Module 3

You bought 1,000 shares of Tund Corp. stock for $75.00 per share and sold it for $77.25 per share within the same year. How will your gain or loss be treated when you file your taxes?

As a capital gain taxed at the current ordinary-income tax rate

You bought 1,000 shares of Tund Corp. stock for $68.12 per share and sold it for $90.03 per share after a few years. How will your gain or loss be treated when you file your taxes?

As a capital gain taxed at the long-term tax rate

The Yum chain of restaurants conducts an initial public offering to raise funds for expansion.

financing activity

If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to:

overstate irs earnings

How much cash is a firm generating through operating, investing, and financing activities?

statement of cash flow

Details changes in the capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings.

statement of stockholders equity

Gives details about the company's cash at the beginning of the year and what is left at the end of the year, including some details about where cash was generated and where it was used during the course of the year.

statement of cash flow

Can a company have negative free cash flow?

yes

Suppose a firm with the 25% tax rate needs to pay $1 in dividends to its shareholders. What is the pretax income it should have to pay this dividend?

1.33

Which of the following statements best describes free cash flow?

Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures

he applicable tax rate for S corporations is based on the:

Stockholders' individual tax rates

Is published once a year and provides stockholders with details about the company's performance and financial condition.

annual report

How much debt and equity has the firm issued to finance its assets?

balance sheet

Provides a quantitative summary of a company's assets, liabilities, and net worth at a specific point in time.

balance sheet

According to a tax law established in 1969, taxpayers must pay the________ of the Alternative Minimum Tax (AMT) or regular tax.

higher

Accounts for all revenues and expenses over an accounting period.

income statement

A pharmaceutical company buys marketing rights to sell a drug exclusively in East Asian markets.

investing activity

Depreciation expenses directly affect a company's taxable income. An increase in depreciation expense will lead to a ___ taxable income. It will ______ tax deducted from a company's earnings, thus leading to a______ operating cash flow.

lower, decrease, higher

You can determine a company's cash situation by analyzing the cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets. If a firm has a lot of net cash flow, does that mean the firm's balance sheet cash account must be high?

no

A company records a decrease in its total raw materials inventory from the previous year.

operating activity

Fitzi Chemical Co. earns revenue from its cash receipts from royalties.

operating activity

Is the U.S. federal tax system for individuals progressive or regressive?

progressive

Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year's accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?

583.00 million, Actual Cash Collected=Net Sales - Increase in Accounts Receivable=($600 - $17) million=$583.00 million

NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $156 million. Last year, the company reported a retained earnings balance of $527 million, whereas this year it increased to $620 million. How much was paid out in dividends this year?

63million Dividends Paid=Net Income - (Ending Retained Earnings - Beginning Retained Earnings)=$156 - ($620 - $527) million=$63 million

To offset taxable income in a given year, ordinary corporate operating losses can be:

Carried forward indefinitely

From a corporation's point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing?

Debt financing

Which source of investor income is susceptible to double taxation?

Dividends

Which of the following best describes shareholders' equity?

Equity is the difference between the company's assets and liabilities.

Which of the following best describes shareholders' equity?

Equity is the sum of shareholders' capital provided by shareholders and retained earnings.

Which of the following best describes shareholders' equity?

Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years.

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Based on your evaluation you have ____ in free cash flow.

FCF=EBIT(1 - Tax) + Depreciation - [(Capital Expenditures + Increase in Net Working Capital)] [EBIT x (1 - Tax rate) + Depreciation] - Additional Capital Expenditures - [(Increase in Cash + Increase in Supplies) - (Increase in Accounts payable + Increase in Accruals)]FCF=[$75,000 x (1 - 0.25)] + $14,286 - $0 - [$11,250 + $6,000) - ($6,000 + $3,750)]=[$56,250 + $14,286] + $0 - ($11,250 - $3,750)=[$56,250 + $14,286] + $0 - $7,500=$63,036