Question 1

Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?

Accepted Answer

A)   The company's tax payment would increase.
B)   The company's cash position would increase.
C)   The company's net income would increase.
D)   Answers a and c are correct.
E)   Answers b and c are correct.F) None of the above
G) B) and E)

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is most correct?

Accepted Answer

A)   Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure.
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.F) D) and E)
G) B) and D)

Question 4

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:

Accepted Answer

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.F) All of the above
G) None of the above

Question 5

A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?

Accepted Answer

A)   35.29%
B)   40.00%
C)   24.67%
D)   64.71%
E)   30.04%F) B) and D)
G) A) and B)

Question 6

A start-up firm is making an initial investment in new plant and equipment. Currently equipment is depreciated on a straight line basis over 10 years. Assume that Congress is considering legislation which will allow the corporation to depreciate the equipment over 7 years. If the legislation becomes law, and the firm implements the 7-year depreciation basis, which of the following will occur?

Accepted Answer

A)   The firm's tax payments will increase.
B)   The firm's net income will increase.
C)   The firm's taxable income will increase.
D)   The firm's net cash flow will increase.
E)   The firm's operating income (EBIT)  will increase.F) A) and E)
G) All of the above

Question 7

Giglio Inc. has the following information for the previous year: Net income = $400; Net operating profit after taxes (NOPAT)  = $500; Total assets = $2,000; and Total operating capital = $1700. The information for the current year is: Net income = $800; Net operating profit after taxes (NOPAT)  = $700; Total assets = $2,300; and Total operating capital = $2100. What is the free cash flow for the current year?

Accepted Answer

A)   $300
B)   $400
C)   $500
D)   $600
E)   $700F) A) and B)
G) D) and E)

Question 8

Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

A)   8.2%
B)   13.1%
C)   16.8%
D)   18.0%
E)   15.3%F) C) and E)
G) D) and E)

Question 10

Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT) . Which of the following definitely cannot help explain this decline?

Accepted Answer

A)   Sales revenues decreased.
B)   Costs of goods sold increased.
C)   Depreciation increased.
D)   Interest expense increased.
E)   Taxes increased.F) C) and D)
G) A) and C)

Question 11

Allen Corporation can (1)  build a new plant which should generate a before-tax return of 11 percent, or (2)  invest the same funds in the preferred stock of Florida Power & Light (FPL) , which should provide Allen with a before-tax return of 9 percent, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested?

Accepted Answer

A)   All in the plant project.
B)   All in FPL preferred stock.
C)   60% in the project; 40% in FPL.
D)   60% in FPL; 40% in the project.
E)   50% in each.F) A) and E)
G) C) and E)

Question 12

A loss incurred by a corporation

Accepted Answer

A)   Must be carried forward unless the company has had 2 loss years in a row.
B)   Can be carried back 2 years, then carried forward up to 20 years following the loss.
C)   Can be carried back 5 years and forward 3 years.
D)   Cannot be used to reduce taxes in other years except with special permission from the IRS.
E)   Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.F) D) and E)
G) A) and B)

Question 13

Which of the following statements is most correct?

Accepted Answer

A)   Actions which increase net income will always increase net cash flow.
B)   One way to increase EVA is to maintain the same operating income with less capital.
C)   One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
D)   Answers a and b are correct.
E)   Answers a and c are correct.F) None of the above
G) B) and D)

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

A seven-year municipal bond yields 4.8 percent. Your marginal tax rate (including state and federal taxes)  is 28 percent. What interest rate on a seven-year corporate bond of equal risk would provide you with the same after-tax return?

Accepted Answer

A)   3.46%
B)   4.80%
C)   6.14%
D)   6.67%
E)   17.14%F) A) and E)
G) B) and D)

Question 16

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Accepted Answer

A) True 
 B)False

Question 17

A bond issued by the State of Pennsylvania provides a 9 percent yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 36 percent tax bracket?

Accepted Answer

A)   14.06%
B)   17.50%
C)   7.00%
D)   12.50%
E)   9.00%F) C) and D)
G) A) and E)

Question 18

Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet last year. This year, 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 is the level of retained earnings on the company's balance sheet this year?

Accepted Answer

A)   $400,000
B)   $500,000
C)   $600,000
D)   $700,000
E)   $800,000F) C) and D)
G) All of the above

Question 19

Total net operating capital is equal to net fixed assets.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most correct?

Accepted Answer

A)   70 percent of a corporation's interest income is excluded from corporate income taxes.
B)   70 percent of a corporation's dividend income is excluded from corporate income taxes.
C)   A municipal bond will generally trade at a higher yield than a corporate bond of equal risk.
D)   All of the answers above are correct.
E)   Answers b and c are correct.F) A) and E)
G) A) and D)

Exam 7: Accounting for Financial Management

Which of the following statements is most correct?

Correct Answer
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Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Correct Answer
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Total net operating capital is equal to net fixed assets.

Correct Answer
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Correct Answer
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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:

Correct Answer
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Correct Answer
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Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT) . Which of the following definitely cannot help explain this decline?

Correct Answer
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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?

Correct Answer
verified

A bond issued by the State of Pennsylvania provides a 9 percent yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 36 percent tax bracket?

Correct Answer
verified

Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?

Correct Answer
verified

A seven-year municipal bond yields 4.8 percent. Your marginal tax rate (including state and federal taxes) is 28 percent. What interest rate on a seven-year corporate bond of equal risk would provide you with the same after-tax return?

Correct Answer
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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.

Correct Answer
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A loss incurred by a corporation

Correct Answer
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Correct Answer
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Correct Answer
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A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is most correct?

Correct Answer
verified

Exam 7: Accounting for Financial Management

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Correct AnswerverifiedShow Answer

Total net operating capital is equal to net fixed assets.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT) . Which of the following definitely cannot help explain this decline?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A bond issued by the State of Pennsylvania provides a 9 percent yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 36 percent tax bracket?

Correct AnswerverifiedShow Answer

Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?

Correct AnswerverifiedShow Answer

A seven-year municipal bond yields 4.8 percent. Your marginal tax rate (including state and federal taxes) is 28 percent. What interest rate on a seven-year corporate bond of equal risk would provide you with the same after-tax return?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A loss incurred by a corporation

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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