Chapter 3 Quiz
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Jan 9, 2024
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Which of the following statements is CORRECT?
Select one:
a.The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
b.Even if a firm follows generally accepted accounting principles (GAAP), its reported net income can be different from its reported net cash flow.
c.Because companies are required to follow GAAP, two firms in exactly the same operating situation will have exactly the same financial statement.
d.The income statement shows us the firm’s financial situation at a given point in time.
e.The emphasis in finance is on the determination of accounting income since the value of a
firm is determined by the net income generated.
2.
Complete the Income Statement. What was the company’s interest expense for the year?
Earnings Before Taxes (EBT)
= EBIT - Interest Or
= Net Incomes + Taxes
Or
=Net Income / (1-taxes rate)
6.5 / .65 = 10 Interest = EBIT - EBT = 10
Select one:
a
.$10.00 million
b.$15.50 million
c.$11.25 million
d.$5.714 million.
e.$4.615 million.
3.
Sanguillen Corp. showed retained earnings of $700,000 on its balance sheet for 2006. In 2007, the company's earnings per share (EPS) were $1.00 and its dividends paid per share (DPS) were $0.50. The company has 200,000 shares of stock outstanding. What will be the level of retained earnings on the company's 2007 balance sheet?
RE = 700,000 2006
EPS 1
DPS = .05
Total Shares 200,000
NI = Total share * EPS
=$200,000
Dividend paid to Common stock = DPS * Total Shares 100,000
Balance of RE 2007 = RE (2006) + NI (2007) - Dividends paid Select one:
a.$600,000
b.$900,000
c.$800,000
d.$500,000
e.$700,000
4.
At the end of 2007, Lehnhoff Inc. had $75 million in cash. During 2008, the following events occurred:
Cash flow from Lehnhoff’s operating activities totaled $325 million.
Lehnhoff issued $700 million in common stock.
Lehnhoff’s notes payable decreased by $100 million.
Lehnhoff purchased fixed assets totaling $600 million.
How much cash did Lehnhoff Inc. have at the end of 2008?
Cash at beg. + Cash inflows - Cash outflows
75 million + 325 + 700 -100 - 600 = 400
Select one:
a.$ 200 million
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b.$1,400 million
c.$ 400 million
d.$ 100 million
e.$ 50 million
5.
Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased. Which of the following could explain this?
Select one:
a.The company sold a lot of new fixed assets.
b.The company issued new common stock.
c.The company eliminated its dividend.
d.The company sold a division and received cash in return.
e.The company paid off some of its long-term debt.
6.
What is the company’s Free Cash Flow (FCF)? Use the information to answer the following questions. FCF = EBIT(1 - Tax Rate) + Depreciation - (capital expenditure + ∆
Net Operating Working Capital)
= 3100(0.7) + 400 - (-2,300 + -600) = 5470
EBIT = 3100
Tax Expense =
Taxable income * Tax rate TR = TE/TI
Tax rate = 690/2300 .3 Depreciation = 400
Capital Expenditure = ∆
Fixed Assets + Depreciation (if not added)
7200-9500
= -2,300
Net Operating Working Capital (NOWC)
= Operating Current Assets - Operating Current Liabilities Or = Current Asset - (Current Liabilities - Interset baring CL)
CA = 7050 (2018) 7200 (2017) CL = 2700 (2018) 2000 (2017)
Inter baring CL = 700 (2018) 450
NOWC (‘18) = 5050 NOWC (‘17) = 5,650
∆
NOWC = -600
What is the 2018 Free Cash Flow?
Select one:
a.-1590
b.+1990
c.-1990
d.-1290
e.+5470
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7.
Continued from previous question. Assume the after-tax cost of capital is 12%. What is the 2018 EVA?
EVA = EBIT * (1 - Tax Rate) - (Total Invested Capital) * (After Tax % cost of capital) =3100(1-0.3) - (10,850)*(0.12) = 868
Total Invested Capital =
Financing Liability + Total Equity Or = Total Assets - (Non-interest bearing Current Liabilities)
Or
= Total Debt + Total Equity
Example = Notes payable + Long term debt + Total equity =12,850 - 300 - 1,700 = 10,850 Select one:
a.-1125
b.+845
c.+ 725
d.+868
e.- 725
8.
A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
elect one:
a.The firm’s taxable income would increase.
b.The firm’s tax payments would increase.
c.The firm’s depreciation would decrease.
d.The firm’s operating income (EBIT) would increase.
e.The firm’s net cash flow would increase.
Faster depreciation means more depreciation expense per year means lower taxes and therefore higher NI
9.
Hayes Corporation has $600 million of common equity on its balance sheet and 10 million shares of common stock outstanding. The company’s market value added (MVA) is $150 million. What is the company’s stock price?
Common equity = 600 m
Total stock = 10 MVA = 150
Market Valued Added (MVA)
= Market value - book value
For example = Share price - BVPS Or = (Price * number of common shares) - Book value of common equity 150 = (x * 10) - 600
75 Select one:
a.$ 75
b.$130
c.$ 132
d.$ 50
e.$ 23
10.
Which of the following statements is CORRECT?
Select one:
a.Investors should focus more on accounting profit such as net income rather than free cash flow. b.It is possible for a company to report negative free cash flow and still be highly valued by investors. These are start-up companies c.Because dividend payments are tax deductible, the after-tax cost of debt is lower than the after-tax cost of equity. This encourages the use of debt rather than equity. d.Statement of cash flow shows the amount of cash that could be withdrawn without harming the firms' ability to operate and to produce future cash flows. That would be the Free Cash Flow which uses other statements too
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e.The value of a company's operations depends on past earnings instead of expected future free cash flow.
Related Questions
1. What is the primary objective of financial accounting?
2. Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flows.
3. What is meant by GAAP? why should all companies follow GAAP in reporting to external users?
4. Explain the roles of the SEC and the FASB in the sitting of accounting standards.
arrow_forward
True or false, does the statement of cash flows explains the difference between net income and the change in the cash balance?
True or false, investors and management use the statement of cash flows to evaluate a firm's profitability?
True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans?
arrow_forward
Answer TRUE or False to the following statements/questions:
A) Does the statement of cash flows explains the difference between net income and the change in the cash balance?
B) Investors and management use the statement of cash flows to evaluate a firm's profitability?
C) True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans?
D) The financing activities section of the statement of cash flows reflects the cash flows that affect current assets and liabilities?
E) Buying property, plant and equipment would be considered a cash outflow from financing?
F) The financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term liability accounts?
G) Suppose Auga Company Ltd just started business and was looking for additional capital in order to purchase a property to build their headquarters. If they found an investor who was willing to sell them land worth $500,000 in…
arrow_forward
please answer all the question.
1. Identify two important variables to be considered when making an investment decision.
2. What must a company do in the long run to be able to provide a return to investors and creditors?
3. What is the primary objective of financial accounting?
4. Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flows.
5. What is meant by GAAP? why should all companies follow GAAP in reporting to external users?
6. Explain the roles of the SEC and the FASB in the sitting of accounting standards.
arrow_forward
Please answer all the questions
1. Define net operating cash flows. Briefly explain why periodic net operating cash flows may not be a good indicator of future operating cash flows.
2. What is meant by GAAP? why should all companies follow GAAP in reporting to external users?please
3. Explain the roles of the SEC and the FASB in the sitting of accounting standards.
arrow_forward
Answer the following questions for the directors:
True or false, does the statement of cash flows explains the difference between net income and the change in the cash balance?
True or false, investors and management use the statement of cash flows to evaluate a firm's profitability?
True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans?
True or false, the financing activities section of the statement of cash flows reflects the cash flows that affect current assets and liabilities?
True or false, buying property, plant and equipment would be considered a cash outflow from financing?
True or false, the financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term liability accounts?
True or false, suppose Auga Company Ltd just started business and was looking for additional capital in order to purchase a property to build their headquarters. If they found an…
arrow_forward
Answer the following questions for the directors:
True or false, does the statement of cash flows explains the difference between net income and the change in the cash balance?
True or false, investors and management use the statement of cash flows to evaluate a firm's profitability?
True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans?
True or false, the financing activities section of the statement of cash flows reflects the cash flows that affect current assets and liabilities?
True or false, buying property, plant and equipment would be considered a cash outflow from financing?
True or false, the financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term liability accounts?
True or false, suppose Auga Company Ltd just started business and was looking for additional capital in order to purchase a property to build their headquarters. If they found an…
arrow_forward
Which of the following statements is correct?
a. Any forecast of financial requirements involves determining how much money the firm will need and is obtained by adding together increases in assets and spontaneous liabilities and subtracting operating income.
b. The percentage of sales method of forecasting financial needs requires only a forecast of the firm's balance sheet. Although a forecasted income statement helps clarify the need, it is not essential to the percentage of sales method.
c. Because dividends are paid after taxes from retained earnings, dividends are not included in the percentage of sales method of forecasting.
d. Financing feedbacks describe the fact that interest must be paid on the debt used to help finance AFN and dividends must be paid on the shares issued to raise the equity part of the AFN. These payments would lower the net income and retained earnings shown in the projected financial statements.
e. All of the statements above are false.
arrow_forward
Describe why an Investor would use Profitability Ratio’s? What are the following ratio's measuring (i) Return on Assets, (ii) Return on Equity, (iii) Profit Margin.
Describe why a CEO would use Activity Ratio’s? What are the following ratio’s measuring (i) Days Receivables Outstanding, (ii) Inventory Turnover.
Describe why a Bank would use Solvency Ratio’s? What are the following ratio’s measuring (i) Current Ratio, (ii) Acid-Test, (iii) Debt Ratio, (iv) Debt to Equity Ratio, Times Interest Earned ratio
arrow_forward
Is a company's net income INDIRECTLY included in the company's balance sheet?
Please explain.
arrow_forward
In finance, what does the term "liquidity" refer to?
a) The ease with which an asset can be converted into
cash
b) The total value of a company's assets
c) The amount of debt a company has
d) The profitability of a business
arrow_forward
How can you tell by looking at a company's Statement of Cash Flows if the company is borrowing more money or paying back more debt?
arrow_forward
Which of the following would not be a goal of externalusers reading a company’s financial statements?a. Understanding the current financial state of the company.b. Assessing the company’s contribution to social andenvironmental policies.c. Predicting the company’s future financial performance.d. Evaluating the company’s ability to generate cash fromsales
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Balance sheet information is useful for all of the following except:a) evaluating a company's financial flexibilityb) evaluating a company's liquidityc) assesing a company's riskd) determining free cash flows
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Which of the following statements is FALSE?i. Using the payback rule, you can calculate how much profits are earned over the investment period.ii. The IRR is sensitive to the timing of the cash flows.iii. Shareholders have the first claim on the cash flows of the company.
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