Question 1

Brown Fashions Inc.'s December 31, 2013, balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2013, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/13, assuming no common stock was either issued or retired during 2013?

Accepted Answer

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

Question 2

An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

Accepted Answer

A) True 
 B)False

Question 3

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?

Accepted Answer

A)   13.85%
B)   14.54%
C)   15.27%
D)   16.03%
E)   16.83%F) B) and C)
G) A) and B)

Question 4

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 5

Which of the following statements is CORRECT?

Accepted Answer

A)   The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits.
B)   All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
C)   Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income.
D)   Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation's income and stockholders were taxed again on this income when it was paid to them as dividends.
E)   All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.F) B) and D)
G) C) and D)

Question 6

Which of the following items is NOT normally considered to be a current asset?

Accepted Answer

A)   Accounts receivable.
B)   Inventory.
C)   Bonds.
D)   Cash.
E)   Short-term, highly-liquid, marketable securities.F) C) and D)
G) C) and E)

Question 7

If 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 8

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 encourage the use of debt financing by corporations.

Accepted Answer

A) True 
 B)False

Question 9

During 2013, 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) B) and E)
G) B) and C)

Question 10

For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP)  are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?

Accepted Answer

A)   The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B)   The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
C)   The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide.
D)   The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
E)   The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.F) A) and E)
G) C) and E)

Question 11

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 12

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.F) D) and E)
G) A) and E)

Question 13

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) None of the above
G) A) and C)

Question 14

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6%, and Carter's marginal income tax rate is 40%, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

Accepted Answer

A)   3.42%
B)   3.60%
C)   3.78%
D)   3.97%
E)   4.17%F) All of the above
G) None of the above

Question 15

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Accepted Answer

A) True 
 B)False

Question 16

Last year, Martyn Company had $500,000 in taxable income from its operations, $50,000 in interest income, and $100,000 in dividend income. Using the corporate tax rate table given below, what was the company's t   Tax on Base  Percentage on  Taxable Income ‾ of Bracket ‾ Excess above Base‾ Up to $50,000$015%$50,000−$75,0007,50025$75,000−$100,00013,75034$100,000−$335,00022,25039$335,000−$10,000,000113,90034$10,000,000−$15,000,0003,400,00035$15,000,000−$18,333,3335,150,00038 Over $18,333,3336,416,66735\begin{array} { l r r l r } &	ext { Tax on Base } &	ext { Percentage on } \\underline{	ext { Taxable Income }}&\underline{	ext { of Bracket }}&\underline{	ext { Excess above Base} }\	ext { Up to } \$ 50,000 & \$ 0 &  15 \% \\$ 50,000 - \$ 75,000 & 7,500 & 25 \\$ 75,000 - \$ 100,000 & 13,750 & 34 \\$ 100,000 - \$ 335,000 & 22,250 & 39 \\$ 335,000 - \$ 10,000,000 & 113,900 & 34 \\$ 10,000,000 - \$ 15,000,000 & 3,400,000 & 35 \\$ 15,000,000 - \$ 18,333,333 & 5,150,000 & 38 \	ext { Over } \$ 18,333,333 & 6,416,667 & 35\end{array} Taxable Income ​ Up to $50,000$50,000−$75,000$75,000−$100,000$100,000−$335,000$335,000−$10,000,000$10,000,000−$15,000,000$15,000,000−$18,333,333 Over $18,333,333​ Tax on Base  of Bracket ​$07,50013,75022,250113,9003,400,0005,150,0006,416,667​ Percentage on  Excess above Base​15%25343934353835​

tax liability for the year?

Accepted Answer

A)   $187,340
B)   $197,200
C)   $207,060
D)   $217,413 E) All of the above
F) B) and D)

Question 17

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.F) A) and B)
G) B) and E)

Question 18

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

Exam 3: Financial Statements, Cash Flow, and Taxes

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

Correct Answer
verified

During 2013, 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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Correct Answer
verified

Correct Answer
verified

If 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.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

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
verified

An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

Correct Answer
verified

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
verified

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
verified

Correct Answer
verified

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 encourage the use of debt financing by corporations.

Correct Answer
verified

Correct Answer
verified

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?

Correct Answer
verified

Which of the following items is NOT normally considered to be a current asset?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 3: Financial Statements, Cash Flow, and Taxes

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

During 2013, 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If 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.

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

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

An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

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

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

Correct AnswerverifiedShow Answer

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 encourage the use of debt financing by corporations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?

Correct AnswerverifiedShow Answer

Which of the following items is NOT normally considered to be a current asset?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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