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: | 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. |
| 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: | 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: | 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: | 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. |
| 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. |
| Firer - Chapter 02 #11
Topic: Average Tax Rates
|
| 12. | _____ refers to the cash flow resulting from the firm's ongoing, normal business activities. |
| Firer - Chapter 02 #12
Topic: Operating Cash Flow
|
| 13. | _____ refers to the net expenditures by the firm on non-current asset purchases. |
| Firer - Chapter 02 #13
Topic: Capital Spending
|
| 14. | _____ refers to the difference between a firm's current assets and its current liabilities. |
| 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. | 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. |
| Firer - Chapter 02 #16
Topic: Cash Flow to Lenders
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| 17. | _____ refers to the firm's dividend payments less any net new equity raised. | 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: |
| 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: |
| 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 |
| 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 |
| 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? |
| 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 |
| 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 |
| 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 |
| 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: | 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 |
| Firer - Chapter 02 #45
Topic: Fixed Costs
|
| 46. | When you are making a financial decision, the most relevant tax rate is the _____ rate. |
| 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
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| 48. | An increase in which one of the following will cause the cash flow from assets to increase? | B. | Change in net working capital | |
| Firer - Chapter 02 #48
Topic: Cash Flow from Assets
|
| 49. | Which one of the following is NOT included in cash flow from assets? |
| 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? 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? 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? 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? 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? 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? 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? | 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? 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? 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? 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?
 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?
 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? 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? 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? 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? 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? 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? 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? 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? |
| Firer - Chapter 02 #75
Topic: Cash Flow to Shareholders
|
| | 
Feedback: Cash flow from assets = R218 - R38 - R180 = R0; Cash flow to lenders = R35 - (-R69) = R104; Cash flow to shareholders = R0 - R104 = -R104
|
| 76. | What is the change in the net working capital from 2012 to 2013? 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? 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? Net capital spending = R10 670 - R10 960 + R1 370 = R1 080 |
| Firer - Chapter 02 #78
Topic: Net Capital Spending
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| 79. | What is the operating cash flow for 2013? Operating cash flow = R1 930 + R1 370 - R455 = R2 845 |
| Firer - Chapter 02 #79
Topic: Operating Cash Flow
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| 80. | What is the cash flow from assets for 2013? 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
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| 81. | What is the amount of net new borrowing for 2013? Net new borrowing = R8 100 - R7 875 = R225 |
| Firer - Chapter 02 #81
Topic: Net New Borrowing
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| 82. | What is the cash flow to lenders for 2013? Cash flow to lenders = R630 - (R8 100 - R7 875) = R405 |
| Firer - Chapter 02 #82
Topic: Cash Flow to Lenders
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| 83. | What is the amount of dividends paid in 2013? 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? Cash flow to shareholders = R845 - (R2 060 - R1 490) - (R5 250 - R5 000) = R25 |
| Firer - Chapter 02 #84
Topic: Cash Flow to Shareholders
|
| 85. | What is the net working capital for 2013? 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? 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? 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? 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? 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? Net new borrowing = R410 - R340 = R70 |
| Firer - Chapter 02 #90
Topic: Net New Borrowing
|
| 91. | What is the cash flow to lenders for 2013? 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? 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
|
| 93. | What is the net profit before tax for 2013? 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? 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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