Exam 3: Financial Statements,cash Flow and Taxes

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 encourage the use of debt financing by corporations.

Solarcell Corporation has $20,000 that it plans to invest in marketable securities.It is choosing between AT&T bonds that yield 11.00%,State of Florida municipal bonds that yield 8.00%,and AT&T preferred stock with a dividend yield of 9.00%.Solarcell's corporate tax rate is 39.00%,and 70.00% 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.

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous year.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

​Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.

C.F.Lee Inc.has the following income statement.How much after-tax operating income does the firm have? Sales \ 3,150.00 Costs 1,850.00 Depreciation 192.00 EB IT \ 1,108.00 Interest expense 285.00 EB T \ 823.00 Taxes (35\%) 288.05 Net income \ 534.95 ?

Which of the following statements is CORRECT?

A bond issued by the State of Pennsylvania provides a 5.75% yield.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket?

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

Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions ($4,050 for each exemption).In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $213,500.Assume the following tax table is applicable: ? Married Couples Filing Joint Returns ? You Pay This Plus This Percentage Average Tax If Your Taxable Amount on the on the Excess over the Rate at Income Is Base of the Bracket Base Top of Bracket Up to \ 18,650 \ 0.00 10.0\% 10.0\% \ 18,650-\ 75,900 1,865.00 15.0 13.8 \ 75,900-\ 153,100 10,452.50 25.0 19.4 \ 153,100-\ 233,350 29,752.50 28.0 22.4 \ 233,350-\ 416,700 52,222.50 33.0 27.1 \ 416,700-\ 470,700 112,728.00 35.0 28.0 Over \ 470,700 131,628.00 39.6 39.6 ? What is their federal tax liability? ?

Which of the following statements is CORRECT?

Garner Grocers began operations in 2015.Garner has reported the following levels of taxable income (EBT)over the past several years.The corporate tax rate was 34% each year.Assume that the company has taken full advantage of the Tax Code's carry-back,carry-forward provisions,and assume that the current provisions were applicable in 2015.What is the amount of taxes the company paid in 2018? Year Taxable Income 2015 -\ 1,750,000 2016 \ 200,000 2017 \ 500,000 2018 \ 2,800,000 ?

Below is the common equity section (in millions)of Timeless Technology's last two year-end balance sheets: 2018 2017 Common stock 2,000 1,000 Retained earnings 2,000 2,340 Total common equity \ 4,000 \ 3,340 ? The firm has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

Collins Co.began operations in 2015.The company lost money the first two years,but has been profitable ever since.The company's taxable income (EBT)for its first four years are summarized below: Year EB T 2015 -\ 7,000,000 2016 -\ 5,200,000 2017 \ 4,200,000 2018 \ 8,300,000 ? The corporate tax rate has remained at 34%.Assume that the company has taken full advantage of the Tax Code's carry-back,carry-forward provisions,and assume that the current provisions were applicable in 2015.What is Collins' tax liability for 2018?

Wu Systems has the following balance sheet.Assume that all current assets are used in operations.How much net operating working capital does the firm have? Cash \ 100 Accounts payable \ 200 Accounts receivable 650 Accruals 110 Inventory 550 Notes payable 590 Current assets \ 1,300 Current liabilities \ 900 Net fixed assets \ 1,000 Long-term debt 600 Common equity 300 Retained earnings 500 Total assets \ 2,300 Total liab. \& equity \ 2,300 ?

The amount shown on the December 31,2018 balance sheet as "retained earnings" is equal to the firm's net income for 2018 minus any dividends it paid

Your corporation has the following cash flows: Operating income \ 250,000 Interest received \ 10,000 Interest paid \ 45,000 Dividends received \ 17,000 Dividends paid \ 50,000 ? If the applicable income tax rate is 40% (federal and state combined),and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,companies would be encouraged to use more debt financing than they presently do,other things held constant.

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

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."

An increase in accounts payable represents an increase in net cash provided by operating activities,an effect similar to taking out a new bank loan.However,these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.