chpt 3
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)?
$ 22,500 EVA = EBIT(1 - T) - (Total invested capital)(After-tax percentage cost of capital) = $300,000(0.6) - ($1,500,000)(0.105) = $180,000 - $157,500 = $22,500
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?
$1,278,000 2250,000- 120,000 = 2130000 2130,000*.6= $1278000
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?
$29.5 1131+72.5-1714 = 29.5
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?
$3,025 Net operating working capital = Current assets − (Current liabilities − Notes payable)Net operating working capital (NOWC) = $4,250 − ($1,825 − $600)Net operating working capital (NOWC) = $3,025
Griffey Communications recently realized $125,000 in operating income. The company had interest income of $25,000 and realized $70,000 in dividend income. The company's interest expense was $40,000. In addition, the company purchased new equipment this year at a cost of $15,000, which is eligible for bonus depreciation.Assuming a 25% corporate tax rate, what is Griffey's tax liability?
$32,500 Taxable income = Operating income − Interest expense - Depreciation expense + Interest income + Taxable dividend incomeTaxable income = Operating income − Interest expense - Depreciation expense + Interest income + Dividend income (1 − Dividend exclusion %)= $125,000 − $40,000 − $15,000 + $25,000 + $70,000(1 − 50%)(Note that bonus deduction for depreciation is 100%.)Total taxable income = $130,000Tax = 0.25($130,000) = $32,500
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?
$4.90 20.50-12.60-3 = 4.90
Scranton Shipyards has $20 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement:
$400,000 EVA = EBIT(1 − T) − (WACC × Total invested capital)EVA = EBIT(1 − T) − (WACC × Total invested capital 20,000,000*.10 )EVA = $2,400,000 − $2,000,000EVA = $400,000
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)?
$450,000 SHare outstanding (p0) - Total book value of common equity = 50,000(27.00) - (0.6 not debt but equity)(1,500,000) =450,000
On December 31, 2021 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 December 31, 2020, the company had reported $445,000 of retained earnings. No shares were repurchased during 2021. How much in dividends did the firm pay during 2021?
$55,000 525,000- 445000- 135000 = -55,000
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)?
$6.25 4.5 mill/ (1-t) = 4500000/.6= 7500000 5,000,000+7,500,000 = 12500,000 18,750,000 - 12,500,000= 6,250,000 $6.25
Last year, 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?
$71,425 $159600- $33,525 = $197500 197500 - 159600 + 71425 = $71425
The Carter Company's taxable income and income tax payments are shown below for 2017 through 2020:Assume that Carter's tax rate for all 4 years was a flat 25%, that is, each dollar of taxable income was taxed at 25%. In 2021, Carter incurred a loss of $17,000. Using corporate loss carry-back, what is Carter's adjusted tax payment for 2020?
$750 The carry-back can go back only 2 years. Thus, there were no adjustments made in 2017 and 2018. After a $12,000 adjustment in 2019, there was a $5,000 loss remaining to apply to 2020. The 2020 adjusted tax payment is $3,000(0.25) = $750. Thus, Carter received a total of $5,250 in tax refunds after the adjustment.
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?
$77.00 Market value added of equity = Stock price × Number of shares − Total BV of Equity$162,000,000 = Stock price × 6,000,000 − $300,000,000Stock price = $77.00
Wayne Corporation had income from operations of $385,000, received interest payments of $15,000, paid interest of $20,000, received dividends from another corporation of $10,000, and paid $40,000 in dividends to its common stockholders. What is Wayne's federal income tax?
$96,250 (Note that dividends are paid from after-tax income and do not affect taxable income.)Tax calculation:Tax = 0.25($385,000) = $96,250
Which of the following statements about financial statements is CORRECT?
A picture of the firm's financial position at a point in time is typically called a balance sheet. Cash budget is not a standard financial statement, and only the balance sheet shows a point in time. The statement of cash flows shows what a company paid out in the past in cash, but interest is rarely broken out.
Last year Bartlett & Croys' 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)?
Bartlett & Croy sold some of its fixed assets. Selling fixed assets would increase cash. Repurchasing stock, increasing capital expenditures, and retiring debt would decrease cash, and depreciation would have no effect.
The following items are often found on a balance sheet. Which one is NOT normally considered a current asset?
Bonds Current assets are items that can be turned into cash within a year. Bonds are long-term assets.
Which of the following statements about the statement of cash flows 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. Depreciation is subtracted from net income in the statement of cash flows. A decrease in accounts receivable means that more cash came in, so it would increase cash. The opposite is true for accounts payable and inventories. Dividends do show up on the statement of cash flows, and depreciation is added back.
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?
Eagle Enterprises made large investments in fixed assets. A cut in dividends, sale of a division, issuance of common stock, or issuance of long-term debt are non-operational factors that would increase cash on the balance sheet. Investments in fixed assets would be non-operational uses of cash.
Below are the 2020 and 2021 year-end balance sheets for Excitement Enterprises: Assets: 2021 2020 Cash $ 200,000 $ 170,000 Accounts receivable 864,000 700,000 Inventories 2,000,000 1,400,000 Total current assets $3,064,000 $2,270,000 Net fixed assets 6,000,000 5,600,000 Total assets $9,064,000 $7,870,000 Liabilities and equity: Accounts payable $1,400,000 $1,090,000 Notes payable to bank 1,600,000 1,800,000 Total current liabilities $3,000,000 $2,890,000 Long-term debt 2,400,000 2,400,000 Common stock 3,000,000 2,000,000 Retained earnings 664,000 580,000 Total common equity $3,664,000 $2,580,000 Total liabilities and equity $9,064,000 $7,870,000 Excitement Enterprises has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2020. As of the end of 2021, none of the principal on this debt had been repaid. Assume that the company's sales in 2020 and 2021 were the same. Which of the following statements must be CORRECT?
Excitement Enterprises issued new common stock in 2021. The lines for short-term debt and long-term debt have not increased, but the lines for common stock and retained earnings have.
Given this financial information, what is the 2021 free cash flow in millions of dollars?
FCF = EBIT(1-T) + Depreciation - (capital expenditures + ?) (use 2020 ebit byt not 2020 )
Which of the following statements is correct?
High income taxpayers may incur an additional 3.8% surtax on capital gains income. High income taxpayers may incur an additional 3.8% surtax on capital gains income, short term capital gains of less than one year are generally taxed as ordinary income, long term capital gains rates differ from short term and generally are lower than ordinary income rates even for high income taxpayers
Last year, the Husky Corporation's cash balance increased, even though it had a negative cash flow. What could explain that?
Husky Corporation sold a new issue of bonds. A bond issuance would increase cash. Investments, dividends, and stock repurchases would reduce cash, and depreciation has no effect.
Which of the following statements about EVA and net income is CORRECT?
One way to increase EVA is to generate the same level of operating income but with less total invested capital.
Which of the following factors could explain why Spartan Financials' net income increased sharply from the previous year, yet its net cash provided from operations declined?
Spartan Financials' depreciation expense decline Dividends, interest, and fixed assets are non-operational uses of cash. An increase in cost of goods sold would decrease net income, all else being equal. Depreciation is added back to find net cash from operations, so it would affect the balance.
Regarding financial statements, which of the following statements is CORRECT?
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 a public document, and investors are among the most important users of it. Reported values may differ from market values. Cash budget is not a financial statement, and annual reports have always been written documents with narrative sections.
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.
True Free cash flow is after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
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.
True Free cash flow is money that can be invested for future growth.
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.
True Retained earnings represent the cumulative total of all earnings kept by the company during its life.
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.
True There are a few different financial statements, with the most important being the income statement, the balance sheet, the cash flow statement, and the statement of stockholders' equity.
On its December 31, 2020 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?
Wildcat Inc. could have paid dividends in 2021, but they would have had to equal the earnings for the year. If retained earnings did not increase, then the company either had no earnings or it paid out all of its earnings as dividends.
Consider the following balance sheet for Big Dog Games, Inc. Because Big Dog has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
false Note that the firm has only $50,000 of cash. It would have to either sell assets or borrow $150,000 to pay cash for the new asset. That might not be possible.
The United States personal income tax system is _____.
progressive, which means that higher income levels have higher tax rates The United States personal income tax system is progressive, which means that higher income levels have higher tax rates.
