Exam 7: Accounting for Financial Management

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

Solarcell Corporation has $20,000 which it plans to invest in marketable securities. It is choosing between AT&T bonds which yield 11 percent, State of Florida muni bonds which yield 8 percent, and AT&T preferred stock with a dividend yield of 9 percent. Solarcell's corporate tax rate is 40 percent, and 70 percent of the preferred stock dividends it receives are tax exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.

Bates Motors has the following information for the previous year: Net income = $200; Net operating profit after taxes (NOPAT) = $300; Total assets = $1,000; and Total net operating capital = $800. The information for the current year is: Net income = $500; Net operating profit after taxes (NOPAT) = $400; Total assets = $1,300; and Total net operating capital = $900. What is the free cash flow for the current year?

The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of the firm. This implies that retained earnings are in fact the reinvested earnings of stockholders.

Which of the following would not cause an increase in net operating working capital?

Byrd Lumber has 2 million shares of stock outstanding. On the balance sheet the company has $40 million worth of common equity. The company's stock price is $15 a share. What is the company's Market Value Added (MVA)?

Edge Brothers recently reported net income of $385,000. The tax rate is 40 percent. The company's interest expense was $200,000. What would have been the company's net income if they would have been able to double their operating income (EBIT), assuming that the company's tax rate and interest expense remain unchanged?