Fine 3010 Quiz 1

Fine 3010 Quiz 1 | Tulane University

Question 1

Suppose that you are given the following information regarding Firms A & B that are in the same industry:

                                                            FIRM A                       FIRM B

Asset Turnover                                  16.2x                           10.3x

L-T Debt-to-Equity Ratio                   1.2x                             0.9x

Net Profit Margin                              9.5%                           8.2%

Times Interest Earned                      1.90                             1.62

Receivables Turnover                        6.4x                             9.1x

Current Ratio                                     1.2x                             1.8x

Asset Turnover Ratio = Sales / Average Total Assets

L-T Debt-to-Equity Ratio = Long-Term Debt / Total Equity

Net Profit Margin = Net Income / Sales

Times Interest Earned = EBIT / Interest Expense

Receivables Turnover = Sales / Avg. Account Receivables

Current Ratio = Current Assets / Current Liabilities 

Use the above information to best answer the following question:

All else constant, which firm appears to be relatively LESS ABLE to pay the interest on their debt? 

Firm B  

Firm A  

Both firms are equally able to pay their interest 

Cannot determine with the information given

Question 2

Suppose that you are given the following information regarding Firms A & B that are in the same industry:

                                                            FIRM A                       FIRM B

Asset Turnover                                  16.2x                           10.3x

L-T Debt-to-Equity Ratio                   1.2x                             0.9x

Net Profit Margin                              9.5%                           8.2%

Times Interest Earned                      1.90                             1.62

Receivables Turnover                        6.4x                             9.1x

Current Ratio                                     1.2x                             1.8x

Asset Turnover Ratio = Sales / Average Total Assets

L-T Debt-to-Equity Ratio = Long-Term Debt / Total Equity

Net Profit Margin = Net Income / Sales

Times Interest Earned = EBIT / Interest Expense

Receivables Turnover = Sales / Avg. Account Receivables

Current Ratio = Current Assets / Current Liabilities

Use the above information to best answer the following questions:

All else constant, which firm appears to use MORE relative leverage?  

Both firms use the same amount of relative leverage 

Firm A  

Firm B  

Cannot determine with the information given

Question 3

Suppose that you are given the following information regarding Firms A & B that are in the same industry:

                                                            FIRM A                       FIRM B

Asset Turnover                                  16.2x                           10.3x

L-T Debt-to-Equity Ratio                   1.2x                             0.9x

Net Profit Margin                              9.5%                           8.2%

Times Interest Earned                      1.90                             1.62

Receivables Turnover                        6.4x                             9.1x

Current Ratio                                     1.2x                             1.8x

Asset Turnover Ratio = Sales / Average Total Assets

L-T Debt-to-Equity Ratio = Long-Term Debt / Total Equity

Net Profit Margin = Net Income / Sales

Times Interest Earned = EBIT / Interest Expense

Receivables Turnover = Sales / Avg. Account Receivables

Current Ratio = Current Assets / Current Liabilities 

Use the above information to best answer the following questions:

All else constant, which firm appears to take LONGER to collect their credit sales on average?  

Firm A  

Both firms sell their inventory equally as fast  

Cannot determine with the information given  

Firm B

Question 4

In 2012, Facebook issued shares of its stock to the public and began trading on the New York Stock Exchange (NYSE). Suppose that tomorrow they were to issue more shares of stock to raise money to design and launch a new social media platform. What is the name of the type of market in which this transaction will take place? 

Question 5

An individual has taxable income of $50,000. Her tax schedule is shown below. 

From $0 to $10,000                  10%

From $10,001 to $50,000     20%

$50,001 and above                    30%

What is her average tax rate (show your work in Canvas)?

What is her marginal tax rate (briefly explain your work in Canvas)?

Average Tax Rate:

10,000(.10)=1000

40,000(.20)=8,000

9,000/50000= 18%

Marginal:

30% (an additional $1 moves her into the 30% tax bracket) 

Question 6

Suppose that Disney’s marginal tax rate is 21%, while its average tax rate is 18.4%.  Which is true?

Each new dollar of income will be taxed at 23.4%  

The average tax rate gives Disney more useful information when making capital budgeting decisions  

The marginal tax rate gives Disney more useful information when making capital budgeting decisions  

Something is wrong with the information given – an average tax rate is usually greater than the marginal tax rate, but here it’s smaller 

Question 7

If you invest $5,000 today in the stock market and you want it to grow to $17,000 in exactly 8 years, what annual interest rate would you need to earn to achieve this goal? Show all inputs and the final answer from your calculator. Take the answer out to 2 decimal points.

PV: 5000

FV: 17,000

N = 8

I = 16.53%

Question 8

An infinite stream of cash flows that are the same amount, equally spaced apart, is called what?

Present Value 

Retained Earnings 

An Annuity 

A Perpetuity  

An Investment Horizon