Chapter 3: Financial Statements, Cash Flow, and Taxes
78.
Brown Fashions Inc.’s December 31, 2013, balance sheet showed total common equity of $4,050,000 and
200,000
shares of stock outstanding. During 2013, the firm had $450,000 of net income, and it paid out
$100,000 as
dividends. What was the book value per share at 12/31/13, assuming no common stock was
either issued or retired
during 2013?
a. $20.90
b. $22.00
c. $23.10
d. $24.26
e. $25.47
79.
Prezas Company’s balance sheet showed total current assets of $4,250, all of which were required in
operations. Its
current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable
to the bank, and $250
of accrued wages and taxes. What was its net operating working capital?
a. $2,874
b. $3,025
c. $3,176
d. $3,335
e. $3,502
80.
Rao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than
depreciation,
and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0%
interest rate, and its
federal-plus-state income tax rate was 40%. What was Rao’s operating income, or EBIT,
in millions?
a. $3.21
b. $3.57
c. $3.97
d. $4.41
e. $4.90
81.
Brown Office Supplies recently reported $15,500 of sales, $8,250 of operating costs other than depreciation,
and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal–
plus-state
income tax rate was 40%. How much was the firm’s earnings before taxes (EBT)?
a. $4,627
b. $4,870
c. $5,114
d. $5,369
e. $5,638
82.
Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a
tax
rate of 40%. The firm’s expenditures on fixed assets and net operating working capital totaled $0.6
million. How
much was its free cash flow, in millions?
a. $1.93
b. $2.03
c. $2.14
d. $2.25
e. $2.36
83.
Over the years, O’Brien Corporation’s stockholders have provided $20,000,000 of capital, when they
purchased new
allowed management to retain some of the firm’s earnings. The firm now has 1,000,000 shares
of common stock out
a price of $38.50 per share. How much value has O’Brien’s management added to
stockholder wealth over the year
O’Brien’s MVA?
a. $18,500,000
b. $18,870,000
c. $19,247,400
d. $19,632,348
e. $20,024,995
$64,300.00
$63,103.75
Accounts receivable
Accruals
Inventory
Notes payable
Current assets
$ 900
Long-term debt
84.
Wu Systems has the following balance sheet. How much net operating working capital does the firm have?
Cash
$ 100
Accounts payable
$ 200
Accounts receivable
650
Accruals
350
Inventory
550
Notes payable
350
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.
$675
b.
85.
Emery Mining Inc. recently reported $150,000 of sales, $75,500 of operating costs other than depreciation,
and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate,
and its
federal-plus-state income tax rate was 35%. How much was the firm’s net income? The firm uses the
same
depreciation expense for tax and stockholder reporting purposes.
a. a. $35,167.33 b. $37,018.24 c. $38,966.57 d. $41,017.44 e. $43,068.31
86.
Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than
depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5%
interest
rate, and its federal-plus-state 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 $0.70 million. By how much
will net income
change as a result of the change in depreciation? The company uses the same depreciation
calculations for tax and
stockholder reporting purposes.
a. −$0.432
b. −$0.455
c. −$0.478
d. −$0.502
e. −$0.527
87.
On 12/31/13, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it
had $135,000 of net income during the year. On its previous balance sheet, at 12/31/12, the company had
reported $445,000 of retained earnings. No shares were repurchased during 2013. How much in dividends did
the firm pay
during 2013?
a. $49,638
b. $52,250
c. $55,000
d. $57,750
e. $60,638
88.
During 2013, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 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. $71,425
b. $74,996
c. $78,746
d. $82,683
e. $86,818
89.
C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have?
Sales
$2,850.00
Costs
1,850.00
Depreciation
192.00
EBIT
$ 808.00
Interest expense
285.00
EBT
$ 523.00
Taxes (35%)
183.05
Net income
$ 339.95
a. $427.78
b. $450.29
c. $473.99
d. $498.94
e. $525.20
90.
Kwok Enterprises has the following income statement. How much after-tax operating income does the firm
have?
Sales
$2,250
Costs
1,400
Depreciation
250
EBIT
$ 600
Interest expense
70
EBT
$ 530
Taxes (40%)
212
Net income
$ 318
a. $325
b. $342
c. $360
d. $378
e. $397
91.
Hartzell Inc. had the following data for 2012, in millions: Net income = $600; after-tax operating income
[EBIT(1 −
T)] = $700; and Total assets = $2,000. Information for 2013 is as follows: Net income = $825;
after-tax operating
income [EBIT(1 − T)] = $925; and Total assets = $2,500. How much free cash flow did
the firm generate during
2013?
a. $383
b. $425
c. $468
d. $514
e. $566
92.
Shrives Publishing recently reported $10,750 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 35%. 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?
a. $1,873
b. $1,972
c. $2,076
d. $2,185
e. $2,300
93.
Houston Pumps recently reported $185,250 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?
a. $10,225
b. $10,736
c. $11,273
d. $11,837
e. $12,429
94.
Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding.
If
Hayes’ Market Value Added (MVA) is $162 million, what is the company’s stock price?
a. $66.02
b. $69.49
c. $73.15
d. $77.00
e. $80.85
95.
Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has
$40
million of common equity on its balance sheet, what is the company’s Market Value Added (MVA)?
a. −$5,415,000
b. −$5,700,000
c. −$6,000,000
d. −$6,300,000
e. −$6,615,000
96.
Scranton Shipyards has $20 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 (40%) 0.8 million
Net income $ 1.2 million
What is Scranton’s EVA?
a. $400,000
b. $420,000
c. $441,000
d. $463,050
e. $486,203
97.
Casey Motors recently reported the following information:
·
Net income = $600,000.
·
Tax rate = 40%.
·
Interest expense = $200,000.
·
Total invested operating capital employed = $9 million.
·
After-tax cost of capital = 10%.
What is the company’s EVA?
a. −$171,000
b. −$180,000
c. −$189,000
d. −$198,450
e. −$208,373
Interest received
Interest paid
Dividends received
Dividend exclusion %
Dividends paid
98.
Your corporation has the following cash flows:
Operating income
$250,000
Interest received
$ 10,000
Interest paid
$ 45,000
Dividends received
$ 20,000
Dividends paid
$ 50,000
If the applicable income tax rate is 40% (federal and state combined), and if 70% of dividends received are
exempt from taxes, what is the corporation’s tax liability?
a. $ 83,980
b. $ 88,400
c. $ 92,820
d. $ 97,461
e. $102,334
99.
Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The
before-tax dividend yield on the preferred stock is 12%. What is the company’s after-tax return on the
preferred,
assuming a 70% dividend exclusion?
a. 10.20%
b. 10.74%
c. 11.28%
d. 11.84%
e. 12.43%
100.
Lovell Co. purchased preferred stock in another company. The preferred stock’s before-tax yield was 8.4%.
The
corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend
exclusion?
a. 7.02%
b. 7.39%
c. 7.76%
d. 8.15%
e. 8.56%
101.
A company with a 15% tax rate buys preferred stock in another company. The preferred stock has a before–
tax
yield of 8%. What is the preferred stock’s after-tax return?
a. 6.90%
b. 7.26%
c. 7.64%
d. 8.02%
e. 8.42%
102.
Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred
stock in
another company. The preferred stock has an 8% before-tax yield. What is Van Dyke’s after-tax yield
on the
preferred stock?
a. 6.57%
b. 6.92%
c. 7.28%
d. 7.64%
e. 8.03%
103.
Granville Co. recently purchased several shares of Kalvaria Electronics’ preferred stock. The preferred stock
has a
before-tax yield of 8.6%. If the company’s tax rate is 40%, what is Granville Co.’s after-tax yield on the
preferred
stock?
a. 6.49%
b. 6.83%
c. 7.19%
d. 7.57%
e. 7.95%
104.
Appalachian Airlines began operating in 2009. The company lost money the first year but has been profitable
ever
since. The company’s taxable income (EBT) for its first five years is listed below. Each year the
company’s
corporate tax rate has been 40%.
Year Taxable Income
2009 −$4,000,000
2010 $1,000,000
2011 $2,000,000
2012 $3,000,000
2013 $5,000,000
Assume that the company has taken full advantage of the Tax Code’s carry-back, carry-forward provisions
and
that the current provisions were applicable in 2009. How much did the company pay in taxes in 2012?
a. $ 688,500
b. $ 765,000
c. $ 800,000
d. $ 930,000
e.
$1,023,000
105.
Garner Grocers began operations in 2010. Garner has reported the following levels of taxable income (EBT)
over
the past several years. The corporate tax rate was 34% each year. Assume that the company has taken
full
advantage of the Tax Code’s carry-back, carry-forward provisions, and assume that the current provisions
were
applicable in 2010. What is the amount of taxes the company paid in 2013?
Year Taxable Income
2010 −$3,200,000
2011 $200,000
2012 $500,000
2013 $2,800,000
a. $ 92,055
b. $ 96,900
c. $102,000
d. $107,100
e. $112,455
106.
A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a
tax
rate of 38%. What is the after-tax return on the preferred stock?
a. 5.32%
b. 5.60%
c. 5.89%
d. 6.20%
e. 6.51%
107.
A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently
yield
5.5%. At what tax rate would investors be indifferent between the two bonds?
a. 35.29%
b. 37.06%
c. 38.91%
d. 40.86%
e. 42.90%
108.
A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What
interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?
a. 5.64%
b. 5.93%
c. 6.25%
d. 6.58%
e. 6.90%
109.
A bond issued by the State of Pennsylvania provides a 9% 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% tax bracket?
a. 13.85%
b. 14.54%
c. 15.27%
d. 16.03%
e. 16.83%
110.
Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago
municipal
bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid.
If Treasury
bonds yield 6%, and Carter’s marginal income tax rate is 40%, what yield on the Chicago
municipal bonds would
make Carter’s treasurer indifferent between the two?
a. 3.42%
b. 3.60%
c. 3.78%
d. 3.97%
e. 4.17%