Self-Check Quiz for HW #1 (Ch. 1 & 3).pdf

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Nov 24, 2024

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Self-Check Quiz for HW Assignment #1 (Chs. 1 & 3) These problems were pulled from the Fall 2019 Exam 1 in your packet: i Last year Shipman, Inc. had $109,000 in operating income. The company had depreciation expense of $37,000, interest expense of $23,400, and a corporate tax rate of 40 percent. The company has $378,000 in current assets and $90,000 in non-interest-bearing current liabilities; it has $266,000 in net plant and equipment. It estimates that it has an after-tax cost of capital of 12 percent. Assume that its only noncash item was depreciation. What was the company’s net cash flow for the year? a. $66,160 b. $102,400 c. $88,360 d. $51,360 e. $87,600 ii Whitlock & Daily Corporation has $350,000 that it wants to invest. It is choosing between Google corporate bonds that yield 8.70 percent, state of Texas municipal bonds that yield 5.72 percent, and AT&T preferred stock with a dividend yield of 6.90 percent. The corporation’s tax rate is 35 percent. Which security would have had the highest after-tax yield using the 2017 tax rules? a. Google corporate bonds with an ATY of 5.66 percent. b. AT&T preferred stock with an ATY of 4.49 percent. c. Google corporate bonds with an ATY of 7.79 percent. d. AT&T preferred stock with an ATY of 6.18 percent. e. State of Texas municipal bonds with an ATY of 5.72 percent. iii Using 2017’s tax rules, Amiouny, Inc. had sales revenue of $400,000. Costs other than depreciation and interest expense were 30 percent of sales. Depreciation expense was $12,000, interest expense was $23,000, dividends received were $10,000 and dividends paid were $5,000. Which of the following statements is most FALSE? (Use the corporate tax table.) a. The firm's taxable income was $248,000. b. The firm's average tax rate was 32.25 percent. c. The firm's marginal tax rate was 39 percent. d. The firm's tax for the year was $79,970. e. The after-tax income was $168,030.

iv If Dickerson Associates had taxable income (or loss) as follows. Which of the following is most CORRECT ? Year Taxable Income 2019 ($20,000) 2020 $5,000 2021 $8,000 2022 ($5,000) 2023 $10,000 a. Under the old tax laws, a loss of $3,000 is able to be carried forward past 2023. b. Under the old tax laws, no loss is able to be carried forward past 2023. c. Under TCJA, a loss of $2,000 is able to be carried forward past 2023. d. Under TCJA, $6,600 loss is able to be carried forward past 2023. e. None of the above v Which of the following is most CORRECT? a. If a wealthy corporation owns real estate for 3 years and then sells it, the tax on the profit would be capped at 15%, and most likely the corporation would have to pay an additional 3.8% on the profit for the healthcare tax. b. If an individual has $4,000 of capital gains and $17,000 of capital losses this year, that person will pay no tax on the capital gains, and will be able to keep $3,000 of his salary from being taxed this year and then carry $8,000 of capital loss forward to the next tax year. c. Individuals’ capital losses are allowed to be carried forward indefinitely. d. A man buys a house for $400,000. He passes away 15 years later when his house is worth $900,000. His heir sells the house and owes tax on 15% of the $500,000 capital gain. e. None of the above. vi Ehrlich & Czarnecki Consulting, Inc. recently reported the following information: • Net income = $800,000 • Sales = $4,200,000 • Total Assets = $9.5 million • Tax rate = 40% • Interest expense = 20,000 • Accounts Payable = 36,000 • Notes Payable = 300,000 • Accruals = 50,000 • After-tax cost of capital = 11% What is the company’s EVA? a. $-296,358 b. $-223,540 c. $-452,391 d. $-488,029 e. None of the above is within $100 of the correct answer.

vii Which of the following statements is most FALSE ? a. All of an S corporation’s income is reported as dividend income to its stockholders, and thus has caps on the tax rates applied. b. Management’s goal should be to take actions designed to maximize a firm’s value. c. An S corporation must have no more than 100 stockholders. d. The corporate tax system previously favored debt financing over equity financing more than it does now with the TC&J Act. e. The value of any business other than a relatively small one will probably be maximized if it is organized as a corporation – it has less risk, can raise more capital, and the investment is liquid. viii Ramsay & Bell, Inc. had sales for 2019 of $180,000, and EBITDA was 36% of sales. Furthermore, depreciation was $8,400, interest was $5,760, the corporate tax rate was 21%, and the company pays 10% of its net income as dividends. Given this information and the balance sheets below, calculate the free cash flow for 2019. a. $24,556 b. $27,056 c. $28,556 d. $30,056 e. None of the above is within $100 of the correct answer. 2019 2018 Cash 92,000 96,000 Accounts Receivable 86,000 90,000 Inventories 55,000 52,000 Total current assets 233,000 225,000 Net fixed assets 110,000 100,000 Total Assets 343,000 325,000 Accounts Payable 15,000 12,000 Accruals 4,000 5,000 Notes payable 8,000 6,500 Total current liabilities 27,000 23,500 Long-term debt 51,500

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60,000 Total liabilities 87,000 75,000 Common stock 180,000 180,000 Retained earnings 76,000 70,000 Total common equity 256,000 250,000 Total liabilities and equity 343,000 325,000 i C Net CF ii D ATY on securities iii E Calculate tax rates iv D BOTH Carry back carry forward v C Tax rules vi B Calculate EVA vii A S Corporation viii C Free Cash Flow Additional questions you should be able to answer (from lectures and textbook): 1. Why is EVA so valuable to a financial analyst? 2. What are you really measuring when you calculate FCF? 3. If you were going to start a small company, what form(s) of business should you NOT consider? 4. Define intrinsic value of a stock. What does it mean when the stock is in equilibrium? 5. How does the threat of takeover relate to stock price? 6. Why do we use Operating Cash Flow on timelines rather than Net Cash Flow? 7. How did the TC&J Act help corporations? 8. Did the TC&J Act help or hurt corporations that receive dividends from other corporations? 8. What was changed by the TC&J Act that will hurt corporations that are trying to survive COVID 19? 10. Do corporations have caps on capital gains tax rates? Do individuals have caps on capital gains tax rates? What are they? 11. Do you understand the stepped-up basis on an inherited asset law?

12. What is the difference between a traditional IRA account and a Roth IRA? Which one would you prefer to invest in at your age? 13. Make sure you know pp. 85-86 regarding the TC&J Act. The presidential candidates will be debating their proposed tax policies, and you need to know what they are talking about. You will like being informed enough to discuss what they say intelligently.