Corporate Finance
3010
Chapter 2 – Financial Statements, Cash Flows and Taxes (13th Ed.)
1) Last year, Blanda Brothers had positive net cash flow, yet cash on the balance sheet decreased. Which of the following could explain the company’s financial performance?
a. The company issued new common stock.
b. The company issued new long-term debt.
c. The company sold off some of its assets.
d. The company purchased a lot of new fixed assets.
e. The company eliminated its dividend.
2) A stock analyst has acquired the following information for Palmer Products:
. Retained earnings on the year-end 2000 balance sheet was $700, 0000.
. Retained earnings on the year-end 2001 balance sheet was $320, 0000.
. The company does not pay dividends.
. The company’s depreciation expense is its only non-cash expense.
. The company has no non-cash revenues.
. The company’s net cash flow for 2001 was $150,000.
On the basis of this information, which of the following statements is most correct?
a. Palmer Products had negative net income in 2001.
b. Palmer Products had positive net income in 2001, but it was less than its net income in 2000.
c. Palmer Products’ depreciation expense in 2001 was less than $150,000.
d. Palmer Products’ cash on the balance sheet at the end of 2001 must be lower than the cash it had on its balance sheet at the end of 2000.
e. Palmer Products’ net cash flow in 2001 must be higher than its net cash flow in 2000.
3) Haskell Motors’ common equity on the balance sheet totals $700 million, and the company has 35 million shares of common stock outstanding. Haskell has significant growth opportunities. Its assets book value is $800 million, but its market value is estimated to be $910 million. Over time, Haskell has issued outstanding debt that has a book value of $100 million and a market value of $75 million. Which of the following statements is most correct?
a. Haskell’s book value per share is $20.
b. Haskell’s market value per share is probably less than $20.
c. Haskell’s market value per share is probably greater than $20.
d. Statements a and b are correct.
e. Statements a and c are correct.
4) Analysts who follow Cascade Technology recently noted that, relative to the previous year, the company’s operating income (EBIT) and net income declined but its operating cash flow had increased. What could explain these changes had?
a. The company’s depreciation expense increased.
b. The company’s interest expense decreased.
c. The company’s tax rate increased.
d. Statements a and b are correct.
e. All of the statements above are correct.
5) Solo Company has been depreciating its fixed assets over 15 years. It is now clear that these assets will only last a total of 10 years. Solo’s accountants have encouraged the firm to revise its annual depreciation to reflect this new information. Which of the following would occur as a result of this change?
a. The company’s earnings per share would decrease.
b. The company’s free cash flow position would increase.
c. The company’s EBIT would increase.
d. Both a and b are correct.
e. All of the answers above are correct.
6) The CFO of Mulroney Brothers has suggested that the company should issue $300 million worth of common stock and use the proceeds to reduce some of the company’s outstanding debt. Assume that the company adopts this policy, and that total assets and operating income (EBIT) remain the same. The company’s tax rate will also remain the same. Which of the following will occur:
a. The company’s net income will increase.
b. The company’s taxable income will fall.
c. The company will pay less in taxes.
d. All of the answers above are correct.
e. Answers b and c are correct.
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?
a. $300
b. $400
c. $500
d. $600
e. $700
8) Hayes Corporation has $300 million of common equity on its balance sheet and 6 million shares of common stock outstanding. The company’s Market Value Added (MVA) is $162 million. What is the company’s stock price?
a. $ 23
b. $ 32
c. $ 50
d. $ 77
e. $138
9) Casey Motors recently reported the following information:
. Net Income = $600,000.
. Tax rate = 40%.
. Interest expense = $200,000.
. Total investor-supplied operating capital employed = $9 million.
. After-tax cost of capital = 10%.
What is the company’s EVA?
a. -$300,000
b. -$180,000
c. $ 0
d. $200,000
e. $400,000
10) New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of common stock outstanding, its interest expense is $500,000, and its corporate tax rate is 40%. What is the company’s operating income?
- $ 980,000
- $1,220,000
- $2,000,000
- $2,500,000
- $3,500,000
11) Tibbs Inc. has the following information for the current year: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,900; Short-term investments = $200; Stockholders equity = $1,800; Debt = $700; and Total net operating capital = $2300. What is the Return on invested capital (ROIC) for the current year?
a. 13.0%
b. 13.8%
c. 16.0%
d. 17.4%
e. 22.2%
12) Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company’s tax rate will remain at 40 percent. If the company’s forecast is correct, how much will net income increase or decrease, as a result of the expansion?
a. No change.
b. $40,000 increase.
c. $60,000 increase.
d. $100,000 increase.
e. $180,000 increase.