Exam 7: Accounting for Financial Management

A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?

A bond issued by the State of Pennsylvania provides a 9 percent yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 36 percent tax bracket?

A loss incurred by a corporation

Which of the following are likely to occur if Congress passes legislation which forces Carter Manufacturing to depreciate their equipment over a longer time period:

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 encourage the use of debt financing by corporations.

Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet last year. This year, the company's earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of stock outstanding. What is the level of retained earnings on the company's balance sheet this year?

Which of the following statements is most correct?

Which of the following statements is most correct?

Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the same funds in the preferred stock of Florida Power & Light (FPL), which should provide Allen with a before-tax return of 9 percent, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested?

Giglio Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT) = $500; Total assets = $2,000; and Total operating capital = $1700. The information for the current year is: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,300; and Total operating capital = $2100. What is the free cash flow for the current year?

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?

Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT). Which of the following definitely cannot help explain this decline?

Total net operating capital is equal to net fixed assets.

A firm has notes payable of $1,546,000, long-term debt of $13,000,000, and total interest expense of $1,300,000. If the firm pays 8 percent interest on its long-term debt, what rate of interest does it pay on its notes payable?

Which of the following statements is most correct?

A start-up firm is making an initial investment in new plant and equipment. Currently equipment is depreciated on a straight line basis over 10 years. Assume that Congress is considering legislation which will allow the corporation to depreciate the equipment over 7 years. If the legislation becomes law, and the firm implements the 7-year depreciation basis, which of the following will occur?

Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

A seven-year municipal bond yields 4.8 percent. Your marginal tax rate (including state and federal taxes) is 28 percent. What interest rate on a seven-year corporate bond of equal risk would provide you with the same after-tax return?