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Exam 3: Financial Statements,cash Flow and Taxes

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Question 71

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For managerial purposes,i.e. ,making decisions regarding the firm's operations,the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations.Related to these modifications,which of the following statements is CORRECT?

A) The standard statements make adjustments to reflect the effects of inflation on asset values,and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B) The standard statements focus on accounting income for the entire corporation,not cash flows,and the two can be quite different during any given accounting period.However,the firm's value is based on its future cash flows because future cash flows indicate how much the firm can distribute to its investors.
C) The standard statements provide useful information on the firm's individual operating units,but management needs more information on the firm's overall operations than the standard statements provide.
D) The standard statements focus on cash flows,but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
E) The best feature of standard statements is that,if they are prepared under GAAP,the data are always consistent from firm to firm.Thus,under GAAP,there is no room for accountants to "adjust" the results to make earnings look better.

F) C) and E)
G) A) and C)

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Question 72

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On 12/31/18,Hite Industries reported retained earnings of $475,000 on its balance sheet,and it reported that it had $135,000 of net income during the year.On its previous balance sheet,at 12/31/17,the company had reported $445,000 of retained earnings.No shares were repurchased during 2018.How much in dividends did the firm pay during 2018?

A) $124,950
B) $127,050
C) $82,950
D) $111,300
E) $105,000

F) All of the above
G) D) and E)

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Question 73

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Shrives Publishing recently reported $13,000 of sales,$5,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had $3,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.During the year,the firm had expenditures on fixed assets and net operating working capital that totaled $1,550.These expenditures were necessary for it to sustain operations and generate future sales and cash flows.What was its free cash flow? (Round your intermediate and final answers to whole dollar amount. )

Casey Motors recently reported the following information: ? Net income = $750,000. ? Tax rate = 40%. ? Interest expense = $200,000. ? Total invested capital employed = $9 million. ? After-tax cost of capital = 10%. What is the company's EVA?

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of the stockholders' claim against the firm's existing assets.Put another way,retained earnings are stockholders' reinvested earnings.

Mays Industries was established in 2013.Since its inception,the company has generated the following levels of taxable income (EBT) : $\begin{array} { r r } \text { Year } & \text { Taxable Income } \\2013 & \$ 50,000 \\2014 & \$ 40,000 \\2015 & \$ 30,000 \\2016 & \$ 20,000 \\2017 & - \$ 52,500 \\2018 & \$ 60,000\end{array}$ ? Assume that each year the company has faced a 40% income tax rate.Also,assume that the company has taken full advantage of the Tax Code's carry-back,carry-forward provisions,and assume that the current provisions were applicable in 2013.What is the company's tax liability for 2018?

A 5-year corporate bond yields 10.70%.A 5-year municipal bond of equal risk yields 6.50%.Assume that the state tax rate is zero.At what federal tax rate are you indifferent between the two bonds? (Round your final answer to two decimal places. )

Which of the following statements is CORRECT?

Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions ($4,050 for each exemption) .In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $213,900.Assume the following tax table is applicable: ? Married Couples Filing Joint Returns ? $\begin{array}{lccc} & \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \\\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \\\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \\\hline\text { Up to } \$ 18,650 & \$ 0.00 & 10.0 \% & 10.0 \% \\\$ 18,650-\$ 75,900 & 1,865.00 & 15.0 & 13.8 \\\$ 75,900-\$ 153,100 & 10,452.50 & 25.0 & 19.4 \\\$ 153,100-\$ 233,350 & 29,752.50 & 28.0 & 22.4 \\\$ 233,350-\$ 416,700 & 52,222.50 & 33.0 & 27.1 \\\$ 416,700-\$ 470,700 & 112,728.00 & 35.0 & 28.0 \\\text { Over } \$ 470,700 & 131,628.00 & 39.6 & 39.6\end{array}$ ? What is their marginal tax rate? ?

Free cash flow (FCF)is,essentially,the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

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 were not affected,and assume that the same depreciation method was used for tax and stockholder reporting purposes.

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?

Granville Co.recently purchased several shares of Kalvaria Electronics' preferred stock.The preferred stock has a before-tax yield of 8.60%.If the company's tax rate is 15%,what is Granville Co.'s after-tax yield on the preferred stock? Assume a 70% dividend exclusion for tax on dividends.(Round your final answer to two decimal places. )

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 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,resulting in a substantial amount of retained earnings shown on the balance sheet.

Rao Construction recently reported $28.00 million of sales,$12.60 million of operating costs other than depreciation,and $3.00 million of depreciation.It had $8.50 million of bonds outstanding that carry a 7.0% interest rate,and its federal-plus-state income tax rate was 40%.What was Rao's operating income,or EBIT,in millions?

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects specific changes in accounts over that period of time.

Assets other than cash are expected to produce cash over time,but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.

Van Dyke Corporation has a corporate tax rate equal to 33%.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? Assume a 70% dividend exclusion for tax on dividends.(Round your final answer to two decimal places. )