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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 1

True/False

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In Canada,amortization is a concept similar to depreciation and can be applied to both tangible and intangible assets.

A) True
B) False

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Question 2

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The value of goodwill on intangible assets is calculated according to the impairment rule instead of a fixed annual charge.

A) True
B) False

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Question 3

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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.

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?

Which statement regarding retained earnings is true?

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects changes in the firm's accounts over that period of time.

To estimate a firm's cash flow from operations,depreciation is added back to net income.Which of the following is true regarding depreciation?

Consider the balance sheet of Wilkes Industries as shown below.Wilkes has $1,000,000 in common stocks and retained earnings.As a result we can state which of the following regarding Wilkes? $\begin{array}{|l|r|l|l|r|}\hline \text { Cash } & \$ 50,000 & &\text { Accounts payable } & \$ 100,000 \\\hline \text { Inventory } & 200,000 & &\text { Accruals } & \underline{100,000} \\\hline \text { Accounts receivable } & 250,000 && \text { Total CL } & \$ 200,000 \\\hline \text { Total CA } & \$ 500,000 && \text { Debt } & 200,000 \\\hline \text { Net fixed assets } & \$ 900,000 && \text { Common stock } & 200,000 \\\hline & && \text { Retained earnings } & 800,000 \\\hline \text { Total assets } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} && \text { Total L \& E } & \mathbf{\$ 1 , 4 0 0 , 0 0 0} \\\hline\end{array}$

Over the years,Janjigian Corporation's shareholders 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 share 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?

Hunter Manufacturing Inc.'s December 31,2011,balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.During 2012,Hunter had $250,000 of net income,and it paid out $100,000 as dividends.What was the book value per share at 12/31/12,assuming that Hunter neither issued nor retired any common stock during 2009?

Barnes' Brothers has the following data for the year ending 12/31/07: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100.Barnes' weighted average cost of capital is 10%.What is its economic value added (EVA) ?

Last year Tiemann Technologies reported $10,500 of sales,$6,250 of operating costs other than depreciation,and $1,300 of depreciation.The company had no amortization charges,it had $5,000 of bonds that carry a 6.5% interest rate,and its combined federal and provincial 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 $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

According to the fundamental equation of accounting,total assets should equal which of the following?

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?

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,this would probably encourage companies to use more debt financing than they currently do,other things held constant.

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 now the company is allowed to depreciate the equipment over 7 years.What would occur in the year following the change?

The Nantell Corporation just purchased an expensive piece of equipment.Originally,the firm planned to depreciate the equipment over 5 years on a straight-line basis,but now wants to depreciate the equipment on a straight-line basis over 7 years.Other things held constant,what will occur as a result of this change? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

If a local Firm X owns 35% of the shares of a Canadian-owned Firm Y,and Y pays dividends to all of its shareholders,what percentage of the dividends received by X can be exempted from its taxable income?

Which of the following statements is correct?

Assume that Bev's Beverages Inc.(BBI) can double its depreciation expense for the upcoming year while sales revenue and tax rate remain unchanged.Prior to the change,BBI's net income after taxes was forecasted to be $4 million.What impact will this change have on BBI's financial statements? Assume that the company uses the same depreciation method for tax and shareholder reporting purposes.