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CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
91. Hartzell Inc. had the following data for 2013, in millions: Net income = $600; after-tax operating income [EBIT(1 −
T)] = $700; and Total assets = $2,000. Information for 2014 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 2014?
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
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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
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 $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
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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?
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
a.
−$171,000
b.
−$180,000
c.
−$189,000
d.
−$198,450
e.
−$208,373
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
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 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%
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 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%
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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%
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
104. Appalachian Airlines began operating in 2010. 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
2010
−$4,000,000
2011
$1,000,000
2012
$2,000,000
2013
$3,000,000
2014
$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 2010. How much did the company pay in taxes in 2013?
a.
$ 688,500
b.
$ 765,000
c.
$ 800,000
d.
$ 930,000
e.
$1,023,000
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
105. Garner Grocers began operations in 2011. 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 2011. What is
the amount of taxes the company paid in 2014?
Year
Taxable Income
2011
−$3,200,000
2012
$ 200,000
2013
$ 500,000
2014
$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%
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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%
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
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%
111. A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate
is zero. At what federal tax rate are you indifferent between the two bonds?
a.
27.78%
b.
29.17%
c.
30.63%
d.
32.16%
e.
33.76%
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
112. 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 6.5% interest rate, and its federal-plus-state
income tax rate was 35%. 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 $725. 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.
a.
−$383.84; $206.68
b.
−$404.04; $217.56
c.
−$425.30; $229.01
d.
−$447.69; $241.06
e.
−$471.25; $253.75
CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
113. Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and
$650 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% 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 make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working
capital. By how much did the firm's net income exceed its free cash flow?
a.
$718
b.
$756
c.
$796
d.
$836
e.
$878
