Finance review questions

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1.Operating Cash Flow (LO3) In comparing accounting net income and operating cash flow, name two items you typically find in the net income that are not in operating cash flow. Explain what each is and why it is excluded on operating cash flow.

2. 1. (LO3) What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit.

3. Testaburger Ltd. uses no external financing and maintains a positive retention ratio. When sales grow by 15%, the firm has a negative projected EFN. What does this tell you about the firm’s internal growth rate? How about the sustainable growth rate? At this same level of sales growth, what will happen to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What happens to the projected EFN if the firm pays out all of its earnings in the form of dividends?

4. The basic present value equation has four parts. What are they?

5. As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value?

6. How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

7. Why does the value of a share of stock depend on dividends?

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