Exam 7: Accounting for Financial Management

A municipal bond issued by the City of Gainesville provides a 7.6 percent after-tax return. For an individual investor in the 31 percent tax bracket, (1) what return on a corporate bond and (2) what return on a preferred stock would produce the same after-tax return to the investor as the municipal bond?

The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.

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

On its 2008 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million. On its 2009 balance sheet, the balance of retained earnings was also equal to $510 million. Which of the following statements is most correct?

New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)?

On the balance sheet, total assets must always equal total liabilities. The amount remaining is what is used to finance the firm and includes equity and long-term debt.

Solo Company has been depreciating its fixed assets over 15 years. It is now clear that these assets will only last a total of 10 years. Solo's accountants have encouraged the firm to revise its annual depreciation to reflect this new information. Which of the following would occur as a result of this change?

The fact that a percentage of the interest income received by a corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

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

A corporation with a marginal tax rate of 35 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par, assuming a 70 percent dividend exclusion?

The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the company's outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The company's tax rate will also remain the same. Which of the following will occur:

New Hampshire Services reported $2.3 million of retained earnings on its balance sheet last year. This year, the company lost money--its net income was -$500,000 (negative $500,000). Despite the loss, the company still paid a $1.00 per share dividend this year. The company's earnings per share for this year were -$2.50 (negative $2.50). What was the level of retained earnings on the company's balance sheet this year?

Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance?

Which of the following statements is most correct?

Arvo Corporation is trying to choose between three alternative investments. The three securities that the company is considering are as follows: (1)(2)(3)The company's tax rate is 28 percent. What is the after-tax return on the best investment alternative?

Strother Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT) = $600; Total assets = $2,000; and Total net operating capital = $1800. The information for the current year is: Net income = $900; Net operating profit after taxes (NOPAT) = $800; Total assets = $2,300; and Total net operating capital = $2200. What is the free cash flow for the current year?

A corporation recently purchased some preferred stock that has a before-tax yield of 7 percent. The company has a tax rate of 40 percent. What is the after-tax yield on the preferred stock?

Last year, Blanda Brothers had positive net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the company's financial performance?

Tibbs Inc. has the following information for the current year: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,900; Short-term investments = $200; Stockholders equity = $1,800; Debt = $700; and Total net operating capital = $2300. What is the Return on invested capital (ROIC) for the current year?

Net operating profit after taxes (NOPAT) is the amount of profit a company would have from its operations if it had no interest income or interest expense.