FIN 534 quiz 2 week 3
Question 1
Which of the following statements is CORRECT?
Correct
Answer:
Interest paid to an individual is counted as income for tax purposes and taxed at
the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends
received were taxed at a maximum rate of 15%.
Question 2
Which of the following statements is CORRECT?
Correct
Answer:
The balance sheet gives us a picture of the firm’s financial position at a point
in time.
Question 3
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?
Answer
Correct
Answer:
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, for valuation purposes we need to discount cash flows, not accounting
income. Moreover, since many firms have a number of separate divisions, and
since division managers should be compensated on their divisions’ performance,
not that of the entire firm, information that focuses on the divisions is needed.
These factors have led to the development of information that is focused on cash
flows and the operations of individual units.
Question 4
On its 2010 balance sheet, Barngrover Books 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?
Answer
Correct
Answer:
Dividends could have been paid in 2010, but they would have had to equal the
earnings for the year.
Question 5
Other things held constant, which of the following actions would increase the amount of
cash on a company’s balance sheet?
Correct Answer:
The company issues new common stock.
Question 6
The 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?
Correct Answer:
The company’s net income would increase.
Question 7
Which of the following factors could explain why Dellva Energy had a negative net cash
flow last year, even though the cash on its balance sheet increased?
Answer
Correct Answer:
The company sold a new issue of bonds.
Question 8
Which of the following statements is CORRECT?
Correct
Answer:
A firm can show a large amount of retained earnings on its balance sheet yet
need to borrow cash to make required payments.
Question 9
Below is the common equity section (in millions) of Teweles Technology’s last two year-end
balance sheets:
Common stock
Retained earnings
Total common equity
2009
2008
$2,000
$1,000
2,000
2,340
$4,000
$3,340
Teweles has never paid a dividend to its common stockholders. Which of the
following statements is CORRECT?
Correct Answer:
Teweles issued common stock in 2009.
Question 10
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.
Correct Answer:
Net fixed assets on the balance sheet will decrease.
Question 11
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?
Correct Answer:
The firm’s net cash flow would increase.
Question 12
Which of the following statements is CORRECT?
Correct
Answer:
Small businesses that qualify under the Tax Code can elect not to pay corporate
taxes, but then their owners must report their pro rata shares of the firm’s income
as personal income and pay taxes on that income.
Question 13
Which of the following statements is CORRECT?
Correct
Answer:
One way to increase EVA is to generate the same level of operating income but
with less investor-supplied capital.
Question 14
Which of the following statements is CORRECT?
Correct
Answer:
Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization
Charges.
Question 15
Which of the following items is NOT included in current assets?
Correct Answer:
Bonds.
Question 16
A firm’s new president wants to strengthen the company’s financial position. Which of the
following actions would make it financially stronger?
Correct Answer:
Increase EBIT while holding sales constant.
Question 17
Which of the following statements is CORRECT?
Correct
Answer:
Borrowing on a long-term basis and using the proceeds to retire short-term debt
would improve the current ratio and thus could be considered to be an example of
“window dressing.”
Question 18
Which of the following statements is CORRECT?
Correct
Answer:
The higher the market/book ratio, then, other things held constant, the higher one
would expect to find the Market Value Added (MVA).
Question 19
Which of the following statements is CORRECT?
Correct
Answer If a firm increases its sales while holding its accounts receivable constant, then, other
things held constant, its days’ sales outstanding will decline.
:
Question 20
Taggart Technologies is considering issuing new common stock and using the proceeds to
reduce its outstanding debt. The stock issue would have no effect on total assets, the
interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur
if the company goes ahead with the stock issue?
Correct Answer:
The tax bill will increase.
Question 21
Casey Communications recently issued new common stock and used the proceeds to pay off
some of its short-term notes payable. This action had no effect on the company’s total
assets or operating income. Which of the following effects would occur as a result of this
action?
Correct Answer:
The company’s current ratio increased.
Question 22
Which of the following statements is CORRECT?
Correct
Answer:
If Firms X and Y have the same net income, number of shares outstanding, and
price per share, then their P/E ratios must also be the same.
Question 23
Companies HD and LD have the same sales, tax rate, interest rate on their debt, total
assets, and basic earning power. Both companies have positive net incomes. Company HD
has a higher debt ratio and, therefore, a higher interest expense. Which of the following
statements is CORRECT?
Correct Answer:
Company HD pays less in taxes.
Question 24
You observe that a firm’s ROE is above the industry average, but its profit margin and
debt ratio are both below the industry average. Which of the following statements is
CORRECT?
Correct Answer:
Its total assets turnover must be above the industry average.
Question 25
Which of the following would indicate an improvement in a company’s financial position,
holding other things constant?
Correct
Answer The current and quick ratios both increase.
:
Question 26
A firm wants to strengthen its financial position. Which of the following actions would
increase its quick ratio?
Correct
Answer:
Offer price reductions along with generous credit terms that would (1) enable the
firm to sell some of its excess inventory and (2)lead to an increase in accounts
receivable.
Question 27
If a bank loan officer were considering a company’s request for a loan, which of the
following statements would you consider to be CORRECT?
Correct
Answer:
Other things held constant, the lower the debt ratio, the lower the interest rate
the bank would charge the firm.
Question 28
Companies HD and LD are both profitable, and they have the same total assets (TA), Sales
(S), return on assets (ROA), and profit margin (PM). However, Company HD has the
higher debt ratio. Which of the following statements is CORRECT?
Correct Answer:
Company HD has a higher ROE than Company LD.
Question 29
Which of the following statements is CORRECT?
Correct
Answer:
Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same
time its profit margin rises from 9% to 10% and its debt increases from 40% of
total assets to 60%. Under these conditions, the ROE will increase.
Question 30
Considered alone, which of the following would increase a company’s current ratio?
Correct Answer:
An increase in accounts receivable.