Exam 2: Statements, CF, Taxes

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income.Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%.How much was Lindley's operating income, or EBIT?

During the year, Bascom Bakery Inc.paid out $21,750 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises: Assets: 2009 2008 Cash \ 200,000 \ 170,000 Accounts receivable 864,000 700,000 Inventories 2,000,000 1,400,000 Total current assets \ 3,064,000 \ 2,270,000 Net fixed assets 6,000,000 5,600,000 Total assets \ 9,064,000 \ 7,870,000 Liabilities and equity: Accounts payable \ 1,400,000 \ 1,090,000 Notes payable 1,600,000 1,800,000 Total current liabilities \ 3,000,000 \ 2,890,000 Long-term debt 2,400,000 2,400,000 Common stock 3,000,000 2,000,000 Retained earnings 664,000 580,000 Total common equity \ 3,664,000 \ 2,580,000 Total liabilities and equity \ 9,064,000 \ 7,870,000 Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2008.As of the end of 2009, none of the principal on this debt had been repaid.Assume that the company's sales in 2008 and 2009 were the same.Which of the following statements must be CORRECT?

the balance sheet, total assets must always equal total liabilities and equity.

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc.(BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.Prior to the new provision, BBI's net income after taxes was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

CFO of Shalit 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.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?

Total net operating capital is equal to net fixed assets.

accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance, the primary emphasis is also on net income because that is what investors use to value the firm.However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

Which of the following statements is CORRECT?

Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.How much was its net cash flow?

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.

Which of the following statements is CORRECT?

Enterprises has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have?

Below is the common equity section (in millions) 2009 2008 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 Teweles has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Which of the following statements is CORRECT?

annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years.The firm's accountants plan to report the 2010 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share.How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA?