Question 1

The interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Accepted Answer

A) True 
 B)False  False

Question 2

Net operating profit after taxes (NOPAT)is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  MVA gives us an idea about how much value a firm's management has added during the last year. 
C)  MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity. 
D)  EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1- T) -(Investor-supplied op. capital) * (A - T cost of capital). 
E)  EVA gives us an idea about how much value a firm's management has added over the firm's life. 
A)  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. 
B)  MVA gives us an idea about how much value a firm's management has added during the last year. 
C)  MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity. 
D)  EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1- T) -(Investor-supplied op. capital) * (A - T cost of capital). 
E)  EVA gives us an idea about how much value a firm's management has added over the firm's life. D

Question 4

Frederickson Office Supplies recently reported $12,500 of sales,$7,250 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate,and its federal-plus-state income tax rate was 40%.How much was the firm's taxable income,or earnings before taxes (EBT)?

Accepted Answer

A)  $3,230.00 
B)  $3,400.00 
C)  $3,570.00 
D)  $3,748.50 
E)  $3,935.93 
A)  $3,230.00 
B)  $3,400.00 
C)  $3,570.00 
D)  $3,748.50 
E)  $3,935.93

Question 5

For managerial purposes,i.e.,making decisions regarding the firm's operations,the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP)are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations.Related to these modifications,which of the following statements is CORRECT?

Accepted Answer

A)  The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. 
B)  The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units. 
C)  The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. 
D)  The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP. 
E)  The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better. 
A)  The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. 
B)  The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units. 
C)  The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. 
D)  The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP. 
E)  The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

Question 6

The LeMond Corporation just purchased a new production line.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)  LeMond's tax liability for the year will be lower. 
B)  LeMond's taxable income will be lower. 
C)  LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year. 
D)  LeMond's cash position will improve (increase). 
E)  LeMond's reported net income after taxes for the year will be lower. 
A)  LeMond's tax liability for the year will be lower. 
B)  LeMond's taxable income will be lower. 
C)  LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year. 
D)  LeMond's cash position will improve (increase). 
E)  LeMond's reported net income after taxes for the year will be lower.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance. 
B)  Dividends paid reduce the net income that is reported on a company's income statement. 
C)  If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. 
D)  If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year. 
E)  Accounts receivable are reported as a current liability on the balance sheet. 
A)  If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance. 
B)  Dividends paid reduce the net income that is reported on a company's income statement. 
C)  If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. 
D)  If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year. 
E)  Accounts receivable are reported as a current liability on the balance sheet.

Question 8

Last year,Michelson Manufacturing reported $10,250 of sales,$3,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges,it had $3,500 of bonds outstanding that carry a 6.5% interest rate,and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $725.By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A)  -$383.84; $206.68 
B)  -$404.04; $217.56 
C) -$425.30; $229.01 
D)  -$447.69; $241.06 
E)  -$471.25; $253.75 
A)  -$383.84; $206.68 
B)  -$404.04; $217.56 
C) -$425.30; $229.01 
D)  -$447.69; $241.06 
E)  -$471.25; $253.75

Question 9

Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

A)  The company purchases a new piece of equipment. 
B)  The company repurchases common stock. 
C)  The company pays a dividend. 
D)  The company issues new common stock. 
E)  The company gives customers more time to pay their bills. 
A)  The company purchases a new piece of equipment. 
B)  The company repurchases common stock. 
C)  The company pays a dividend. 
D)  The company issues new common stock. 
E)  The company gives customers more time to pay their bills.

Question 10

Olivia Hardison,CFO of Impact United Athletic Designs,plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT),and its tax rate all remain constant.Which of the following would occur?

Accepted Answer

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

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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

Question 13

Jessie's Bobcat Rentals' operations provided a negative net cash flow last year,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?

Accepted Answer

A)  The company had high depreciation expenses. 
B)  The company repurchased some of its common stock. 
C)  The company dramatically increased its capital expenditures. 
D)  The company retired a large amount of its long-term debt. 
E)  The company sold some of its fixed assets. 
A)  The company had high depreciation expenses. 
B)  The company repurchased some of its common stock. 
C)  The company dramatically increased its capital expenditures. 
D)  The company retired a large amount of its long-term debt. 
E)  The company sold some of its fixed assets.

Question 14

To estimate the cash flow from operations,depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  The statement of cash flows shows how much the firm's cash-the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)-increased or decreased during a given year. 
B)  The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. 
C)  The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. 
D)  The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. 
E)  The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. 
A)  The statement of cash flows shows how much the firm's cash-the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)-increased or decreased during a given year. 
B)  The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. 
C)  The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. 
D)  The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. 
E)  The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

Question 16

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,this would probably encourage companies to use more debt financing than they presently do,other things held constant.

Accepted Answer

A) True 
 B)False

Question 17

Wells Water Systems recently reported $8,250 of sales,$4,500 of operating costs other than depreciation,and $950 of depreciation.The company had no amortization charges,it had $3,250 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 sales and cash flows in the future,the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

Accepted Answer

A)  $1,770.00 
B)  $1,858.50 
C)  $1,951.43 
D)  $2,049.00 
E)  $2,151.45 
A)  $1,770.00 
B)  $1,858.50 
C)  $1,951.43 
D)  $2,049.00 
E)  $2,151.45

Question 18

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT)does the firm have? $$\begin{array} { l r r } 
\text { Sales } & & \$ 2,000.00 \
\text { Costs } & & 1,200.00 \
\hline \text { Depreciation }  && 100.00 \
\text { EBIT }& \$ & 700.00 \
\hline \text { Interest exgense }  & & 200.00 \
\text { EBT }& \$ & 500.00 \
 \text { Taxes (35\%) }& & 175.00 \
\text { Net income  } & & \$ &325.00
\end{array}$$

Accepted Answer

A)  $370.60 
B)  $390.11 
C)  $410.64 
D)  $432.25 
E)  $455.00 
A)  $370.60 
B)  $390.11 
C)  $410.64 
D)  $432.25 
E)  $455.00

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

DeYoung Devices Inc.,a new high-tech instrumentation firm,is building and equipping a new manufacturing facility.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 reported net income would increase. 
B)  The firm's operating income (EBIT) would increase. 
C)  The firm's taxable income would increase. 
D)  The firm's net cash flow would increase. 
E)  The firm's tax payments would increase. 
A)  The firm's reported net income would increase. 
B)  The firm's operating income (EBIT) would increase. 
C)  The firm's taxable income would increase. 
D)  The firm's net cash flow would increase. 
E)  The firm's tax payments would increase.

Exam 2: Financial Statements, cash Flow, and Taxes

The interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Net operating profit after taxes (NOPAT)is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

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.

Which of the following statements is CORRECT?

To estimate the cash flow from operations,depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

Which of the following statements is CORRECT?

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,this would probably encourage companies to use more debt financing than they presently do,other things held constant.

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT)does the firm have? Sales \ 2,000.00 Costs 1,200.00 Depreciation 100.00 EBIT \ 700.00 Interest exgense 200.00 EBT \ 500.00 Taxes (35\%) 175.00 Net income \ 325.00

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

An Overview of Financial Management and the Financial Environment

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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