Question 1

Which of the following best describes free cash flow?

Accepted Answer

A)   Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investments in operating capital have been made.
B)   Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investments in operating capital have been made.
C)   Free cash flow is the net change in the cash account on the balance sheet.
D)   Free cash flow is equal to net income plus depreciation.
E)   Free cash flow is equal to the cash flow from non-taxable transactions. A

Question 2

West Corporation has $50,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 6 percent; Exxon bonds yielding 9.5 percent; GM preferred stock with a dividend yield of 9 percent. West's corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.)

Accepted Answer

A)   8.06%
B)   7.13%
C)   6.18%
D)   6.55%
E)   6.00% A

Question 3

Which of the following statements is most correct?

Accepted Answer

A)   Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders.
B)   70 percent of the interest received by corporations is excluded from taxable income.
C)   70 percent of the dividends received by corporations is excluded from taxable income.
D)   None of the answers above is correct.
E)   Answers a and c are correct. C

Question 4

Non-cash assets 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 the assets are carried on the books.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most correct?

Accepted Answer

A)   Indexing tax brackets reduces the extent of "bracket creep."
B)   Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light.
C)   Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities.
D)   Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds. However, other factors may offset tax considerations.
E)   All of the statements above are true.

Question 6

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

Accepted Answer

A)   2.40%
B)   3.60%
C)   4.50%
D)   5.25%
E)   6.00%

Question 7

The income statement measures the flow of funds into (i.e., revenue) and out of (i.e., expenses) the firm over a certain time period. It is always based on accounting data.

Accepted Answer

A) True 
 B)False

Question 8

Hayes Corporation has $300 million worth of common equity on its balance sheet, and 6 million shares of stock outstanding. The company's Market Value Added (MVA) is $162 million. What is the company's stock price?

Accepted Answer

A)   $ 23
B)   $ 32
C)   $ 50
D)   $ 77
E)   $138

Question 9

Mantle Corporation is considering two equally risky investments: (1)(2)What is the break-even corporate tax rate which makes the company indifferent between the two investments?

Accepted Answer

A)   33.17%
B)   34.00%
C)   37.97%
D)   42.15%
E)   42.86%

Question 10

In accounting, emphasis is placed on determining net income. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the business.

Accepted Answer

A) True 
 B)False

Question 11

The time dimension is important in financial statement analysis. While the balance sheet and income statements represent the firm's financial position at a point in time, the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

Accepted Answer

A) True 
 B)False

Question 12

Spencer Inc. has the following information for the current year: Net income = $600; Net operating profit after taxes (NOPAT) = $500; Total assets = $4,000; Short-term investments = $500; Stockholders equity = $2,000; Debt = $1,000; and Total net operating capital = $2500. What is the Return on invested capital (ROIC) for the current year?

Accepted Answer

A)   15.0%
B)   20.0%
C)   24.0%
D)   25.0%
E)   30.0%

Question 13

Kramer Corporation recently announced that its net income was lower than last year. However, analysts estimate that the company's net cash flow increased. What factors could explain this discrepancy?

Accepted Answer

A)   The company's depreciation expense increased.
B)   The company's interest expense declined.
C)   The company had an increase in its noncash revenues.
D)   Answers a and b are correct.
E)   Answers b and c are correct.

Question 14

Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased. What could explain these events?

Accepted Answer

A)   Aldrin issued long-term debt.
B)   Aldrin repurchased some of its common stock.
C)   Aldrin sold some of its assets.
D)   Statements a and b are correct.
E)   Statements a and c are correct.

Question 15

Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company's tax rate will remain at 40 percent. If the company's forecast is correct, how much will net income increase or decrease, as a result of the expansion?

Accepted Answer

A)   No change.
B)   $40,000 increase.
C)   $60,000 increase.
D)   $100,000 increase.
E)   $180,000 increase.

Question 16

A corporation can earn 7.5 percent if it invests in municipal bonds. The corporation can also earn 8.5 percent (before-tax) by investing in preferred stock. Assume that the two investments have equal risk. What is the break-even corporate tax rate which makes the corporation indifferent between the two investments?

Accepted Answer

A)   17.65%
B)   24.88%
C)   39.22%
D)   44.15%
E)   49.33%

Question 17

The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of retained earnings.

Accepted Answer

A) True 
 B)False

Question 18

In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Accepted Answer

A) True 
 B)False

Question 19

Spencer Inc. has the following information for the current year: Net income = $600; Net operating profit after taxes (NOPAT) = $500; Total assets = $4,000; Short-term investments = $500; Stockholders equity = $2,000; Debt = $1,000; and Total net operating capital = $2500. If Spencer's cost of capital is 10%, what is its Economic value added (EVA)?

Accepted Answer

A)   $250
B)   $300
C)   $350
D)   $375
E)   $400

Question 20

Net operating working capital is equal to the operating current assets minus the operating current liabilities.

Accepted Answer

A) True 
 B)False

Exam 7: Accounting for Financial Management

Which of the following best describes free cash flow?

Which of the following statements is most correct?

Non-cash assets 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 the assets are carried on the books.

Which of the following statements is most correct?

The income statement measures the flow of funds into (i.e., revenue) and out of (i.e., expenses) the firm over a certain time period. It is always based on accounting data.

Hayes Corporation has $300 million worth of common equity on its balance sheet, and 6 million shares of stock outstanding. The company's Market Value Added (MVA) is $162 million. What is the company's stock price?

Mantle Corporation is considering two equally risky investments: (1) (2) What is the break-even corporate tax rate which makes the company indifferent between the two investments?

In accounting, emphasis is placed on determining net income. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the business.

The time dimension is important in financial statement analysis. While the balance sheet and income statements represent the firm's financial position at a point in time, the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

Kramer Corporation recently announced that its net income was lower than last year. However, analysts estimate that the company's net cash flow increased. What factors could explain this discrepancy?

Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased. What could explain these events?

The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of retained earnings.

In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Net operating working capital is equal to the operating current assets minus the operating current liabilities.