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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 21

True/False

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Net operating profit after taxes (NOPAT)is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

A) True
B) False

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Question 22

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Which of the following statements is CORRECT?

A) The maximum federal tax rate on personal income in 2014 was 50%.
B) Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
C) Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate,which in 2014 could go up to 35%,but dividends received were taxed at a maximum rate of 15%.
D) The maximum federal tax rate on corporate income in 2014 was 50%.
E) Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes.

F) B) and D)
G) None of the above

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Question 23

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Which of the following statements is CORRECT?

TSW Inc.had the following data for last year: Net income = $800;Net operating profit after taxes (NOPAT) = $700;Total assets = $3,000;and Total operating capital = $2,000.Information for the just-completed year is as follows: Net income = $1,000;Net operating profit after taxes (NOPAT) = $925;Total assets = $2,600;and Total operating capital = $2,500.How much free cash flow did the firm generate during the just-completed year?

Over 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?

Which of the following statements is CORRECT?

Analysts following Armstrong Products recently noted that the company's operating net cash flow increased over the prior year,yet cash as reported on the balance sheet decreased.Which of the following factors could explain this situation?

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding,and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Which of the following items is NOT included in current assets?

Wells Water Systems recently reported $8,250 of sales,$4,500 of operating costs other than depreciation,and $950 of depreciation.The company had no amortization charges,it had $3,250 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 sales and cash flows in the future,the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

A security analyst obtained the following information from Prestopino Products' financial statements: ∙Retained earnings at the end of 2014 were $700,000,but retained earnings at the end of 2015 had declined to $320,000. ∙The company does not pay dividends. ∙The company's depreciation expense is its only non-cash expense;it has no amortization charges. ∙The company has no non-cash revenues. ∙The company's net cash flow (NCF) for 2015 was $150,000. On the basis of this information,which of the following statements is CORRECT?

Last year,Michelson Manufacturing reported $10,250 of sales,$3,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges,it had $3,500 of bonds outstanding 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 $725.By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

The LeMond Corporation just purchased a new production line.Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis,but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years.Other things held constant,which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation) .The company had $18,750 of investor-supplied operating assets (or capital) ,the weighted average cost of that capital (the WACC) was 9.5%,and the federal-plus-state income tax rate was 40%.What was HHH's Economic Value Added (EVA) ,i.e. ,how much value did management add to stockholders' wealth during the year?

Which of the following statements is CORRECT?

Assets other than cash are expected to produce cash over time,but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

Which of the following would be most likely to occur in the year after Congress,in an effort to increase tax revenue,passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales,other operating costs,and tax rates are not affected,and assume that the same depreciation method is used for tax and stockholder reporting purposes.

On its 2014 balance sheet,Barngrover Books showed $510 million of retained earnings,and exactly that same amount was shown the following year in 2015.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash flow,assuming it had no amortization expense and sold none of its fixed assets?