Exam 1

Question 1

NOPAT=

Answer 1

EBIT x Tax Rate

Question 2

Operating Cash Flow=

Answer 2

NOPAT + Depreciation

Question 3

Investment in Operation Capital=

Answer 3

change in gross fixed assets + change in net operating working capital

Question 4

Net Operating working capital=

Answer 4

current assets - current liabilities

Question 5

Free Cash Flow=

Answer 5

operating cash flow - investment in operating capital

Question 6

Tax Liability=

Answer 6

taxable income x tax rate

Question 7

average tax rate=

Answer 7

tax liability/taxable income

Question 8

calculate taxes reported on the income statement:

Answer 8

EBIT - interest expense - net income

Question 9

when a firm alters its capital structure to include more or less debt (and, in turn, less or more equity), it impacts:

Answer 9

residual cash flows available for stockholders, the number of shares of stock outstanding, and the earnings per share

Question 10

The Sarbanes-Oxley Act requires public companies to ensure the following individuals have considerable experience applying generally accepted accounting principles (GAAP) for financial statements?

Answer 10

corporate boards audit committees

Question 11

what should be considered to maximize owner’s equity value?

Answer 11

how best to return the profits from those projects to the owners over time, which projects to invest in, and how best to bring additional funds into the firm

Question 12

what is an example of aligning managers personal interest with those of the owners?

Answer 12

offer the managers an equity stake in the firm

Question 13

the overall goal of the financial manager is to:

Answer 13

maximize shareholder wealth

Question 14

a legal duty between two parties where one must act in the interest of the other party

Answer 14

fiduciary duty

Question 15

earnings per share=

Answer 15

net income/shares

Question 16

an all-equity financed firm will

Answer 16

pay more in income taxes than a primarily debt-financed firm

Question 17

sole proprietorship is…

Answer 17

easy to start but has unlimited liability

Question 18

where would you find common stock and paid-in surplus

Answer 18

balance sheet

Question 19

what statement shows total revenues and total expenses to generate revenues

Answer 19

income statement

Question 20

how to find total assets using ROA, profit margin, and sales:

Answer 20

TA = (profit margin x sales)/ROA

Question 21

current ratio=

Answer 21

current assets/ current liabilities

Question 22

quick ratio=

Answer 22

(current assets - inventory) / current liabilities

Question 23

cash ratio=

Answer 23

(cash and marketable securities) / current liabilities

Question 24

debt ratio=

Answer 24

total debt / total assets

Question 25

debt-to-equity=

Answer 25

total debt / total equity

Question 26

equity multiplier=

Answer 26

total assets / total equity OR total assets / common stockholders' equity

Question 27

internal growth rate=

Answer 27

ROA x dividend payout

Question 28

debt management ratio:

Answer 28

measures the extent to which the firm uses debt versus equity to finance assets

Question 29

times interest earned=

Answer 29

EBIT / interest

Question 30

fixed-charge coverage=

Answer 30

earnings available to meet fixed charges / fixed charges

Question 31

cash coverage=

Answer 31

(EBIT + depreciation) / fixed charges

Question 32

gross profit margin=

Answer 32

(sales - COGS) / sales

Question 33

operating profit margin=

Answer 33

EBIT / sales

Question 34

profit margin=

Answer 34

net income available to common stockholders / sales

Question 35

ROA=

Answer 35

net income available to common stockholders / total assets

Question 36

ROE=

Answer 36

net income available to common stockholders / common stockholders' equity

Question 37

inventory turnover=

Answer 37

sales or COGS / inventory

Question 38

rule of 72=

Answer 38

72 / %

Question 39

PV of a perpetuity=

Answer 39

PMT / % (decimal form)

Question 40

PV of annuity due=

Answer 40

$ annuity x (1 + rate in decimal form)

Question 41

effective annual rate (EAR)=

Answer 41

[(1 + (decimal rate/N))^ N] - 1

Question 42

when interest rates are lower borrowers can...

Answer 42

borrow more money

Question 43

your credit rating and economic conditions will determine..

Answer 43

the interest rate that a lender will offer

Question 44

partnership

Answer 44

easy to start, but hard to raise capital

Question 45

corporation

Answer 45

easy to transfer ownership, double taxation

Question 46

hybrid

Answer 46

single taxation, limited liability, costs more

Question 47

angel investor

Answer 47

well off and invests own money

Question 48

2/10 net 30

Answer 48

2% discount if paid in 10 days OR due in full by 30 days

Question 49

social security rate:

Answer 49

.062

Question 50

medicare rate:

Answer 50

.0145

Question 51

ch 7 bankruptcy:

Answer 51

liquidation

Question 52

ch 13 bankruptcy:

Answer 52

reorganization of debt

Question 53

ch 9 bankruptcy:

Answer 53

municipalities

Question 54

ch 11 bankruptcy:

Answer 54

reorganization of business to pay off debts

Question 55

ch 12 bankruptcy:

Answer 55

family farm and fisherman

Question 56

ch 15 bankruptcy:

Answer 56

international bankruptcy

Question 57

most businesses try to keep their debt-to-equity ratio below...

Answer 57

2

Question 58

debt payment to income ratio (individual)

Answer 58

should be less than 20% after-tax income on consumer credit payments

Question 59

debt-to-equity ratio (individual)

Answer 59

maximum of 1

Question 60

28/36 rule:

Answer 60

households spend a max of 28% of gross monthly income on total household expenses and 38% on total debt services