Question 1

This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.

Accepted Answer

A) Average tax rate 
B) Marginal tax rate 
C) Progressive tax system 
D) Earnings before tax

Question 2

Zoeckler Mowing & Landscaping's year-end 2011 balance sheet lists current assets of $350,000,fixed assets of $325,000,current liabilities of $145,000,and long-term debt of $185,000.Calculate Zoeckler's total stockholders' equity.

Accepted Answer

A) $115,000 
B) $490,000 
C) $345,000 
D) $500,000

Question 3

A firm has operating income of $1,000,depreciation expense of $185,and its investment in operating capital is $400.The firm is 100 percent equity financed and has a 35 percent tax rate.What is the firm's operating cash flow?

Accepted Answer

A) $725 
B) $795 
C) $835 
D) $965

Question 4

Debt versus Equity Financing You are considering a stock investment in one of two firms (AllDebt,Inc.and AllEquity,Inc.),both of which operate in the same industry and have identical operating income of $600,000.AllDebt,Inc.finances its $1.2 million in assets with $1 million in debt (on which it pays 10 percent interest annually)and $0.2 million in equity.AllEquity,Inc.finances its $1.2 million in assets with no debt and $1.2 million in equity.Both firms pay a tax rate of 30 percent on their taxable income.What are the asset funders' (the debt holders and stockholders)resulting return on assets for the two firms?

Accepted Answer

A) 29.17%, and 35%, respectively 
B) 37.5%, and 35%, respectively 
C) 37.5%, and 37.5%, respectively 
D) 50%, and 50%, respectively

Question 5

Corporate Taxes Swimmy,Inc.had $400,000 in 2013 taxable income.Using the tax schedule from Table 2-3,what are the company's 2013 income taxes,average tax rate,and marginal tax rate,respectively?

Accepted Answer

A) $22,100, 5.53%, 34% 
B) $113,900, 28.48%, 34% 
C) $136,000, 34.00%, 34% 
D) $136,000, 39.00%, 34%

Question 6

Statement of Cash Flows In 2013,Lower Case Productions had cash flows from investing activities of +$50,000 and cash flows from financing activities of +$100,000.The balance in the firm's cash account was $80,000 at the beginning of 2013 and $65,000 at the end of the year.What was Lower Case's cash flow from operations for 2013?

Accepted Answer

A) -$15,000 
B) -$150,000 
C) -$165,000 
D) -$65,000

Question 7

Hunt Taxidermy,Inc.is concerned about the taxes paid by the company in 2013.In addition to $36.5 million of taxable income,the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy,Inc.Calculate Hunt Taxidermy's taxable income.

Accepted Answer

A) $40,250,000 
B) $38,150,000 
C) $36,900,000 
D) $36,620,000

Question 8

All of the following are reasons that one should be cautious in interpreting financial statements EXCEPT:

Accepted Answer

A) Firms can take steps to over- or understate earnings at various times. 
B) It is difficult to compare two firms that use different depreciation methods. 
C) Financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings. 
D) All of these are reasons to be cautious in interpreting financial statements.

Question 9

Statement of Cash Flows Nickolas's Nut Farms,Inc.has net cash flows from operating activities for the last year of $25 million.The income statement shows that net income is $15 million and depreciation expense is $6 million.During the year,the change in inventory on the balance sheet was a decrease of $4 million,change in accrued wages and taxes was a decrease of $1 million and change in accounts payable was a decrease of $1 million.At the beginning of the year the balance of accounts receivable was $5 million.What was the end of year balance for accounts receivable?

Accepted Answer

A) $2 million 
B) $3 million 
C) $7 million 
D) $9 million

Question 10

Income Statement You have been given the following information for Fina's Furniture Corp.:
Net sales = $25,500,000;
Cost of goods sold = $10,250,000;
Addition to retained earnings = $305,000;
Dividends paid to preferred and common stockholders = $500,000;
Interest expense = $2,000,000.
The firm's tax rate is 30 percent.What is the depreciation expense for Fina's Furniture Corp.?

Accepted Answer

A) $12,100,000 
B) $12,400,000 
C) $14,100,000 
D) $14,400,000

Question 11

You are considering an investment in Fields and Struthers,Inc.and want to evaluate the firm's free cash flow.From the income statement,you see that Fields and Struthers earned an EBIT of $52 million,paid taxes of $10 million,and its depreciation expense was $5 million.Fields and Struthers' gross fixed assets increased by $38 million from 2012 to 2013.The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million.Calculate Fields and Struthers' operating cash flow (OCF),investment in operating capital (IOC),and free cash flow (FCF)for 2013.

Accepted Answer

A) OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000 
B) OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000 
C) OCF = $42,000,000; IOC = $46,000,000; FCF = -$4,000,000 
D) OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000

Question 12

Statement of Retained Earnings Jamaican Ice Cream Corp.started the year with a balance of retained earnings of $100 million.The company reported net income for the year of $45 million,paid dividends of $2 million to the preferred stock holders and $15 million to common stock holders.What is Jamaican Ice Cream's end of year balance in retained earnings?

Accepted Answer

A) $38 million 
B) $55 million 
C) $128 million 
D) $162 million

Question 13

LLV Inc.originally forecasted the following financial data for next year: sales = $1,000,cost of goods sold = $710,and interest expense = $95.The firm believes that COGS will always be 71 percent of sales.Due to pressure from shareholders,the firm wants to achieve a net income of $150.Assuming the interest expense will remain the same,how large must sales be to achieve this goal? Assume a 35 percent tax rate.

Accepted Answer

A) $1,403.82 
B) $1,3009.18 
C) $1,123.34 
D) $1,296.51

Question 14

A firm has sales of $690,EBIT of $300,depreciation of $40,and fixed assets increased by $265.If the firm's tax rate is 40 percent and there were no increases in net operating working capital,what is the firm's free cash flow?

Accepted Answer

A) $15 
B) $75 
C) -$45 
D) -$55

Question 15

Corporate Taxes The Sasnak Corporation had a 2013 taxable income of $4,450,000 from operations after all operating costs but before
(1)interest charges of $750,000,
(2)dividends received of $900,000,
(3)dividends paid of $500,000,and
(4)income taxes.
Using the tax schedule in Table 2.3,what is Sasnak's income tax liability?
What are Sasnak's average and marginal tax rates on taxable income from operations?

Accepted Answer

A) $1,349,800, 30.33%, 34%, respectively 
B) $1,349,800, 34.00%, 34%, respectively 
C) $1,564,000, 34.00%, 34%, respectively 
D) $1,564,000, 35.15%, 34%, respectively

Question 16

Statement of Cash Flows Fina's Faucets,Inc.has net cash flows from operating activities for the last year of $17 million.The income statement shows that net income is $15 million and depreciation expense is $6 million.During the year,the change in inventory on the balance sheet was an increase of $4 million,change in accrued wages and taxes was an increase of $1 million and change in accounts payable was an increase of $1 million.At the beginning of the year the balance of accounts receivable was $5 million.What was the end of year balance for accounts receivable?

Accepted Answer

A) $2 million 
B) $3 million 
C) $7 million 
D) $9 million

Question 17

Balance Sheet Harvey's Hamburger Stand has total assets of $3 million of which $1 million are current assets.Cash makes up 20 percent of the current assets and accounts receivable makes up another 5 percent of current assets.Harvey's gross plant and equipment has a book value of $1.5 million and other long-term assets have a book value of $1 million.Using this information,what is the balance of inventory and the balance of depreciation on Harvey's Hamburger Stand's balance sheet?

Accepted Answer

A) $250,000, $500,000 
B) $250,000, $1 million 
C) $750,000, $500,000 
D) $750,000, $1 million

Question 18

Income Statement Consider a firm with an EBIT of $5,000,000.The firm finances its assets with $20,000,000 debt (costing 5 percent)and 70,000 shares of stock selling at $50.00 per share.To reduce the firm's risk associated with this financial leverage,the firm is considering reducing its debt by $5,000,000 by selling an additional 100,000 shares of stock.The firm is in the 40 percent tax bracket.The change in capital structure will have no effect on the operations of the firm.Thus,EBIT will remain $5,000,000.What is the change in the firm's EPS from this change in capital structure?

Accepted Answer

A) Decrease EPS by $9.29 
B) Decrease EPS by $18.70 
C) Decrease EPS by $19.29 
D) Increase EPS by $2.14

Question 19

Income Statement The following is the 2013 income statement for Lamps,Inc.
The CEO of Lamps wants the company to earn a net income of $12 million in 2014.Cost of goods sold is expected to be 75 percent of net sales,depreciation expense is not expected to change,interest expense is expected to increase to $4 million,and the firm's tax rate will be 40 percent.What is the net sales needed to produce net income of $12 million?

Accepted Answer

A) $29 million 
B) $112 million 
C) $116 million 
D) $124 million

Question 20

Income Statement You have been given the following information for Sherry's Sandwich Corp.:
Net sales = $300,000;
Gross profit = $100,000;
Addition to retained earnings = $30,000;
Dividends paid to preferred and common stockholders = $8,500;
Depreciation expense = $25,000.
The firm's tax rate is 30 percent.What are the cost of goods sold and the interest expense for Sherry's Sandwich Corp.?

Accepted Answer

A) $20,000, and $200,000, respectively 
B) $100,000, and $20,000, respectively 
C) $200,000, and $20,000, respectively 
D) $200,000, and $36,500, respectively

Exam 2: Reviewing Financial Statements