Question 1

Which of the following items is NOT included in current assets?

Accepted Answer

A)  Short-term,highly liquid,marketable securities. 
B)  Accounts receivable. 
C)  Inventory. 
D)  Bonds. 
E)  Cash. 
A)  Short-term,highly liquid,marketable securities. 
B)  Accounts receivable. 
C)  Inventory. 
D)  Bonds. 
E)  Cash.

Question 2

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 3

Which of the following would be most likely to occur in the year after Congress,in an effort to increase tax revenue,passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales,other operating costs,and tax rates are not affected,and assume that the same depreciation method is used for tax and stockholder reporting purposes.

Accepted Answer

A)  Companies' reported net incomes would decline. 
B)  Companies' net operating profits after taxes (NOPAT)would decline. 
C)  Companies' physical stocks of fixed assets would increase. 
D)  Companies' net cash flows would increase. 
E)  Companies' cash positions would decline. 
A)  Companies' reported net incomes would decline. 
B)  Companies' net operating profits after taxes (NOPAT)would decline. 
C)  Companies' physical stocks of fixed assets would increase. 
D)  Companies' net cash flows would increase. 
E)  Companies' cash positions would decline.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  In the statement of cash flows,a decrease in accounts receivable is reported as a use of cash. 
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 reported as a use of cash. 
D)  In the statement of cash flows,depreciation charges are reported as a use of cash. 
E)  In the statement of cash flows,a decrease in inventories is reported as a use of cash. 
A)  In the statement of cash flows,a decrease in accounts receivable is reported as a use of cash. 
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 reported as a use of cash. 
D)  In the statement of cash flows,depreciation charges are reported as a use of cash. 
E)  In the statement of cash flows,a decrease in inventories is reported as a use of cash.

Question 5

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding,and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Accepted Answer

A)  $27.50 
B)  $28.88 
C)  $30.32 
D)  $31.83 
E)  $33.43 
A)  $27.50 
B)  $28.88 
C)  $30.32 
D)  $31.83 
E)  $33.43

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  The more depreciation a firm has in a given year,the higher its EPS,other things held constant. 
B)  Typically,a firm's DPS should exceed its EPS. 
C)  Typically,a firm's EBIT should exceed its EBITDA. 
D)  If a firm is more profitable than average (e.g. ,Google),we would normally expect to see its stock price exceed its book value per share. 
E)  If a firm is more profitable than most other firms,we would normally expect to see its book value per share exceed its stock price,especially after several years of high inflation. 
A)  The more depreciation a firm has in a given year,the higher its EPS,other things held constant. 
B)  Typically,a firm's DPS should exceed its EPS. 
C)  Typically,a firm's EBIT should exceed its EBITDA. 
D)  If a firm is more profitable than average (e.g. ,Google),we would normally expect to see its stock price exceed its book value per share. 
E)  If a firm is more profitable than most other firms,we would normally expect to see its book value per share exceed its stock price,especially after several years of high inflation.

Question 9

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 10

TSW Inc.had the following data for last year: Net income = $800;Net operating profit after taxes (NOPAT)= $700;Total assets = $3,000;and Total operating capital = $2,000.Information for the just-completed year is as follows: Net income = $1,000;Net operating profit after taxes (NOPAT)= $925;Total assets = $2,600;and Total operating capital = $2,500.How much free cash flow did the firm generate during the just-completed year?

Accepted Answer

A)  $383 
B)  $425 
C)  $468 
D)  $514 
E)  $566 
A)  $383 
B)  $425 
C)  $468 
D)  $514 
E)  $566

Question 11

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

Question 12

JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash flow,assuming it had no amortization expense and sold none of its fixed assets?

Accepted Answer

A)  $4,831.31 
B)  $5,085.59 
C)  $5,353.25 
D)  $5,635.00 
E)  $5,916.75 
A)  $4,831.31 
B)  $5,085.59 
C)  $5,353.25 
D)  $5,635.00 
E)  $5,916.75

Question 13

Over the years,Janjigian Corporation's stockholders have provided $15,250 of capital,part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.The firm now has 1,000 shares of common stock outstanding,and it sells at a price of $42.00 per share.How much value has Janjigian's management added to stockholder wealth over the years,i.e. ,what is Janjigian's MVA?

Accepted Answer

A)  $21,788 
B)  $22,935 
C)  $24,142 
D)  $25,413 
E)  $26,750 
A)  $21,788 
B)  $22,935 
C)  $24,142 
D)  $25,413 
E)  $26,750

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first,and then goes on down to list the firm's longest lived assets last. 
B)  The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. 
C)  The balance sheet for a given year tells us how much money the company earned during that year. 
D)  The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity,assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 
E)  For most companies,the market value of the stock equals the book value of the stock as reported on the balance sheet. 
A)  A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first,and then goes on down to list the firm's longest lived assets last. 
B)  The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. 
C)  The balance sheet for a given year tells us how much money the company earned during that year. 
D)  The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity,assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 
E)  For most companies,the market value of the stock equals the book value of the stock as reported on the balance sheet.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  The maximum federal tax rate on personal income in 2014 was 50%. 
B)  Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 
C)  Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate,which in 2014 could go up to 35%,but dividends received were taxed at a maximum rate of 15%. 
D)  The maximum federal tax rate on corporate income in 2014 was 50%. 
E)  Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes. 
A)  The maximum federal tax rate on personal income in 2014 was 50%. 
B)  Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 
C)  Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate,which in 2014 could go up to 35%,but dividends received were taxed at a maximum rate of 15%. 
D)  The maximum federal tax rate on corporate income in 2014 was 50%. 
E)  Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes.

Question 16

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 values at which these assets are carried on the books.

Accepted Answer

A) True 
 B)False

Question 17

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation).The company had $18,750 of investor-supplied operating assets (or capital),the weighted average cost of that capital (the WACC)was 9.5%,and the federal-plus-state income tax rate was 40%.What was HHH's Economic Value Added (EVA),i.e. ,how much value did management add to stockholders' wealth during the year?

Accepted Answer

A)  $1,357.13 
B)  $1,428.56 
C)  $1,503.75 
D)  $1,578.94 
E)  $1,657.88 
A)  $1,357.13 
B)  $1,428.56 
C)  $1,503.75 
D)  $1,578.94 
E)  $1,657.88

Question 18

Analysts following Armstrong Products recently noted that the company's operating net cash flow increased over the prior year,yet cash as reported on the balance sheet decreased.Which of the following factors could explain this situation?

Accepted Answer

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

Question 19

A security analyst obtained the following information from Prestopino Products' financial statements:
∙Retained earnings at the end of 2014 were $700,000,but retained earnings at the end of 2015 had declined to $320,000.
∙The company does not pay dividends.
∙The company's depreciation expense is its only non-cash expense;it has no amortization charges.
∙The company has no non-cash revenues.
∙The company's net cash flow (NCF)for 2015 was $150,000.
On the basis of this information,which of the following statements is CORRECT?

Accepted Answer

A)  Prestopino had negative net income in 2015. 
B)  Prestopino's depreciation expense in 2015 was less than $150,000. 
C)  Prestopino had positive net income in 2015,but its income was less than its 2014 income. 
D)  Prestopino's NCF in 2015 must be higher than its NCF in 2014. 
E)  Prestopino's cash on the balance sheet at the end of 2015 must be lower than the cash it had on the balance sheet at the end of 2014. 
A)  Prestopino had negative net income in 2015. 
B)  Prestopino's depreciation expense in 2015 was less than $150,000. 
C)  Prestopino had positive net income in 2015,but its income was less than its 2014 income. 
D)  Prestopino's NCF in 2015 must be higher than its NCF in 2014. 
E)  Prestopino's cash on the balance sheet at the end of 2015 must be lower than the cash it had on the balance sheet at the end of 2014.

Question 20

On its 2014 balance sheet,Barngrover Books showed $510 million of retained earnings,and exactly that same amount was shown the following year in 2015.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

Accepted Answer

A)  Dividends could have been paid in 2015,but they would have had to equal the earnings for the year. 
B)  If the company lost money in 2015,they must have paid dividends. 
C)  The company must have had zero net income in 2015. 
D)  The company must have paid out half of its earnings as dividends. 
E)  The company must have paid no dividends in 2015. 
A)  Dividends could have been paid in 2015,but they would have had to equal the earnings for the year. 
B)  If the company lost money in 2015,they must have paid dividends. 
C)  The company must have had zero net income in 2015. 
D)  The company must have paid out half of its earnings as dividends. 
E)  The company must have paid no dividends in 2015.

Exam 2: Financial Statements, Cash Flow, and Taxes

Which of the following items is NOT included in current assets?

Which of the following statements is CORRECT?

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding,and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Which of the following statements is CORRECT?

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.

JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash flow,assuming it had no amortization expense and sold none of its fixed assets?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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 values at which these assets are carried on the books.

Analysts following Armstrong Products recently noted that the company's operating net cash flow increased over the prior year,yet cash as reported on the balance sheet decreased.Which of the following factors could explain this situation?

On its 2014 balance sheet,Barngrover Books showed $510 million of retained earnings,and exactly that same amount was shown the following year in 2015.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

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

Corporate Valuation and Stock Valuation

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

Financial Planning and Applications to Corporate Valuation

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

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

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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