Question 1

A firm maintains a constant dividend payout ratio of .45. What is the plowback ratio?

Accepted Answer

The plowback ratio, also known as the retention ratio, is the portion of earnings that is reinvested in the company rather than paid out as dividends. It is calculated as (1 - dividend payout ratio). 
In this case, the dividend payout ratio is .45, so the plowback ratio is (1 - .45) = .55. 
Therefore, the correct answer is B) 1 - .45.

Question 2

Which one of the following will increase the return on equity?

Accepted Answer

Decrease in cost of goods sold will increase the net income and, hence, increase the return on equity.

Question 3

Which one of the following is most apt to vary directly with sales?

Accepted Answer

Current assets are items that can be easily converted into cash within a year, such as inventory and accounts receivable. As sales increase, the need for these assets also increases to support the business operations, making it the most apt to vary directly with sales. Long-term debt, shareholders' equity, paid-in capital, and retained earnings are all more likely to be influenced by other factors such as financing decisions and company profits.

Question 4

Which of the following affect the earnings per share?I. decrease in interest expense
II. share repurchase
III. increase in tax rates
IV. preferred stock dividend

Accepted Answer

All four options affect the earnings per share (EPS). A decrease in interest expense increases net income, thus increasing EPS. Share repurchase reduces the number of outstanding shares, increasing EPS. An increase in tax rates decreases net income, thus decreasing EPS. Preferred stock dividends reduce the earnings available to common shareholders, thus affecting EPS.

Question 5

Accent Jewelry, Inc., has annual sales of $4.8 million and a gross profit margin of 55%. The operating expenses are $510,550 and depreciation is $160,250. Interest expense is $80,000 and the tax rate is 21%. What is the net income?

Accepted Answer

The answer of Accent Jewelry, Inc., has annual sales of...

Question 6

Which one of the following is generally used as the basis for computing the cash flow per share?

Accepted Answer

Operating cash flow is generally used as the basis for computing cash flow per share, as it represents the cash generated by a company's core operations that is available to distribute to shareholders. Investment cash flow and financing cash flow are not used as the basis for computing cash flow per share, as they represent cash flows related to investments and financing activities, respectively. Net cash increase is not a basis for computing cash flow per share, as it is simply a measure of the change in a company's cash balance. Retained cash earnings may be relevant to the calculation of cash flow per share, but they are not typically used as the basis for the calculation.

Question 7

Which two of the following are generally used to fund the external financing need?
I. sale of fixed assets
II. increase in accounts payable
III. issuance of long-term debt
IV. sale of equity securities

Accepted Answer

II and IV. Increases in accounts payable and the sale of equity securities are common methods to fund external financing needs. Accounts payable increase represents a form of short-term financing, while selling equity securities provides longer-term funding without increasing debt.

Question 8

A firm has $4,200 of cash, equipment worth $46,300, inventory of $38,400, a building worth $130,500, and $21,500 of accounts receivable. What is the value of the total fixed assets?

Accepted Answer

Fixed assets include equipment and buildings, so the total value is $46,300 (equipment) + $130,500 (building) = $176,800.

Question 9

ABC Construction, Inc., has buildings and equipment of $315,600, long-term debt of $154,700, accounts payable of $52,000, cash of $9,800, accounts receivable of $18,300, inventory of $62,000, and retained earnings of $147,000. What is the total equity of the firm?

Accepted Answer

Total assets = buildings and equipment + cash + accounts receivable + inventory = $315,600 + $9,800 + $18,300 + $62,000 = $405,700
Total liabilities = long-term debt + accounts payable = $154,700 + $52,000 = $206,700
Total equity = total assets - total liabilities = $405,700 - $206,700 = $199,000

Question 10

Young Industries has a 3-year bank loan of $95,000, a 6-month note payable of $7,500, an $89,700 mortgage, and accounts payable of $43,900. What is the amount of the total current liabilities? (Ignore the current portion of any long-term debt.)

Accepted Answer

Total current liabilities = 6-month note payable + accounts payable
Total current liabilities = $7,500 + $43,900 = $51,400. 
Therefore, the correct answer is D) $51,400.

Question 11

Behrend Corporation has annual sales of $4.5 million, depreciation of $425,000, operating expenses of $679,000, cost of goods sold of $2.3 million, and interest expense of $230,000. What is the operating income?

Accepted Answer

Operating income is calculated as Sales - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation. Therefore, $4.5 million - $2.3 million - $679,000 - $425,000 = $1,096,000. Interest expense is not subtracted in the calculation of operating income.

Question 12

The management of Downtown Athletics recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?

Accepted Answer

By limiting future borrowing and sales of stock, management has limited the company's ability to expand or invest in new projects. This, in turn, will limit future growth potential for the company.

Question 13

The Cruise Ship Co. has taxable income of $3,500,000. The company paid out $550,000 in interest expense. The tax rate is 21% and the dividend payout ratio is 30%. What is the amount that was paid out in dividends?

Accepted Answer

The answer of The Cruise Ship Co. has taxable income...

Question 14

Handy Man Services, Inc., has net income of $555,000. What is the addition to retained earnings if the dividend payout ratio is 42%?

Accepted Answer

The dividend payout ratio is the percentage of net income paid out as dividends. Thus, the amount of dividends paid out by Handy Man Services, Inc. can be calculated as:
Dividends = Net Income x Dividend Payout Ratio
Dividends = $555,000 x 42% = $233,100
The addition to retained earnings can be found by subtracting the dividends paid out from the net income:
Retained Earnings = Net Income - Dividends
Retained Earnings = $555,000 - $233,100 = $321,900
Therefore, the answer is D) $321,900.

Question 15

Which one of the following is most apt to be constant given the percentage of sales approach to creating pro forma statements?

Accepted Answer

According to the percentage of sales approach, gross margin is calculated as a percentage of sales revenue, and therefore is relatively constant. Book value, earnings per share, return on equity, and cash flow per share are all affected by various factors other than sales revenue and may fluctuate significantly.

Question 16

GH Enterprises has annual sales of $3.4 million, depreciation of $260,000, operating expenses of $500,000, and cost of goods sold of $2.2 million. What is the gross profit?

Accepted Answer

Gross profit is calculated as sales minus the cost of goods sold (COGS). Therefore, gross profit = $3.4 million - $2.2 million = $1.2 million.

Question 17

Which one of the following statements related to book value per share (BVPS)is correct?

Accepted Answer

BVPS is calculated as total equity divided by the number of shares outstanding. When new shares are issued at market value, the total equity of the firm increases, which in turn increases the BVPS. Therefore, statement E is correct. A, B, and C are incorrect statements. Statement D is incorrect because BVPS is based on book value, not market value.

Question 18

Which one of the following accounts is least likely to vary directly with the level of sales?

Accepted Answer

Interest expense is typically a fixed amount that is not directly affected by the level of sales. The other options (accounts payable, inventory, cost of goods sold, and accounts receivable) are all directly related to the level of sales in some way.

Question 19

A firm has $5,300 of cash, equipment worth $49,000, inventory of $30,000, $8,900 worth of patents, and $15,700 of accounts receivable. What is the value of the total current assets?

Accepted Answer

The answer of A firm has $5,300 of cash, equipment...

Question 20

A decrease in which one of the following will increase the return on assets?

Accepted Answer

A decrease in inventory reduces the asset base, which can increase the return on assets if net income remains constant.

Quiz 19: Projecting Cash Flow and Earnings