Exam 3: Financial Statements, cash Flow, and Taxes

Assets other than cash are expected to produce cash over time,but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.

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

Which of the following statements is most correct?

A 5-year corporate bond yields 9%.A 5-year municipal bond of equal risk yields 6.5%.Assume that the state tax rate is zero.At what federal tax rate are you indifferent between the two bonds?

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

Which of the following statements is CORRECT?

Austin Financial recently announced that its net income increased sharply from the previous year,yet its net cash provided from operations declined.Which of the following could explain this performance?

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

An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

Houston Pumps recently reported $185,250 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?

Two metrics that are used to measure a company's financial performance are net income and cash flow.Accountants emphasize net income as calculated in accordance with generally accepted accounting principles.Finance people generally put at least as much weight on cash flows as they do on net income.

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 its 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 its tax rate all remain constant.Which of the following would occur?

Kwok Enterprises has the following income statement.How much after-tax operating income does the firm have?

Emery Mining Inc.recently reported $150,000 of sales,$75,500 of operating costs other than depreciation,and $10,200 of depreciation.The company had $16,500 of outstanding bonds that carry a 7.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes.

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students some time to set up the problem and do the arithmetic. We allow for this when assigning problems for a timed test. Also, students must use a number of definitions to answer some of the questions. To avoid excessive memorization, we provide students with a list of formulas and definitions for use on exams. Problems with * in the topic line are nonalgorithmic. -Bauer Software's current balance sheet shows total common equity of $5,125,000.The company has 530,000 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?

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 statements is CORRECT?

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. ​

Allen Corporation can (1)build a new plant that should generate a before-tax return of 11%,or (2)invest the same funds in the preferred stock of Florida Power & Light (FPL),which should provide Allen with a before-tax return of 9%,all in the form of dividends.Assume that Allen's marginal tax rate is 25%,and that 70% of dividends received are excluded from taxable income.If the plant project is divisible into small increments,and if the two investments are equally risky,what combination of these two possibilities will maximize Allen's effective return on the money invested?

Typically,the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year,adds net income,subtracts dividends paid,and ends up with total stockholders' equity at the end of the year.Over time,a profitable company will have earnings in excess of the dividends it pays out,and will result in a substantial amount of retained earnings shown on the balance sheet.