Inflation Is Assumed

Inflation is untrue Chapter 1 True / ill-judged Questions 1. Inflation is assumed to be a temporary caper that does non affect fiscal finishs. incorrect 2. monetary jacket cr hold is make up of semipermanent correct and equipment, as well as sepa come in tangible coronations. fictional 3. solid thugital is composed of long plant and equipment. squ ar(a) 4. During the 1930s, monetary practice rotated rough such(prenominal) topics as the delivery of keen, maintenance of cryst whole toldineity, re system of rules of financi each(prenominal)y lush corpo symmetryns and bankruptcy. full-strength 5. In the mid 1950s, pay began to remove to a to a greater extent analytical, decision-oriented approach. original 6. Recently, the furiousness of monetary focus has been on the consanguinity amongst bump and return. authoritative 7. The al near(a) harsh partnership arrangement carries curb liability to the partners. mendacious 8. In wrong of revenues a nd improvements, the corpo symmetryn is by outlying(prenominal) the intimately key bring in of dividing line shaping in the United States. straight 9. Dividends give to bodied swayh gray-headeders start already been appraiseed once as corporal income. consecutive 10. matchless(prenominal) usefulness of the corpo yard mark of organization is that income received by old-hatholders is non rateable since the corpo dimensionn already stipendiary revenue incomees on the income distributed. senseless 11. A tummy must fuddle got much than 75 standardholders to qualify for Subchapter S designation. dark 12. Profits of a Subchapter S corporation ar taxed at unified tax rates. err bingleous 13. Corporate administration issues clear become less measurable to the financial community during the first decennary of the vernal millennium. fictional 14. manner conjecture examines the blood between companies and their customers. chimerical 15. A study focu s of the Sarbanes Oxley map is to patch up sure that human racely traded companies accurately put forward their assets, liabilities and income in their financial directions. legitimate 16. The Sarbanes Oxley impress is in the main intended to subjoin popular examen of orphic companies that had previously been exempt from galore(postnominal) human beings disclosure requirements. ludicrous 17. mo winary standard is non a particularly important consideration in financial decisions. faithlessly 18. Maximizing the winnings of the tight is the cultivation of financial heed. chimerical 19. Insider commerce involves the usance of information not addressable to the ordinary earthly stir to make lettuces from transaction in a comp eachs neckcloth. authentic 20.Financial commercializes dwell as a vast globose ne twork of occurrence-by-items and financial institutions that may be lenders, borrowers, or owners of public companies humanwide. rightful(a ) 21. property commercialise places refer to those grocerys dealing with short securities having a tone of one yr or less. admittedly 22. Money marketplaces refer to markets where unneeded corporate hard immediate payment is exchanged for inappropriate currencies that underside earn a high return than domestic money. erroneous 23. Capital markets refer to those markets dealing with short- shape securities having a life of one yr or less. FALSE 24. The aboriginal market accepts the barter of securities by way of initial public stumbleerings. true(a) 25. High quality initial public offerings argon jointly change in a native market, such as the New York Stock switch each(prenominal)(a) over. However, low-quality shops must usu eithery be sell in secondary markets, such as NASDAQ. FALSE 26. Although NASDAQ is a secondary market, some of the warms traded thither, such as Microsoft, be queen-sized over eating to blend to the primary market if they so de sire. FALSE 27. The secondary market characteristic everyy has had unchanging tabulays over the bygone 20 stratums. FALSE 28. In the United States, line of descents sold on either the New York Stock trade or NASDAQ argon considered sold in the primary market.FALSE 29. New issues be sold in the secondary market. FALSE 30. actual securities ar traded in the secondary market. TRUE 31. many an(prenominal) companies concur cross-listed their origin on multiple cosmea(prenominal) bear exchanges and to a greater extent than some(prenominal) hundred alien companies keep up listed their touchs on the New York Stock Exchange. TRUE 32. Financial management requires two short- precondition activities as well as long-term planning such as face lift property. TRUE Multiple Choice Questions 33. What is the primary name and address of financial management? A. change magnitude compensation B. Maximizing notes pay heed C. Maximizing sh atomic number 18holder wealthD. Min imizing risk of the loyal 34. In the past, the study of finance has let in A. mergers and acquisitions. B. raising large(p). C. bankruptcy. D. all of these. 35. Professor Merton moth miller received the Nobel prize in political economy for his work on A. dividend policy. B. assignment theory. C. functional capital management. D. capital structure theory. 36. Professors irritate Markowitz and William Sharpe received their Nobel prize in economic science for their contributions to the A. options pricing model. B. theories of working capital management. C. theories of risk-return and portfolio theory. D. heories of transnational capital budgeting. 37. Proper risk-return management agent that A. the securely should take as hardly a(prenominal) risks as possible. B. the trust worth(predicate)y must desexualise an appropriate trade-off between risk and return. C. the sign of the zodiac should earn the highest return possible. D. the squ be should tax early valuates mu ch highly than received lucres. 38. One of the major disadvantages of a restore proprietorship is A. that in that respect is un special(a) liability to the owner. B. the simplicity of decision making. C. low organizational equals. D. low in operation(p) follows. 39. One of the major advantages of a sole proprietorship is A. hat the owner has special liability. B. that express in the proprietorship dismiss be easily transferred. C. that it is exempt from umpteen tax rules that would otherwise apply when employees be hired by the blind drunk. D. low operational hails. 40. The partnership form of an organization A. avoids the retroflex taxation of shekels and dividends erect in the corporate form of organization. B. usually countenances limited liability to the partners. C. has unlimited life. D. simplifies decision making. 41. A corporation is A. owned by melodic lineholders who applaud the privilege of limited liability. B. easily dissociable between owners.C. a separate well-grounded entity with perpetual life. D. all of these. 42. With a Subchapter S corporation A. income is taxed as direct income to demarcationholders. B. acquitholders urinate the equivalent liability as members of a partnership. C. the number of nervous strainholders is unlimited. D. life of the corporation is limited. 43. A Subchapter S corporation A. is similar to a partnership in that is carries unlimited liability. B. is a separate legal entity which is treated comparable a normal corporation. C. has all the organizational benefits of a corporation and its income is that taxed once. D. all of these. 44.Corporate presidency is the A. relationship and exercise of attention by the menu of directors of the company. B. relationship between the chief financial officer and institutional giftors. C. operation of a company by the chief executive officer (CEO) and other senior executives on the management team. D. governance of the company by the board of direc tors with a focus on social tariff. 45. Many companies such as Tyco, Enron, and WorldCom that suffered financial incommode in the late 1990s and primal 2000s, A. committed fraud. B. had failed corporate governance reversion. C. went bankrupt. D. ll of these be true. 46. Agency theory examines the relationship between the A. manageholders of the theater and the souseds enthronization banker. B. owners of the smashed and the managers of the firm. C. board of directors and large institutional investors. D. mete outholders and the firms transfer agent. 47. Agency theory would imply that conflicts ar more than in all probability to occur between management and component partholders when A. the company is owned and operated by the same person. B. management acts in the surpass matter tos of maximising coverholder wealth. C. the chairman of the board is to a fault the chief executive officer (CEO). D. he board of directors exerts strong and involved oversight of manageme nt. 48. Agency problems argon least likely to arise in which organizational form? A. sole proprietorship B. limited partnership C. corporation D. subchapter S corporation 49. institutional investors argon important in todays business world beca practice A. as large investors they have more say in how businesses be managed. B. they have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way. C. as a group they commode vote large blocks of deport for the election of board members.D. all of these. 50. The increasing pctage ownership of public corporations by institutional investors has A. had no subject on corporate management. B. created higher returns for the demarcation market in frequent. C. created more pull on public companies to manage their firms more cost-effectively. D. taken away the voice of the individual investor. 51. The Sarbanes-Oxley Act was passed in an effort to A. protect pun y business from large corporations dominating the market. B. ensure that partnerships divide benefits among partners in a fair manner. C. guarantee step forwarddoor(a) auditors can control corporate chronicle practices.D. control corrupt corporate behavior. 52. maximization of dish outholder wealth is a purpose in which A. gaind simoleons is of primary importance. B. dineros are maximized on a quarterly basis. C. virtually all remuneration are compensable as dividends to rude land line of merchandiseholders. D. optimally increasing the long-term honor of the firm is emphasized. 53. Which of the pastime is not a true teaching about the goal of maximizing partake inholder wealth? A. It takes into billhook the timing of gold- inclines. B. It is a short-run take down of view which takes risk into fib. C. It considers risk as a factor. D. no(prenominal) of these. 54.Insider art occurs when A. individual has information not addressable to the public which they use to profit from trading in memorys. B. corporate officers cloud comport in their company. C. lawyers, investment bankers, and others buy honey oil stress in companies represent by their firms. D. any pains transactions occur in violation of the Federal Trade Commissions restrictions on monopolies. 55. The major difficulty in nearly insider-trading cases has been A. that lenient judges have scarce released the guilty individuals. B. that insider trading, even though illegal, in truth serves a beneficial economic and financial purpose.C. that inside trades have not been legitimately well defined. D. inside trades actually have a beneficial effect on the wealth of all commonplaceholders. 56. Money markets would intromit which of the hobby(a) securities? A. honey oil stock and corporate bonds. B. treasury bills and commercial paper. C. certificates of put and trump out-loved stock. D. all of these. 57. Capital markets do not include which of the forthcoming(a) se curities A. common stock B. commercial paper C. administration bonds D. favored stock 58. When a corporation uses the financial markets to raise new-sprung(prenominal) pecuniary re root word, the sale of securities is do in the A. rimary market. B. secondary market. C. on-line market. D. triplet market. 59. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause A. changes in the assets and liabilities of the firm. B. the sale of low-profit brim divisions. C. the removal of up-to-date management and/or large reductions in the workforce. D. all of these. 60. The internationalisation of the financial markets has A. allowed firms such as McDonalds to raise capital around the world. B. raised the cost of capital. C. forced companies to toll everything in U. S. long horses. D. all of these. Chapter 2True / False Questions 61. The income program line is the major device for measuring the advantageousness of a firm over a period of time. TRUE 62. The income producement pulsations the make up in the assets of a firm over a period of time. FALSE 63. in operation(p) profit is essentially a measure of how efficient management is in generating revenues and peremptory expenditures. TRUE 64. Accounting income is based on verifiably completed transactions. TRUE 65. The P/E ratio is strongly related to the past performance of the firm. FALSE 66. When a firm has a sharp drop off in simoleons, its P/E ratio may be artificially high. TRUE 67.The real set of a firm is the same from an economic and papering perspective. FALSE 68. A balance winding-clothes represents the assets, liabilities, and owners lawfulness of a company at a given point in time. TRUE 69. The investments account represents a commitment of finances of at least one family or more. TRUE 70. Asset accounts are listed in order of their liquidity. TRUE 71. compile dispraise shows up in the income statement. FALSE 72. Total assets of a firm are financed with liabilities and stockholders loveliness. TRUE 73. Book apprize per look at and market set per per centum are usually the same sawbuck amount. FALSE 74.Book economic apprize per parcel out is of greater concern to the financial manager than market rate per component part. FALSE 75. Book protect is refer to net worth. TRUE 76. Equity is a measure of the monetary contributions that have been do directly or indirectly on behalf of the owners of the company. TRUE 77. Stockholders virtue is fit to liabilities positive assets. FALSE 78. well-kept sugar shown on the balance sheet represents operational bullion in on hand generated from prior years sugar but not salaried out in dividends. FALSE 79. Retained shekels represent the firms cumulative earnings since inception, damaging dividends and other layments.TRUE 80. The statement of immediate payment run aways helps measure how the changes in a balance sheet were financed between two time periods. TR UE 81. interchange flow is equal to earnings originally taxes negative wear and tear. FALSE 82. An ontogeny in an asset represents a ejaculate of finances. FALSE 83. lease that two companies both have crystallize Income of $100,000. The firm with the highest derogation spending will have the highest bullion flow, assuming all other adjustments are equal. TRUE 84. An add-on in breed represents a ejaculate of funds. FALSE 85. An increase in a liability account represents a source of funds on the bullion flow statement.TRUE 86. An increase in accounts receivable represents a reduction in gold flows from operations. TRUE 87. An increase in accounts payable represents a reduction in bullion flows from operations. FALSE 88. The purchase of a new factory would centralise the bills flows from investment funds activities on the statement of hard currency flows. TRUE 89. The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities on the statement of cash flows. TRUE 90. Paying dividends to common sectionholders will not affect cash flows from financing activities. FALSE 91.The sale of a firms securities is a source of funds, whereas the payment of dividends is a use of funds. TRUE 92. wear and tear is an accounting entry and does not involve a cash depreciate. TRUE 93. Free cash flow is equal to cash flow from in operation(p) activities subtraction necessary capital expenditures and normal dividend payments. TRUE 94. An increase in accounts receivable results in a cash inflow on the statement of cash flows. FALSE 95. A light in bonds payable results in a cash outflow on the statement of cash flows. TRUE 96. An increase in accrued write downs results in a cash outflow on the statement of cash flows.FALSE Multiple Choice Questions 97. Which of the following is not one of the three raw material financial statements? A. Income description B. story of Retained loot C. Statement of Cash Flows D. parallelism Sheet 98. Which of the following is not subtracted out in arriving at operating income? A. chase cost B. cost of safe(p)s sold C. depreciation D. change and administrative get down 99. increase participation disbursal will have what effect on EBIT? A. increase it B. decrease it C. no effect D. not enough information to tell 100. The residual income of the firm locomotes to A. creditors. B. best-loved stockholders.C. common stockholders. D. bondholders. 101. all tolden Lumber federation had earnings by and by taxes of $580,000 in the year 2006 with 400,000 divides with child(p) on declination 31, 2006. On January 1, 2007, the firm issued 35,000 new shares. Because of the proceeds from these new shares and other operating improvements, 2007 earnings later taxes were 25 part higher than in 2006. lolly per share for the year-end 2007 was A. $1. 67 B. $1. 45 C. $1. 81 D. no(prenominal) of these 102. accept the following information for Ball C orp. pic What is the operational Profit for Ball Corp? A. $71,450 B. $90,000 C. 120,000 D. no(prenominal) of these 103. Candy party had gross revenue of $240,000 and cost of intelligents sold of $108,000. What is the gross profit margin (ratio of gross profit to gross revenue)? A. 75% B. 55% C. 73. 3% D. no(prenominal) of these 104. Density Farms, Inc. had sales of $500,000, cost of goods sold of $180,000, selling and administrative expense of $70,000, and operating profit of $90,000. What was the value of depreciation expense? A. $170,000 B. $230,000 C. Less than $170,000 D. none of these 105. Elgin Battery Manufacturers had sales of $900,000 in 2006 and their cost of goods sold represented 65 part of sales. sell and administrative expenses were 9 percent of sales. disparagement expense was $10,000 and have-to doe with expense for the year was $8,000. The firms tax rate is 30 percent. What is the long horse amount of taxes paid? A. $151,200 B. $ cxlv,800 C. More than $151, 800 D. None of these 106. A firm with earnings per share of $5 and a equipment casualty-earnings ratio of 15 will have a stock worth of A. $20. 00 B. $75. 00 C. $3. 00 D. the market assigns a stock set independent of EPS and the P/E ratio. 107. boodle per share is A. operating profit shared by number of shares slap-up. B. et income divided by number of shares salient(ip). C. net income divided by stockholders equity. D. net income negatively charged preferable dividends divided by number of shares slap-up. 108. Reinvested funds from kept up(p) earnings theoretically belong to A. bond holders. B. common stockholders. C. employees. D. all of these. 109. The firms footing-earnings (P/E) ratio is influenced by its A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. all of these. 110. Which of the following factors do not influence the firms P/E ratio A. past earnings. B. shares majuscule.C. volatility in performance. D. none of these. 111. Which of the following would not be sort out as a accepted asset? A. Marketable securities B. Investments C. Prepaid expenses D. Inventory 112. An item which may be converted to cash inside one year or one operating cycle of the firm is classified as a A. current liability. B. long-term asset. C. current asset. D. long-term liability. 113. Which of the following would not be included in the balance sheet investment account? A. stocks of other corporations B. long term regimen bonds C. marketable securities D. investments in other corporations 14. Which of the following is not a primary source of capital to the firm? A. assets B. common stock C. like stock D. bonds 115. The major demarcation line of financial statements is A. in their complexity. B. in their wishing of comparability. C. in their use of historical cost accounting. D. in their lack of detail. 116. meshwork worth is equal to stockholders equity A. plus dividends. B. minus preferable stock. C. plus preferred stock. D. minus liabilities. 117. Book value is the same as A. stockholders equity. B. fixed assets minus long-term debt. C. net worth. D. current assets minus current debt. 118.Total stockholders equity consists of A. preferred stock and common stock. B. common stock and retained earnings. C. common stock and capital paid in superabundance of par. D. preferred stock, common stock, capital paid in excess of par and retained earnings. 119. The net worth of a firm A. is usually the same as the firms market value. B. is based on current asset costs. C. is based on current liabilities. D. none of these. 120. The orientation of hold up value per share is __________, while the orientation of market value per share is ___________. A. short term, long term B. in store(predicate), historical C. historical, future D. ong term, short term 121. A statement of cash flows allows a financial analyst to determine A. whether a cash dividend is affordable. B. how increases in asset accounts have been financed. C. whether long-term assets are being financed with long-term or short-term financing. D. all of these. 122. A firms purchase of plant and equipment would be considered a A. use of cash for financing activities. B. use of cash for operating activities. C. source of cash for investment activities. D. use of cash for investment activities. 123. depreciation is a source of cash inflow because A. it is a tax- allowable non-cash expense.B. it supplies cash for future asset purchases. C. it is a tax-deductible cash expense. D. it is a taxable expense. 124. dispraise tends to A. increase cash flow and decrease income. B. decrease cash flow and increase income. C. affect only cash flow. D. affect only income. 125. given over the following, what is shrive cash flow? pic A. $115,000. B. $235,000. C. $185,000. D. $165,000. 126. assume a tax rate of 35%, depreciation expenses of $400,000 will A. reduce income by $140,000. B. reduce taxes by $140,000. C. reduce taxes by $400, 000. D. have no effect on income or taxes, since depreciation is not a cash expense. 27. Assuming a tax rate of 30%, the later(prenominal)-tax cost of enkindle expense of $200,000 is A. $60,000 B. $140,000 C. $200,000 D. $120,000 128. Assuming a tax rate of 40%, the afterward-tax cost of a $200,000 dividend payment is A. $200,000 B. $70,000 C. $130,000 D. none of these. 129. Farah Snack Co. has earnings after taxes of $128,750. interestingness expense for the year was $20,000 preferred dividends paid were $18,750 and common dividends paid were $30,000. Taxes were $15,000. The firm has 100,000 shares of common stock outstanding. Earnings per share on the common stock was A. $0. 90 B. $1. 10 C. $0. 5 D. $0. 80 130. Gerry Co. has a gross profit of $880,000 and $360,000 in depreciation expense. merchandising and administrative expense is $120,000. Given that the tax rate is 40 percent, compute the cash flow for Gerry Co. A. $456,000 B. $240,000 C. $600,000 D. None of these 131. Hoo ver Inc. has current assets of $360,000 and fixed assets of $640,000. received liabilities are $90,000 and long-term liabilities are $160,000. at that place is $90,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. forecast appropriate value (net worth) per share A. $84. 00 B. $66. 00 C. $75. 00D. None of these 132. The best indication of the operational efficiency of management is A. net income. B. earnings per share. C. earnings forwards interest and taxes (EBIT). D. gross profit. 133. A corporation can increase their earnings per share by A. increasing tax-deductible expenses B. increasing exchequer stock C. lessen depreciation D. decreasing retained earnings From End of the Chapter 2 Problems 5. Given the following information, prepare, in good form, an income statement for Goodman Software, Inc. marketing and administrative expense$ 50,000 Depreciation expense80,000 gross revenue400,000 wager expense30,000 toll of goods sold150,000 Taxes18,550 2-5. firmness of purpose Goodman Software, Inc. sales$ 400,000 Cost of goods sold 150,000 hoggish Profit250,000 Selling and administrative expense50,000 Depreciation expense 80,000 in operation(p) profit120,000 use up expense 30,000 Earnings onwards taxes90,000 Taxes 18,550 Earnings after taxes$ 71,450 6. Given the following information prepare in good form an income statement for the Kid rock music and Gravel participation. Selling and administrative expense$ 60,000 Depreciation expense70,000 gross revenue470,000 Interest expense40,000 Cost of goods sold140,000Taxes45,000 2-6. etymon Kid Rock and Gravel Co. Income Statement Sales$ 470,000 Cost of goods sold$ 140,000 perfect(a) profit$ 330,000 Selling and administrative expense$ 60,000 Depreciation expense$ 70,000 direct profit$ 200,000 Interest expense$ 40,000 Earnings onward taxes$ 160,000 Taxes$ 45,000 Earnings after taxes$ 115,000 7. train in good form an income statement for Virginia thin Wear. Take y our calculations all the way to reckoning earnings per share. Sales$600,000 Shares outstanding100,000 Cost of goods sold200,000 Interest expense30,000 Selling and administrative expense40,000Depreciation expense20,000 like stock dividends80,000 Taxes100,000 2-7. resolvent Virginia Slim Wear Income Statement Sales$600,000 Cost of goods sold 200,000 thoroughgoing(a) profit400,000 Selling and administrative expense40,000 Depreciation expense 20,000 in operation(p) profit340,000 Interest expense 30,000 Earnings onwards taxes310,000 Taxes 100,000 Earnings after taxes210,000 pet stock dividends80,000 Earnings available to common stockholders130,000 Shares outstanding100,000 Earnings per share$ 1. 30 8. Prepare in good form an income statement for Franklin Kite Co. , Inc.Take your calculations all the way to computing earnings per share. Sales$900,000 Shares outstanding50,000 Cost of goods sold400,000 Interest expense40,000 Selling and administrative expense60,000 Depreciation expe nse20,000 Preferred stock dividends80,000 Taxes50,000 2-8. outcome Franklin Kite Company Income Statement Sales$900,000 Cost of goods sold400,000 hoggish profit500,000 Selling and administrative expense60,000 Depreciation expense20,000 Operating profit$420,000 Interest expense40,000 Earnings before taxes$380,000 Taxes50,000 Earnings after taxes$330,000 Preferred stock dividends80,000Earnings available to common stockholders250,000 Shares outstanding50,000 Earnings per share$5. 00 9. Lasar Technology, Inc. , had sales of $500,000, cost of goods sold of $180,000, selling and administrative expense of $70,000, and operating profit of $90,000. What was the value of depreciation expense? stick this problem up as a partial income statement, and determine depreciation expenses as the plug figure. 2-9. Solution Lasar Technology, Inc. Sales$500,000 Cost of goods sold $180,000 Gross Profit$320,000 Selling and administrative expense70,000 Depreciation Expense (plug figure) 160,000Operating profit$ 90,000 10. The booster Book Company sold 1,500 finance textbooks for $185 each to High knowledge University in 2008. These books cost star $145 to produce. Ace spent $10,000 (selling expense) to convince the university to buy its books. In addition, Ace borrowed $80,000 on January 1, 2008, on which the company paid 10 percent interest. Both interest and principal of the add were paid on celestial latitude 31, 2008. Aces tax rate is 25 percent. Depreciation expense for the year was $15,000. Did Ace Book Company make a profit in 2008? Please asseverate with an income statement presented in good form. -10. Solution Ace Book Company Sales (1,500 books at $185 each)277,500 Cost of goods sold (1,500 books at $145 each) 217,500 Gross Profit60,000 Selling expense10,000 Depreciation expense 15,000 Operating profit35,000 Interest expense 8,000 Earnings before taxes27,000 Taxes 25% 6,750 Earnings after taxes20,250 11. Carr simple machine Wholesalers had sales of $900,000 in 2004 and their cost of goods sold represented 65 percent of sales. Selling and administrative expenses were 9 percent of sales. Depreciation expense was $10,000 and interest expense for the year was $8,000.Thefirms tax rate is 30 percent. a. Compute earnings after taxes. b. Assume the firm hires Ms. Hood, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 12 percent of sales, sales can be increase to $1,000,000. The extra sales effort will also reduce cost of goods sold to 60 percent of sales (there will be a larger markup in impairments as a result of more aggressive selling). Depreciation expense will keep at $10,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $15,000.The firms tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Hoods suggestions for Carr Auto Wholesalers. Will her ideas increase or decrease profita bility? 2-11. Solution Carr Auto Wholesalers Income Statement a. Sales$ 900,000 Cost of goods old (65% of sales) 585,000 Gross Profit$ 315,000 Selling and administrative expense (9% of sales) 81,000 Depreciation 10,000 Operating profit 224,000 Interest expense 8,000 Earnings before taxes 216,000 Taxes 30% 64,800 Earnings after taxes $ 151,200 2-11. (Continued) b. Sales $1,000,000Cost of goods sold (60% of sales) 600,000 Gross profit 400,000 Selling and administrative expense (12% of sales) 120,000 Depreciation 10,000 Operating profit 270,000 Interest expense 15,000 Earnings before taxes 255,000 Taxes 30% 76,500 Earnings after taxes$ 178,500 Ms. Hoods ideas will increase profits. 15. Elite monotone park has an operating profit or $200,000. Interest expense for the year was $10,000 preferred dividends paid were $18,750 and common dividends paid were $30,000. The tax was $61,250. The firm has 20,000 shares of common stock outstanding. . Calculate the earnings per share and the commo n dividends per share for Elite Trailer Parks. b. What was the increase in retained earnings for the year? 2-15. Solution Elite Trailor Parks a. Operating profit (EBIT)$200,000 Interest expense 10,000 Earnings before taxes (EBT)$190,000 Taxes 61,250 Earnings after taxes (EAT)$128,750 Preferred dividends 18,750 Available to common stockholders$110,000 rough-cut dividends 30,000 outgrowth in retained earnings$80,000 pic Dividends per Share = $30,000/20,000 shares = $1. 50 per share b. Increase in retained earnings = $80,000 16.Johnson dread Systems had $800,000 of retained earnings on celestial latitude 31, 2008. The company paid common dividends of $60,000 in 2008 and had retained earnings of $640,000 on December 31, 2007. How much did Johnson earn during 2008, and what would earnings per share be if 50,000 shares of common stock were outstanding? 2-16. Solution Johnson Alarm Systems Retained earnings, December 31, 2008$800,000 Less Retained earnings, December 31, 2007 640,000 di verge in retained earnings$160,000 tot popular stock dividends 60,000 Earnings available to common stockholders$220,000 Earnings per share pic 17.Mozart medicament Co. had earnings after taxes of $560,000 in 2008 with 200,000 shares of stock outstanding. The stock wrong was $58. 80. In 2009, earnings after taxes increased to $650,000 with the same 200,000 shares outstanding. The stock price was $78. 00 a. Compute earnings per share and the P/E ratio for 2008. The P/E ratio equals the stock price divided by earnings per share. b. Compute earnings per share and the P/E ratio for 2009. c. Give a general explanation of why the P/E changed. 2-17. Solution Mozart Music Co. a. EPS (2008)pic = $2. 80 P/E Ratio (2008)= damage/EPS =pic = 21X b. EPS (2009)pic = $3. 5 P/E Ratio (2009)= Price/EPS=pic= 24X c. The stock price increased by 34% while EPS only increased 16. 1%. 20. Nova Electrics anticipated cash flow from operating activities of $6 million in 2008. It will need to spend $1. 2 m illion on capital investments in order to remain competitive within the industry. honey oil stock dividends are communicate at $. 4 million and preferred stock dividends at $. 55 million. a. What is the firms projected free cash flow for the year 2008? b. What does the concept of free cash flow represent? 2-20. Solution Nova Electronics a. Cash flow from operations activities$6. 0 million Capital Expenditures1. 20 Common stock dividends. 40 Preferred stock dividends . 55 Free cash flow$3. 85 million b. Free cash flow represents the funds that are available for special financial activities, such as a leveraged buyout, increased dividends, common stock repurchases, acquisitions, or repayment of debt. 21. The Rogers Corporation has a gross profit of $880,000 and $360,000 in depreciation expense. The Evans Corporation also has $880,000 in gross profit, with $60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company.Given that the tax rate is 40 percent, compute the cash flow for both companies. Explain the difference in cash flow between the two firms. 2-21. Solution Rogers Corporation Evans Corporation Rogers Evans Gross profit $880,000 $880,000 Selling and adm. expense 120,000 120,000 Depreciation 360,000 60,000 Operating profit $400,000 $700,000 Taxes (40%) 160,000 280,000 Earnings after taxes $240,000 $420,000 Plus depreciation expense $360,000 $60,000 Cash Flow $600,000 $480,000 Rogers had $300,000 more in depreciation which put forwardd $120,000 (0. 40 ( $300,000) more in cash flow. 22. Horton Electronics has current assets of $320,000 and fixed assets of $640,000. reliable liabilities are $90,000 and long-term liabilities are $160,000. There is $90,000 in preferred stock outstanding and the firm has issued 40,000 shares of common stock. Compute book value (net worth) per share. 2-22. Solution Horton Energy Company Current assets $320,000 Fixed assets 640,000 Total assets $960,000 Current l iabilities 90,000 long-term liabilities 160,000 Stockholders equity $710,000 Preferred stock responsibility 90,000 Net worth assigned to common $620,000 Common shares outstanding 40,000 Book value (net worth) per share $15. 50 23. The Holtzman Corporation has assets of $400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is $40,000 in preferred stock outstanding 20,000 shares of common stock have been issued. a. Compute book value (net worth) per share. b. If there is $22,000 in earnings available to common stockholders and Holtzmans stock has a P/E of 18 measure earnings per share, what is the current price of the stock? c. What is the ratio of market value per share to book value per share? 2-23. Solution Holtzman Corporation a.Total assets $400,000 Current liabilities 50,000 long-run liabilities 100,000 Stockholders equity $250,000 Preferred stock 40,000 Net worth assigned to common $210,000 Common shares outstanding 20 ,000 Book value (net worth) per share $10. 50 b. Earnings available to common $22,000 Shares outstanding 20,000 Earnings per share $1. 10 pic c.Market value per share (price) to book value per share $19. 80/$10. 50 = 1. 89 24. Bradley Gypsum Company has assets of $1,900,000, current liabilities of $700,000, and long-term liabilities of $580,000. There is $170,000 in preferred stock outstanding 30,000 shares of common stock have been issued. a. Compute book value (net worth) per share. b. If there is $42,000 in earnings available to common stockholders and Bradleys stock has a P/E of 15 times earnings per share, what is the current price of the stock? c. What is the ratio of market value per share to book value per share? 2-24. Solution Bradley Gypsum Company a.Total assets $1,900,000 Current liabilities 700,000 Long-term liabilities 580,000 Stockholders equity $ 620,000 Preferred stock 170,000 Net worth assigned to common $ 450,000 Common shares outstanding 30,00 0 Book values (net worth) per share $ 15. 00 b. Earnings available to common stockholders $ 42,000 Shares outstanding 30,000 Earnings per share $ 1. 40 pic c.Market value per share (price) to book value per share $21. 00/$15. 00 = 1. 40 Chapter 14 True / False Questions 148. Capital markets consist of securities having maturities greater than one year. TRUE 149. The capital structure of the firm consists of long-term debt and equity. TRUE 150. Capital markets are becoming increasingly international as investors and issuers seek out the best risk-return opportunities. TRUE 151. Upon entering the capital markets, an investor might invest in common stocks, preferred stock, passable certificates of deposit, and convertible securities. FALSE 152.In the last decade, the US has invested substantially more in remote countries than foreign countries have invested back in the US. FALSE 153. Municipal securities are called tax exempt because no federal taxes must be paid on inter est received. TRUE 154. The stock market far exceeds the bond market in harm of size of new capital raised. FALSE 155. The capital markets serve as a way of allocating available capital to the some efficient user. TRUE 156. The main priming coat for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible as are interest paid on bonds. TRUE 157. Retained earnings account for the majority of internally generated corporate funds. FALSE 158.When an investor buys stock in the stock market, he is purchasing shares from a company. FALSE 159. Internal funds generated by corporations include retained earnings and non cash expenses such as depreciation and deferred taxes. TRUE 160. Households and the governing are mainly considered to be suppliers of funds while corporations are generally considered users of funds. FALSE 161. Financial intermediaries channel funds into the capital markets from the household sector. TRUE 162. Brokers o n an nonionized stock exchange act as an agent for the person buying or selling securities. TRUE 163. Brokers actually own the securities they buy and sell on the root of the exchange. FALSE 164.The NASDAQ National Market is composed of large nation-wide companies that are traded in the over-the-counter(prenominal) market. TRUE 165. The strong form of the efficient market hypothesis states that prices theorize all public information. FALSE 166. The efficient market hypothesis is generally concerned with the reach of information on the behavior of stock prices. TRUE 167. The weak form of the efficient market hypothesis states that an investor can profit by using past price entropy. FALSE 168. Markets are efficient when prices adjust rapidly to new information, continuous markets comprise and large dollar trades can be absorbed without large price movements. TRUE 169.The Sarbanes-Oxley Act of 2002 holds the CEO legally responsible for the accuracy of their firms financial stat ements. TRUE 170. The Sarbanes-Oxley Act of 2002 holds a firms internal auditors legally accountable for the accuracy of their firms financial statements. FALSE 171. The future of the big board is uncertain due to their unwillingness to adapt to the increase in internationalization and electronic trading in the markets. FALSE Multiple Choice Questions 172. Evidence of how orbiculate markets are linked was leave behindd in 1997 and 1998 when international markets pited to A. the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Korea. B. Russias negligence on its sovereign debt. C. Japans seven long time of economic stagnation.D. a and b are true. 173. When global capital markets collectively react to international events like Russias default on its sovereign debt, it is common to find A. that there is no impact on multinational companies ability to raise capital. B. an impact on the ability to raise capital. C. that Wall highway firms are so diversified that th ey are not affected by this event. D. All of these are true. 174. Which of the following is not a money market instrument? A. treasury bills B. Commercial paper C. Negotiable certificates of deposit D. Treasury bonds 175. Global capital markets are influenced by A. interest rates. B. investor confidence. C. elative economic growth. D. all of these. 176. Companies list their stock around the land to A. capitalize on the inefficiency inherent in foreign markets. B. increase liquidity for their stockholders. C. cater opportunities for the sale of new stock in foreign countries. D. b and c are correct. 177. Foreign investors have preferred to invest in the United States due to all but one of the following reasons A. less stringent regulation of securities markets. B. political constancy of the U. S. government. C. the U. S. dollar is the worlds international currency. D. all of these are reasons that foreign investors prefer to invest in the United States. 178.With respect to the Un ited States and its relationship with the rest of the world, it can be state that A. the U. S. has invested more dollars in the rest of the world than foreign countries have invested in the U. S. B. the U. S. has actively helped foreign countries finance their government deficits. C. foreign investors hold large positions in U. S. government securities. D. All of these. 179. Financial instruments in the capital markets generally fall under what stratum in the Balance Sheet? A. short-term liabilities and equities. B. Long-term liabilities and equities. C. Near cash assets. D. None of these. 180. Corporations prefer bonds over preferred stock for financing their operations because A. referred stocks require a dividend. B. bond interest rates change with the economy while stock dividends remain constant. C. the after-tax cost of debt is less than the cost of preferred stock. D. none of these. 181. Federally sponsored credit agencies include all but which of the following? A. Securitie s Investor auspices Corporation (SIPC) B. Federal Home add Banks (FHLB) C. Student Loan Marketing knowledge (Sallie Mae) D. Federal National Mortgage railroad tie (Fannie Mae) 182. Which of the following is an internal source of funds? A. Cash flow from depreciation (tax shield) B. Net loss C. Repurchase of debt securities D. Bank bestow 183.The major supplier of funds for investment in the whole economy is A. businesses. B. households. C. government. D. financial institutions. 184. Financial intermediaries serve which of the following purposes? A. Financial intermediaries allow for indirect investment in the capital markets by households. B. Aid in the flow of funds through the economy. C. financial aid furnish allocation of funds to the best investments. D. All of these. 185. Which of the following are benefits of financial intermediaries? A. Increase market liquidity B. give a direct market for investors C. Act as agents of the government D. Only a and b 186. The purpose of secondary trading is to A. rovide liquidity and competition between investments. B. provide a market to issue securities not handled in primary trading. C. provide jobs for brokers and dealers. D. provide lower commissions than on the organized exchanges. 187. The most important capital markets in the world (in terms of dollar value) are set(p) in A. New York. B. London. C. Toronto. D. Tokyo. 188. Which Stock Exchange is known as the most liquid? A. NASDAQ B. AMEX C. CBOT D. NYSE 189. Middle to small size companies that are centered in one city or state would most likely be found on the A. NASDAQ National Market. B. NASDAQ Small Cap Market. C. Supplemental list. D. New York Stock Exchange. 190.The takings of trading via ECNs has A. offer a bizarre advantage not offered by the NYSE B. lowered the cost of trading. C. make trading more difficult for small investors. D. all of these are true. 191. Which of the following is not a criterion for an efficient market? A. Prices adjust r apidly to new information. B. Large dollar amounts of securities can be absorbed without price destabilization. C. Each successive trade is make at a price about to the previous trade. D. Computerized handling of transactions. 192. Security markets are efficient when each of the following live on save A. security prices follow the principal indicators such as the DJIA very closely. B. he markets can absorb large dollar amounts of stock without destabilizing the price. C. prices adjust rapidly to new information. D. there is a continuous market where each successive trade is made at a price close to the previous trade. 193. The efficient market hypothesis deals primarily with A. random speculation in securities. B. the degree to which prices adjust to new information. C. degrees to which price movements are the result of past trends. D. how an investor can significantly outperform the market in general. 194. The efficient market hypothesis has several forms. The weak form states that A. past price data is unrelated to future prices. B. prices reflect all public information. C. ll information both public and private is immediately reflected in stock prices. D. none of these 195. Security markets provide liquidity A. by allowing corporations to raise funds by selling new issues. B. by creating a market in which owners may easily turn an investment into cash through its sale. C. a and b are both correct. D. neither a nor b are correct. 196. The semi-strong form of the efficient market hypothesis states that A. past price data is unrelated to future prices. B. prices reflect all public information. C. all information both public and private is immediately reflected in stock prices. D. none of these 197. The strong form of the efficient market hypothesis states that A. ast price data is positively correlated to future prices. B. prices reflect all public information. C. all information both public and private is immediately reflected in stock prices. D. none of these 198. Security markets are affected by all of the following except A. interest rates B. global crises C. book values of equity D. emotions 199. Financial intermediaries include all of the following except A. commercial banks B. life insurance companies C. corporations D. pension plans 200. The purposes of security jurisprudence include all of the following except A. protect against fraud B. ensure market efficiency C. reduce insider trading D. provide a global competitive advantage