Question 1

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) A) and E)
G) C) and D)

Question 2

Hartzell Inc. had the following data for 2012, in millions: Net income = $600; after-tax operating income [EBIT(1 − T) ] = $700; and Total assets = $2,000. Information for 2013 is as follows: Net income = $825; after-tax operating income [EBIT(1 − T) ] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2013?

Accepted Answer

A)   $383
B)   $425
C)   $468
D)   $514
E)   $566F) A) and B)
G) B) and D)

Question 3

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) B) and E)
G) C) and D)

Question 4

Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA) ?

Accepted Answer

A)   −$5,415,000
B)   −$5,700,000
C)   −$6,000,000
D)   −$6,300,000
E)   −$6,615,000F) A) and B)
G) C) and D)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   After-tax operating income is calculated as EBIT(1 − T)  + Depreciation.
C)   Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
D)   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.
E)   Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.F) D) and E)
G) C) and E)

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Casey Motors recently reported the following information:
· Net income = $600,000.
· Tax rate = 40%.
· Interest expense = $200,000.
· Total invested operating capital employed = $9 million.
· After-tax cost of capital = 10%.
What is the company's EVA?

Accepted Answer

A)   −$171,000
B)   −$180,000
C)   −$189,000
D)   −$198,450
E)   −$208,373F) C) and D)
G) A) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned.
B)   Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
C)   To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue.
D)   Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to discourage the use of debt financing by corporations.
E)   If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2013, this would lower their free cash flows for 2013.F) B) and E)
G) None of the above

Question 9

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) A) and C)
G) A) and B)

Question 10

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) A) and D)
G) C) and D)

Question 11

Rao Construction recently reported $20.50 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?

Accepted Answer

A)   $3.21
B)   $3.57
C)   $3.97
D)   $4.41
E)   $4.90F) A) and D)
G) C) and D)

Question 12

Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP) ?

Accepted Answer

A)   The company repurchased some of its common stock.
B)   The company dramatically increased its capital expenditures.
C)   The company retired a large amount of its long-term debt.
D)   The company sold some of its fixed assets.
E)   The company had high depreciation expenses.F) B) and D)
G) A) and B)

Question 13

Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.70 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A)   −$0.432
B)   −$0.455
C)   −$0.478
D)   −$0.502
E)   −$0.527F) A) and B)
G) C) and E)

Question 14

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 15

The amount shown on the December 31, 2013, balance sheet as "retained earnings" is equal to the firm's net income for 2013 minus any dividends it paid.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   Since depreciation increases the firm's net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
B)   A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
C)   Common equity includes common stock and retained earnings, less accumulated depreciation.
D)   The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends.
E)   If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.F) A) and B)
G) B) and D)

Question 17

Below is the common equity section (in millions)  of Timeless Technology's last two year-end balance sheets:  2013‾2012‾Common stock$2,000$1,000 Retained earnings 2,000‾2,340‾Total common equity$4,000‾3,340‾\begin{array}{ll}&\underline{2013} & \underline{2012}\	ext {Common stock}&\$2,000&\$1,000\	ext { Retained earnings }&\underline{2,000} & \underline{2,340}\	ext {Total common equity}&\underline{\$4,000}&\underline{3,340}\end{array}Common stock Retained earnings Total common equity​2013​$2,0002,000​$4,000​​2012​$1,0002,340​3,340​​    The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Accepted Answer

A)   The company's net income in 2013 was higher than in 2012.
B)   The firm issued common stock in 2013.
C)   The market price of the firm's stock doubled in 2013.
D)   The firm had positive net income in both 2012 and 2013, but its net income in 2013 was lower than it was in 2012.
E)   The company has more equity than debt on its balance sheet. F) A) and C)
G) C) and E)

Question 18

Garner Grocers began operations in 2010. Garner has reported the following levels of taxable income (EBT)  over the past several years. The corporate tax rate was 34% each year. 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 2010. What is the amount of taxes the company paid in 2013?  Year Taxable Income 2010−$3,200,0002011$200,0002012$500,0002013$2,800,000\begin{array} { lr } Year&	ext { Taxable Income }\\hline2010&- \$ 3,200,000 \2011&\$ 200,000 \2012&\$ 500,000 \2013&\$ 2,800,000\end{array}Year2010201120122013​ Taxable Income −$3,200,000$200,000$500,000$2,800,000​​

Accepted Answer

A)   $ 92,055
B)   $ 96,900
C)   $102,000
D)   $107,100
E)   $112,455 F) C) and D)
G) C) and E)

Question 19

Your corporation has the following cash flows:   Operating income $250,000 Interest received $10,000 Interest paid $45,000 Dividends received $20,000 Dividends paid $50,000\begin{array}{ll}	ext { Operating income } & \$ 250,000 \	ext { Interest received } & \$ 10,000 \	ext { Interest paid } & \$ 45,000 \	ext { Dividends received } & \$ 20,000 \	ext { Dividends paid } & \$ 50,000\end{array} Operating income  Interest received  Interest paid  Dividends received  Dividends paid ​$250,000$10,000$45,000$20,000$50,000​  If the applicable income tax rate is 40% (federal and state combined) , and if 70% of dividends received are exempt from taxes, what is the corporation's tax liability?

Accepted Answer

A)   $ 83,980
B)   $ 88,400
C)   $ 92,820
D)   $ 97,461
E)   $102,334 F) A) and E)
G) C) and D)

Question 20

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Accepted Answer

A)   5.32%
B)   5.60%
C)   5.89%
D)   6.20%
E)   6.51%F) A) and E)
G) None of the above

Exam 3: Financial Statements, Cash Flow, and Taxes

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

Correct Answer
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Casey Motors recently reported the following information: · Net income = $600,000. · Tax rate = 40%. · Interest expense = $200,000. · Total invested operating capital employed = $9 million. · After-tax cost of capital = 10%. What is the company's EVA?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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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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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The amount shown on the December 31, 2013, balance sheet as "retained earnings" is equal to the firm's net income for 2013 minus any dividends it paid.

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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A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA) ?

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

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Exam 3: Financial Statements, Cash Flow, and Taxes

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Casey Motors recently reported the following information: · Net income = $600,000. · Tax rate = 40%. · Interest expense = $200,000. · Total invested operating capital employed = $9 million. · After-tax cost of capital = 10%. What is the company's EVA?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

The amount shown on the December 31, 2013, balance sheet as "retained earnings" is equal to the firm's net income for 2013 minus any dividends it paid.

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

Correct AnswerverifiedShow Answer

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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