #104
Topic: Cash Flow Balances

105.

The managers of a firm wish to expand the firm's operations and are trying to determine the amount of debt financing the firm should obtain versus the amount of equity financing that should be raised. The managers have asked you to explain the effects that both of these forms of financing would have on the cash flows of the firm. Write a short response to this request. 

Debt financing will require cash outflows for both interest and principal payments. The interest outflow will be partially offset by a decrease in the cash outflow for taxes. Should the firm accept additional debt, the liquidity of the firm might have to be increased to ensure the debt obligations can be met in a timely manner. On the other hand, equity financing does not create any requirement for future cash outflows as equity does not need to be repaid nor are dividends required. However, if dividends are paid, they would not lower the firm's cash outflow for taxes.

Firer - Chapter 02 #105
Topic: Forms of Financing

106.

Discuss the difference between book values and market values and explain which one is more important to the financial manager and why. 

The accounts on the statement of financial position are generally carried at historical cost, not market values. Although the book value of the current assets and the liabilities may closely approximate market values, the same cannot be said for the rest of the statement of financial position accounts. Market values are more relevant as they reflect today's values whereas the statement of financial position reflects historical costs as adjusted by various accounting methods. To determine the current value of a firm, and its worth to the shareholders, financial managers must monitor market values.

Firer - Chapter 02 #106
Topic: Book Vs Market Value

107.

Assume you are a credit manager in charge of approving commercial loans to business firms. Identify three aspects of a firm's cash flows you would review and explain the type of information you hope to gain from reviewing each of those five aspects. 

Student answers will vary but there are some examples:
1) Operating cash flow - Is the firm generating positive cash flow from its current operations?
2) Cash flow to creditors - Is the firm currently repaying debt or is it assuming additional debt?
3) Net working capital - Is the firm increasing or decreasing its net working capital and what effect, if any, is this having on the firm's liquidity?
4) Cash flow to shareholders - Is the firm currently paying any dividends to its shareholders and are those shareholders investing additional capital into the firm?
5) Net capital spending - Is the firm currently investing in additional fixed assets?

Firer - Chapter 02 #107
Topic: Cash Flow from Assets

ch2 Summary

Category

# of Questions

Firer - Chapter 02

110

Topic: Addition to Retained Profits

1

Topic: Average Tax Rates

1

Topic: Book Value

3

Topic: Book Value and Market Value

1

Topic: Book Vs Market Value

1

Topic: Capital Spending

1

Topic: Cash Flow and Accounting Statements

1

Topic: Cash Flow Balances

1

Topic: Cash Flow from Assets

9

Topic: Cash Flow to Creditors

1

Topic: Cash Flow to Lenders

5

Topic: Cash Flow to Shareholders

6

Topic: Change in Net Working Capital

4

Topic: Current Assets

3

Topic: Current Liabilities

1

Topic: Depreciation and Cash Flow

1

Topic: Dividends Paid

1

Topic: Dividends Per Share

2

Topic: Earnings Per Share

2

Topic: Financial Leverage

2

Topic: Fixed Costs

1

Topic: Forms of Financing

1

Topic: Free Cash Flow

1

Topic: GAAP

1

Topic: Income Statement

2

Topic: Leverage

1

Topic: Liquid Assets

2

Topic: Liquidity

5

Topic: Long-Term Debt

1

Topic: Marginal Tax Rate

3

Topic: Market Value

3

Topic: Matching Principle

1

Topic: Net Capital Spending

4

Topic: Net New Borrowing

2

Topic: Net Profit After Tax

3

Topic: Net Working Capital

7

Topic: Non-Cash Expenses

1

Topic: Non-Cash Items

2

Topic: Operating Cash Flow

7

Topic: Profit Before Interest and Taxes

1

Topic: Realization Principle

1

Topic: Shareholders Equity

3

Topic: Statement of Financial Position

3

Topic: Tangible Asset

1

Topic: Tax Liabilities and Cash Flow

1

Topic: Taxes

1

Topic: Total Liabilities

1

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