Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Since depreciation increases the firm's net cash provided by operating activities,the more depreciation a company has,the larger its retained earnings will be,other things held constant. 
B)  A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. 
C)  Common equity includes common stock and retained earnings,less accumulated depreciation. 
D)  The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. 
E)  If a firm reports a loss on its income statement,then the retained earnings account as shown on the balance sheet will be negative. 
A)  Since depreciation increases the firm's net cash provided by operating activities,the more depreciation a company has,the larger its retained earnings will be,other things held constant. 
B)  A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. 
C)  Common equity includes common stock and retained earnings,less accumulated depreciation. 
D)  The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. 
E)  If a firm reports a loss on its income statement,then the retained earnings account as shown on the balance sheet will be negative.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  MVA stands for "market value added" and is defined as follows:
MVA = (Shares outstanding)(Stock price)+ Book value of common equity. 
B)  The primary difference between EVA and accounting net income is that when net income is calculated,a deduction is made to account for the cost of common equity,whereas EVA represents net income before deducting the cost of the equity capital the firm uses. 
C)  MVA gives us an idea about how much value a firm's management has added during the last year. 
D)  EVA gives us an idea about how much value a firm's management has added over the firm's life. 
E)  EVA stands for "economic value added" and is defined as follows:
EVA = NOPAT - (Total invested capital)(AT cost of capital %) 
A)  MVA stands for "market value added" and is defined as follows:
MVA = (Shares outstanding)(Stock price)+ Book value of common equity. 
B)  The primary difference between EVA and accounting net income is that when net income is calculated,a deduction is made to account for the cost of common equity,whereas EVA represents net income before deducting the cost of the equity capital the firm uses. 
C)  MVA gives us an idea about how much value a firm's management has added during the last year. 
D)  EVA gives us an idea about how much value a firm's management has added over the firm's life. 
E)  EVA stands for "economic value added" and is defined as follows:
EVA = NOPAT - (Total invested capital)(AT cost of capital %)

Question 3

Bauer Software's current balance sheet shows total common equity of $5,125,000.The company has 520,000 shares of stock outstanding,and they sell at a price of $27.50 per share.By how much do the firm's market and book values per share differ? (Round your intermediate and final answer to two decimal places. )

Accepted Answer

A)  $15.00 
B)  $22.06 
C)  $16.41 
D)  $17.64 
E)  $17.47 
A)  $15.00 
B)  $22.06 
C)  $16.41 
D)  $17.64 
E)  $17.47

Question 4

Maureen Smith is a single individual.She claims one exemption of $4,050 for herself and claims a standard deduction of $6,350.Her salary for the year was $204,250.Assume the following tax table is applicable.
?
Single Individuals
? $\begin{array}{lccc} 
& \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \
\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \
\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \
\hline\text { Up to } \$ 9,325 & \$ 0.00 & 10.0 \% & 10.0 \% \
\$ 9,325-\$ 37,950 & 932.50 & 15.0 & 13.8 \
\$ 37,950-\$ 91,900 & 5,226.25 & 25.0 & 20.4 \
\$ 91,900-\$ 191,650 & 18,713.75 & 28.0 & 24.3 \
\$ 191,650-\$ 416,700 & 46,643.75 & 33.0 & 29.0 \
\$ 416,700-\$ 418,400 & 120,910.25 & 35.0 & 29.0 \
\text { Over } \$ 418,400 & 121,505.25 & 39.6 & 39.6
\end{array}$
?
What is her marginal tax rate?
?

Accepted Answer

A)  35.0% 
B)  15.0% 
C)  33.0% 
D)  25.0% 
E)  28.0% 
A)  35.0% 
B)  15.0% 
C)  33.0% 
D)  25.0% 
E)  28.0%

Question 5

On the balance sheet,total assets must always equal the sum of total liabilities and equity.

Accepted Answer

A) True 
 B)False

Question 6

A corporation can earn 7.50% if it invests in municipal bonds.The corporation can also earn 8.20% (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? Assume a 70.00% dividend exclusion for tax on dividends.(Do not round your intermediate answer and round your final answer to two decimal places. )

Accepted Answer

A)  28.74% 
B)  31.02% 
C)  28.46% 
D)  27.89% 
E)  35.28% 
A)  28.74% 
B)  31.02% 
C)  28.46% 
D)  27.89% 
E)  35.28%

Question 7

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 $271,300.Assume the following tax table is applicable:
?
Married Couples Filing Joint Returns
? $\begin{array}{lccc} 
& \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \
\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \
\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \
\hline\text { Up to } \$ 18,650 & \$ 0.00 & 10.0 \% & 10.0 \% \
\$ 18,650-\$ 75,900 & 1,865.00 & 15.0 & 13.8 \
\$ 75,900-\$ 153,100 & 10,452.50 & 25.0 & 19.4 \
\$ 153,100-\$ 233,350 & 29,752.50 & 28.0 & 22.4 \
\$ 233,350-\$ 416,700 & 52,222.50 & 33.0 & 27.1 \
\$ 416,700-\$ 470,700 & 112,728.00 & 35.0 & 28.0 \
\text { Over } \$ 470,700 & 131,628.00 & 39.6 & 39.6
\end{array}$
?
What is their average tax rate?
?

Accepted Answer

A)  22.28% 
B)  19.38% 
C)  22.95% 
D)  23.84% 
E)  16.71% 
A)  22.28% 
B)  19.38% 
C)  22.95% 
D)  23.84% 
E)  16.71%

Question 8

During 2018,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?

Accepted Answer

A)  $55,897 
B)  $49,140 
C)  $47,297 
D)  $61,425 
E)  $63,882 
A)  $55,897 
B)  $49,140 
C)  $47,297 
D)  $61,425 
E)  $63,882

Question 9

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of the company's outstanding bonds that carry a 7% interest rate.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT),and tax rate all remain constant.Which of the following would occur?

Accepted Answer

A)  The company's taxable income would fall. 
B)  The company's interest expense would remain constant. 
C)  The company would have less common equity than before. 
D)  The company's net income would increase. 
E)  The company would have to pay less taxes. 
A)  The company's taxable income would fall. 
B)  The company's interest expense would remain constant. 
C)  The company would have less common equity than before. 
D)  The company's net income would increase. 
E)  The company would have to pay less taxes.

Question 10

Houston Pumps recently reported $222,500 of sales,$140,500 of operating costs other than depreciation,and $9,250 of depreciation.The company had $35,250 of outstanding bonds that carry a 6.75% interest rate,and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate future sales and cash flows,the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital.What was the firm's free cash flow?

Accepted Answer

A)  $34,438 
B)  $39,948 
C)  $26,517 
D)  $27,894 
E)  $33,060 
A)  $34,438 
B)  $39,948 
C)  $26,517 
D)  $27,894 
E)  $33,060

Question 11

Below are the 2017 and 2018 year-end balance sheets for Tran Enterprises: $\begin{array}{lrr}\text { Assets: } & 2018 & 2017 \
\text { Cash } & \$ 200,000 & \$ 170,000 \
\text { Accounts receivable } & 864,000 & 700,000 \
\text { Inventories } & \underline{2,000,000} & \underline{1,400,000} \
\text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \
\text { Net fixed assets } & 6,000,000 & 5,600,000 \
\text { Total assets } & \$ 9,064,000 & \$ 7,870,000 \
\hline
\end{array}$
Liabilities and equity: 
$\begin{array}{lrr}
\text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \
\text { Notes payable to bank } & \underline{1,600,000} & \underline{1,800,000} \
\text { Total current liabilities } & \$ 3,000,000 & \$ 2,890,000 \
\text { Long-term debt } & 2,400,000 & 2,400,000 \
\text { Common stock } & 3,000,000 & 2,000,000 \
\text { Retained earnings } & \underline{664,000} &{580,000} \
\text { Total common equity } & \$ 3,664,000 & \$ 2,580,000 \
\text { Total liabilities and equity } & \$ 9,064,000 & \$ 7,870,000
\end{array}$
The firm has never paid a dividend on its common stock,and it issued $2,400,000 of 10-year,non-callable,long-term debt in 2017.As of the end of 2018,none of the principal on this debt had been repaid.Assume that the company's sales in 2017 and 2018 were the same.Which of the following statements must be CORRECT?

Accepted Answer

A)  The firm increased its short-term bank debt in 2018. 
B)  The firm issued long-term debt in 2018. 
C)  The firm issued new common stock in 2018. 
D)  The firm repurchased some common stock in 2018. 
E)  The firm had negative net income in 2018. 
A)  The firm increased its short-term bank debt in 2018. 
B)  The firm issued long-term debt in 2018. 
C)  The firm issued new common stock in 2018. 
D)  The firm repurchased some common stock in 2018. 
E)  The firm had negative net income in 2018.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The four most important financial statements provided in the annual report are the balance sheet,income statement,cash budget,and the statement of stockholders' equity. 
B)  The balance sheet gives us a picture of the firm's financial position at a point in time. 
C)  The income statement gives us a picture of the firm's financial position at a point in time. 
D)  The statement of cash flows tells us how much cash the firm must pay out in interest during the year. 
E)  The statement of cash flows tells us how much cash the firm will require during some future period,generally a month or a year. 
A)  The four most important financial statements provided in the annual report are the balance sheet,income statement,cash budget,and the statement of stockholders' equity. 
B)  The balance sheet gives us a picture of the firm's financial position at a point in time. 
C)  The income statement gives us a picture of the firm's financial position at a point in time. 
D)  The statement of cash flows tells us how much cash the firm must pay out in interest during the year. 
E)  The statement of cash flows tells us how much cash the firm will require during some future period,generally a month or a year.

Question 13

A start-up firm is making an initial investment in a 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?

Accepted Answer

A)  The firm's operating income (EBIT)would increase. 
B)  The firm's taxable income would increase. 
C)  The firm's cash flow would increase. 
D)  The firm's tax payments would increase. 
E)  The firm's reported net income would increase. 
A)  The firm's operating income (EBIT)would increase. 
B)  The firm's taxable income would increase. 
C)  The firm's cash flow would increase. 
D)  The firm's tax payments would increase. 
E)  The firm's reported net income would increase.

Question 14

Mantle Corporation is considering two equally risky investments: A $\$ 5,000$ investment in preferred stock that yields $6.75 \%$.
A $\$ 5,000$ investment in a corporate bond that yields $10.00 \%$.
What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends.(Do not round your intermediate answer and round your final answer to two decimal places. )

Accepted Answer

A)  46.87% 
B)  34.23% 
C)  37.08% 
D)  40.75% 
E)  50.13% 
A)  46.87% 
B)  34.23% 
C)  37.08% 
D)  40.75% 
E)  50.13%

Question 15

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.

Accepted Answer

A)  Nantell's taxable income will be lower. 
B)  Nantell's operating income (EBIT)will increase. 
C)  Nantell's cash position will improve (increase). 
D)  Nantell's reported net income for the year will be lower. 
E)  Nantell's tax liability for the year will be lower. 
A)  Nantell's taxable income will be lower. 
B)  Nantell's operating income (EBIT)will increase. 
C)  Nantell's cash position will improve (increase). 
D)  Nantell's reported net income for the year will be lower. 
E)  Nantell's tax liability for the year will be lower.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Assets other than cash are expected to produce cash over time,and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. 
B)  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. 
C)  The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. 
D)  The four most important financial statements provided in the annual report are the balance sheet,income statement,cash budget,and the statement of stockholders' equity. 
E)  Prior to the Enron scandal in the early 2000s,companies would put verbal information in their annual reports along with the financial statements.That verbal information was often misleading,so today annual reports can contain only quantitative information-audited financial statements. 
A)  Assets other than cash are expected to produce cash over time,and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. 
B)  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. 
C)  The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. 
D)  The four most important financial statements provided in the annual report are the balance sheet,income statement,cash budget,and the statement of stockholders' equity. 
E)  Prior to the Enron scandal in the early 2000s,companies would put verbal information in their annual reports along with the financial statements.That verbal information was often misleading,so today annual reports can contain only quantitative information-audited financial statements.

Question 18

For 2018,Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation).The company has $20,500 of total invested capital,the weighted average cost of that capital (the WACC)was 8%,and the federal-plus-state income tax rate was 40%.What was the firm's Economic Value Added (EVA),i.e. ,how much value did management add to stockholders' wealth during 2017?

Accepted Answer

A)  $2,599 
B)  $1,921 
C)  $2,712 
D)  $2,373 
E)  $2,260 
A)  $2,599 
B)  $1,921 
C)  $2,712 
D)  $2,373 
E)  $2,260

Question 19

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

Accepted Answer

A)  The company sold a new issue of bonds. 
B)  The company made a large investment in a new plant and equipment. 
C)  The company paid a large dividend. 
D)  The company had high depreciation expenses. 
E)  The company repurchased 20% of its common stock. 
A)  The company sold a new issue of bonds. 
B)  The company made a large investment in a new plant and equipment. 
C)  The company paid a large dividend. 
D)  The company had high depreciation expenses. 
E)  The company repurchased 20% of its common stock.

Question 20

Last year,Stewart-Stern Inc.reported $11,250 of sales,$4,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had $3,500 of bonds outstanding that carry a 6.50% interest rate,and its federal-plus-state income tax rate was 35.00%.During last year,the firm had expenditures on fixed assets and net operating working capital that totaled $2,000.These expenditures were necessary for it to sustain operations and generate future sales and cash flows.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $1,225.By how much will the depreciation change cause (1)the firm's net income and (2)its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes.Do not round the intermediate calculations. $$\Delta \text { Net Income } \quad \Delta \text { Free Cash Flow }$$
?

Accepted Answer

A)  -$796.25;$428.75 
B)  -$772.36;$330.14 
C)  -$939.58;$437.33 
D)  -$724.59;$505.93 
E)  -$923.65;$475.91 
A)  -$796.25;$428.75 
B)  -$772.36;$330.14 
C)  -$939.58;$437.33 
D)  -$724.59;$505.93 
E)  -$923.65;$475.91

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

On the balance sheet,total assets must always equal the sum of total liabilities and equity.

During 2018,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?

Which of the following statements is CORRECT?

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?

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

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?

On the balance sheet,total assets must always equal the sum of total liabilities and equity.

During 2018,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?

Which of the following statements is CORRECT?

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?

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

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