FINC 311 Exam I Spring 2010 Evans Name:_________________________________ Problems: 1. Prepare a balance sheet and income statement in good form for ABC Corporation based on the following information. (20 points) Sales $6,250 Accounts Receivable $ 515 Cash 15 Total Operating Exp. 5,450 Long-term Debt 1,520 Inventories 880 Plant & Equipment 2,590 Interest Expense 180 Accounts Payable 120 Preferred Dividend 8 Income Tax Expense 248 Notes Payable 220 Preferred Stock 80 Accruals 280 Retained Earnings ? Common stock 260 Salaries 2,500 Office expenses 800 Rent 950 Depreciation exp. 1,200 Check Figures Total Assets = $4,000 Retained earnings = $1,520 Operating Income = $800 Net Income = $372 Earnings Available to the Common Stockholders (EACS) = $364 2. Given the information in problem 1, compute the amount of the dividend paid to the common stockholders for the year if retained earnings at the beginning of the year was $1,302. (10 points) Dividends paid to common stockholders = $146 3. Use the percent of sales method to prepare a pro forma income statement for Turner Enterprises, Inc. Projected sales for next year equal $4 million. Cost of goods sold equals 70% of sales. The firm plans to spend $200,000 during the period to renovate its office facility and will pay back $150,000 in notes payable during the year. Other projected expenses include: ∙Administrative expense -- $500,000 ∙Depreciation expense –- 300,000 ∙Interest expense -- 50,000 ∙Selling expense -- 5% of sales The company has a 40% tax rate and plans to pay $30,000 in dividends to the common stockholders. (15 points) N/A 4. Lindsey Insurance Co. has current sales of $10 million and predicts next year's sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders. What are Lindsey's discretionary financing needs for the upcoming year? (15 pts.) N/A Part II: Multiple Choice (2 points each) 1. Byron, Inc. has total current assets of $800,000; total current liabilities of $450,000; long-term assets of $300,000; and long-term debt of $200,000. How much is the firm's total equity? A. $1,150,000 B. $150,000 C. $450,000 D. $750,000 2. The percent of sales method can be used to forecast: A. expenses. B. assets. C. liabilities. D. all of the above. 3. Wheeler Corporation had retained earnings as of 12/31/03 of $10 million. During 2004, Wheeler's net income was $ 2 million. The retained earnings balance at the end of 2004 was equal to $9 million. Therefore: A. Wheeler paid a dividend in 2004 of $1 million. B. Wheeler paid a dividend in 2004 of $3 million. C. Wheeler sold common stock during 2004 for $3 million. D. Wheeler increased its long-term debt by $1 million during 2004. 4. When forecasting fixed asset requirements, the projected fixed asset balance will: A. not increase proportionally with sales if the existing level of fixed assets is sufficient to support current sales. B. not increase proportionally if excess capacity exists. C. remain the same since the balance is fixed. D. always increase proportionally with sales. 5. An example of a primary market transaction is: A. a new issue of common stock by AT&T B. a sale of some outstanding common stock of A&T by an investor. C. AT&T repurchasing its own stock from a stockholder. D. all of the above. 6. The two principal sources of financing for a corporation are: A. debt and accounts payable. B. debt and equity. C. common equity and preferred equity. D. cash and common equity. 7. Using the percentage of sales method, forecasted retained earnings balance is equal to: A. prior year retained earnings plus projected net income less projected dividends. B. the ratio of retained earnings to sales for the current year multiplied by projected sales for next year. C. the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method. D. the ratio of retained earnings to sales for the current year multiplied by projected sales for next year, minus dividends paid. 8. Using the percentage of sales method of forecasting: A. all asset and liability accounts increase or decrease proportionally with sales. B. only asset accounts increase or decrease proportionally with sales. C. accounts payable and accrued expenses are the only liabilities that increase or decrease proportionally with sales. D. all balance sheet accounts increase or decrease proportionally with sales. 9. Global.Com has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is Global's net working capital? A. $390,000 B. $175,000 C. $700,000 D. $210,000 10. The primary goal of a publicly owned corporation is to: A. maximize dividends per share. B. maximize shareholder wealth. C. maximize earnings per share after taxes. D. minimize shareholder risk. 11. ABC Corp. is required by a debt agreement to maintain a current ratio of at least 1.5, and ABC’s current ratio now is 2.0. ABC wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can ABC purchase without violating its debt agreement if their total current assets equal $20 million? a. $13.33 million b. $10.00 million c. $25.00 million d. $6.67 million 12. Corporations are allowed to deduct specific items for income tax purposes. Which of the following is true with respect to tax deductibility? A. Dividends on common stock are deductible while dividends on preferred stock are not. B. Dividends on preferred stock are deductible while dividends on common stock are not. C. Depreciation expense is deductible while dividends (on both common and preferred stock) are not. D. Dividends (on both common and preferred stock) are deductible while depreciation expense is not. 13. Jones Finance Company had a cash balance of $1 million at the beginning of 2004. During 2004, Sales were $5 million and expenses were $3 million. Therefore: A. the cash balance at the end of 2004 is $3 million. B. the cash balance at the end of 2004 must be greater than $1 million. C. the cash balance at the end of 2004 must be less than $5 million. D. the cash balance at the end of 2004 cannot be determined from the information given. 14. The current ratio of a firm would be increased by which of the following? a. land held for investment is sold for cash b. equipment is purchased, financed by a long-term debt issue c. inventories are sold for cash d. inventories are sold on a credit basis 15. The true owners of the corporation are the: A. holders of debt issues of the firm. B. preferred stockholders. C. board of directors of the firm. D. common stockholders. 16. Which of the following statements concerning net income is most correct? A. Net income represents cash available to pay dividends. B. Net income represents sales minus operating expenses at a specific point in time. C. Negative net income reduces a company's cash balance. D. Net income represents income that may be reinvested in the firm or distributed to its owners. 17. John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the: A. secondary market. B. primary market. C. credit market. D. futures market. 18. In order to increase its operating profit margin, a company could a. reduce expenses while maintaining its sales level b. replace debt with equity financing to lower interest expense c. increase sales while maintaining its current product mix d. sell more shares of common stock 19. Financial analysis a. uses historical financial statements and is thus useful only to assess past performance. b. relies on generally accepted accounting principles to make comparisons between companies valid. c. uses historical financial statements to measure a company’s performance and in making financial projections of future performance. d. is accounting record-keeping using generally accepted accounting principles. 20. Fixed assets are often estimated incorrectly by the percent of sales method because: A. fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales. B. fixed asset are very expensive. C. fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales. D. fixed assets are part of the capital budgeting process.
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