BA 10 CORPORATE FINANCE STUDY GUIDE INFORM OF QUESTION AND
ANSWER. 2O25
QUESTION: 23.36 - ANSWER-A firm reports a current ratio of 2 and a quick ratio of 1.2. The firm has
total current assets of $4,000. If the firm reports cost of goods sold at $25,000 for the given year, what is
the average age of their inventory?
Current = 2 = CA/CL = $4000/CL, CL=$2000 Quick = 1.2 = ($4000-INV)/$2000 INV = $1,600 Inventory turn
= $25000/$1600=15.625
Average age = 365/15.625=23.36
QUESTION:17.50% - ANSWER-If a company's net profit margin is 5% and its total asset turnover is 3.5,
what is its ROA?
ROA=Net profit margin * total asset turnover ROA=.05*3.5=.1750
QUESTION: $4 - ANSWER-The asset to equity ratio for a firm is 1.5, and the firm has total assets of
$3,000,000. Last year, net income for the firm was $250,000, and the earnings per share for the firm was
reported as $0.50. What is the current book value per share for the firm?
,1.5=3,000,000/x; X=shareholder equity=$2,000,000 EPS=$0.50=$250,000/Y; Y= # of shares = 500,000
Book value per share = $2,000,000/500,000 = $4
QUESTION: No, it would only be worth $50 million if it were all paid out today. - ANSWER-The
Springfield Crusaders just signed their quarterback to a 10 year $50 million contract. Is this contract
really worth $50 million? (assume r >0)
QUESTION: $31,250 - ANSWER-You are offered a security that will pay you $2,500 at the end of the year
forever. If your discount rate is 8%, what is the most you are willing to pay for this security?
2500/.08 = 31250
QUESTION: the number of periods that the present value is left on deposit. - ANSWER-In the equation
below, the exponent "3" represents
$133.10 = $100 ´ (1 + .1)3
QUESTION: $21 - ANSWER-A firm has 10 million shares outstanding with a current market price of $20
per share. There is one investment project available to the firm. The initial investment of the project is
$20 million, and the NPV of the project is $10 million. What will be the firm's stock price if capital
markets fully reflect the value of undertaking the project?
The stock price will increase by $1 per share (= $10m/10m shares)
QUESTION: $0.2 million - ANSWER-A piece of equipment costs $1.2m. The equipment has a useful life of
4 years. In each of the four years, the investment generates a cash inflow of $0.5m. The impact of the
,investment project on net income is derived by subtracting depreciation from cash flow each year.
Assuming the equipment is depreciated on a straight-line basis over 4 years, what is the average
contribution to net income across all four years?
QUESTION: $5,340,000 - ANSWER-Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000.
The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding.
The company is considering raising $1 million in debt with a required return of 6%, and would use the
proceeds to repurchase outstanding stock.What is the value of Bavarian Brew after restructuring?
Assume corporate taxes of 34%.
The value after restructuring would be $5,340,000.
500,000/.10 + 1,000,000(.34) = $5,340,000
QUESTION: $90,000 - ANSWER-Given the following information, calculate the company's long-term
debt.
Current assets:
$125,000
Current liabilities:
$ 85,000
Net fixed assets:
$250,000
, Total equity:
$200,000
QUESTION: .88 - ANSWER-Roxy Corp. has total current liabilities of $22,000 and an inventory of $7,000.
If its current ratio is 1.2, then what is Rocy's quick ratio?
QUESTION: $2,375,000 - ANSWER-A firm reports net income of $500,000 for 2011. The most recent
balance sheet for the reports retained earnings of $2,000,000. The firm will pay out 25% of net income
as dividends. What will the new balance be for retained earnings?
QUESTION: Investment B, because it has higher effective annual return. - ANSWER-You have the choice
between two investments that have the same maturity and the same nominal return. Investment A pays
simple interest, investment B pays compounded interest. Which one should you pick?
QUESTION: $769.23 - ANSWER-Forever Insurance Company has offered to pay you or your heirs $100
per year at the end of each year forever. If the correct discount rate for such a cash flow is 13%, what
amount would you be willing to pay Forever Insurance for this set of cash flows?
QUESTION: The property was extensively renovated last year at a cost of $15,000. - ANSWER-Roger is
considering the expansion of his business into a property he purchased two years ago. Which of the
following items should not be included in the analysis of this expansion?
a. The property was extensively renovated last year at a cost of $15,000.
b. Roger can lease the property to another company for $12,000 per year.
c. The expansion will result in a slight increase of inventory carried.
ANSWER. 2O25
QUESTION: 23.36 - ANSWER-A firm reports a current ratio of 2 and a quick ratio of 1.2. The firm has
total current assets of $4,000. If the firm reports cost of goods sold at $25,000 for the given year, what is
the average age of their inventory?
Current = 2 = CA/CL = $4000/CL, CL=$2000 Quick = 1.2 = ($4000-INV)/$2000 INV = $1,600 Inventory turn
= $25000/$1600=15.625
Average age = 365/15.625=23.36
QUESTION:17.50% - ANSWER-If a company's net profit margin is 5% and its total asset turnover is 3.5,
what is its ROA?
ROA=Net profit margin * total asset turnover ROA=.05*3.5=.1750
QUESTION: $4 - ANSWER-The asset to equity ratio for a firm is 1.5, and the firm has total assets of
$3,000,000. Last year, net income for the firm was $250,000, and the earnings per share for the firm was
reported as $0.50. What is the current book value per share for the firm?
,1.5=3,000,000/x; X=shareholder equity=$2,000,000 EPS=$0.50=$250,000/Y; Y= # of shares = 500,000
Book value per share = $2,000,000/500,000 = $4
QUESTION: No, it would only be worth $50 million if it were all paid out today. - ANSWER-The
Springfield Crusaders just signed their quarterback to a 10 year $50 million contract. Is this contract
really worth $50 million? (assume r >0)
QUESTION: $31,250 - ANSWER-You are offered a security that will pay you $2,500 at the end of the year
forever. If your discount rate is 8%, what is the most you are willing to pay for this security?
2500/.08 = 31250
QUESTION: the number of periods that the present value is left on deposit. - ANSWER-In the equation
below, the exponent "3" represents
$133.10 = $100 ´ (1 + .1)3
QUESTION: $21 - ANSWER-A firm has 10 million shares outstanding with a current market price of $20
per share. There is one investment project available to the firm. The initial investment of the project is
$20 million, and the NPV of the project is $10 million. What will be the firm's stock price if capital
markets fully reflect the value of undertaking the project?
The stock price will increase by $1 per share (= $10m/10m shares)
QUESTION: $0.2 million - ANSWER-A piece of equipment costs $1.2m. The equipment has a useful life of
4 years. In each of the four years, the investment generates a cash inflow of $0.5m. The impact of the
,investment project on net income is derived by subtracting depreciation from cash flow each year.
Assuming the equipment is depreciated on a straight-line basis over 4 years, what is the average
contribution to net income across all four years?
QUESTION: $5,340,000 - ANSWER-Bavarian Brew, an unlevered firm, has an expected EBIT of $500,000.
The required return on assets for the firm's assets is 10%. The company has 250,000 shares outstanding.
The company is considering raising $1 million in debt with a required return of 6%, and would use the
proceeds to repurchase outstanding stock.What is the value of Bavarian Brew after restructuring?
Assume corporate taxes of 34%.
The value after restructuring would be $5,340,000.
500,000/.10 + 1,000,000(.34) = $5,340,000
QUESTION: $90,000 - ANSWER-Given the following information, calculate the company's long-term
debt.
Current assets:
$125,000
Current liabilities:
$ 85,000
Net fixed assets:
$250,000
, Total equity:
$200,000
QUESTION: .88 - ANSWER-Roxy Corp. has total current liabilities of $22,000 and an inventory of $7,000.
If its current ratio is 1.2, then what is Rocy's quick ratio?
QUESTION: $2,375,000 - ANSWER-A firm reports net income of $500,000 for 2011. The most recent
balance sheet for the reports retained earnings of $2,000,000. The firm will pay out 25% of net income
as dividends. What will the new balance be for retained earnings?
QUESTION: Investment B, because it has higher effective annual return. - ANSWER-You have the choice
between two investments that have the same maturity and the same nominal return. Investment A pays
simple interest, investment B pays compounded interest. Which one should you pick?
QUESTION: $769.23 - ANSWER-Forever Insurance Company has offered to pay you or your heirs $100
per year at the end of each year forever. If the correct discount rate for such a cash flow is 13%, what
amount would you be willing to pay Forever Insurance for this set of cash flows?
QUESTION: The property was extensively renovated last year at a cost of $15,000. - ANSWER-Roger is
considering the expansion of his business into a property he purchased two years ago. Which of the
following items should not be included in the analysis of this expansion?
a. The property was extensively renovated last year at a cost of $15,000.
b. Roger can lease the property to another company for $12,000 per year.
c. The expansion will result in a slight increase of inventory carried.
