The annual report contains four basic financial statements the by nenehilario

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									1. The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement
         of retained earnings.
        a. True b. False
Financial statements
3. The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income
         statement measures the progress of the firm at a point in time.
        a. True b. False
Income statement
5. The income statement measures the flow of funds into (i.e., revenue) and out of (i.e., expenses) the firm over a certain time period. It is
         always based on accounting data.
        a.     True b. False
Operating cash flows
7. Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows
          can differ from accounting profits.
         a. True b. False
Interest expense and dividends
11. Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax
         a.    True b. False
Net operating profit after taxes (NOPAT)
14. Net operating profit after taxes (NOPAT) is the amount of profit a company would have from its operations if it had no interest
          income or interest expense.
        a. True b. False
Interest expense and dividends
15. 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.
         a. True b. False
Retained earnings
17. The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of
          the firm. This implies that retained earnings are in fact the reinvested earnings of stockholders.
          a. True b. False
Future cash flows
19. Current cash flow from existing assets is highly relevant to the investor. However, the value of the firm depends primarily upon its
          growth opportunities. As a result, profit projections from those opportunities are the only relevant future flows with which
          investors are concerned.
         a. True b. False
Cash flow and net income
21. In accounting, emphasis is placed on determining net income. In finance, the primary emphasis is also on net income because that is
          what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the
         a.    True b. False
Net cash flow and net income
23. Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the
         following could explain this performance?
        a.     The company's interest expense increased.
        b.     The company's depreciation expense declined.
        c.     The company's operating income declined.
        d.     All of the statements above are correct.
        e. None of the statements above is correct.

Cash flow and taxes
26. Which of the following statements is most correct?
     a.        Other things held constant, a reduction in the depreciable life of its assets (say from 10 to 7 years, but with no change in useful life)
               would reduce a firm's internally generated funds.
     b.        Generally speaking, a reduction in the depreciable life of its assets (but with no change in useful life) would force a firm to spend
               more money to acquire fixed assets.
     c.        An increase in tax rates reduces the attractiveness of municipal bonds relative to corporate bonds.
     d. The lowering of the capital gains tax rate relative to the personal tax rate should lead to a reduction in dividend payments, other
     things held constant.
29. Which of the following statements is most correct?
     a.        Corporations are allowed to exclude 70 percent of their interest income from corporate taxes.
     b.        Corporations are allowed to exclude 70% or 100% of their dividend income from corporate taxes.
     c.        Individuals pay taxes on only 30 percent of the income realized from municipal bonds.
     d.        Answers a and b are correct.
     e. None of the answers above is correct.
Balance sheet
32. On its 1997 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million. On its 1998 balance sheet, the
          balance of retained earnings was also equal to $510 million. Which of the following statements is most correct?
          a.      The company must have had net income equal to zero in 1998.
          b.      The company did not pay a dividend in 1998.
          c.      If the company's net income in 1998 was $200 million, dividends paid must have also equaled $200 million.
          d.      If the company lost money in 1998, they must have paid a dividend.
          e.      None of the statements above is correct.
Net operating profit after taxes (NOPAT)
34. Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT). Which of the following definitely cannot
               help explain this decline?
           a. Sales revenues decreased.
           b. Costs of goods sold increased.
           c. Depreciation increased.
           d. Interest expense increased.
           e. Taxes increased.
Miscellaneous concepts
36. Which of the following statements is most correct?
     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 percent of the interest received by corporations is excluded from taxable income.
     c.        70 or 100 percent of the dividends received by corporations is excluded from taxable income.
     d.        None of the answers above is correct.
     e.        Answers a and c are correct.
Financial statements
37. Which of the following statements is most correct?
     a.        Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual
     b.        Accounting profits are more important than free cash flow.
     c.        High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits
               can also be affected.
     d.        When an action is taken at one point in time, but its full effects cannot be accurately measured until later, this has the potential to
               affect the firm's financial statements. However, as long as the firm keeps the same standard accounting period this timing

               problem can be avoided.
     e.        None of the statements above is correct.
Changes in depreciation
39. Which of the following are likely to occur if Congress passes legislation which forces Carter Manufacturing to depreciate their
           equipment over a longer time period:
          a.        The company's physical stock of assets would increase.
          b.        The company's reported net income would decline.
          c.        The company's cash position would decline.
          d.        All of the answers above are correct.
          e.        Answers b and c are correct.
Changes in depreciation
41. Solo Company has been depreciating its fixed assets over 15 years. It is now clear that these assets will only last a total of 10 years.
               Solo's accountants have encouraged the firm to revise its annual depreciation to reflect this new information. Which of the
               following would occur as a result of this change?
           a. The company's earnings per share would decrease.
           b. The company's cash position would increase.
           c. The company's EBIT would increase.
           d. Both a and b are correct.
           e. All of the answers above are correct.
Corporate taxes
45. Your corporation has the following cash flows:
                                    Operating income          $250,000
                                    Interest received        10,000
                                    Interest paid           45,000
                                    Dividends received         20,000
                                    Dividends paid           50,000
               If the applicable income tax rate is 40 percent (federal and state combined), and if 70 percent of dividends received are exempt
               from taxes, what is the corporation's tax liability?
               a.    $74,000
               b.    $88,400
               c.    $91,600
               d.    $100,000
               e.    $106,500
After-tax returns
47. 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 percent, and
               Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer
               indifferent between the two?
           a.       2.40%
           b.       3.60%
           c.       4.50%
           d.       5.25%
           e.       6.00%
After-tax returns
49. A 5-year corporate bond yields 9 percent. A 5-year municipal bond of equal risk yields 6.5 percent. Assume that the state tax rate is
zero. At what federal tax rate are you indifferent between the two bonds?
          a.        27.78%
          b.        38.46%
          c.        41.22%

       d.      54.33%
       e.      72.22%
After-tax returns
55. Solarcell Corporation has $20,000 which it plans to invest in marketable securities. It is choosing between AT&T bonds which yield 11
        percent, State of Florida muni bonds which yield 8 percent, and AT&T preferred stock with a dividend yield of 9 percent.
        Solarcell's corporate tax rate is 40 percent, and 70 percent of the preferred stock dividends it receives are tax exempt. Assuming
        that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be
        selected? Answer by giving the aftertax rate of return on the highest yielding security.
        a.      8.46%
        b.      8.00%
        c.      7.92%
        d.      9.00%
        e.      9.16%
After-tax returns
57. Mantle Corporation is considering two equally risky investments:
            (1) A $5,000 investment in preferred stock which yields 7 percent.
            (2) A $5,000 investment in a corporate bond which yields 10 percent.
        What is the break-even corporate tax rate which makes the company indifferent between the two investments?
        a.      33.17%
        b.      34.00%
        c.      37.97%
        d.      42.15%
        e.      42.86%
After-tax returns
60. Arvo Corporation is trying to choose between three alternative investments. The three securities that the company is considering are as
             (1) Tax-free municipal bonds with a return of 7 percent.
             (2) Wooli Corporation bonds with a return of 10 percent.
             (3) CFI Corp. preferred stock with a return of 9 percent.
        The company's tax rate is 28 percent. What is the after-tax return on the best investment alternative?
        a.       7.00%
        b.       7.20%
        c.       6.48%
        d.       9.00%
        e.       8.24%
Rate of interest
61. A firm has notes payable of $1,546,000, long-term debt of $13,000,000, and total interest expense of $1,300,000. If the firm pays 8
        percent interest on its long-term debt, what rate of interest does it pay on its notes payable?
       a.      8.2%
       b.       13.1%
       c.      16.8%
       d.      18.0%
       e.      15.3%
Corporate taxes
62. Corporations face the following corporate tax schedule:
                              Taxable Income          Tax on Base            Rate
                              $    0 - $ 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%
           Company Z has $80,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from
           preferred stock it holds in other corporations. What is Company Z's tax liability?
           a.     $12,250
           b.     $13,750
           c.     $16,810
           d.     $20,210
           e.     $28,100
Personal taxes
                        63.     Single individuals face the following tax schedule:
                                                                                                            Rate (on the amount above the
                         Taxab1e Income ($)                               Tax on Base
                         $0 - $ 24,650                                    $     0.00
                         $24,650 - $ 59,750                                   3,697.50
                         $59,750-$124,650       $124,650       -           13,525.50
                         $271,050                                          33,644.50
                         Over $271,050                                     86,348.50
            Bob Turley, a single individual, received a salary of $61,750 last year. Turley also received $7,000 in dividend income during the
            year. His personal exemption is $2,650, and his itemized deductions are $5,000. What is Turley's marginal and average tax rate for
            the year?

a.   28%         marginal       and      22   .25%   Average
b.   31%         marginal       and      18   .92%   Average
c.   31%         marginal       and      22   .82%   Average
d.   31%         marginal       and      27   .61%   Average
e.   36%         marginal       and      31   .6%    average

Net income
73. Edge Brothers recently reported net income of $385,000. The tax rate is 40 percent. The company's interest expense was $200,000.
What would have been the company's net income if they would have been able to double their operating income (EBIT), assuming that the
company's tax rate and interest expense remain unchanged?
            a.     $ 770,000
            b.     $ 890,000
            c.     $ 920,000
            d.     $1,100,000
            e.     $1,275,000
Sales level
            75.      Hebner     Housing        Corporation         has        forecast    the   following     numbers    for   this   upcoming   year:
       Sales                                                       $1,000,000
       Cost of Goods Sold Interest                                       600,000
       Expense                                                           100,000
       Net Income                                                        180,000
      The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the
      company's sales were to increase to $1.5 million, its cost of goods sold would increase to $900,000.
      The company's CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $240,000. Assume that
      Hebner's interest expense remains constant. In order to achieve this level of net income, what level of sales will the company have to
      a.         $ 400,000
      b.         $ 500,000
      c.         $ 750,000

       d.      $1,000,000
       e.      $1,250,000
Retained earnings
       77. Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet for 1997. In 1998, the company's earnings per share
       (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of stock outstanding. What will
       be the level of retained earnings on the company's 1998 balance sheet?
       a.     $400,000
       b.     $500,000
       c.     $600,000
       d.     $700,000
       e.     $800,000
Operating income
79. New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The
            company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)?
        a.     $980,000
        b.     $1,220,000
        c.     $2,000,000
        d.     $2,500,000
        e.     $3,500,000


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