Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   Typically, a firm's DPS should exceed its EPS.
B)   Typically, a firm's net income should exceed its EBIT.
C)   If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share.
D)   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.
E)   The more depreciation a firm has in a given year, the higher its EPS, other things held constant.F) A) and C)
G) A) and B)

Question 2

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 3

Garner Grocers began operations in 2009. Garner has reported the following levels of taxable income (EBT)  over the past several years. The corporate tax rate was 34% each year. Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions, and assume that the current provisions were applicable in 2009. What is the amount of taxes the company paid in 2012?

Accepted Answer

A)   $ 92,055
B)   $ 96,900
C)   $102,000
D)   $107,100
E)   $112,455F) A) and D)
G) A) and C)

Question 4

Uniontown Books began operating in 2008. The company lost money its first three years of operations, but has had an operating profit during the past two years. The company's operating income (EBIT) The company has no debt, and therefore, pays no interest expense. Its corporate tax rate has remained at 34% during this 5-year period. What was Uniontown's tax liability for 2012? (Assume that the company has taken full advantage of the carry-back and carry-forward provisions, and assume that the current provisions were applicable in 2008.)

Accepted Answer

A)   $466,412
B)   $490,960
C)   $516,800
D)   $544,000
E)   $571,200F) A) and B)
G) A) and C)

Question 5

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA)  is $162 million, what is the company's stock price?

Accepted Answer

A)   $66.02
B)   $69.49
C)   $73.15
D)   $77.00
E)   $80.85F) B) and C)
G) A) and D)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
B)   The balance sheet gives us a picture of the firm's financial position at a point in time.
C)   The income statement gives us a picture of the firm's financial position at a point in time.
D)   The statement of cash flows tells us how much cash the firm must pay out in interest during the year.
E)   The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.F) None of the above
G) B) and D)

Question 7

Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Accepted Answer

A) True 
 B)False

Question 8

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

A)   Accounts payable.
B)   Short-term notes payable to the bank.
C)   Accrued wages.
D)   Cost of goods sold.
E)   Accrued payroll taxes.F) B) and D)
G) B) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   The more depreciation a firm reports, the higher its tax bill, other things held constant.
B)   People sometimes talk about the firm's cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
C)   Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow.
D)   Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.
E)   Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.F) A) and B)
G) None of the above

Question 11

West Corporation has $50,000 that 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 8.5%; Exxon Mobil bonds yielding 10.5%; and GM preferred stock with a dividend yield of 9.25%. West's corporate tax rate is 35%. 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)   8.500%
B)   8.925%
C)   9.371%
D)   9.840%
E)   10.332%F) D) and E)
G) B) and D)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   The current cash flow from existing assets is highly relevant to investors. However, since the value of the firm depends primarily upon its growth opportunities, accounting net income projections from those opportunities are the only relevant future flows with which investors are concerned.
B)   Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
C)   To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue.
D)   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 discourage the use of debt financing by corporations.
E)   If Congress changed depreciation allowances so that companies had to report higher depreciation levels for tax purposes in 2012, this would lower their free cash flows for 2012.F) C) and D)
G) A) and B)

Question 13

Mantle Corporation is considering two equally risky investments: • A $5,000 investment in preferred stock that yields 7%. • A $5,000 investment in a corporate bond that yields 10%. What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Accepted Answer

A)   34.27%
B)   36.08%
C)   37.97%
D)   39.87%
E)   41.87%F) C) and E)
G) A) and E)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2011 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
C)   The maximum federal tax rate on corporate income in 2011 was 50%.
D)   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.
E)   The maximum federal tax rate on personal income in 2011 was 50%.F) B) and E)
G) C) and D)

Question 15

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)   $525.20F) B) and D)
G) A) and E)

Question 16

Assume that Besley Golf Equipment commenced operations on January 1, 2012, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2012 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2012 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

Accepted Answer

A)   The firm's reported net fixed assets would increase.
B)   The firm's EBIT would increase.
C)   The firm's reported 2012 earnings per share would increase.
D)   The firm's cash position in 2012 and 2013 would increase.
E)   The provision will increase the company's tax payments.F) B) and E)
G) A) and D)

Question 17

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.F) C) and D)
G) A) and B)

Question 18

Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.

Accepted Answer

A) True 
 B)False

Question 19

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Accepted Answer

A)   7.02%
B)   7.39%
C)   7.76%
D)   8.15%
E)   8.56%F) D) and E)
G) B) and E)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
B)   The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
C)   The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
D)   The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
E)   The statement of cash flows shows how much the firm's cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents) --increased or decreased during a given year.F) A) and B)
G) A) and C)

Exam 3: Financial Statements

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

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

Correct Answer
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Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Correct Answer
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Correct Answer
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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."

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price?

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Mantle Corporation is considering two equally risky investments: • A $5,000 investment in preferred stock that yields 7%. • A $5,000 investment in a corporate bond that yields 10%. What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 3: Financial Statements

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

Correct AnswerverifiedShow Answer

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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."

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Mantle Corporation is considering two equally risky investments: • A $5,000 investment in preferred stock that yields 7%. • A $5,000 investment in a corporate bond that yields 10%. What is the break-even corporate tax rate that makes the company indifferent between the two investments?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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