Exam 3: Financial Statements

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)?

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Which of the following statements is CORRECT?

A corporation can earn 7.5% if it invests in municipal bonds. The corporation can also earn 8.5% (before-tax) by investing in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate tax rate that makes the corporation indifferent between the two investments?

On 12/31/12, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/11, the company had reported $445,000 of retained earnings. No shares were repurchased during 2012. How much in dividends did the firm pay during 2012?

The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

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 the tax rate. Prior to the new provision, BBI's net income 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.

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?

The balance sheet 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.

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.

Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

Which of the following statements is CORRECT?

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

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

Brown Fashions Inc.'s December 31, 2012 balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2012, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/12, assuming no common stock was either issued or retired during 2012?