Inflation Is Assumed

Inflation is assumed Chapter 1 True / False Questions 1. Inflation is assumed to be a momentary problem that does non affect m 1tary determinations. turned 2. Financial heavy(p) is composed of semipermanent plant and equipment, as well as other palpable investments. mistaken 3. Real Capital is composed of long-term plant and equipment. authentic 4. During the 1930s, financial practice revolved around such(prenominal) topics as the preservation of bully, caution of liquidity, reorganization of financially troubled heaps and bankruptcy. professedly 5. In the mid 1950s, finance began to change to a more analytical, decision-oriented approach.TRUE 6. Recently, the emphasis of financial concern has been on the human relationship between chance and indemnity. TRUE 7. The most normal partnership arrangement carries limited liability to the partners. FALSE 8. In terms of revenues and lollys, the flock is by far-off the most important coordinate of business organization in the fall in States. TRUE 9. Dividends paid to unified transmith oldishers have already been taxed once as inembodiedd income. TRUE 10. One advantage of the corporate form of organization is that income received by fallholders is not taxable since the corpo symmetryn already paid taxes on the income distributed.FALSE 11. A corporation must have more than 75 rootageholders to qualify for Subchapter S designation. FALSE 12. Profits of a Subchapter S corporation be taxed at corporate tax pass judgment. FALSE 13. Corporate goernance issues have become slight important to the financial community during the first decade of the in the raw millennium. FALSE 14. commission Theory examines the relationship between companies and their customers. FALSE 15. A major(ip) focus of the Sarbanes Oxley Act is to make sure that publicly traded companies accurately present their pluss, liabilities and income in their financial avowals.TRUE 16. The Sarbanes Oxley Act is primarily intended to attach public scrutiny of private companies that had previously been exempt from many public disclosure requirements. FALSE 17. Timing is not a particularly important consideration in financial decisions. FALSE 18. Maximizing the earnings of the unwavering is the coating of financial management. FALSE 19. Insider trading involves the hold of information not purchasable to the general public to make sugars from trading in a companys stock. TRUE 20.Financial grocery stores exist as a bulky global ne dickensrk of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. TRUE 21. Money commercializes refer to those markets dealing with short-term securities having a life of one year or less. TRUE 22. Money markets refer to markets where excess corporate immediate payment is exchanged for overseas currencies that sens earn a higher return than domestic money. FALSE 23. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. FALSE 24. The primary market includes the trade of securities by way of initial public creviceings.TRUE 25. High quality initial public offerings ar usually sold in a primary market, such as the New York Stock deepen. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ. FALSE 26. Although NASDAQ is a secondary market, well-nigh of the firms traded there, such as Microsoft, be elephantine enough to move to the primary market if they so desire. FALSE 27. The secondary market characteristically has had stable impairments over the past 20 years. FALSE 28. In the United States, stocks sold on either the New York Stock Exchange or NASDAQ argon considered sold in the primary market.FALSE 29. New issues are sold in the secondary market. FALSE 30. Existing securities are traded in the secondary market. TRUE 31. Many companies have cross-listed their stock on multiple international stock exchan ges and more than several hundred foreign companies have listed their partake ins on the New York Stock Exchange. TRUE 32. Financial management requires both short-term activities as well as long-term planning such as raising funds. TRUE Multiple Choice Questions 33. What is the primary goal of financial management? A. Increased earnings B. Maximizing gold break away C. Maximizing divvy upowner wealthD. Minimizing risk of the firm 34. In the past, the study of finance has include A. mergers and acquisitions. B. raising capital. C. bankruptcy. D. all of these. 35. Professor Merton Miller received the Nobel prize in economics for his work on A. dividend policy. B. investment theory. C. working capital management. D. capital coordinate theory. 36. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics 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 international capital budgeting. 37. Proper risk-return management means that A. the firm should consider as few risks as possible. B. the firm must determine an appropriate trade-off between risk and return. C. the firm should earn the highest return possible. D. the firm should assess future(a) dineros more highly than incumbent profits. 38. One of the major disadvantages of a sole proprietorship is A. that there is unlimited liability to the owner. B. the simplicity of decision making. C. low organizational damages. D. low operating costs. 39. One of the major advantages of a sole proprietorship is A. hat the owner has limited liability. B. that stock in the proprietorship can be easily transferred. C. that it is exempt from many tax rules that would otherwise apply when employees are hired by the firm. D. low operating costs. 40. The partnership form of an organization A. avoids the double taxation of earnings and dividends found in the corporate form of orga nization. B. usually provides limited liability to the partners. C. has unlimited life. D. simplifies decision making. 41. A corporation is A. owned by stockholders who enjoy the privilege of limited liability. B. easily divisible between owners.C. a separate legal entity with perpetual life. D. all of these. 42. With a Subchapter S corporation A. income is taxed as direct income to stockholders. B. stockholders have the same liability as members of a partnership. C. the number of stockholders is unlimited. D. life of the corporation is limited. 43. A Subchapter S corporation A. is sympathetic to a partnership in that is carries unlimited liability. B. is a separate legal entity which is treated like a normal corporation. C. has all the organizational benefits of a corporation and its income is only taxed once. D. all of these. 44.Corporate political science is the A. relationship and exercise of oversight by the board of directors of the company. B. relationship between the chief financial officer and institutional investors. C. subr bug outine 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 directors with a focus on social responsibility. 45. Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s, A. committed fraud. B. had failed corporate governance oversight. C. went bankrupt. D. ll of these are true. 46. Agency theory examines the relationship between the A. shareholders of the firm and the firms investment banker. B. owners of the firm and the managers of the firm. C. board of directors and large institutional investors. D. shareholders and the firms transfer agent. 47. Agency theory would think of that conflicts are more likely to occur between management and shareholders when A. the company is owned and operated by the same person. B. management acts in the best interests of maximizing sha reholder wealth. C. the chairman of the board is also the chief executive officer (CEO). D. he board of directors exerts fast(a) and involved oversight of management. 48. Agency problems are least likely to arise in which organizational form? A. sole proprietorship B. limited partnership C. corporation D. subchapter S corporation 49. Institutional investors are important in todays business world because A. as large investors they have more say in how businesses are managed. B. they have a fiduciary responsibility to the workers and investors that they represent to gull that the firms they own are managed in an ethical way. C. as a group they can vote large blocks of stock for the election of board members.D. all of these. 50. The change magnitude pctage ownership of public corporations by institutional investors has A. had no depression on corporate management. B. created higher returns for the stock market in general. C. created more pressing on public companies to manage thei r firms more efficiently. D. taken away the voice of the individual investor. 51. The Sarbanes-Oxley Act was passed in an effort to A. protect small business from large corporations dominating the market. B. ensure that partnerships divide profits among partners in a fair manner. C. guarantee outside auditors can control corporate distinguishing practices.D. control despoil corporate behavior. 52. Maximization of shareholder wealth is a concept in which A. increased earnings is of primary importance. B. profits are maximized on a quarterly basis. C. virtually all earnings are paid as dividends to vulgar stockholders. D. optimally increasing the long-term abide by of the firm is emphasized. 53. Which of the sideline is not a true narration about the goal of maximizing shareholder wealth? A. It takes into level the timing of currency in-flows. B. It is a short-run point of view which takes risk into account. C. It considers risk as a factor. D. no(prenominal) of these. 54.I nsider trading occurs when A. someone has information not available to the public which they use to profit from trading in stocks. B. corporate officers demoralize stock in their company. C. lawyers, investment bankers, and others buy common stock in companies represented by their firms. D. any stock transactions occur in impact of the Federal Trade Commissions restrictions on monopolies. 55. The major difficulty in most insider-trading cases has been A. that lenient judges have simply released the guilty individuals. B. that insider trading, even though illegal, very serves a beneficial economic and financial heading.C. that inside trades have not been legally well defined. D. inside trades actually have a beneficial effect on the wealth of all stockholders. 56. Money markets would include which of the next securities? A. common stock and corporate bonds. B. treasury bills and commercial paper. C. certificates of deposit and best-loved stock. D. all of these. 57. Capital marke ts do not include which of the following securities A. common stock B. commercial paper C. government bonds D. preferred stock 58. When a corporation uses the financial markets to rig out new funds, the sale of securities is made in the A. rimary market. B. secondary market. C. on-line market. D. third 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 margin divisions. C. the removal of current management and/or large reductions in the workforce. D. all of these. 60. The internationalization 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 price everything in U. S. clams. D. all of these. Chapter 2True / False Questions 61. The income statement is the major device for measuring the profitability of a firm over a period of time. TRUE 62. T he income statement measures the increase in the assets of a firm over a period of time. FALSE 63. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling depreciates. TRUE 64. Accounting income is base 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 earnings, its P/E ratio may be artificially high. TRUE 67.The real care for of a firm is the same from an economic and accounting perspective. FALSE 68. A eternal rest sheet represents the assets, liabilities, and owners equity of a company at a given point in time. TRUE 69. The investments account represents a commitment of funds of at least one year or more. TRUE 70. Asset accounts are listed in order of their liquidity. TRUE 71. Accumulated depreciation shows up in the income statement. FALSE 72. Total assets of a firm are financed with liabilities and stockhol ders equity. TRUE 73. Book value per share and market value per share are usually the same dollar amount. FALSE 74.Book value per share is of greater concern to the financial manager than market value per share. FALSE 75. Book value is equal to net worth. TRUE 76. Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the owners of the company. TRUE 77. Stockholders equity is equal to liabilities plus assets. FALSE 78. Retained earnings shown on the remnant sheet represents available cash on hand generated from prior years earnings but not paid out in dividends. FALSE 79. Retained earnings represent the firms cumulative earnings since inception, minus dividends and other preparements.TRUE 80. The statement of cash flows helps measure how the changes in a balance sheet were financed between two time periods. TRUE 81. Cash flow is equal to earnings in the first place taxes minus depreciation. FALSE 82. An increase in an asset repre sents a line of funds. FALSE 83. Assume that two companies both have Net Income of $100,000. The firm with the highest depreciation write down go away have the highest cash flow, presumptuous all other adjustments are equal. TRUE 84. An increase in inventory represents a rise of funds. FALSE 85. An increase in a liability account represents a source of funds on the cash flow statement.TRUE 86. An increase in accounts receivable represents a reduction in cash flows from operations. TRUE 87. An increase in accounts payable represents a reduction in cash flows from operations. FALSE 88. The purchase of a new factory would skip the cash flows from investing activities on the statement of cash 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 shareholders 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. derogation is an accounting entry and does not involve a cash write down. TRUE 93. vindicate cash flow is equal to cash flow from operating activities minus 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 decrease in bonds payable results in a cash outflow on the statement of cash flows. TRUE 96. An increase in accrued get 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 basic financial statements? A. Income Statement B. Statement of Retained hire C. Statement of Cash Flows D. Balance Sheet 98. Which of the following is not subtracted out in arriving at operating income? A. interest set down B. cost of earnests sold C. depreciation D. exchange and adminis trative get down 99. Increasing interest write down 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 kick the buckets to A. accreditors. B. preferred stockholders.C. common stockholders. D. bondholders. 101. Allen Lumber Company had earnings later taxes of $580,000 in the year 2006 with 400,000 shares great on December 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 after taxes were 25 percent higher than in 2006. wage per share for the year-end 2007 was A. $1. 67 B. $1. 45 C. $1. 81 D. None of these 102. Consider the following information for Ball Corp. pic What is the Operating Profit for Ball Corp? A. $71,450 B. $90,000 C. 120,000 D. None of these 103. Candy Company had sales of $240,000 and cost of goods sold of $108,000. What is the taxation profit margin (ratio of g ross profit to sales)? A. 75% B. 55% C. 73. 3% D. None 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 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. The firms tax rate is 30 percent. What is the dollar amount of taxes paid? A. $151,200 B. $145,800 C. to a greater extent than $151,800 D. None of these 106. A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a stock price of A. $20. 00 B. $75. 00 C. $3. 00 D. the market assigns a stock price independent of EPS and the P/E ratio. 107. Earnings per share is A. operating p rofit divided by number of shares outstanding. B. et income divided by number of shares outstanding. C. net income divided by stockholders equity. D. net income minus preferred dividends divided by number of shares outstanding. 108. Reinvested funds from well-kept earnings theoretically belong to A. bond holders. B. common stockholders. C. employees. D. all of these. 109. The firms price-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 outstanding.C. volatility in performance. D. none of these. 111. Which of the following would not be assort as a current asset? A. Marketable securities B. Investments C. postpaid expenses D. Inventory 112. An item which may be converted to cash within 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 government 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. preferred stock D. bonds 115. The major limitation of financial statements is A. in their complexity. B. in their wish of comparability. C. in their use of historical cost accounting. D. in their lack of detail. 116. Net worth is equal to stockholders equity A. plus dividends. B. minus preferred stock. C. plus preferred stock. D. minus liabilities. 117. Book value is the same as A. stockholders equity. B. placed 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 excess 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 entertain value per share is __________, while the orientation of market value per share is ___________. A. short term, long term B. future, 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 i nvestment activities. 123. Depreciation is a source of cash inflow because A. it is a tax-deductible 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. Depreciation 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 the following, what is free cash flow? pic A. $115,000. B. $235,000. C. $185,000. D. $165,000. 126. Assuming 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 after-tax cost of interest 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 after-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. lodge in 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. Selling 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. Hoover Inc. has current assets of $360,000 and fixed assets of $640,000. Current liabilities are $90,000 and long-term liabilities are $160,000. in that location is $90,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. Compute have got value (net worth) per share A. $84. 00 B. $66. 00 C. $75. 00D. None of these 132. The best indicat ion of the practicable efficiency of management is A. net income. B. earnings per share. C. earnings before interest and taxes (EBIT). D. gross profit. 133. A corporation can increase their earnings per share by A. increasing tax-deductible expenses B. increasing Treasury stock C. decreasing depreciation D. decreasing retained earnings From End of the Chapter 2 Problems 5. Given the following information, prepare, in good form, an income statement for Goodman Software, Inc. Selling and administrative expense$ 50,000 Depreciation expense80,000 gross revenue400,000Interest expense30,000 hail of goods sold150,000 Taxes18,550 2-5. Solution Goodman Software, Inc. Sales$ 400,000 Cost of goods sold 150,000 Gross Profit250,000 Selling and administrative expense50,000 Depreciation expense 80,000 Operating profit120,000 Interest expense 30,000 Earnings before 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 and Gravel Company. Selling and administrative expense$ 60,000 Depreciation expense70,000 Sales470,000 Interest expense40,000 Cost of goods sold140,000Taxes45,000 2-6. Solution Kid Rock and Gravel Co. Income Statement Sales$ 470,000 Cost of goods sold$ 140,000 Gross profit$ 330,000 Selling and administrative expense$ 60,000 Depreciation expense$ 70,000 Operating profit$ 200,000 Interest expense$ 40,000 Earnings before taxes$ 160,000 Taxes$ 45,000 Earnings after taxes$ 115,000 7. Prepare in good form an income statement for Virginia Slim Wear. Take your calculations all the way to computing earnings per share. Sales$600,000 Shares outstanding100,000 Cost of goods sold200,000 Interest expense30,000 Selling and administrative expense40,000Depreciation expense20,000 preferent stock dividends80,000 Taxes100,000 2-7. Solution Virginia Slim Wear Income Statement Sales$600,000 Cost of goods sold 200,000 Gross profit400,000 Selling and administrative expense40,000 Depreciation expense 20,000 Operating profit340,000 Interest expense 30,000 Earnings before taxes310,000 Taxes 100,000 Earnings after taxes210,000 Preferred stock dividends80,000 Earnings available to common stockholders130,000 Shares outstanding100,000 Earnings per share$ 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 expense20,000 Preferred stock dividends80,000 Taxes50,000 2-8. Solution Franklin Kite Company Income Statement Sales$900,000 Cost of goods sold400,000 Gross 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 ou tstanding50,000 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? Set this problem up as a partial derivative 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 Ace Book Company sold 1,500 finance textbooks for $185 each to High Tuition University in 2008. These books cost Ace $145 to produce. Ace spent $10,000 (selling expense) to coax 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 loan were paid on December 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 verify 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 political 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 increased 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 prices as a result of more self-assertive selling). Depreciation expense will dwell at $10,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to $15,000.The firms tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Hoods suggestions for Carr Auto Wholesalers. Will her ideas increase or decrease profitability? 2-11. Solution Carr Auto Wholesalers Income Statement a. Sales$ 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 $1,000,000Cost of goods sold (60% of sales) 600,000 Gross profit 400,000 Selling and adm inistrative expense (12% of sales) 120,000 Depreciation 10,000 Operating profit 270,000 Interest expense 15,000 Earnings before taxes 255,000 Taxes 30% 76,500 Earnings after taxes$ 178,500 Ms. Hoods ideas will increase profits. 15. Elite garget Parks 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 common 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 viridity dividends 30,000 Increase in retained earnings$80,000 pic Dividends per Share = $30,000/20,000 shar es = $1. 50 per share b. Increase in retained earnings = $80,000 16.Johnson Alarm Systems had $800,000 of retained earnings on December 31, 2008. The company paid common dividends of $60,000 in 2008 and had retained earnings of $640,000 on December 31, 2007. How oftentimes 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 depart in retained earnings$160,000 Add Common stock dividends 60,000 Earnings available to common stockholders$220,000 Earnings per share pic 17.Mozart Music Co. had earnings after taxes of $560,000 in 2008 with 200,000 shares of stock outstanding. The stock price 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 rati o 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)= Price/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 million on capital investments in order to remain combative within the industry. Common stock dividends are projected 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 refund 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 i n depreciation which provided $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. Current 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 obdurate assets 640,000 Total assets $960,000 Current liabilities 90,000 Long-term liabilities 160,000 Stockholders equity $710,000 Preferred stock obligation 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 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? 2-23. Solution Holtzman Corporation a.Total assets $400,000 Current liabilities 50,000 Long-term liabilities 100,000 Stockholders equity $250,000 Preferred stock 40,000 Net worth assigned to common $210,000 Common shares outstanding 20,000 Book values (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 30,000 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 i nternational 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, negotiable certificates of deposit, and convertible securities. FALSE 152.In the last decade, the US has invested substantially more in foreign 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 interest received. TRUE 154. The stock market far exceeds the bond market in terms of size of new capital raised. FALSE 155. The capital markets serve as a way of allocating available capital to the most efficient user. TRUE 156. The main reason 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 inv estor 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 government are mainly considered to be suppliers of funds while corporations are generally considered users of funds. FALSE 161. Financial intermediaries bear funds into the capital markets from the household sector. TRUE 162. Brokers on an organized 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 floor of the exchange. FALSE 164.The NASDAQ depicted object 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 reflect all public information. FALSE 166. The efficient market hypothesis is generally touch on with the impact 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 development past price selective information. FALSE 168. Markets are efficient when prices adjust rapidly to new information, continuous markets exist and large dollar trades can be inattentive without large price movements. TRUE 169.The Sarbanes-Oxley Act of 2002 holds the CEO legally accountable for the accuracy of their firms financial statements. 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 NYSE 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 global markets are linked was provided in 1997 and 1998 when international markets reacted to A. the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Korea. B. Russias default on its monarch debt. C. Japans seven years of economic stagnation.D. a and b are true. 173. When global capital markets collectively react to international events like Russias default on its self-reliant 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 bridle-path firms are so diversified that they are not affected by this event. D. All of these are true. 174. Which of the following is not a money market prick? 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 globe to A. capitalize on the inefficiency inherent in foreign markets. B. increase liquidity for their stockholders . C. provide 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 stability 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 United States and its relationship with the rest of the world, it can be said 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 category in the Balance Sheet? A. Short-term liabilities and eq uities. 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. Securities Investor Protection Corporation (SIPC) B. Federal Home Loan Banks (FHLB) C. Student Loan Marketing Association (Sallie Mae) D. Federal National Mortgage Association (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 loan 183.The major supplier of funds for investment in the whole economy is A. businesses. B. households. C. government. D. financial institutions. 184. Financial intermediari es 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 finished the economy. C. Help provide 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. Provide 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 visit commissions than on the organized exchanges. 187. The most important capital markets in the world (in terms of dollar value) are located 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 compan ies 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 emergence of trading via ECNs has A. offer a unique advantage not offered by the NYSE B. lowered the cost of trading. C. made 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 rapidly to new information. B. Large dollar amounts of securities can be absorbed without price destabilization. C. Each successive trade is made at a price close to the previous trade. D. Computerized handling of transactions. 192. Security markets are efficient when each of the following exist except A. security prices follow the leading 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. th ere 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 sta tes 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 ordinance include all of the following except A. protect against fraud B. ensure market efficiency C. reduce insider trading D. provide a global competitive advantage