HOMEWORK 3

Johnson's Nursery has net income of $42,500, depreciation expense of $1,800, interest expense of $900, taxes of $1,600, additions to net working capital of $2,300, and capital expenditures of $11,700. What is the amount of the free cash flow?

$31,200

Which of the following statements is CORRECT? Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends and the riskiness of those cash flows. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.

Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.

Which of the firm's financial statements most clearly recognizes the payment for new equipment?

Balance sheet

Who pays taxes on earnings distributed as dividends?

Both the issuing corporation and the shareholder

Which of the following cannot be used to reduce taxable corporate income?

Cash dividends

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

Cash flows from financing will decrease.

Amy wants to know if inventory is increasing as a percentage of total assets. Which one of these statements most easily provides the information she is seeking?

Common-size balance sheet

If a firm's net income is positive and its noncash expenses are positive, which of the following could account for a negative amount of cash provided by operations?

Current assets increase more than current liabilities increase.

Which of the following statements is CORRECT? Typically, a firm's DPS should exceed its EPS? Typically, a firm's net income should exceed its EBIT? If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share? If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

Which of the following statements is CORRECT? Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section

In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.

Which of the following is more likely to be correct if market value of equity is less than book value of equity.

Investors anticipate low earning potential.

Which of the following statements is CORRECT? The more depreciation a firm reports, the higher its tax bill, other things held constant. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow. 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. Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.

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.

In general, what is changing as you read down the left-hand side of a balance sheet?

The assets are becoming less liquid.

Which of the following statements is CORRECT? The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. The balance sheet gives us a picture of the firm's financial position at a point in time. The income statement gives us a picture of the firm's financial position at a point in time. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. The statement of cash flows tells us how much cash the firm will require during some future period, generally a month or a year.

The balance sheet gives us a picture of the firm's financial position at a point in time.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

The company issues new common stock.

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

The company made large investments in fixed assets.

For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT? The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows because future cash flows indicate how much the firm can distribute to its investors. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows because future cash flows indicate how much the firm can distribute to its investors.

An increase in depreciation expense will (other things equal)

decrease net income.

Net working capital is a measure of a company's

estimated cash reservoir.

If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be

less than their book value.