Question 1

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income.Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 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 Lindley's operating income, or EBIT?

Accepted Answer

A) $3,462 
B) $3,644 
C) $3,836 
D) $4,038 
E) $4,250

Question 2

During the year, Bascom Bakery Inc.paid out $21,750 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Accepted Answer

A) $77,000 
B) $80,850 
C) $84,893 
D) $89,137 
E) $93,594

Question 3

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:
$\begin{array}{|l|l|l|}
\hline \text { Assets: } &{2009} & {2008} \
\hline \text { Cash } & \$ 200,000 & \$ 170,000 \
\hline \text { Accounts receivable } & 864,000 & 700,000 \
\hline \text { Inventories } & 2,000,000 & 1,400,000 \
\hline \text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \
\hline \text { Net fixed assets } & 6,000,000 & 5,600,000 \
\hline \text { Total assets } & \$ 9,064,000 & \$ 7,870,000 \\hline\
\hline \text { Liabilities and equity: } & & \
\hline \text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \
\hline \text { Notes payable } & 1,600,000 & 1,800,000 \
\hline \text { Total current liabilities } & \$ 3,000,000 & \$ 2,890,000 \
\hline \text { Long-term debt } & 2,400,000 & 2,400,000 \
\hline \text { Common stock } & 3,000,000 & 2,000,000 \
\hline \text { Retained earnings } & 664,000 & 580,000 \
\hline \text { Total common equity } & \$ 3,664,000 & \$ 2,580,000 \
\hline \text { Total liabilities and equity } & \$ 9,064,000 & \$ 7,870,000 \
\hline
\end{array}$
 Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2008.As of the end of 2009, none of the principal on this debt had been repaid.Assume that the company's sales in 2008 and 2009 were the same.Which of the following statements must be CORRECT?

Accepted Answer

A) Wolken increased its short-term bank debt in 2009. 
B) Wolken issued long-term debt in 2009. 
C) Wolken issued new common stock in 2009. 
D) Wolken repurchased some common stock in 2009. 
E) Wolken had negative net income in 2009.

Question 4

the balance sheet, total assets must always equal total liabilities and equity.

Accepted Answer

A) True 
 B)False

Question 5

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 tax rate.Prior to the new provision, BBI's net income after taxes 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 net cash flow. 
B) The provision will increase the company's tax payments. 
C) Net fixed assets on the balance sheet will increase. 
D) The provision will increase the company's net income. 
E) Net fixed assets on the balance sheet will decrease.

Question 6

CFO of Shalit 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.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 7

Total net operating capital is equal to net fixed assets.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.How much was its net cash flow?

Accepted Answer

A) $3,284.75 
B) $3,457.63 
C) $3,639.61 
D) $3,831.17 
E) $4,032.81

Question 11

the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A) Operating cash flow (OCF) is defined as follows: OCF = EBIT(1-T) - Depreciation and Amortization. 
B) Changes in working capital have no effect on free cash flow. 
C) Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T)
+ Depreciation and Amortization
- Capital expenditures required to sustain operations
- Required changes in net operating working capital. 
D) Free cash flow (FCF) is defined as follows: FCF = EBIT(1-T)+ Depreciation and Amortization + Capital expenditures. 
E) Operating cash flow is the same as free cash flow (FCF).

Question 13

Enterprises has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have?

Accepted Answer

A) $81.23 
B) $85.50 
C) $90.00 
D) $94.50 
E) $99.23

Question 14

Below is the common equity section (in millions)

2009
2008

Common stock
$2,000
$1,000

Retained earnings
2,000
2,340

Total common equity
$4,000
$3,340

Teweles 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 2009 was higher than in 2008. 
B) Teweles issued common stock in 2009. 
C) The market price of Teweles' stock doubled in 2009. 
D) Teweles had positive net income in both 2008 and 2009, but the company's net income in 2009 was lower than it was in 2008. 
E) The company has more equity than debt on its balance sheet.

Question 15

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 16

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 net 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 net cash flow. 
D) Net cash flow (NCF) is often defined as follows: Net Cash Flow = Net Income + Depreciation and Amortization Charges. 
E) Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

balance sheet is a financial statement that 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 19

Assume that Pappas Company commenced operations on January 1, 2010, 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 2010 management realized that the assets would last for only 10 years.The firm's accountants plan to report the 2010 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 2010 earnings per share would increase. 
D) The firm's cash position in 2010 and 2011 would increase. 
E) The firm's net liabilities would increase.

Question 20

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

Exam 2: Statements, CF, Taxes

During the year, Bascom Bakery Inc.paid out $21,750 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

the balance sheet, total assets must always equal total liabilities and equity.

Total net operating capital is equal to net fixed assets.

Which of the following statements is CORRECT?

the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Which of the following statements is CORRECT?

Enterprises has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have?

Below is the common equity section (in millions) 2009 2008 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 Teweles has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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

balance sheet is a financial statement that 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.