Corporate Finance Quiz
1. If a company has sales of $500,000, a tax rate of 25%, a profit margin of 12% and earnings before interest and taxes (EBIT) of $110,000, what is its times-interest-earned ratio?
a) 1.667
b) 2.0000
c) 2.6667
d) 3.6667
2. If a company has a return on assets (ROA; the gross return) of 12.5%, a profit margin of 10%, cost of goods sold of $500,000 (cost of goods sold are stable at 40% of sales), interest expense of $25,000 and taxes of $15,000, what is the company's total asset turnover ratio?
a) 0.694
b) 0.845
c) 0.947
d) 1.250
3. An investor is considering investing in Red Ltd., and has gathered the following data on the company (all the figures except for the percentages and dividends per share are in thousands):
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Red Ltd.
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Net income - current year
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$1,500
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Dividend per share - current year
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$0.75
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Expected annual growth in dividends
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3%
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Expected free cash flows (in one year)
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$800
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Expected annual growth in free cash flows
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2%
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Number of common shares outstanding
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1,000
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Weighted average cost of capital
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5%
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Cost of equity capital
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7%
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Current value of long-term debt
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$7,500
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Based on this information, what should the current price of Red shares be under the capitalization of future cash flows approach and under the discounting of future free cash flows, respectively?
a) $11.04; $8.50
b) $18.75; $19.17
c) $19.31; $19.17
d) $19.31; $26.67
4. A company has sales of $10 million and a gross profit margin of 65%. It has $1.2 million in current assets that consist of cash, marketable securities, accounts receivable and inventory. Its current ratio is 1.50, its quick (acid test) ratio is 1.10 and its beginning inventory balance is $280,000. What is its inventory turnover ratio?
a) 6.034
b) 10.938
c) 11.667
d) 21.667
5. The balance sheet of Lever Inc. is as follows (in thousands):
Current assets $92
Property, plant and equipment 600
Total assets $692
Current liabilities $60
Long-term liabilities 80
Total liabilities 140
Shareholders' equity:
Common shares (40 shares) 320
Preferred shares 80
Retained earnings 152
Total shareholders' equity 552
Total shareholders' equity and liabilities $692
Other information (the dollar amounts are in thousands):
Current assets include inventories with a cost of $52. These inventories could be sold for $80 less a 12% commission. The replacement cost of the inventories is $60. Property, plant and equipment includes a building and land with a net book value of $480. The building and land have a fair market value of $800 and a replacement cost of $840.
What is the estimated value of one share of Lever Inc. using the liquidation method?
a) $20.26
b) $20.50
c) $21.00
d) $22.26
Intermediate Financial Reporting Quiz
1. Golden Lab Inc. (GLI) uses the direct method to prepare the operating activities section of its statement of cash flows. GLI's policy is to report the receipt of interest and dividends as investing activities, and the payment of interest and dividends as financing activities.
Following are extracts from the company's financial statements for its year ended December 31, 20X4:
Cash paid to fund the settlement of a decommissioning obligation - $ 16,000
Cash paid to purchase an investment at amortized cost - 17,000
Cash paid to purchase at fair value through profit or loss securities designated as cash equivalents - 15,000
Cash paid to suppliers and employees - 393,000
Cash receipts from customers - 812,000
Cash received from the sale of equipment (net book value: $40,000) - 49,000
Cash remitted to pension trust - 62,000
Depreciation expense - 91,000
Income taxes paid - 92,000
Issuance of common shares in exchange for equipment - 68,000
Payment to settle lawsuit - 38,000
Pension expense - 74,000
Proceeds from issuing bonds - 100,000
What was GLI's cash flow from operating activities for the year ended December 31, 20X4?
a) $120,000 inflow
b) $211,000 inflow
c) $227,000 inflow
d) $249,000 inflow
2. Fashion Forward Inc. (FFI) is a public company that has a December 31 year end. FFI's policy is to report the receipt of interest and dividends as investing activities, and the payment of interest and dividends as financing activities.
Following are extracts from the company's financial statements for its year ended December 31, 20X4:
Cash dividends paid - $60,000
Distribution of property dividend - 5,000
Payment on lease liability - 10,000
Proceeds from issuing bonds - 95,000
Right-of-use asset acquired under a lease contract - 115,000
What was FFI's cash flow from financing activities for the year ended December 31, 20X4?
a) $25,000 inflow
b) $35,000 inflow
c) $85,000 inflow
d) $95,000 outflow
3. On Tan Inc.'s 20X5 statement of cash flows, net cash provided by operating activities was $70,000. For 20X5, depreciation on plant assets was $30,000, impairment of goodwill was $5,000, and cash dividends paid on ordinary shares was $36,000. The cash dividends paid were reported as a financing activity. Based only on the information given above, what was Tan's net income for 20X5?
a) $35,000
b) $70,000
c) $71,000
d) $105,000
Use the following information to answer questions 4 and 5.
Following is select financial information for Enough Already Corp. (EAC) for its year ending December 31, 20X5, together with comparative information:
Enough Already Corp. Statement of profit or loss For the year ended December 31, 20X5 (in '000s)
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20X5
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20X4
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Sales
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$132,500
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$125,000
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Cost of goods sold
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76,200
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72,600
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Gross profit
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$56,300
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$52,400
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Expenses:
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Operating expense
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$27,500
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$25,700
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Depreciation expense
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6,850
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6,850
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Advertising expense
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4,92
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4,850
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Interest expense
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5,950
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6,500
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Total expenses
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$45,220
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$43,900
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Profit or loss before tax
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$11,080
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$8,500
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Income tax expense
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4,400
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3,000
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Profit or loss
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$6,680
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$5,500
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Enough Already Corp. Statement of financial position As at December 31, 20X5 (in '000s)
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20X5
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20X4
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20X3
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Current assets:
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Cash
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$13,290
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$10,700
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$101,395
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Accounts receivables
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34,500
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33,800
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28,900
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Inventory
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21,200
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19,800
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16,550
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Total current assets
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$68,990
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$64,300
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$55,845
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Capital assets
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92,300
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99,150
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106,000
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Total assets
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$161,290
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$163,450
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$161,845
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Current liabilities:
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Accounts payable
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$15,690
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$16,145
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$14,155
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Unearned revenue
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9,200
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8,900
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8,400
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Current portion of long-term debt
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8,500
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8,500
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8,500
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Total current liabilities
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$33,390
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$33,545
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$31,055
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Long-term liabilities
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68,000
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76,500
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85,000
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Total liabilities
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$101,390
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$110,045
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$116,055
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Shareholders' equity
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59,900
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53,405
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45,790
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Total liabilities and shareholders' equity
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$161,290
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$163,450
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$161,845
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Industry averages
Gross margin - 44.5%
Return on equity (ROE) - 12.9%
Current ratio - 1.8:1
Quick ration - 1.2:1
4. Which of the following statements regarding EAC's change in profitability from the previous year is true? (Hint: Calculate gross margin and return on equity for your analysis.)
a) EAC's profitability has deteriorated, but the organization is more efficient at generating income from its equity base.
b) EAC's profitability has deteriorated, and the organization is less efficient at generating income from its equity base.
c) EAC's profitability has improved, but the organization is less efficient at generating income from its equity base.
d) EAC's profitability has improved, and the organization is more efficient at generating income from its equity base.
5. Which of the following statements regarding EAC's liquidity is true? (Hint: Calculate the current ratio and quick ratio for your analysis.)
a) EAC's ability to meet its short-term obligations has improved from the prior year, and is better than similar companies in the industry.
b) EAC's ability to meet its short-term obligations has improved from the prior year, but is still worse than similar companies in the industry.
c) EAC's ability to meet its short-term obligations has worsened from the prior year, but is still better than similar companies in the industry.
d) EAC's ability to meet its short-term obligations has worsened from the prior year, and is worse than similar companies in the industry.