Question 1

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.

Accepted Answer

A)   Companies' after-tax operating profits would decline.
B)   Companies' physical stocks of fixed assets would increase.
C)   Companies' cash flows would increase.
D)   Companies' cash positions would decline.
E)   Companies' reported net incomes would decline.F) B) and E)
G) A) and B)

Question 2

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Typically, a firm's DPS should exceed its EPS.
B)   Typically, a firm's net income should exceed its EBIT.
C)   If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share.
D)   If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
E)   The more depreciation a firm has in a given year, the higher its EPS, other things held constant.F) B) and D)
G) None of the above

Question 4

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Accepted Answer

A)   The company's dividend payment to common stockholders declined.
B)   The company's expenditures on fixed assets declined.
C)   The company's cost of goods sold increased.
D)   The company's depreciation expense declined.
E)   The company's interest expense increased.F) B) and E)
G) A) and B)

Question 5

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?

Accepted Answer

A)   10.20%
B)   10.74%
C)   11.28%
D)   11.84%
E)   12.43%F) A) and B)
G) A) and C)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   Actions that increase reported net income will always increase cash flow.
B)   One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
C)   One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
D)   One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital obtained at a higher cost of capital.
E)   If a firm reports positive net income, its EVA must also be positive.F) A) and D)
G) None of the above

Question 7

Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 8

The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.

Accepted Answer

A) True 
 B)False

Question 9

Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following items is NOT normally considered to be a current asset?

Accepted Answer

A)   Accounts receivable.
B)   Inventory.
C)   Bonds.
D)   Cash.
E)   Short-term, highly-liquid, marketable securities.F) B) and D)
G) B) and C)

Question 11

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

EBITDA stands for earnings before interest, taxes, debt, and assets.

Accepted Answer

A) True 
 B)False

Question 13

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Accepted Answer

A)   6.57%
B)   6.92%
C)   7.28%
D)   7.64%
E)   8.03%F) C) and D)
G) B) and E)

Question 14

An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows.

Accepted Answer

A) True 
 B)False

Question 15

Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital?

Accepted Answer

A)   $2,874
B)   $3,025
C)   $3,176
D)   $3,335
E)   $3,502F) C) and D)
G) B) and E)

Question 16

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT) , and its tax rate all remain constant. Which of the following would occur?

Accepted Answer

A)   The company's taxable income would fall.
B)   The company's interest expense would remain constant.
C)   The company would have less common equity than before.
D)   The company's net income would increase.
E)   The company would have to pay less taxes.F) C) and D)
G) A) and E)

Question 17

A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?

Accepted Answer

A)   27.78%
B)   29.17%
C)   30.63%
D)   32.16%
E)   33.76%F) A) and E)
G) C) and D)

Question 18

The amount shown on the December 31, 2012 balance sheet as "retained earnings" is equal to the firm's net income for 2012 minus any dividends it paid.

Accepted Answer

A) True 
 B)False

Question 19

Last year, Delip Industries had (1)  negative cash flow from operations, (2)  a negative free cash flow, and (3)  an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Accepted Answer

A)   The company had a sharp increase in its inventories.
B)   The company had a sharp increase in its accrued liabilities.
C)   The company sold a new issue of common stock.
D)   The company made a large capital investment early in the year.
E)   The company had a sharp increase in depreciation expenses.F) C) and E)
G) A) and D)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
B)   The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP) .
C)   The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SE
C)  .
D)   If a firm follows generally accepted accounting principles (GAAP) , then its reported net income will be identical to its reported cash flow.
E)   The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.F) A) and B)
G) B) and E)

Exam 3: Financial Statements

Correct Answer
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Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows.

Correct Answer
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The amount shown on the December 31, 2012 balance sheet as "retained earnings" is equal to the firm's net income for 2012 minus any dividends it paid.

Correct Answer
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Correct Answer
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The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.

Correct Answer
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EBITDA stands for earnings before interest, taxes, debt, and assets.

Correct Answer
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Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Correct Answer
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Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?

Correct Answer
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If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following items is NOT normally considered to be a current asset?

Correct Answer
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A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?

Correct Answer
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Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Correct Answer
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Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Correct Answer
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Correct Answer
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If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 3: Financial Statements

Correct AnswerverifiedShow Answer

Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows.

Correct AnswerverifiedShow Answer

The amount shown on the December 31, 2012 balance sheet as "retained earnings" is equal to the firm's net income for 2012 minus any dividends it paid.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.

Correct AnswerverifiedShow Answer

EBITDA stands for earnings before interest, taxes, debt, and assets.

Correct AnswerverifiedShow Answer

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Correct AnswerverifiedShow Answer

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?

Correct AnswerverifiedShow Answer

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following items is NOT normally considered to be a current asset?

Correct AnswerverifiedShow Answer

A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?

Correct AnswerverifiedShow Answer

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Correct AnswerverifiedShow Answer

Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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