Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors. 
B)  Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books. 
C)  The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm's reported profits and its actual cash flow for the same period. 
D)  The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. 
E)  EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS. 
A)  Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors. 
B)  Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books. 
C)  The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm's reported profits and its actual cash flow for the same period. 
D)  The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. 
E)  EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS.

Question 2

EBIT stands for earnings before interest and taxes, and it is often called "operating income."

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned. 
B)  Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income. 
C)  To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue. 
D)  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 discourage the use of debt financing by corporations. 
E)  If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2012, this would lower their free cash flows for 2012. 
A)  The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned. 
B)  Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income. 
C)  To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue. 
D)  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 discourage the use of debt financing by corporations. 
E)  If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2012, this would lower their free cash flows for 2012.

Question 4

Brown Office Supplies recently reported $15,500 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)?

Accepted Answer

A)  $4,627 
B)  $4,870 
C)  $5,114 
D)  $5,369 
E)  $5,638 
A)  $4,627 
B)  $4,870 
C)  $5,114 
D)  $5,369 
E)  $5,638

Question 5

Mantle Corporation is considering two equally risky investments:
• A $5,000 investment in preferred stock that yields 7%.
• A $5,000 investment in a corporate bond that yields 10%.
What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Accepted Answer

A)  34.27% 
B)  36.08% 
C)  37.97% 
D)  39.87% 
E)  41.87% 
A)  34.27% 
B)  36.08% 
C)  37.97% 
D)  39.87% 
E)  41.87%

Question 6

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

Accepted Answer

A) True 
 B)False

Question 7

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Accepted Answer

A)  5.32% 
B)  5.60% 
C)  5.89% 
D)  6.20% 
E)  6.51% 
A)  5.32% 
B)  5.60% 
C)  5.89% 
D)  6.20% 
E)  6.51%

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year. 
B)  The balance sheet for a given year, say 2012, tells us how much money the company earned during that year. 
C)  The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 
D)  If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. 
E)  The assets section of a typical industrial company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last. 
A)  The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year. 
B)  The balance sheet for a given year, say 2012, tells us how much money the company earned during that year. 
C)  The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 
D)  If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. 
E)  The assets section of a typical industrial company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.

Question 9

Hartzell Inc. had the following data for 2011, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2012 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2012?

Accepted Answer

A)  $383 
B)  $425 
C)  $468 
D)  $514 
E)  $566 
A)  $383 
B)  $425 
C)  $468 
D)  $514 
E)  $566

Question 10

Rao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. What was Rao's operating income, or EBIT, in millions?

Accepted Answer

A)  $3.21 
B)  $3.57 
C)  $3.97 
D)  $4.41 
E)  $4.90 
A)  $3.21 
B)  $3.57 
C)  $3.97 
D)  $4.41 
E)  $4.90

Which of the following statements is CORRECT?

EBIT stands for earnings before interest and taxes, and it is often called "operating income."

Which of the following statements is CORRECT?

Mantle Corporation is considering two equally risky investments: • A $5,000 investment in preferred stock that yields 7%. • A $5,000 investment in a corporate bond that yields 10%. What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Which of the following statements is CORRECT?

Overview

Financial Markets

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

Exam 3: Financial Statements

Which of the following statements is CORRECT?

EBIT stands for earnings before interest and taxes, and it is often called "operating income."

Which of the following statements is CORRECT?

Mantle Corporation is considering two equally risky investments: • A $5,000 investment in preferred stock that yields 7%. • A $5,000 investment in a corporate bond that yields 10%. What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Which of the following statements is CORRECT?

Overview

Financial Markets

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters