FIR 3410: CHAPTER 3
15 Cards in this Set
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Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.
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True
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The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
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True
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Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on…
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True
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On its 12/31/11 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year.
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Dividends could have been paid in 2011, but they would have had to equal the earnings for the year.
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Below is the common equity section (in millions) of Timeless Technology’s last two year-end balance sheets:
20112010
Common stock$2,000$1,000
Retained earnings2,0002,340
Total common equity$4,000$3,340
The firm has never paid a dividend to its common stockholders. Which of …
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The firm issued common stock in 2011.
(Reason: Only way to increase common stock is by issuing more stock. Note Equity is valued at historical costs hence changes in market price of stock does not affect the Book Value of Equity.)
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If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share.
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If a firm has been profitable, then the stock price rises and hence Market value > book value.
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Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.
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True. Bottom line of the income Statement is Net Income and not Cash Flow. Depreciation is a non-cash expense, does not impact cash flow. However depreciation will affect reported profits as it is treated as an expense in the income statement. Hence only d is correct.
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One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
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An increase in credit sales increases Net income but will not increase Cash Flows (it will get subtracted due to increase in accounts receivable). EVA does not assume equity capital is free. Option d decreases EVA and e is not necessarily true as Wacc times Investor supplied capital can e…
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70% of the dividends received by corporations is excluded from taxable income.
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To avoid triple taxation companies’ get the exclusion from taxation on dividends received.
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Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI’s net income was forecasted to be $4 million.…
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Net fixed assets on the balance sheet will decrease. Fixed assets need to be depreciated by the amount of depreciation expense.
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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…
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Change in depreciation$0.700
Tax rate0.350
Reduction in net income= 0.35*0.7 = $0.455
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Hartzell Inc. had the following data for 2010, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2011 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How…
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We use: FCF = EBIT(1 – T) + Deprec. – (Capex + NOWC)
Or rewriting the above: FCF = EBIT(1 – T) – (Capex – Depreciation + NOWC)
FCF = EBIT(1 – T) - Net investment in FA + NOWC
= 925 -500 =425
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Appalachian Airlines began operating in 2007. 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%.
YearTaxable Income
2007-$4,00…
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$800,000
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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?
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Dividend exclusion %70%
After-tax dividend yield = Preferred dividend rate
[1 – (1 – Div. exclusion %)(T)]
After-tax dividend yield = 7% * (1-(1-0.7)*0.38) = 7%* (1-0.114) = 7%*0.886 = 6.202%
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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 yi…
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Remember that municipal bonds are tax exempt, so their Before Tax yield = After Tax yield.
Municipal yield = AT bond yield
Municipal yield = BT bond yield × (1 – T)
Municipal yield = 3.60%
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FIR 3410: CHAPTER 3