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Question 1
Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT). Which of the following definitely cannot help explain this decline?
A. a. Sales revenues decreased.
B. b. Costs of goods sold increased.
C. c. Depreciation increased.
D. d. Interest expense increased.
E. e. Taxes increased.
Question 2
Which of the following best describes free cash flow?
A. a. Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investements in operating capital have been made.
B. b. Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investements in operating capital have been made.
C. c. Free cash flow is the net change in the cash account on the balance sheet.
D. d. Free cash flow is equal to net income plus depreciation.
E. e. Free cash flow is equal to the cash flow from non-taxable transactions.
Question 3
Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?
A. a. The company's tax payment would increase.
B. b. The company's cash position would increase.
C. c. The company's net income would increase.
D. d. Answers a and c are correct.
E. e. Answers b and c are correct.
Question 4
Byrd Lumber has 2 million shares of stock outstanding. On the balance sheet the company has $40 million worth of common equity. The company's stock price is $15 a share. What is the company's Market Value Added (MVA)?
A. a. ($80 million)
B. b. ($20 million)
C. c. ($10 million)
D. d. $20 million
E. e. $80 million
Question 5
West Corporation has $50,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 6 percent; Exxon bonds yielding 9.5 percent; GM preferred stock with a dividend yield of 9 percent. West's corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.)
A. a. 8.06%
B. b. 7.13%
C. c. 6.18%
D. d. 6.55%
E. e. 6.00%
Question 6
Corporations face the following corporate tax schedule:
Taxable Income Tax on Base Rate
Taxable income Tax on Base Rate
$ 0 - $ 50,000 $ 0 15%
$ 50,000 - $ 75,000 $7,500 25%
$ 75,000 - $100,000 $13,750 34%
$100,000 - $335,000 $22,250 39%
Company Z has $80,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from preferred stock it holds in other corporations. What is Company Z's tax liability?
Corporations face the following corporate tax schedule:
A. a. $12,250
B. b. $13,750
C. c. $16,810
D. d. $20,210
E. e. $28,100
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Question 7
Mays Industries was established in 2002. Since its inception, the company has generated the following levels of earnings before taxes (EBT) (losses are shown in parentheses):
Year EBT $
2002 50,000
2003 40,000
2004 30,000
2005 20,000
2006 (60,000)
2007 60,000
Assume that each year the company has faced a 40 percent income tax rate. Also, assume that current carry back and carry forward provisions were available in prior years. What is the company's tax liability for 2007?
A. a. $20,000
B. b. $21,000
C. c. $22,000
D. d. $24,000
E. e. $26,000
Question 8
Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company's tax rate will remain at 40 percent. If the company's forecast is correct, how much will net income increase or decrease, as a result of the expansion?
A. a. No change.
B. b. $40,000 increase.
C. c. $60,000 increase.
D. d. $100,000 increase.
E. e. $180,000 increase.
Question 9
Coolidge Cola is forecasting the following income statement:
Sales $30,000,000
Operating costs excluding depreciation 20,000,000
Depreciation 5,000,000
Operating income (EBIT) $ 5,000,000
Interest expense 2,000,000
Taxable income (EBT) $ 3,000,000
Taxes (40%) 1,200,000
Net income $ 1,800,000
Assume that, with the exception of depreciation, all other non-cash revenues and expenses sum to zero.
Congress is considering a proposal which will allow companies to depreciate their equipment at a faster rate. If this provision were put in place, Coolidge's depreciation expense would be $8,000,000 (instead of $5,000,000). This proposal would have no effect on the economic value of the company's equipment, nor would it affect the company's tax rate, which would remain at 40 percent. If this proposal were to be implemented, what would be the company's net cash flow?
A. a. $2,000,000
B. b. $4,000,000
C. c. $6,800,000
D. d. $8,000,000
E. e. $9,800,000
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Question 10
Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet for 2006. In 2007, the company's earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of stock outstanding. What will be the level of retained earnings on the company's 2007 balance sheet?
A. a. $400,000
B. b. $500,000
C. c. $600,000
D. d. $700,000
E. e. $800,000
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