Chapter 3

dividends per share

dividends paid to common stockholders / common shares outstanding

Free Cash Flow (FCF)

(EBIT(1-T)+Depreciation and amortization) - (Capitol expenditures + change in Net operating working capitol) OR EBIT*(1-T) - ((Year 2 Total Liabilities and equity - (AP+Accruals)-(Year 1 Total Liabilities and equity - (AP+Accruals))

net operating working capital

(current assets- excess cash)-(current liabilities-notes payable) Or (Cash+AR+INventory)-(AP+Accruals)

If a firm buys $100,000 of materials and $50,000 of labor services, it typically must pay cash for these items during the current year. If its income statement shows a $50,000 depreciation expense, this expense also requires a cash payment. True or false?

False

average tax rate

Taxes paid divided by taxable income.

marginal tax rate

The tax rate applicable to the last unit of a person's income.

Salinger Software was founded in 2012. The company lost money each of its first three years, but was able to turn a profit in 2015. Salinger's operating income (EBIT) for its first four years of operations is reported below. YearEBIT 2012-$325,000,000 2013-$150,000,000 2014-$100,000,000 2015$700,000,000 The company has no debt, so operating income equals earnings before taxes. The corporate tax rate has remained constant at 35%. Assume that the company took full advantage of the carry-back, carry-forward provisions in the Tax Code, and assume that the current provisions were applicable in 2012. How much tax did the company pay in 2015?

$700,000,000.00-($100,000,000.00+$150,000,000.00+$325,000,000.00) $125,000,000.00*.35 $43,750,000.00

dividends received are subjected to triple taxation:

(1) The original corporation is taxed. (2) The second corporation is taxed on the dividends it receives. (3) The individuals who receive the final dividends are taxed again. This explains the 70% intercorporate dividend exclusion.

GPD Corporation has operating income (EBIT) of $300,000, total assets of $1,500,000, and its capital structure consists of 40% debt and 60% common equity.Total assets equal total invested capital. The firm's after-tax cost of capital is 10.5% and its tax rate is 40%. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of common stock is $27.00. What is the firm's Economic Value Added (EVA)? a. $575,000 b. $ 22,500 c. $450,000 d. $ 87,575 e. $187,740

(300,000*.6)-(1,500,000*.105)=22,500 b. $ 22,500

GPD Corporation has operating income (EBIT) of $300,000, total assets of $1,500,000, and its capital structure consists of 40% debt and 60% common equity. Total assets equal total invested capital. The firm's after-tax cost of capital is 10.5% and its tax rate is 40%. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of common stock is $27.00. What is the firm's Market Value Added (MVA)? a. $575,000 b. $ 87,575 c. $450,000 d. $ 22,500 e. $187,740

(50,000* 27)-(.6* 150,000,000)=450,000 c. $450,000

Ryngaert & Sons, Inc. has operating income (EBIT) of $2,250,000. The company's depreciation expense is $450,000, its interest expense is $120,000, and it faces a 40% tax rate. Assume the firm has no amortization expense. What is its net income? a. $1,728,000 b. $1,475,000 c. $1,800,000 d. $1,008,000 e. $1,278,000

2,250,000-(120,000+852,000)=1,278,000 EBIT-(Interest+Taxes) e. $1,278,000

Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital? a. $3,176 b. $3,025 c. $3,335 d. $3,502 e. $2,874

4250-(1825-600) b. $3,025

net operating working capital (NOWC)

=Current assets minus non-interest-bearing current liabilities. OR =Current Assets - (Current Liabilities-Notes Payable)

Stockholders' Equity

=Paid in capitol + Retained Earnings OR =Total assets - Total liabilities

Total debt versus total liabilities

A company's total debt includes both its short-term and long-term interest-bearing liabilities. Total liabilities equal total debt plus the company's "free" (non-interest bearing) liabilities.

Annual Reports

A report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management's analysis of the firm's past operations and future prospects.

S Corporations

A small corporation that, under Subchapter S of the Internal Revenue Code, elects to be taxed as a proprietorship or a partnership yet retains limited liability and other benefits of the corporate form of organization.

progressive

A tax system where the tax rate is higher on higher incomes. The personal income tax in the United States, which ranges from 0% on the lowest incomes to 39.6% on the highest incomes, is progressive.

Statement of Cash Flows Long-term investing activities

All activities involving long-term assets are covered in this section. Allied had only one long-term investment activity—the acquisition of some fixed assets, as shown on line j. If Allied had sold some fixed assets, its accountants would have reported it in this section as a positive amount (i.e., as a cash inflow).

Statement of Cash Flows Net cash provided by operating activities

All of the previous items are part of normal operations—they arise as a result of doing business. When we sum them, we obtain the net cash flow from operations. Allied had positive flows from net income, depreciation, and increases in payables and accruals; but it used cash to increase inventories and to carry receivables. The net result was that operations led to a $2.5 million net cash outflo

Statement of Cash Flows Increase in notes payable.

Allied borrowed an additional $50 million from its bank this year, which was a cash inflow. When Allied repays the loan, this will be an outflow.

Statement of Cash Flows Additions to property, plant, and equipment

Allied spent $230 million on fixed assets during the current year. This is an outflow; therefore, it is shown in parentheses. If Allied had sold some of its fixed assets, this would have been a cash inflow

Statement of Cash Flows Financing activities

Allied's financing activities are shown in this section.

Statement of Cash Flows Net cash used in investing activities

Because Allied had only one investment activity, the total on this line is the same as that on the previous line.

Market values versus book values

Companies generally use GAAP to determine the values reported on their balance sheets. In most cases, these accounting numbers (or "book values") are different from what the assets would sell for if they were offered for sale (or "market values")

working capital

Current assets are often called working capital because these assets "turn over"; that is, they are used and then replaced throughout the year.

Statement of Cash Flows Payment of dividends to stockholders.

Dividends are paid in cash, and the $57.5 million that Allied paid to stockholders is shown as a negative amount.

economic value added (EVA)

EVA = Net Operating Profit After Taxes (NOPAT) - (Annual dollar cost of capitol) =EBIT(-T) - (Total invested capital * After-tax percentage cost of capital)

earnings before interest, taxes, depreciation, and amortization

Even though depreciation and amortization are reported as costs on the income statements, they are not cash expenses—cash was spent in the past, when the assets being written off were acquired, but no cash is paid out to cover depreciation and amortization. Therefore, managers, security analysts, and bank loan officers who are concerned with the amount of cash a company is generating often calculate EBITDA

After the recent corporate scandals, Congress and the SEC tightened reporting rules and began to impose stiff penalties on corporations and their officers who circulated misleading information. Consequently, we can be positive that the information firms publish in their annual reports and release to the press is accurate and truthful, and that all numbers were calculated in a consistent manner by different firms. True or false?

False

Depreciation is an annual charge against income that reflects the estimated dollar cost of capital equipment used up but doesn't represent an actual cash outlay. As a result, net income is not adjusted by depreciation in the statement of cash flows. True or false?

False

One way to think about free cash flow is that if the amount were withdrawn, it would harm the firm's ability to operate and to produce future cash flows. a. True b. False

False

Retained earnings refer to the portion of a corporation's profits that are paid out to shareholders. a. True b. False

False

Some intercorporate dividends received by a corporation are excluded from taxable income has encouraged debt financing over equity financing. a. True b. False

False

Statement of Cash Flows Increase in accounts receivable.

If Allied chooses to sell on credit when it makes a sale, it will not immediately get the cash that it would have received had it not extended credit. To stay in business, it must replace the inventory that it sold on credit; but it won't yet have received cash from the credit sale. So if the firm's accounts receivable increase, this will amount to a use of cash. Allied's receivables rose by $60 million in 2016, and that use of cash is shown as a negative number on line e. If Allied had reduced its receivables, this would be shown as a positive cash flow. (Once cash is received for the sale, the accompanying accounts receivable will be eliminated.)

Rao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. What was Rao's operating income, or EBIT, in millions? a. $4.90 b. $3.21 c. $3.97 d. $3.57 e. $4.41

Sales-Operating cost excluding depreciation-deporeciation = Operating income 20.5-12.6-3=4.9

Time dimension

The balance sheet is a snapshot of the firm's financial position at a point in time—for example, on December 31, 2016.

Statement of Cash Flows Depreciation and amortization

The first adjustment relates to depreciation and amortization. Allied's accountants subtracted depreciation (it has no amortization expense), which is a noncash charge, when they calculated net income. Therefore, depreciation must be added back to net income when cash flow is determined.

Statement of Cash Flows Net income

The first operating activity is net income, which is the first source of cash. If all sales were for cash, if all costs required immediate cash payments, and if the firm were in a static situation, net income would equal cash from operations. However, these conditions don't hold, so net income is not equal to cash from operations. Adjustments shown in the remainder of the statement must be made.

Statement of Cash Flows Increase in accrued wages and taxes.

The same logic applies to accruals as to accounts payable. Allied's accruals increased by $10 million this year, which means that in 2016, it borrowed an additional $10 million from its workers and taxing authorities. So this represents a $10 million cash inflow.

retained earnings

They represent the cumulative total of all earnings kept by the company during its life.

Statement of Cash Flows Operating activities

This section deals with items that occur as part of normal ongoing operations.

Statement of Cash Flows Summary

This section summarizes the change in cash and cash equivalents over the year.

Statement of Cash Flows Increase in inventories

To make or buy inventory items, the firm must use cash. It may receive some of this cash as loans from its suppliers and workers (payables and accruals); but ultimately, any increase in inventories requires cash.

A positive level of FCF indicates that the firm is generating more than enough cash to finance current investments in fixed assets and working capital. By contrast, negative free cash flow means that the company does not have sufficient internal funds to finance investments in fixed assets and working capital, and that it will have to raise new money in the capital markets in order to pay for these investments. True/False

True

Accounting profits are less important in finance than cash flows. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital. a. True b. False

True

Capital gains are taxed and capital losses are not. True/False

True

Economic value added (EVA) is equal to EBIT(1 - T), or NOPAT, minus the dollar cost of all the firm's total invested capital. The primary difference between EVA and accounting net income is that only the cost of debt (interest charges) is deducted when calculating accounting net income whereas the cost of common equity is also deducted when finding EVA. True or false?

True

Free cash flow (FCF) is the cash flow from operations, after investments necessary to maintain future cash flows, that is available for payment to investors, and it is found using the following equation. True or false? FCF = [EBIT (1-T) + Depreciation and Amoritization] - Required capital expenditures and increase in NOWC

True

Given that the retained earnings account on the balance sheet is not a cash account--rather, it represents part of the stockholders' claims against the firm's existing assets—we could say that retained earnings are stockholders' reinvested earnings. a. True b. False

True

If a corporation had positive income and thus paid taxes in 2013 and 2012, but it incurred a loss in 2014, it could carry that loss back to those 2 prior years, reduce the taxable income in those years, and receive a credit (in the form of a refund check) for any overpayments of past taxes. Moreover, if its 2014 loss was greater than the taxable income in those past 2 years, then it could carry the loss forward to reduce income in 2015 and beyond—up to 20 years. True or false?

True

In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital. True/False

True

Stockholders' equity consists of paid-in capital, which is the amount of money the firm has raised by issuing newly created shares to stockholders, and retained earnings, which is the sum of all past earnings minus all past dividends. True or false?

True

The balance sheet summarizes the assets that the firm owns and the debt and equity capital that was used to finance those assets. The assets are divided into those expected to be used within a year and those expected to be used for more than one year. Similarly, liabilities and capital are divided into those items that must be paid off within a year and those that have longer maturities. True or false?

True

The firm's financial statements report what has actually happened to its assets, earnings, and dividends over the past few years True/False

True

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings. a. True b. False

True

management's verbal statements attempt to explain why things turned out the way they did and what might happen in the future. True/False

True

The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

d. Nantell's operating income (EBIT) will increase.

The annual report includes which of the following statements? a. A balance sheet for the latest year and possibly for several prior years. b. An income statement for the latest year and possibly for several prior years. c. A statement of cash flows for the latest year. d. A statement of stockholders' equity for the latest year. e. All of these are correct.

e. All of these are correct.

Last year, the Husky Corporation's cash balance increased, even though it had a negative cash flow. What could explain that? a. Husky Corporation paid a large dividend. b. Husky Corporation had high depreciation expenses on computer technology. c. Husky Corporation made a large investment in new equipment. d. Husky Corporation repurchased 20% of its common stock. e. Husky Corporation sold a new issue of bonds.

e. Husky Corporation sold a new issue of bonds.

Which of the following statements is CORRECT? a. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. b. Accounts receivable are reported as a current liability on the balance sheet. c. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year. d. Dividends paid reduce the net income that is reported on a company's income statement. e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

Regarding financial statements, which of the following statements is CORRECT? a. The only four financial statements provided in an annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity. b. 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. c. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports along with the financial statements. That verbal information was often misleading, so today annual reports can contain only audited financial statements and infographics. d. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. e. 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.

e. 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.

On its 12/31/14 balance sheet, Wildcat Inc. showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. Wildcat Inc. must have paid out half of its 2014 earnings as dividends. b. Wildcat Inc. must have paid no dividends in 2014. c. If Wildcat Inc. lost money in 2014, it must have paid dividends. d. Wildcat Inc. must have had zero net income in 2014. e. Wildcat Inc. could have paid dividends in 2014, but they would have had to equal the earnings for the year.

e. Wildcat Inc. could have paid dividends in 2014, but they would have had to equal the earnings for the year.

statement of cash flows

which shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease its cash. --A report that shows how items that affect the balance sheet and income statement affect the firm's cash flows.

Wayne Corporation had income from operations of $385,000, it received interest payments of $15,000, it paid interest of $20,000, it received dividends from another corporation of $10,000, and it paid $40,000 in dividends to its common stockholders. What is Wayne's federal income tax? a. $141,700 b. $163,500 c. $130,220 d. $155,200 e. $122,760

c. $130,220

In its recent income statement Tyler Toys Inc. reported $72.5 million of net income, and in its year-end balance sheet it reported $1,174 million of retained earnings. The previous year its balance sheet showed $1,131 million of retained earnings. What were the total dividends (in millions of dollars) paid to shareholders during the most recent year? a. $10.5 b. $29.5 c. $17.7 d. $33.0 e. $24.6

1,131,000,000+72,500,000-div=1,174,000,000 1,203,500,000-div=1,174,000,000 29,500,000 b. $29.5

Emery Mining Inc. recently reported $150,000 of sales, $75,500 of operating costs other than depreciation, and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes. a. $37,108.24 b. $38,966.57 c. $35,167.33 d. $43,068.31 e. $41,017.44

150,000-(75,500+10,200+1,196.25+22,086.31) e. $41,017.44

During 2013, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year? $74,996 $86,818 $82,683 $71,425 $78,746

159,600+NI-33,525=197,500 NI=$78,746

Peterson Manufacturing recently reported EBITDA of $18.75 million and $4.5 million of net income. It has $5 million of interest expense and its corporate tax rate is 40%. What was its depreciation and amortization expense (in millions of dollars)? a. $3.75 b. $6.25 c. $2.25 d. $8.50 e. $1.50

18.75-(7.5+5)=6.25 b. $6.25

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $130 million, what is the company's stock price? (Round your final answer to two decimal places.)

300+130=430 430/6=71.67

Prezas Company's balance sheet showed total current assets of $3,500, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital?

3500-(975+250) =2275

Statement of Cash Flows Increase in accounts payable.

Accounts payable represent a loan from suppliers. Allied bought goods on credit, and its payables increased by $30 million this year. That is treated as a $30 million increase in cash on line f. If Allied had reduced its payables, that would have required, or used, cash. Note that as Allied grows, it will purchase more inventories. That will give rise to additional payables, which will reduce the amount of new outside funds required to finance inventory growth.

Statement of Cash Flows Increase in bonds (long-term debt)

Allied borrowed an additional $170 million from long-term investors this year, issuing bonds in exchange for cash. This is shown as an inflow. When the bonds are repaid by the firm some years hence, this will be an outflow.

Alternative Minimum Tax (AMT)

Created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Roth IRAs

Individual retirement arrangements in which contributions are not tax deductible but the future income and capital gains within these accounts are not taxed if the money is withdrawn after age .

Traditional IRAs

Individual retirement arrangements in which qualified contributions are tax deductible and income and capital gains on investments within the account are not taxed until the money is withdrawn after age .

Other sources of funds

Most companies finance their assets with a combination of short-term debt, long-term debt, and common equity.

Depreciation

Most companies prepare two sets of financial statements—one is based on Internal Revenue Service (IRS) rules and is used to calculate taxes; the other is based on GAAP and is used for reporting to investors. Firms often use accelerated depreciation for tax purposes but straight-line depreciation for stockholder reporting.

earnings per share

Net Income/Common shares outstanding

MVA, or market value added

The excess of the market value of equity over its book value. --the difference between the market value of a firm's equity and the book value as shown on the balance sheet, with market value found by multiplying the stock price by the number of shares outstanding.

carryback

Ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year.

carryforward

Ordinary corporate operating losses can be carried backward for 2 years and carried forward for 20 years to offset taxable income in a given year.

Operating Income

Sales Revenue - Operating costs

capital loss

The loss from the sale of a capital asset for less than its purchase price.

Statement of Cash Flows Net decrease in cash

The net sum of the operating activities, investing activities, and financing activities is shown here. These activities resulted in a $70 million net decrease in cash during 2016, mainly due to expenditures on new fixed assets.

NOPAT, or net operating profit after taxes

The profit a company would generate if it had no debt and held only operating assets. EBIR(1-T)

capital gain

The profit from the sale of a capital asset for more than its purchase price.

Statement of Cash Flows Net cash provided by financing activities

The sum of the three financing entries, which is a positive $162.5 million, is shown here. These funds were used to help pay for the $230 million of new plant and equipment and to help cover the deficit resulting from operations.

The balance sheet, the income statement, the cash flow statement, and the statement of stockholders' equity are the four essential financial statements found in an annual report. a. True b. False

True

Last year Firm X had sales of $100,000, labor costs of $30,000, material costs of $30,000, and depreciation of $10,000. Assume that labor and material costs were paid in cash. The tax rate on its net income was 40%. What was the firm's net income? a. $18,000 b. $16,000 c. $14,000 d. $12,000 e. $20,000

a. $18,000

Which of the following scenarios implies a capital loss? a. Buy a security for $100, sell it for $99 b. Buy a security for $100, sell it for $150. c. Buy a security and do not sell it. d. Buy a security for $100, sell it for $100.

a. Buy a security for $100, sell it for $99

Which of the following statements is CORRECT? a. Free cash flow (FCF) is defined as follows:FCF = EBIT(1 - T)+ Depreciation- Capital expenditures required to sustain operations- Required changes in net operating working capital. b. Changes in working capital have no effect on free cash flow. c. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors--both creditors and stockholders. d. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. e. Free cash flow (FCF) is defined as follows:FCF = EBIT(1 - T) + Capital expenditures.

a. Free cash flow (FCF) is defined as follows:FCF = EBIT(1 - T)+ Depreciation- Capital expenditures required to sustain operations- Required changes in net operating working capital.

Which of the following statements regarding free cash flows is NOT CORRECT? a. Negative free cash flow is always bad and indicative that the firm will be bankrupt soon. There is never a good reason for a firm to have negative free cash flow. b. Free cash flow is the "extra money" that the firm has available to spend on things like paying investors. c. FCF = [EBIT(1 - T) + Depreciation and Amortization] - [Capital Expenditures + ΔNOWC] d. Basically, free cash flow is a measure of how much money a company has that's not currently tied up in keeping itself afloat.

a. Negative free cash flow is always bad and indicative that the firm will be bankrupt soon. There is never a good reason for a firm to have negative free cash flow.

Which of the following does NOT increase cash and cash equivalents during the year? a. Repayment of long-term bonds b. A decrease in accounts receivable c. An increase in notes payable d. An increase in accounts payable e. A decrease in inventories

a. Repayment of long-term bonds

Which of the following factors could explain why Spartan Financial's net income increased sharply from the previous year, yet its net cash provided from operations declined? a. Spartan Financial's depreciation expense declined. b. Spartan Financial's expenditures on fixed assets declined. c. Spartan Financial's interest expense increased. d. Spartan Financial's cost of goods sold increased. e. Spartan Financial's dividend payment to common stockholders declined.

a. Spartan Financial's depreciation expense declined.

Which of the following is not something that corporations can do with their profits? a. They can do all of these. b. Pay income tax to the government c. Hold profits within the firm d. Pay them to shareholders

a. They can do all of these.

Cash versus other assets

assets are reported in dollar terms, only the cash and equivalents account represents actual spendable money.

The following items are often found on a balance sheet. Which one is NOT normally considered to be a current asset? a. Inventory. b. Bonds. c. Accounts receivable. d. Cash. e. Short-term, highly-liquid, marketable securities.

b. Bonds.

Which of the following statements is CORRECT? a. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). b. The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last. c. The balance sheet for a given year tells us how much money the company earned during that year. d. If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. e. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.

b. The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.

On 12/31/13, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/12, the company had reported $445,000 of retained earnings. No shares were repurchased during 2013. How much in dividends did the firm pay during 2013? a. $52,250 b. $60,638 c. $55,000 d. $57,750 e. $49,638

c. $55,000

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price? a. $80.85 b. $66.02 c. $77.00 d. $69.49 e. $73.15

c. $77.00

Last year Bartlett & Croy's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)? a. Bartlett & Croy repurchased some of its common stock. b. Bartlett & Croy retired a large amount of its long-term debt. c. Bartlett & Croy sold some of its fixed assets. d. Bartlett & Croy dramatically increased its capital expenditures. e. Bartlett & Croy had high depreciation expenses.

c. Bartlett & Croy sold some of its fixed assets.

Which of the following factors could explain why Eagle Enterprises' net cash provided from operations increased over last year, yet cash as reported on the balance sheet decreased? a. Eagle Enterprises cut its dividend. b. Eagle Enterprises sold a division and received cash in return. c. Eagle Enterprises made large investments in fixed assets. d. Eagle Enterprises issued new long-term debt. e. Eagle Enterprises issued new common stock.

c. Eagle Enterprises made large investments in fixed assets.

a. Excitement Enterprises repurchased some common stock in 2015. b. Excitement Enterprises increased its short-term bank debt in 2015. c. Excitement Enterprises issued new common stock in 2015. d. Excitement Enterprises had negative net income in 2015. e. Excitement Enterprises issued long-term debt in 2015.

c. Excitement Enterprises issued new common stock in 2015.

Which of the following accounts is EXCLUDED when calculating net operating working capital? a. Accruals b. Accounts receivable c. Notes payable to banks d. Inventories e. Accounts payable

c. Notes payable to banks

Which of the following statements about EVA and net income is CORRECT? a. Actions that increase reported net income will always increase cash flow. b. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. c. One way to increase EVA is to generate the same level of operating income but with less total invested capital. d. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. e. If a firm reports positive net income, its EVA must also be positive.

c. One way to increase EVA is to generate the same level of operating income but with less total invested capital.

Which of the following statements is correct? a. The fact that a percentage of the interest received by one corporation, which is paid by another corporation, is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. b. In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources. c. Under our current tax laws, when investors pay taxes on their dividend income, they are being subjected to a form of double taxation. d. A corporation's payments for capital—interest and dividend payments—are tax deductible; therefore, the government does not encourage companies to use one form of financing over the other. e. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, companies would use more debt financing than they presently do, other things held constant.

c. Under our current tax laws, when investors pay taxes on their dividend income, they are being subjected to a form of double taxation.

Net Working Capital

current assets - current liabilities

Question Workspace Check My Work If a firm began the year showing $10 million as retained earnings on its balance sheet, had $2 million of net income for the year, and paid $3 million in dividends, what would be the amount of its retained earnings at the end of the year? a. $ 6,000,000 b. $10,000,000 c. $ 8,000,000 d. $ 9,000,000 e. $ 7,000,000

d. $ 9,000,000

Scranton Shipyards has $20 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: a. $486,203 b. $463,050 c. $420,000 d. $400,000 e. $441,000

d. $400,000

Which of the following statements about financial statements is CORRECT? a. The income statement gives us a picture of the firm's financial position at a point in time. b. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. c. The statement of cash flows tells us how much taxable income the firm has earned during the year. d. A picture of the firm's financial position at a point in time is typically called a balance sheet. e. 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.

d. A picture of the firm's financial position at a point in time is typically called a balance sheet.

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

d. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.

Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? a. The company had a sharp increase in depreciation expenses. b. The company made a large capital investment early in the year. c. The company had a sharp increase in its inventories. d. The company sold a new issue of common stock. e. The company had a sharp increase in its accrued liabilities.

d. The company sold a new issue of common stock.

Total Debt

short term debt + long term debt

statement of stockholders' equity

shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year. --A statement that shows by how much a firm's equity changed during the year and why this change occurred.

income statement

shows the firm's sales and costs (and thus profits) during some past period --Reports summarizing a firm's revenues, expenses, and profits during a reporting period, generally a quarter or a year.

balance sheet

shows what assets the company owns and who has claims on those assets as of a given date. A statement of a firm's financial position at a specific point in time. --The left side of the statement shows the assets that the company owns, and the right side shows the firm's liabilities and stockholders' equity, which are claims against the firm's assets.

Book value per share

total common equity / common shares outstanding

Total Liabilities

total debt + (accounts payable + accruals)