Question 1

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 D)

Question 2

Arvo Corporation is trying to choose between three alternative investments. The three securities that the company is considering are as follows:
• Tax-free municipal bonds with a return of 8.8%.
• Wooli Corporation bonds with a return of 11.75%.
• CFI Corp. preferred stock with a return of 9.8%.
The company's tax rate is 25%. What is the after-tax return on the best investment alternative?

Accepted Answer

A)   7.383%
B)   7.772%
C)   8.181%
D)   8.612%
E)   9.065%F) A) and B)
G) C) and D)

Question 3

Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

Accepted Answer

A) True 
 B)False

Question 4

Watson Oil recently reported (in millions)  $8,250 of sales, $5,750 of operating costs other than depreciation, and $650 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?

Accepted Answer

A)   $718
B)   $756
C)   $796
D)   $836
E)   $878F) B) and E)
G) None of the above

Question 5

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 D)
G) A) and E)

Question 6

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 7

Which of the following statements is CORRECT?

Accepted Answer

A)   Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital.
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- 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)  + Capital expenditures.
E)  Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors both creditors and stockholders.F) A) and E)
G) B) and C)

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)   Since depreciation increases the firm's net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
B)   A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
C)   Common equity includes common stock and retained earnings, less accumulated depreciation.
D)   The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends.
E)   If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.F) D) and E)
G) A) and E)

Question 10

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.

Accepted Answer

A) True 
 B)False

Question 11

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 E)
G) A) and C)

Question 12

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) B) and D)
G) C) and D)

Question 13

Allen Corporation can (1)  build a new plant that should generate a before-tax return of 11%, or (2)  invest the same funds in the preferred stock of Florida Power & Light (FPL) , which should provide Allen with a before-tax return of 9%, all in the form of dividends. Assume that Allen's marginal tax rate is 25%, and that 70% of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested?

Accepted Answer

A)   All in the plant project.
B)   All in FPL preferred stock.
C)   60% in the project; 40% in FPL.
D)   60% in FPL; 40% in the project.
E)   50% in each.F) A) and B)
G) C) and D)

Question 14

Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.70 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A)   -$0.432
B)   -$0.455
C)   -$0.478
D)   -$0.502
E)   -$0.527F) C) and E)
G) None of the above

Question 15

Houston Pumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?

Accepted Answer

A)   $10,225
B)   $10,736
C)   $11,273
D)   $11,837
E)   $12,429F) All of the above
G) B) and E)

Question 16

A loss incurred by a corporation

Accepted Answer

A)   Must be carried forward unless the company has had 2 loss years in a row.
B)   Can be carried back 2 years, then carried forward up to 20 years following the loss.
C)   Can be carried back 5 years and forward 3 years.
D)   Cannot be used to reduce taxes in other years except with special permission from the IRS.
E)   Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.F) A) and E)
G) A) and B)

Question 17

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

Question 18

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

Question 19

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) D) and E)
G) None of the above

Question 20

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

Exam 3: Financial Statements

Correct Answer
verified

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
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

Correct Answer
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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

A loss incurred by a corporation

Correct Answer
verified

Correct Answer
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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 statements is CORRECT?

Correct Answer
verified

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.

Correct Answer
verified

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
verified

Which of the following statements is most correct?

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

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

Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

Correct Answer
verified

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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Correct Answer
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Exam 3: Financial Statements

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

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

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

A loss incurred by a corporation

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 statements is CORRECT?

Correct AnswerverifiedShow Answer

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.

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

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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