Chapter 03: Financial Statements, Cash Flow and Taxes
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82. Vasudevan Inc. recently reported operating income of $2.3 million, depreciation of $1.20 million, and had a tax rate of
25%. The firm’s expenditures on fixed assets and net operating working capital totaled $0.60 million. How much was its
free cash flow, in millions?
a. $2.22
b. $2.06
c. $2.325
d. $2.44
e. $1.96
83. Over the years, O’Brien Corporation’s stockholders have provided $20,000,000 of capital, when they purchased new
issues of stock and allowed management to retain some of the firm’s earnings. The firm now has 1,000,000 shares of
Chapter 03: Financial Statements, Cash Flow and Taxes
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common stock outstanding, and it sells at a price of $41.00 per share. How much value has O’Brien’s management added
to stockholder wealth over the years, i.e., what is O’Brien’s MVA?
a. $23,100,000
b. $19,950,000
c. $22,050,000
d. $24,150,000
e. $21,000,000
84. Wu Systems has the following balance sheet. Assume that all current assets are used in operations. How much net
operating working capital does the firm have?
Cash $ 100 Accounts payable $ 200
Accounts receivable 650 Accruals 155
Inventory 550 Notes payable 545
Current assets $ 1,300 Current liabilities $ 900
Net fixed assets $ 1,000 Long-term debt 600
Common equity 300
Retained earnings 500
Total assets $ 2,300 Total liab. & equity $ 2,300
a. $945
b. $860
c. $983
d. $1,021
e. $1,143
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87. On 12/31/19, Hite Industries reported retained earnings of $537,500 on its balance sheet, and it reported that it had
$135,000 of net income during the year. On its previous balance sheet, at 12/31/18, the company had reported $445,000 of
retained earnings. No shares were repurchased during 2019. How much in dividends did the firm pay during 2019?
a. $46,750
b. $44,625
c. $53,125
d. $48,450
e. $42,500
88. During 2019, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $215,000 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. $80,033
b. $84,479
c. $77,365
d. $88,925
e. $72,919
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91. Hartzell Inc. had the following data for 2018, in millions: Net income = $600; after-tax operating income [EBIT (1–T)]
= $700; and Total assets = $2,000. Information for 2019is as follows: Net income = $825; after-tax operating income
[EBIT (1–T)] = $1,450; and Total assets = $2,500. Assume the firm had no excess cash. How much free cash flow did the
firm generate during 2019?
a. $1159
b. $1,131
c. $884
d. $1,150
e. $950
92. Shrives Publishing recently reported $11,500 of sales, $5,500 of operating costs other than depreciation, and $1,250 of
depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate
was 25%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550.
These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free
cash flow? (Round your intermediate and final answers to whole dollar amount.)
a. $3,457
b. $2,593
c. $2,955
d. $3,263
e. $3,039
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93. Houston Pumps recently reported $172,500 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 25%. 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?
a. $4,213
b. $1,860
c. $5,354
d. $2,286
e. $1,978
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95. Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $25
million of common equity on its balance sheet, what is the company’s Market Value Added (MVA)? Answer options are
provided in whole dollar.
a. $9,000,000
b. $11,250,000
c. $7,200,000
d. $8,100,000
e. $10,800,000
96. Scranton Shipyards has $8.5 million in total invested operating capital, and its WACC is 10%. Scranton has the
following income statement:
Sales $10.0 million
Operating costs 6.0 million
Operating income (EBIT) $ 4.0 million
Interest expense 2.0 million
Earnings before taxes (EBT) $ 2.0 million
Taxes (25%) 0.5 million
Net income $ 1.5 million
What is Scranton’s EVA? Answer options are provided in whole dollar.
a. $1,937,500
b. $1,860,000
c. $2,150,000
d. $1,472,500
e. $2,956,500
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c. 7.14%
d. 7.98%
e. 6.02%
107. A corporate bond currently yields 8.80%. Municipal bonds with the same risk, maturity, and liquidity currently yield
5.50%. At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal
places.)
a. 45.00%
b. 33.75%
c. 37.50%
d. 42.00%
e. 28.50%
5.50% = 8.80% (1 – T)
0.6250 = (1 – T)
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108. A 7-year municipal bond yields 4.80%. Your marginal tax rate (including state and federal taxes) is 32.00%. What
interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final
answer to two decimal places.)
a. 8.68%
b. 8.19%
c. 6.00%
d. 6.28%
e. 7.06%
4.80% = BT yield (1 – T)
4.80% = BT yield 68.00%
109. A bond issued by the State of Pennsylvania provides a 4.25% 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 35.00% tax bracket?
a. 7.19%
b. 8.11%
c. 6.54%
d. 7.98%
e. 5.43%