Question 1

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%

Question 2

In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.

Accepted Answer

A) True 
 B)False

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% of the interest received by corporations is excluded from taxable income.
C)   70% of the dividends received by corporations is excluded from taxable income.
D)   Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain.
E)   The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   After-tax operating income is calculated as EBIT(1 - T)  + Depreciation.
C)   Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
D)   If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.
E)   Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.

Question 5

The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.

Accepted Answer

A) True 
 B)False

Question 6

An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows.

Accepted Answer

A) True 
 B)False

Question 7

EBITDA stands for earnings before interest, taxes, debt, and assets.

Accepted Answer

A) True 
 B)False

Question 8

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.
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 subtracted from net income in the operating activities section.
D)   In the statement of cash flows, depreciation is subtracted from net income in the operating activities section.
E)   In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.

Question 10

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.

Question 11

Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Accepted Answer

A)   $675
B)   $750
C)   $825
D)   $908
E)   $998

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.
B)   The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
C)   The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders.
D)   The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity.
E)   Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information--audited financial statements.

Question 13

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. 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's taxable income would fall.
B)   The company's interest expense would remain constant.
C)   The company would have less common equity than before.
D)   The company's net income would increase.
E)   The company would have to pay less taxes.

Question 14

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

Question 15

Brown Office Supplies recently reported $15,500 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT) ?

Accepted Answer

A)   $4,627
B)   $4,870
C)   $5,114
D)   $5,369
E)   $5,638

Question 16

Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?

Accepted Answer

A)   $325
B)   $342
C)   $360
D)   $378
E)   $397

Question 17

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Accepted Answer

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

Question 18

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 19

Below is the common equity section (in millions) The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Accepted Answer

A)   The company's net income in 2011 was higher than in 2010.
B)   The firm issued common stock in 2011.
C)   The market price of the firm's stock doubled in 2011.
D)   The firm had positive net income in both 2010 and 2011, but its net income in 2011 was lower than it was in 2010.
E)   The company has more equity than debt on its balance sheet.

Question 20

On its 12/31/11 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Accepted Answer

A)   If the company lost money in 2011, it must have paid dividends.
B)   The company must have had zero net income in 2011.
C)   The company must have paid out half of its 2011 earnings as dividends.
D)   The company must have paid no dividends in 2011.
E)   Dividends could have been paid in 2011, but they would have had to equal the earnings for the year.

Exam 3: Financial Statements

On its 12/31/11 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Correct Answer
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The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.

Correct Answer
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Correct Answer
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In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.

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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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Below is the common equity section (in millions) The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Correct Answer
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Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?

Correct Answer
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Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Correct Answer
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EBITDA stands for earnings before interest, taxes, debt, and assets.

Correct Answer
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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
verified

Which of the following statements is CORRECT?

Correct Answer
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Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Correct Answer
verified

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

Correct Answer
verified

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Correct Answer
verified

Exam 3: Financial Statements

On its 12/31/11 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Below is the common equity section (in millions) The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?

Correct AnswerverifiedShow Answer

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Correct AnswerverifiedShow Answer

EBITDA stands for earnings before interest, taxes, debt, and assets.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Correct AnswerverifiedShow Answer

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