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Exam 3: Financial Statements,cash Flow and Taxes

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Question 41

True/False

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On the balance sheet,total assets must always equal the sum of total liabilities and equity.

A) True
B) False

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Question 42

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During 2018,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?

A) $55,897
B) $49,140
C) $47,297
D) $61,425
E) $63,882

F) A) and E)
G) A) and B)

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Question 43

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Houston Pumps recently reported $222,500 of sales,$140,500 of operating costs other than depreciation,and $9,250 of depreciation.The company had $35,250 of outstanding bonds that carry a 6.75% interest rate,and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate future sales and cash flows,the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital.What was the firm's free cash flow?

Which of the following statements is CORRECT?

Mantle Corporation is considering two equally risky investments: A $\$ 5,000$ investment in preferred stock that yields $6.75 \%$ . A $\$ 5,000$ investment in a corporate bond that yields $10.00 \%$ . What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends.(Do not round your intermediate answer and round your final answer to two decimal places. )

Last year,Stewart-Stern Inc.reported $11,250 of sales,$4,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had $3,500 of bonds outstanding that carry a 6.50% interest rate,and its federal-plus-state income tax rate was 35.00%.During last year,the firm had expenditures on fixed assets and net operating working capital that totaled $2,000.These expenditures were necessary for it to sustain operations and generate future sales and cash flows.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $1,225.By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes.Do not round the intermediate calculations. $\Delta \text { Net Income } \quad \Delta \text { Free Cash Flow }$ ?

Which of the following statements is CORRECT?

A corporation can earn 7.50% if it invests in municipal bonds.The corporation can also earn 8.20% (before-tax) by investing in preferred stock.Assume that the two investments have equal risk.What is the break-even corporate tax rate that makes the corporation indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends.(Do not round your intermediate answer and round your final answer to two decimal places. )

For 2018,Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation) .The company has $20,500 of total invested capital,the weighted average cost of that capital (the WACC) was 8%,and the federal-plus-state income tax rate was 40%.What was the firm's Economic Value Added (EVA) ,i.e. ,how much value did management add to stockholders' wealth during 2017?

Which of the following statements is CORRECT?

Maureen Smith is a single individual.She claims one exemption of $4,050 for herself and claims a standard deduction of $6,350.Her salary for the year was $204,250.Assume the following tax table is applicable. ? Single Individuals ? $\begin{array}{lccc} & \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \\\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \\\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \\\hline\text { Up to } \$ 9,325 & \$ 0.00 & 10.0 \% & 10.0 \% \\\$ 9,325-\$ 37,950 & 932.50 & 15.0 & 13.8 \\\$ 37,950-\$ 91,900 & 5,226.25 & 25.0 & 20.4 \\\$ 91,900-\$ 191,650 & 18,713.75 & 28.0 & 24.3 \\\$ 191,650-\$ 416,700 & 46,643.75 & 33.0 & 29.0 \\\$ 416,700-\$ 418,400 & 120,910.25 & 35.0 & 29.0 \\\text { Over } \$ 418,400 & 121,505.25 & 39.6 & 39.6\end{array}$ ? What is her marginal tax rate? ?

Because the U.S.tax system is a progressive tax system,a taxpayer's marginal and average tax rates are the same.

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of the company's outstanding bonds that carry a 7% interest rate.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT) ,and tax rate all remain constant.Which of the following would occur?

The Nantell Corporation just purchased an expensive piece of equipment.Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis,but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years.Other things held constant,which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Which of the following statements is CORRECT?

Below are the 2017 and 2018 year-end balance sheets for Tran Enterprises: $\begin{array}{lrr}\text { Assets: } & 2018 & 2017 \\\text { Cash } & \$ 200,000 & \$ 170,000 \\\text { Accounts receivable } & 864,000 & 700,000 \\\text { Inventories } & \underline{2,000,000} & \underline{1,400,000} \\\text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \\\text { Net fixed assets } & 6,000,000 & 5,600,000 \\\text { Total assets } & \$ 9,064,000 & \$ 7,870,000 \\\hline\end{array}$ Liabilities and equity: $\begin{array}{lrr}\text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \\\text { Notes payable to bank } & \underline{1,600,000} & \underline{1,800,000} \\\text { Total current liabilities } & \$ 3,000,000 & \$ 2,890,000 \\\text { Long-term debt } & 2,400,000 & 2,400,000 \\\text { Common stock } & 3,000,000 & 2,000,000 \\\text { Retained earnings } & \underline{664,000} &{580,000} \\\text { Total common equity } & \$ 3,664,000 & \$ 2,580,000 \\\text { Total liabilities and equity } & \$ 9,064,000 & \$ 7,870,000\end{array}$ The firm has never paid a dividend on its common stock,and it issued $2,400,000 of 10-year,non-callable,long-term debt in 2017.As of the end of 2018,none of the principal on this debt had been repaid.Assume that the company's sales in 2017 and 2018 were the same.Which of the following statements must be CORRECT?

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

A start-up firm is making an initial investment in a 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?

Bauer Software's current balance sheet shows total common equity of $5,125,000.The company has 520,000 shares of stock outstanding,and they sell at a price of $27.50 per share.By how much do the firm's market and book values per share differ? (Round your intermediate and final answer to two decimal places. )

Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions ($4,050 for each exemption) .In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $271,300.Assume the following tax table is applicable: ? Married Couples Filing Joint Returns ? $\begin{array}{lccc} & \text { You Pay This } & \text { Plus This Percentage } & \text { Average Tax } \\\text { If Your Taxable } & \text { Amount on the } & \text { on the Excess over the } & \text { Rate at } \\\text { Income Is } & \text { Base of the Bracket } & \text { Base } & \text { Top of Bracket } \\\hline\text { Up to } \$ 18,650 & \$ 0.00 & 10.0 \% & 10.0 \% \\\$ 18,650-\$ 75,900 & 1,865.00 & 15.0 & 13.8 \\\$ 75,900-\$ 153,100 & 10,452.50 & 25.0 & 19.4 \\\$ 153,100-\$ 233,350 & 29,752.50 & 28.0 & 22.4 \\\$ 233,350-\$ 416,700 & 52,222.50 & 33.0 & 27.1 \\\$ 416,700-\$ 470,700 & 112,728.00 & 35.0 & 28.0 \\\text { Over } \$ 470,700 & 131,628.00 & 39.6 & 39.6\end{array}$ ? What is their average tax rate? ?