Question 1

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.

Question 2

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 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:σmva = (shares outstanding)(stock price) + book value of common equity. 
D)  eva stands for economic value added, and it is defined as follows:σeva = ebit(1 σ t) σ (investor-supplied op. capital) × (a σ 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.

Question 4

Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.
 $\begin{array}{lll}
\text { Cash } & \$ 50,000 \text { Accounts payable } & \$ 100,000 \
\text { Inventory } & 200,000 \text { Accruals } & 100,000\
\text {Accounts receivable } & \text { 250,000 Total CL } & \$ 200,000\
\text { Total CA } & \$ 500,000 \text { Debt } & 200,000 \
\text { Net fixed assets } & \$ 900,000 \text { Common stock } & 200,000\
\ &\ \text { ----------Retained earnings } & 800,000\
\text { Total assets} & \$1,400,000 \text { Total L \& E } & \$1,400,000\
\end{array}$

Accepted Answer

A) True 
 B)False

Question 5

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

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  all corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income. 
B)  the income of certain small corporations that qualify under the tax code is completely exempt from corporate income taxes. thus, the federal government receives no tax revenue from these businesses. 
C)  all businesses, regardless of their legal form of organization, are taxed under the business tax provisions of the internal revenue code. 
D)  small businesses that qualify under the tax code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income. 
E)  congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

Question 7

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 8

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 CORRECTσ

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.

Question 9

The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Accepted Answer

A) True 
 B)False

Question 10

Barnes' Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA)?

Accepted Answer

A)  $399.11 
B)  $420.11 
C)  $442.23 
D)  $465.50 
E)  $490.00

Question 11

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)σ

Accepted Answer

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

Question 12

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  one way to increase eva is to achieve the same level of operating income but with more investor-supplied capital. 
B)  if a firm reports positive net income, its eva must also be positive. 
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 generate the same level of operating income but with less investor-supplied capital. 
E)  actions that increase reported net income will always increase net cash flow.

Question 14

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.

Question 15

In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

Accepted Answer

A) True 
 B)False

Question 16

Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?
 $\begin{array}{lcr}
\text { Cash } & \$ 10 \text { Accounts payable } & \$ 20 \
\text { Short-term investments } & \text { Accruals } & 20 \
\text { Accounts receivable } & \text { 50Notes payable } & 50 \
\text { Inventory } & \$ 40 \text { Current liabilities } & 90 \
\text { Current assets } & \$ 130 \text { Long-term debt } & 00 \
\text { Net fixed assets } & \$ 100 \text { Common equity } & 30 \
& \text { Retained earnings } & 50\
\text { Total assets } &  \text { \$ 230 Total liab. \& equity . } &\$2 30 \
\end{array}$

Accepted Answer

A)  $54.00 
B)  $60.00 
C)  $66.00 
D)  $72.60 
E)  $79.86

Question 17

Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds 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 $750. By how much will net after-tax income change as a result of the change in depreciationσ The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A) $463.13 
B) $487.50 
C)  $511.88 
D)  $537.47 
E) $564.34

Exam 6: Accounting for Financial Management

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.

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.

The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?