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FIN 534 Week 6 Quiz 5

FIN 534 Week 6 Quiz 5

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FIN 534 Week 6 Quiz 5

Which of the following items cannot be found on a firm’s balance sheet under current liabilities?


Accounts payable.

Short-term notes payable to the bank.

Accrued wages.

Cost of goods sold.

Accrued payroll taxes.

2 points  

Question 2

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.

2 points  

Question 3

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined.  Which of the following could explain this performance?


The company’s operating income declined.

The company’s expenditures on fixed assets declined.

The company’s cost of goods sold increased.

The company’s depreciation and amortization expenses declined.

The company’s interest expense increased.

2 points  

Question 4

Which of the following statements is CORRECT?


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.

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%.

The maximum federal tax rate on corporate income in 2008 was 50%.

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.

The maximum federal tax rate on personal income in 2008 was 50%.

2 points  

Question 5

Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.  The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2010 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?


The firm’s reported net fixed assets would increase.

The firm’s EBIT would increase.

The firm's reported 2010 earnings per share would increase.

The firm's cash position in 2010 and 2011 would increase.

The firm’s net liabilities would increase.

2 points  

Question 6

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.


Companies’ net operating profits after taxes (NOPAT) would decline.

Companies’ physical stocks of fixed assets would increase.

Companies’ net cash flows would increase.

Companies’ cash positions would decline.

Companies’ reported net incomes would decline.

2 points  

Question 7

Which of the following statements is CORRECT?


One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.

If a firm reports positive net income, its EVA must also be positive.

One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.

One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

Actions that increase reported net income will always increase net cash flow.

2 points  

Question 8

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.

2 points  

Question 9

Which of the following statements is CORRECT?


Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

Common equity includes common stock and retained earnings, less accumulated depreciation.

The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.

2 points  

Question 10

Which of the following statements is CORRECT?


The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.

MVA gives us an idea about how much value a firm’s management has added during the last year.

MVA stands for market value added, and it is defined as follows:
  MVA = (Shares outstanding)(Stock price) + Book value of common equity.

EVA stands for economic value added, and it is defined as follows:
  (1-T) – (Investor-supplied op. capital) x (A-T cost of capital).

EVA gives us an idea about how much value a firm’s management has added over the firm’s life.

2 points  

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