1. CHAPTER 13

# 1.1(2.5 pts.)

The discount rate must be specified in advance for which of the following methods?

Option A

Option B

Option C

Option D

# 1.2(2.5 pts.)

(Ignore income taxes in this problem.) The Valentine Company has decided to buy a machine costing $14,750. Estimated cash savings from using the new machine amount to $4,500 per year. The machine will have no salvage value at the end of its useful life of five years. If Valentine's required rate of return is 10%, the machine's internal rate of return is closest to:

10%

12%

14%

16%

# 1.3(2.5 pts.)

(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:

Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.

If the new equipment is purchased, the present value of all cash flows that occur now is:

$(45,000)

$(39,000)

$(37,000)

$(34,000)

# 1.4(2.5 pts.)

(Ignore income taxes in this problem.) The management of Rouleau Corporation is investigating automating a process. Old equipment, with a current salvage value of $10,000, would be replaced by a new machine. The new machine would be purchased for $240,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $64,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

10.0%

26.7%

10.4%

16.7%

# 1.5(2.5 pts.)

(Ignore income taxes in this problem.) In order to receive $12,000 at the end of three years and $10,000 at the end of five years, how much must be invested now if you can earn 14% rate of return?

$12,978

$8,100

$13,290

$32,054

# 1.6(2.5 pts.)

(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.

Rank the projects according to the profitability index, from most profitable to least profitable.

O, M, N

O, N, M

M, O, N

N, M, O

# 1.7(2.5 pts.)

A decrease in the discount rate:

will increase present values of future cash flows.

is one way to compensate for greater risk in a project.

will reduce present values of future cash flows.

responses a and b are both correct.

# 1.8(2.5 pts.)

(Ignore income taxes in this problem.) Chow Company has gathered the following data on a proposed investment project:

The internal rate of return on the investment is closest to:

13%

15%

14%

12%

# 1.9(2.5 pts.)

(Ignore income taxes in this problem.) Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:

Lichty uses the total-cost approach and a discount rate of 10% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of five years Mr. Lichty plans to close the car wash and retire.

If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:

$(26,537)

$(15,164)

$(18,463)

$(37,901)

# 1.10(2.5 pts.)

(Ignore income taxes in this problem.) Virani Corporation has entered into a 8 year lease for a piece of equipment. The annual payment under the lease will be $2,000, with payments being made at the beginning of each year. If the discount rate is 9%, the present value of the lease payments is closest to:

$8,030

$12,066

$16,000

$14,679

# 1.11(2.5 pts.)

(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:

The net present value on this investment is closest to:

$400,000

$80,000

$91,600

$76,750

 2. CHAPTER 14CHAPTER 14

# 2.1(2.5 pts.)

Lucas Company recorded the following events last year:

On the statement of cash flows, some of these events are classified as operating activities, some are classified as investing activities, and some are classified as financing activities.

Based solely on the information above, the net cash provided by (used in) financing activities on the statement of cash flows would be:

$85,000

$(80,000)

$(145,000)

$170,000

# 2.2(2.5 pts.)

Severn Corporation prepares its statement of cash flows using the direct method. Last year, Severn reported Income Tax Expense of $27,000. At the beginning of last year, Severn had a $2,000 balance in the Income Taxes Payable account. At the end of last year, Severn had a $5,000 balance in the account. On its statement of cash flows for last year, what amount should Severn have shown for its Income Tax Expense adjusted to a cash basis (i.e., income taxes paid)?

$20,000

$22,000

$24,000

$30,000

# 2.3(2.5 pts.)

Megna Company's net income last year was $143,000. Changes in the company's balance sheet accounts for the year appear below:

The company paid a cash dividend and it did not dispose of any long-term investments or property, plant, and equipment. The company did not issue any bonds payable or repurchase any of its own common stock. The following questions pertain to the company's statement of cash flows.

The net cash provided by (used in) financing activities last year was:

$20,000

$(20,000)

$69,000

$(69,000)

# 2.4(2.5 pts.)

Hocking Corporation's comparative balance sheet appears below:

The company's net income (loss) for the year was $10,000 and its cash dividends were $1,000. It did not sell or retire any property, plant, and equipment during the year. The company uses the indirect method to determine the net cash provided by operating activities.

Which of the following is correct regarding the operating activities section of the statement of cash flows?

The change in Prepaid Expenses will be added to net income; The change in Income Taxes Payable will be subtracted from net income

The change in Prepaid Expenses will be subtracted from net income; The change in Income Taxes Payable will be subtracted from net income

The change in Prepaid Expenses will be subtracted from net income; The change in Income Taxes Payable will be added to net income

The change in Prepaid Expenses will be added to net income; The change in Income Taxes Payable will be added to net income

# 2.5(2.5 pts.)

Gasco Corporation's balance sheet and income statement appear below:

Cash dividends were $54. The company sold equipment for $14 that was originally purchased for $8 and that had accumulated depreciation of $1. It did not issue any bonds payable or repurchase any of its own common stock.

The net cash provided by (used in) financing activities for the year was:

$(54)

$2

$(72)

$(20)

# 2.6(2.5 pts.)

Cridman Company's selling and administrative expenses for last year totaled $180,000. During the year the company's prepaid expense account balance decreased by $5,000 and accrued liabilities increased by $8,000. Depreciation for the year was $12,000. Based on this information, selling and administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:

$205,000

$181,000

$155,000

$179,000

# 2.7(2.5 pts.)

The most recent balance sheet and income statement of Marroquin Corporation appear below:

The company paid a cash dividend and it did not dispose of any property, plant, and equipment. The company did not issue any bonds payable or repurchase any of its own common stock. The following questions pertain to the company's statement of cash flows.

The net cash provided by (used in) financing activities for the year was:

$3

$(65)

$(24)

$(44)

# 2.8(2.5 pts.)

The most recent balance sheet and income statement of Heldt Corporation appear below:

The company paid a cash dividend and it did not dispose of any property, plant, and equipment. The company did not purchase any bonds payable or repurchase any of its own common stock. The following questions pertain to the company's statement of cash flows.

The net cash provided by (used in) investing activities for the year was:

$102

$61

$(102)

$(61)

# 2.9(2.5 pts.)

Schleich Corporation's most recent balance sheet appears below:

Net income for the year was $274. Cash dividends were $53. The company did not sell or retire any property, plant, and equipment during the year. The net cash provided by (used in) operating activities for the year was:

$286

$262

$391

$12

# 2.10(2.5 pts.)

Van Aalst Company's comparative balance sheet and income statement for last year appear below:

The company declared and paid $77,000 in cash dividends during the year. It did not sell or retire any property, plant, and equipment during the year. The company uses the direct method to determine the net cash provided by operating activities.

On the statement of cash flows, the selling and administrative expense adjusted to a cash basis would be:

$270,000

$246,000

$294,000

$288,000

# 2.11(2.5 pts.)

Alkine Company's comparative balance sheet appears below:

Alkine reported the following net income for the year:

Dividends were declared and paid during the year. A gain of $8,000 was recorded on the sale of the long-term investments. The company did not purchase any long-term investments or dispose of any property, plant, and equipment during the year. It also did not issue any bonds payable or repurchase any of its own common stock.

Under the direct method, the sales adjusted to a cash basis would be:

$252,000

$244,000

$260,000

$250,000

 3. CHAPTER 15CHAPTER 15

# 3.1(2.5 pts.)

Higgins Company presently has a current ratio of 0.6. It is currently negotiating a loan, but it has been informed it must improve its current ratio before the loan will be approved. Which of the following actions would improve its current ratio?

Pay off a portion of its long-term debt.

Use cash to pay off some current liabilities.

Purchase additional inventory on credit.

Collect some of the current accounts receivable.

# 3.2(2.5 pts.)

Hick Corporation's most recent balance sheet and income statement appear below:

Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $9.57 per share.

The return on common stockholders' equity for Year 2 is closest to:

12.44%

13.02%

15.38%

10.53%

# 3.3(2.5 pts.)

Financial statements for Marcell Company appear below:

Marcell Company's average sale period for Year 2 was closest to:

15.7 days

25.8 days

36.9 days

22.6 days

# 3.4(2.5 pts.)

Financial statements for Harwich Company for the most recent year appear below:

The balances in the Cash, Accounts Receivable, Inventory, Bonds Payable, Common Stock, and Additional Paid-In Capital accounts are unchanged from the beginning of the year. A $0.75 per share dividend was declared and paid during the year. On December 31, Harwich Company's common stock was trading at $24.00 per share.

Harwich Company's current ratio at December 31 was closest to:

1.95

2.67

1.33

2.00

# 3.5(2.5 pts.)

Financial statements for Marcell Company appear below:

Marcell Company's inventory turnover for Year 2 was closest to:

16.2

23.2

14.2

9.9

# 3.6(2.5 pts.)

Hick Corporation's most recent balance sheet and income statement appear below:

Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $9.57 per share.

The gross margin percentage for Year 2 is closest to:

82.9%

45.3%

446.2%

22.4%

# 3.7(2.5 pts.)

Excerpts from Goodrow Corporation's most recent balance sheet and income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $5.34 per share.

The dividend payout ratio for Year 2 is closest to:

50.0%

28.6%

33.3%

3333.3%

# 3.8 Assuming stable business conditions, an increase in the accounts receivable turnover ratio could be explained by:

(2.5 pts.) stricter policies with respect to the granting of credit to customers.

an easing of policies with respect to the granting of credit to customers.

a slowdown in collecting accounts receivables from customers.

none of these.

# 3.9(2.5 pts.)

Financial statements for Orange Company appear below:

Dividends during Year 2 totaled $156 thousand, of which $18 thousand were preferred dividends.The market price of a share of common stock on December 31, Year 2 was $100.

Orange Company's times interest earned for Year 2 was closest to:

16.0

28.3

17.0

11.2

# 3.10(2.5 pts.)

Hartzog Corporation's most recent balance sheet and income statement appear below:

Dividends on common stock during Year 2 totaled $60 thousand. Dividends on preferred stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $7.04 per share.

The dividend payout ratio for Year 2 is closest to:

81.3%

75.0%

70.6%

1250.0%

# 3.11(2.5 pts.)

Excerpts from Zorra Corporation's most recent balance sheet appear below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods sold was $850.

The current ratio at the end of Year 2 is closest to:

0.38

2.62

0.52

0.74