Question 1

Which of the following factors could explain why Michigan Energy's cash balance increased even though it 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 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 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 2

A bond issued by the State of Pennsylvania provides a 9% 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% tax bracket?

Accepted Answer

A) 13.85% 
B) 14.54% 
C) 15.27% 
D) 16.03% 
E) 16.83% 
A) 13.85% 
B) 14.54% 
C) 15.27% 
D) 16.03% 
E) 16.83%

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) Actions that increase reported net income will always increase cash flow. 
B) One way to increase EVA is to generate the same level of operating income but with less total invested capital. 
C) One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. 
D) One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. 
E) If a firm reports positive net income, its EVA must also be positive. 
A) Actions that increase reported net income will always increase cash flow. 
B) One way to increase EVA is to generate the same level of operating income but with less total invested capital. 
C) One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. 
D) One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. 
E) If a firm reports positive net income, its EVA must also be positive.

Question 4

A 7-year municipal bond yields 4.8%.Your marginal tax rate (including state and federal taxes)is 27%.What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

Accepted Answer

A) 5.64% 
B) 5.93% 
C) 6.25% 
D) 6.58% 
E) 6.90% 
A) 5.64% 
B) 5.93% 
C) 6.25% 
D) 6.58% 
E) 6.90%

Question 5

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 6

During 2014,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $197,500 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) $71,425 
B) $74,996 
C) $78,746 
D) $82,683 
E) $86,818 
A) $71,425 
B) $74,996 
C) $78,746 
D) $82,683 
E) $86,818

Question 7

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

A) True 
 B)False

Question 8

A corporate bond currently yields 8.5%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds?

Accepted Answer

A) 35.29% 
B) 37.06% 
C) 38.91% 
D) 40.86% 
E) 42.90% 
A) 35.29% 
B) 37.06% 
C) 38.91% 
D) 40.86% 
E) 42.90%

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

C.F.Lee Inc.has the following income statement.How much after-tax operating income does the firm have?

Accepted Answer

A) $427.78 
B) $450.29 
C) $473.99 
D) $498.94 
E) $525.20 
A) $427.78 
B) $450.29 
C) $473.99 
D) $498.94 
E) $525.20

Question 11

Scranton Shipyards has $20 million in total invested operating capital,and its WACC is 10%.Scranton has the following income statement:
What is Scranton's EVA?

Accepted Answer

A) $400,000 
B) $420,000 
C) $441,000 
D) $463,050 
E) $486,203 
A) $400,000 
B) $420,000 
C) $441,000 
D) $463,050 
E) $486,203

Question 12

On 12/31/14,Hite Industries reported retained earnings of $525,000 on its balance sheet,and it reported that it had $135,000 of net income during the year.On its previous balance sheet,at 12/31/13,the company had reported $445,000 of retained earnings.No shares were repurchased during 2014.How much in dividends did the firm pay during 2014?

Accepted Answer

A) $49,638 
B) $52,250 
C) $55,000 
D) $57,750 
E) $60,638 
A) $49,638 
B) $52,250 
C) $55,000 
D) $57,750 
E) $60,638

Question 13

A loss incurred by a corporation

Accepted Answer

A) Must be carried forward unless the company has had 2 loss years in a row. 
B) Can be carried back 2 years, then carried forward up to 20 years following the loss. 
C) Can be carried back 5 years and forward 3 years. 
D) Cannot be used to reduce taxes in other years except with special permission from the IRS. 
E) Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm. 
A) Must be carried forward unless the company has had 2 loss years in a row. 
B) Can be carried back 2 years, then carried forward up to 20 years following the loss. 
C) Can be carried back 5 years and forward 3 years. 
D) Cannot be used to reduce taxes in other years except with special permission from the IRS. 
E) Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.

Question 14

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 12%.What is the company's after-tax return on the preferred,assuming a 70% dividend exclusion?

Accepted Answer

A) 10.20% 
B) 10.74% 
C) 11.28% 
D) 11.84% 
E) 12.43% 
A) 10.20% 
B) 10.74% 
C) 11.28% 
D) 11.84% 
E) 12.43%

Question 15

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 changes in net operating working capital.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A) In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section. 
B) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. 
C) In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. 
D) In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. 
E) In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section. 
A) In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section. 
B) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. 
C) In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. 
D) In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. 
E) In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.

Question 17

Analysts who follow Howe Industries recently noted that,relative to the previous year,the company's net cash provided from operations increased,yet cash as reported on the balance sheet decreased.Which of the following factors could explain this situation?

Accepted Answer

A) The company cut its dividend. 
B) The company made large investments in fixed assets. 
C) The company sold a division and received cash in return. 
D) The company issued new common stock. 
E) The company issued new long-term debt. 
A) The company cut its dividend. 
B) The company made large investments in fixed assets. 
C) The company sold a division and received cash in return. 
D) The company issued new common stock. 
E) The company issued new long-term debt.

Question 18

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."

Accepted Answer

A) True 
 B)False

Question 19

Shrives Publishing recently reported $10,750 of sales,$5,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had $3,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.During the year,the firm had expenditures on fixed assets and net operating working capital that totaled $1,550.These expenditures were necessary for it to sustain operations and generate future sales and cash flows.What was its free cash flow?

Accepted Answer

A) $1,873 
B) $1,972 
C) $2,076 
D) $2,185 
E) $2,300 
A) $1,873 
B) $1,972 
C) $2,076 
D) $2,185 
E) $2,300

Question 20

The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Accepted Answer

A) True 
 B)False

Exam 3: Financial Statements, cash Flow, and Taxes

Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?

A bond issued by the State of Pennsylvania provides a 9% 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% tax bracket?

Which of the following statements is CORRECT?

A 7-year municipal bond yields 4.8%.Your marginal tax rate (including state and federal taxes)is 27%.What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

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.

During 2014,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

A corporate bond currently yields 8.5%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds?

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

C.F.Lee Inc.has the following income statement.How much after-tax operating income does the firm have?

Scranton Shipyards has $20 million in total invested operating capital,and its WACC is 10%.Scranton has the following income statement: What is Scranton's EVA?

A loss incurred by a corporation

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 12%.What is the company's after-tax return on the preferred,assuming a 70% dividend exclusion?

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 changes in net operating working capital.

Which of the following statements is CORRECT?

Analysts who follow Howe Industries recently noted that,relative to the previous year,the company's net cash provided from operations increased,yet cash as reported on the balance sheet decreased.Which of the following factors could explain this situation?

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."

The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

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

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters