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FIN 534 quiz2 week 3
 
 Question 1
Which of the following statements is CORRECT?
 
a. 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.
b. 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%.
c. The maximum federal tax rate on corporate income in 2008 was
50%.
d. 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.
d. The maximum federal tax rate on personal income in 2008 was
50%.
 
 
Question 2
Which of the following statements is CORRECT?
 
The four most important financial statements provided in the
annual report are the balance sheet, income statement, cash budget,
and the statement of retained earnings.
The balance sheet gives us a picture of the firm’s financial
position at a point in time.
The income statement gives us a picture of the firm’s financial
position at a point in time.
The statement of cash flows tells us how much cash the firm has in
the form of currency and demand deposits.
The statement of cash needs tells us how much cash the firm will
require during some future period, generally a month or a year.
 
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?
 
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.
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.
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.
The standard statements focus on cash flows, but managers are
less concerned with cash flows than with accounting income as
defined by GAAP.
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.
 
 
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?
 
a. If the company lost money in 2010, they must have paid
dividends.
b. The company must have had zero net income in 2010.
c. The company must have paid out half of its earnings as
dividends.
d. The company must have paid no dividends in 2010.
e. 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?
          
           
 

           
The company repurchases common stock.
The company pays a dividend.
The company issues new common stock.
The company gives customers more time to pay their bills.
The company purchases a new piece of equipment.
 
 
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?        
          
           
 
The company’s taxable income would fall.
The company’s interest expense would remain constant.
The company would have less common equity than before.
The company’s net income would increase.
The company would have to pay less taxes.
          
           
 
 
 
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?       
          
           
 
 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 amortization expenses.
e. The company repurchased 20% of its common stock.  
 
 
Question 8
Which of the following statements is CORRECT? 
          
           
 
 
Question 9
Below is the common equity section (in millions) of Teweles
Technology’s last two year-end balance sheets:
 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.
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?  
                 
      
Question 12
Which of the following statements is CORRECT?  
Question 13
Which of the following statements is CORRECT?
Question 14
Which of the following statements is CORRECT?
 Question 15
Which of the following items is NOT included in current
assets?
  
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?
 
Question 17
Which of the following statements is CORRECT?
 
Question 18
Which of the following statements is CORRECT?
 
Question 19
Which of the following statements is CORRECT?
 
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?
 
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?
  
Question 22
Which of the following statements is CORRECT?
 
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?
 
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?
 
Question 25
Which of the following would indicate an improvement in a
company’s financial position, holding other things constant?
Question 26
A firm wants to strengthen its financial position.  Which
of the following actions would increase its quick ratio?
 
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?
 
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?
 
Question 29
Which of the following statements is CORRECT?
 
Question 30
Considered alone, which of the following would increase a
company’s current ratio?

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