Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Typically,a firm's DPS should exceed its EPS. 
B)  Typically,a firm's net income should exceed its EBIT. 
C)  If a firm is more profitable than average,we would normally expect to see its stock price exceed its book value per share. 
D)  If a firm is more profitable than most other firms,we would normally expect to see its book value per share exceed its stock price,especially after several years of high inflation. 
E)  The more depreciation a firm has in a given year,the higher its EPS,other things held constant. 
A)  Typically,a firm's DPS should exceed its EPS. 
B)  Typically,a firm's net income should exceed its EBIT. 
C)  If a firm is more profitable than average,we would normally expect to see its stock price exceed its book value per share. 
D)  If a firm is more profitable than most other firms,we would normally expect to see its book value per share exceed its stock price,especially after several years of high inflation. 
E)  The more depreciation a firm has in a given year,the higher its EPS,other things held constant.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 
B)  Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate,which in 2018 could go up to 39.6%,but qualified dividends received are taxed at a maximum rate of 15% for most individuals. 
C)  The maximum federal tax rate on corporate income in 2018 was 50%. 
D)  Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes. 
E)  The maximum federal tax rate on personal income in 2018 was 50%. 
A)  Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 
B)  Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate,which in 2018 could go up to 39.6%,but qualified dividends received are taxed at a maximum rate of 15% for most individuals. 
C)  The maximum federal tax rate on corporate income in 2018 was 50%. 
D)  Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes. 
E)  The maximum federal tax rate on personal income in 2018 was 50%.

Question 3

Hayes Corporation has $300 million of common equity,with 6 million shares of common stock outstanding.If Hayes' Market Value Added (MVA)is $192 million,what is the company's stock price? (Round your final answer to two decimal places. )

Accepted Answer

A)  $82.00 
B)  $101.68 
C)  $93.48 
D)  $99.22 
E)  $82.82 
A)  $82.00 
B)  $101.68 
C)  $93.48 
D)  $99.22 
E)  $82.82

Question 4

Arvo Corporation is trying to choose between three alternative investments.The three securities that the company is considering are as follows: - Tax-free municipal bonds with a return of $8.80 \%$.
- Wooli Corporation bonds with a return of $11.75 \%$.
- $\quad$ CFI Corp. preferred stock with a return of $9.80 \%$.
?
The company's tax rate is 35.00%.What is the after-tax return on the best investment alternative? Assume a 70.00% dividend exclusion for tax on dividends.(Round your final answer to 3 decimal places. )

Accepted Answer

A)  8.800% 
B)  8.624% 
C)  9.064% 
D)  8.448% 
E)  9.504% 
A)  8.800% 
B)  8.624% 
C)  9.064% 
D)  8.448% 
E)  9.504%

Question 5

Assume that Besley Golf Equipment commenced operations on January 1,2018 and was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.The company planned to depreciate its fixed assets over 15 years,but in December 2018 management realized that the assets would last for only 10 years.The firm's accountants plan to report the 2018 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

Accepted Answer

A)  The firm's reported net fixed assets would increase. 
B)  The firm's EBIT would increase. 
C)  The firm's reported 2018 earnings per share would increase. 
D)  The firm's cash position in 2018 and 2019 would increase. 
E)  The provision will increase the company's tax payments. 
A)  The firm's reported net fixed assets would increase. 
B)  The firm's EBIT would increase. 
C)  The firm's reported 2018 earnings per share would increase. 
D)  The firm's cash position in 2018 and 2019 would increase. 
E)  The provision will increase the company's tax payments.

Question 6

Last year,Martyn Company had $440,000 in taxable income from its operations,$50,000 in interest income,and $100,000 in dividend income.Using the corporate tax rate table given below,what was the company's tax liability for the year? $\begin{array}{lrr}
\text { Taxable Income } & \text { Tax on Base of Bracket } & \text { Percentage on Excess above Base } \
\$ 0-\$ 50,000 & \$ 0 & 15 \% \
\$ 50,000-\$ 75,000 & 7,500 & 25\
\$ 75,000-\$ 100,000 & 13,750 & 34 \
\$ 100,000-\$ 335,000 & 22,250 & 39 \
\$ 335,000-\$ 10,000,000 & 113,900 & 34\
\$ 10,000,000-\$ 15,000,000 & 3,400,000 & 35 \
\$ 15,000,000-\$ 18,333,333 & 5,150,000 & 38 \
\text { Over } \$ 18,333,333 & 6,416,667 & 35
\end{array}$
?
Assume a 70% dividend exclusion for tax on dividends.

Accepted Answer

A)  $176,800 
B)  $221,000 
C)  $215,696 
D)  $160,888 
E)  $212,160 
A)  $176,800 
B)  $221,000 
C)  $215,696 
D)  $160,888 
E)  $212,160

Question 7

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company.The before-tax dividend yield on the preferred stock is 8.75%.What is the company's after-tax return on the preferred,assuming a 70% dividend exclusion? (Round your final answer to two decimal places. )

Accepted Answer

A)  9.63% 
B)  7.83% 
C)  5.95% 
D)  7.20% 
E)  9.55% 
A)  9.63% 
B)  7.83% 
C)  5.95% 
D)  7.20% 
E)  9.55%

Question 8

Lintner Beverage Corp.reported the following information from their financial statements: $$\begin{array} { l r } 
\text { Operating income (EBIT) } = & \$ 10,500,000 \
\text { Interest payments on long-term debt } = & \$ 1,750,000 \
\text { Dividend income } = & \$ 1,000,000
\end{array}$$
Calculate Lintner's total tax liability using the corporate tax schedule below: $\begin{array}{lrr}
\text { Taxable Income } & \text { Tax on Base of Bracket } & \text { Percentage on Excess above Base } \
\$ 0-\$ 50,000 & \$ 0 & 15 \% \
\$ 50,000-\$ 75,000 & 7,500 & 25\
\$ 75,000-\$ 100,000 & 13,750 & 34 \
\$ 100,000-\$ 335,000 & 22,250 & 39 \
\$ 335,000-\$ 10,000,000 & 113,900 & 34\
\$ 10,000,000-\$ 15,000,000 & 3,400,000 & 35 \
\$ 15,000,000-\$ 18,333,333 & 5,150,000 & 38 \
\text { Over } \$ 18,333,333 & 6,416,667 & 35
\end{array}$
?
Assume a 70% dividend exclusion for tax on dividends.

Accepted Answer

A)  $2,892,380 
B)  $3,692,400 
C)  $3,292,390 
D)  $2,738,530 
E)  $3,077,000 
A)  $2,892,380 
B)  $3,692,400 
C)  $3,292,390 
D)  $2,738,530 
E)  $3,077,000

Question 9

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 depreciation 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 2018,companies would have lower free cash flows in 2018. 
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 depreciation 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 2018,companies would have lower free cash flows in 2018.

Question 10

A 7-year municipal bond yields 4.80%.Your marginal tax rate (including state and federal taxes)is 36.00%.What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places. )

Accepted Answer

A)  6.08% 
B)  6.45% 
C)  9.30% 
D)  9.08% 
E)  7.50% 
A)  6.08% 
B)  6.45% 
C)  9.30% 
D)  9.08% 
E)  7.50%

Question 11

Prezas Company's balance sheet showed total current assets of $2,500,all of which were required in operations.Its current liabilities consisted of $975 of accounts payable,$600 of 6% short-term notes payable to the bank,and $250 of accrued wages and taxes.What was its net operating working capital?

Accepted Answer

A)  $1,173 
B)  $1,199 
C)  $1,301 
D)  $1,326 
E)  $1,275 
A)  $1,173 
B)  $1,199 
C)  $1,301 
D)  $1,326 
E)  $1,275

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase,then when they are collected cash will come into the firm. 
B)  In finance,we are generally more interested in cash flows than in accounting profits.Free cash flow (FCF)is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital.Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows. 
C)  The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then,also in the first section,we show some items that add to or subtract from cash,and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative,but if it is negative,the firm is almost certain to soon go bankrupt. 
D)  The next-to-last line on the income statement shows the firm's earnings,while the last line shows the dividends the company paid.Therefore,the dividends are frequently called "the bottom line." 
E)  Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth. 
A)  An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase,then when they are collected cash will come into the firm. 
B)  In finance,we are generally more interested in cash flows than in accounting profits.Free cash flow (FCF)is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital.Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows. 
C)  The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then,also in the first section,we show some items that add to or subtract from cash,and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative,but if it is negative,the firm is almost certain to soon go bankrupt. 
D)  The next-to-last line on the income statement shows the firm's earnings,while the last line shows the dividends the company paid.Therefore,the dividends are frequently called "the bottom line." 
E)  Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.

Question 13

Vasudevan Inc.recently reported operating income of $3.00 million,depreciation of $1.20 million,and had a tax rate of 40%.The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million.How much was its free cash flow,in millions?

Accepted Answer

A)  $2.83 
B)  $1.82 
C)  $2.40 
D)  $2.50 
E)  $2.33 
A)  $2.83 
B)  $1.82 
C)  $2.40 
D)  $2.50 
E)  $2.33

Question 14

Brown Office Supplies recently reported $18,000 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)  $5,749 
B)  $8,918 
C)  $7,370 
D)  $8,033 
E)  $7,223 
A)  $5,749 
B)  $8,918 
C)  $7,370 
D)  $8,033 
E)  $7,223

Question 15

Last year,Delip Industries had (1)negative cash flow from operations, (2)a negative free cash flow,and (3)an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Accepted Answer

A)  The company had a sharp increase in its inventories. 
B)  The company had a sharp increase in its accrued liabilities. 
C)  The company sold a new issue of common stock. 
D)  The company made a large capital investment early in the year. 
E)  The company had a sharp increase in depreciation expenses. 
A)  The company had a sharp increase in its inventories. 
B)  The company had a sharp increase in its accrued liabilities. 
C)  The company sold a new issue of common stock. 
D)  The company made a large capital investment early in the year. 
E)  The company had a sharp increase in depreciation expenses.

Question 16

Consider the following balance sheet for Games Inc.Because Games has $800,000 of retained earnings,we know that the company would be able to pay cash to buy an asset with a cost of $200,000. $\begin{array}{llll}
\text { Cash } & \$ 50,000 & \text { Accounts payable } & \$ 100,000 \
\text { Inventory } & \$ 200,000 & \text { Accruals } & \$ 100,000 \
\text { Accounts receivable } & \$ 250,000 & \text { Total CL } & \$ 200,000\
\text { Total CA } & \$ 50,000 & \text { Long-term debt } & \$ 200,000 \
\text { Net fixed assets } & \$ 900,000 & \text { Common stock } & \$ 200,000 \
& & \text { Retained earnings } & \$ 800,000\
\text { Total assets }&\$1,400,000&\text { Total L \& E }&\$1,400,000
\end{array}$ 
?

Accepted Answer

A) True 
 B)False

Question 17

Which of the following items is NOT normally considered a current asset?

Accepted Answer

A)  Accounts receivable. 
B)  Inventory. 
C)  Bonds. 
D)  Cash. 
E)  Short-term,highly-liquid,marketable securities. 
A)  Accounts receivable. 
B)  Inventory. 
C)  Bonds. 
D)  Cash. 
E)  Short-term,highly-liquid,marketable securities.

Question 18

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Accepted Answer

A) True 
 B)False

Question 19

The statement of cash flows has four main sections,one each for operating,investing,and financing activities,and one that shows a summary of the cash and cash equivalents at the end of the year.

Accepted Answer

A) True 
 B)False

Question 20

EBITDA stands for "earnings before interest,taxes,debt,and assets."

Accepted Answer

A) True 
 B)False

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Hayes Corporation has $300 million of common equity,with 6 million shares of common stock outstanding.If Hayes' Market Value Added (MVA)is $192 million,what is the company's stock price? (Round your final answer to two decimal places. )

Which of the following statements is CORRECT?

A 7-year municipal bond yields 4.80%.Your marginal tax rate (including state and federal taxes)is 36.00%.What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places. )

Prezas Company's balance sheet showed total current assets of $2,500,all of which were required in operations.Its current liabilities consisted of $975 of accounts payable,$600 of 6% short-term notes payable to the bank,and $250 of accrued wages and taxes.What was its net operating working capital?

Which of the following statements is CORRECT?

Vasudevan Inc.recently reported operating income of $3.00 million,depreciation of $1.20 million,and had a tax rate of 40%.The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million.How much was its free cash flow,in millions?

Last year,Delip Industries had (1)negative cash flow from operations, (2)a negative free cash flow,and (3)an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Which of the following items is NOT normally considered a current asset?

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

The statement of cash flows has four main sections,one each for operating,investing,and financing activities,and one that shows a summary of the cash and cash equivalents at the end of the year.

EBITDA stands for "earnings before interest,taxes,debt,and assets."

An Overview of Financial Management

Financial Markets and Institutions

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 3: Financial Statements,cash Flow and Taxes

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Hayes Corporation has $300 million of common equity,with 6 million shares of common stock outstanding.If Hayes' Market Value Added (MVA)is $192 million,what is the company's stock price? (Round your final answer to two decimal places. )

Which of the following statements is CORRECT?

A 7-year municipal bond yields 4.80%.Your marginal tax rate (including state and federal taxes)is 36.00%.What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places. )

Prezas Company's balance sheet showed total current assets of $2,500,all of which were required in operations.Its current liabilities consisted of $975 of accounts payable,$600 of 6% short-term notes payable to the bank,and $250 of accrued wages and taxes.What was its net operating working capital?

Which of the following statements is CORRECT?

Vasudevan Inc.recently reported operating income of $3.00 million,depreciation of $1.20 million,and had a tax rate of 40%.The firm's expenditures on fixed assets and net operating working capital totaled $0.60 million.How much was its free cash flow,in millions?

Last year,Delip Industries had (1)negative cash flow from operations, (2)a negative free cash flow,and (3)an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Which of the following items is NOT normally considered a current asset?

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

The statement of cash flows has four main sections,one each for operating,investing,and financing activities,and one that shows a summary of the cash and cash equivalents at the end of the year.

EBITDA stands for "earnings before interest,taxes,debt,and assets."

An Overview of Financial Management

Financial Markets and Institutions

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters