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Chapter 03: Financial Statements, Cash Flow, and Taxes
85. Emery Mining Inc. recently reported $130,000 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. (Round your intermediate and final answers to two decimal places.)
a.
$22,413.95
b.
$29,138.14
c.
$28,577.79
d.
$24,935.52
e.
$28,017.44
Chapter 03: Financial Statements, Cash Flow, and Taxes
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 $0.63 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. (Round
your final answer to 3 decimal places.)
a.
-$0.393
b.
-$0.512
c.
-$0.418
d.
-$0.410
e.
-$0.508
Chapter 03: Financial Statements, Cash Flow, and Taxes
87. On 12/31/15, Hite Industries reported retained earnings of $497,500 on its balance sheet, and it reported that it had
$135,000 of net income during the year. On its previous balance sheet, at 12/31/14, the company had reported $445,000 of
retained earnings. No shares were repurchased during 2015. How much in dividends did the firm pay during 2015?
a.
$79,200
b.
$74,250
c.
$66,000
d.
$99,000
e.
$82,500
Chapter 03: Financial Statements, Cash Flow, and Taxes
88. During 2015, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $260,000 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.
$123,211
b.
$154,014
c.
$156,692
d.
$133,925
e.
$107,140
89. C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have?
Sales
$3,100.00
Costs
1,850.00
Depreciation
192.00
EBIT
$1,058.00
Interest expense
285.00
EBT
$773.00
Taxes (35%)
270.55
Chapter 03: Financial Statements, Cash Flow, and Taxes
Net income
$502.45
a.
$845.87
b.
$680.82
c.
$825.24
d.
$687.70
e.
$584.55
90. Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?
Sales
$2,850
Costs
1,400
Depreciation
250
EBIT
$1,200
Interest expense
70
EBT
$1,130
Taxes (40%)
452
Net income
$678
a.
$720
Chapter 03: Financial Statements, Cash Flow, and Taxes
b.
$806
c.
$799
d.
$749
e.
$590
91. Hartzell Inc. had the following data for 2014, in millions: Net income = $600; after-tax operating income [EBIT (1-T)]
= $700; and Total assets = $2,000. Information for 2015 is as follows: Net income = $825; after-tax operating income
[EBIT (1-T)] = $1,175; and Total assets = $2,500. How much free cash flow did the firm generate during 2015?
a.
$668
b.
$635
c.
$513
d.
$587
e.
$675
Chapter 03: Financial Statements, Cash Flow, and Taxes
92. Shrives Publishing recently reported $14,500 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 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? (Round your intermediate and final answers to whole dollar amount.)
a.
$4,311
b.
$4,832
c.
$5,069
d.
$4,738
e.
$4,785
Chapter 03: Financial Statements, Cash Flow, and Taxes
93. Houston Pumps recently reported $230,000 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.
039,313
b.
44,423
c.
043,244
d.
38,919
e.
34,202
Chapter 03: Financial Statements, Cash Flow, and Taxes
94. Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes’
Market Value Added (MVA) is $172 million, what is the company’s stock price? (Round your final answer to two
decimal places.)
a.
$78.67
b.
$75.52
c.
$73.16
d.
$81.03
e.
$95.19
95. Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $37
million of common equity on its balance sheet, what is the company’s Market Value Added (MVA)? Answer options are
provided in whole dollar.
Chapter 03: Financial Statements, Cash Flow, and Taxes
a.
-3,000,000
b.
-2,250,000
c.
-3,750,000
d.
-2,700,000
e.
-3,150,000
96. Scranton Shipyards has $7.0 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? Answer options are provided in whole dollar.
a.
$1,275,000
b.
$2,040,000
c.
$1,700,000
d.
$1,530,000
e.
$1,870,000
Chapter 03: Financial Statements, Cash Flow, and Taxes
97. Casey Motors recently reported the following information:
∙ Net income = $600,000.
∙ Tax rate = 40%.
∙ Interest expense = $200,000.
∙ Total invested capital employed = $9 million.
∙ After-tax cost of capital = 10%.
What is the company’s EVA?
a.
-198,000
b.
-135,000
c.
-203,400
d.
-180,000
e.
-216,000
Chapter 03: Financial Statements, Cash Flow, and Taxes
98. Your corporation has the following cash flows:
Operating income
$250,000
Interest received
$10,000
Interest paid
$45,000
Dividends received
$7,000
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.
$87,708
b.
$86,840
c.
$72,077
d.
$96,392
e.
$71,209
Chapter 03: Financial Statements, Cash Flow, and Taxes
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 6.50%. What is the company's after-tax return on the preferred, assuming a
70% dividend exclusion? (Round your final answer to two decimal places.)
a.
4.54%
b.
5.82%
c.
5.00%
d.
5.64%
e.
6.81%
Chapter 03: Financial Statements, Cash Flow, and Taxes
100. Lovell Co. purchased preferred stock in another company. The preferred stock’s before-tax yield was 6.60%. The
corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion? (Round
your final answer to two decimal places.)
a.
5.81%
b.
6.21%
c.
7.26%
d.
4.36%
e.
5.46%
101. A company with a 15% tax rate buys preferred stock in another company. The preferred stock has a before-tax yield
of 6.50%. Assume a 70% dividend exclusion for tax on dividends. What is the preferred stock’s after-tax return? (Round
your final answer to two decimal places.)
a.
6.52%
b.
6.02%
c.
6.21%
d.
6.70%
e.
5.15%
Chapter 03: Financial Statements, Cash Flow, and Taxes
102. Van Dyke Corporation has a corporate tax rate equal to 31.00%. 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? Assume a 70% dividend exclusion for tax on dividends. (Round your final answer to two decimal places.)
a.
6.10%
b.
7.40%
c.
6.75%
d.
7.26%
e.
8.27%
Chapter 03: Financial Statements, Cash Flow, and Taxes
103. Granville Co. recently purchased several shares of Kalvaria Electronics’ preferred stock. The preferred stock has a
before-tax yield of 8.10%. If the company’s tax rate is 25%, what is Granville Co.’s after-tax yield on the preferred stock?
Assume a 70% dividend exclusion for tax on dividends. (Round your final answer to two decimal places.)
a.
9.14%
b.
7.49%
c.
6.97%
d.
8.47%
e.
6.59%
104. Appalachian Airlines began operating in 2011. 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
2011
-$5,500,000
Chapter 03: Financial Statements, Cash Flow, and Taxes
2012
$1,000,000
2013
$2,000,000
2014
$3,000,000
2015
$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 2011. How much did the company pay in taxes in 2014?
a.
$202,000
b.
$200,000
c.
$184,000
d.
$154,000
e.
$174,000
105. Garner Grocers began operations in 2012. 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 2012. What is
the amount of taxes the company paid in 2015?
Year
Taxable Income
Chapter 03: Financial Statements, Cash Flow, and Taxes
2012
-$2,250,000
2013
$200,000
2014
$500,000
2015
$2,800,000
a.
$484,500
b.
$323,000
c.
$408,000
d.
$425,000
e.
$467,500
106. A corporation recently purchased some preferred stock that has a before-tax yield of 9.00%. The company has a tax
rate of 38%. What is the after-tax return on the preferred stock? Assume a 70% dividend exclusion for tax on dividends.
(Round your final answer to two decimal places.)
a.
8.13%
b.
7.97%
c.
8.21%
d.
7.10%
Chapter 03: Financial Statements, Cash Flow, and Taxes
e.
8.85%
107. A corporate bond currently yields 8.20%. 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? (Round your final answer to two decimal
places.)
a.
36.22%
b.
38.20%
c.
32.93%
d.
33.59%
e.
35.56%
Chapter 03: Financial Statements, Cash Flow, and Taxes
108. A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 39.00%. 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.
9.60%
b.
7.63%
c.
8.34%
d.
6.45%
e.
7.87%
109. A bond issued by the State of Pennsylvania provides a 4.00% 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.
5.48%
