Question 1

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Accepted Answer

A)   6.49%
B)   6.83%
C)   7.19%
D)   7.57%
E)   7.95%F) C) and D)
G) A) and D)

Question 2

During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?

Accepted Answer

A)   $71,425
B)   $74,996
C)   $78,746
D)   $82,683
E)   $86,818F) All of the above
G) A) and D)

Question 3

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.

Accepted Answer

A) True 
 B)False

Question 4

Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP) ?

Accepted Answer

A)   The company repurchased some of its common stock.
B)   The company dramatically increased its capital expenditures.
C)   The company retired a large amount of its long-term debt.
D)   The company sold some of its fixed assets.
E)   The company had high depreciation expenses.F) C) and E)
G) B) and D)

Question 5

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) B) and D)
G) A) and E)

Question 6

A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?

Accepted Answer

A)   35.29%
B)   37.06%
C)   38.91%
D)   40.86%
E)   42.90%F) A) and E)
G) A) and D)

Question 7

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes)  is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

Accepted Answer

A)   5.64%
B)   5.93%
C)   6.25%
D)   6.58%
E)   6.90%F) A) and B)
G) B) and C)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding) (Stock price)  + Book value of common equity.
B)   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.
C)   MVA gives us an idea about how much value a firm's management has added during the last year.
D)   EVA gives us an idea about how much value a firm's management has added over the firm's life.
E)   EVA stands for economic value added, and it is defined as follows:F) B) and D)
G) A) and D)

Question 9

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

Accepted Answer

A)   The firm's operating income (EBIT)  would increase.
B)   The firm's taxable income would increase.
C)   The firm's cash flow would increase.
D)   The firm's tax payments would increase.
E)   The firm's reported net income would increase.F) B) and D)
G) B) and E)

Question 10

The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Accepted Answer

A)   Nantell's taxable income will be lower.
B)   Nantell's operating income (EBIT)  will increase.
C)   Nantell's cash position will improve (increase) .
D)   Nantell's reported net income for the year will be lower.
E)   Nantell's tax liability for the year will be lower.F) A) and D)
G) A) and B)

Question 11

Brown Fashions Inc.'s December 31, 2012 balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2012, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/12, assuming no common stock was either issued or retired during 2012?

Accepted Answer

A)   $20.90
B)   $22.00
C)   $23.10
D)   $24.26
E)   $25.47F) C) and E)
G) D) and E)

Question 12

On 12/31/12, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/11, the company had reported $445,000 of retained earnings. No shares were repurchased during 2012. How much in dividends did the firm pay during 2012?

Accepted Answer

A)   $49,638
B)   $52,250
C)   $55,000
D)   $57,750
E)   $60,638F) B) and E)
G) B) and D)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase, then when they are collected cash will come into the firm.
B)   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 net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows.
C)   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 add to or subtract from 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.
D)   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."
E)   Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.F) D) and E)
G) B) and C)

Question 14

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) A) and B)
G) A) and C)

Question 15

The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   Dividends paid reduce the net income that is reported on a company's income statement.
B)   If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
C)   If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year.
D)   Accounts receivable are reported as a current liability on the balance sheet.
E)   If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.F) All of the above
G) B) and D)

Question 17

The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A)   35.39%
B)   37.25%
C)   39.22%
D)   41.18%
E)   43.24%F) A) and D)
G) A) and C)

Question 19

Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

Accepted Answer

A) True 
 B)False

Question 20

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI)  to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Accepted Answer

A)   The provision will reduce the company's cash flow.
B)   The provision will increase the company's tax payments.
C)   The provision will increase the firm's operating income (EBIT) .
D)   The provision will increase the company's net income.
E)   Net fixed assets on the balance sheet will decrease.F) B) and E)
G) A) and B)

Exam 3: Financial Statements

Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

Correct Answer
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Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Correct Answer
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The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.

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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A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

Correct Answer
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A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?

Correct Answer
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The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?

Correct Answer
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Correct Answer
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Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.

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

Correct Answer
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Which of the following statements is CORRECT?

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Exam 3: Financial Statements

Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

Correct AnswerverifiedShow Answer

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Correct AnswerverifiedShow Answer

The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

Correct AnswerverifiedShow Answer

A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?

Correct AnswerverifiedShow Answer

The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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Correct AnswerverifiedShow Answer

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