FINC 302 Chapter 3 Homework and Quiz

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 = $1 / (1-0.25)

Your existing business generates $111,000 in EBIT. •The corporate tax rate applicable to your business is 25%. •The depreciation expense reported in the financial statements is $21,143. •You don't need to spend any money for new equipment in your existing cafés; however, you do need $16,650 of additional cash. •You also need to purchase $8,880 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. •It is also estimated that your accruals, including taxes and wages payable, will increase by $5,550. Based on your evaluation you have in free cash flow.

$111,000 - (111,000-1*.25)=83,250 $83,250 + 21,143 - ($16,650-5,550) =93,293

In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $___________ in annual dividends.

$40.00 (200,000 preferred stock dividends/5,000 shares)

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 $148 million. Last year, the company reported a retained earnings balance of $476 million, whereas this year it increased to $560 million. How much was paid out in dividends this year?

$64 million = $148-(560-476)

Moose Industries has a corporate tax rate of 25%. Last year the company realized $14,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the company's net income for the year?

12,500,00 3,125,000 EBIT-annual interest expense = 12,500,000 12,500,000*.25 = 3,125,000 12,500,000-3,125,000 = $9,375,000

What happened to assets, earnings, dividends, and cash flows during the financial year?

Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis.

Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow?

Acquiring operating assets

Global Satellite Corp. reported net sales of $550 million last year and generated a net income of $121.00 million. Last year's accounts receivable increased by $23 million. What is the maximum amount of cash that Global Satellite Corp. received from sales last year?

Actual Cash Collected=Net Sales - Increase in Accounts Receivable=($550 - $23) million=$527.00 million

C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have? Sales $3,200.00 Costs 1,850.00 Depreciation $192.00 EBIT $1,158.00 Interest expense 285.00 EBT $873.00 Taxes (25%) 218.25 Net Income $654.75

After tax Operating Income = EBIT * (1 - Tax Rate) =1,158.00*(1-.25)= 1,158.00(.75) = $868.50

Statement #3: The book value of one of Blue Hamster's fixed assets is calculated as the original cost of the asset minus its annual depreciation expense.

An asset's net book value is calculated by subtracting its accumulated depreciation expense from its total historic and installation costs

You bought 1,000 shares of Tund Corp. stock for $60.59 per share and sold it for $82.35 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

Statement #1: Blue Hamster's pool of relatively liquid assets, which are available to support the company's current and future sales, decreased from Year 1 to Year 2.

Blue Hamster's total current asset balance actually increased from $11,250 million to $14,062 million between Year 1 and Year 2

Which of the following items is NOT normally considered a current asset?

Bonds.

Statement #3: The book value per share of Cute Camel's stock in Year 2 was $562.50.

Correct because The per-share book value is calculated by dividing the company's total common equity by the number of outstanding shares of common stock. (total common equity/outstanding shares)

Statement #1: Cute Camel's net collection of inventory items increased by more than the firm's sales between Years 1 and 2.

Correct because Total inventories of raw materials, work-in-process, and final goods increased from $5,940 million to $7,425 million between Year 1 and Year 2

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Cost of goods sold.

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

On its 12/31/19 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the previous year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Dividends could have been paid in 2019, but they would have had to equal the earnings for the year.

Which of the following best describes shareholders' equity?

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

Explains the changes in a company's stockholders' equity over the accounting year.

Explains the changes in a company's stockholders' equity over the accounting year.

(True/False) An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.

False

(true/false) Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.

False

Statement #2: Over the past two years, Cute Camel Woodcraft Company has relied more on the use of short-term debt than on long-term debt financing.

False because Cute Camel's total current liabilities increased by $469 million, while its use of long-term debt increased by $1,406 million

Yum Brands distributes dividends to its common stockholders for the first time.

Financing Activity

Hartzell Inc. had the following data for 2018, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2019 is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $825; and Total assets = $2,500. Assume the firm had no excess cash. How much free cash flow did the firm generate during 2019?

Given that, In 2018, Net income = $600; After-tax operating income [EBIT (1-T)] = $700; Total assets = $2,000 In 2019, Net income = $825; After-tax operating income [EBIT (1-T)] = $825 Total assets = $2,500 Net capital investment = Total assets for 2019 - Total assets for 2018 = $2,500 - $2,000 = $500 Free Cash Flow during 2019 = After-tax operating income for 2019 - Net capital investment Free cash flow during 2019 = $825 - $500 = $325

A company buys some common stock in its supplier's firm with its extra cash.

Investing activity

Which of the following is true for the statement of cash flows

It reflects cash generated and used during the reporting period.

Year 2 Forecasting

Net Sale: $37,500,000 (30,000,000*1.25) Operating Cost: $26,250,000 (37,500,000*.70) Depreciation/amortization: $1,200,000 (given) Operating Income (EBIT) $10,050,000 (37,500,000-26,250,000-1,200,000) Interest Expense: $1,507,500 (10,050,000*.15) Pre-tax Income (EBT): $8,542,500 (10,050,000-1,507,500) Tax Expense: $2,135,625 (.25*8,542,500) Earning after Taxes: $6,406,875 (8,542,500-2,135,625) Preferred stock dividends: 200,000 (same as year 1) Earnings available to common shareholders: $6,206,875 (6,406,857-200,000) Common stock dividends: 1,922,063 (6,206,875-4,284,812 Contribution to retained earnings: $4,284,812 (given)

D and W Co. sells its last season's inventory to a discount store.

Operating activities

A company reports a 10% increase in its accounts payable from the last month.

Operating activity

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

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

Which of the following statements best describes free cash flow?

The cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm's ongoing operations

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.

Based on your understanding of the different items reported in the balance sheet and the information they provide, which statement regarding Blue Hamster Manufacturing Inc.'s balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company's assets should be listed in the order in which they are to be converted into cash.

Based on your understanding of the different items reported on the balance sheet and the information they provide, which statement regarding Cute Camel Woodcraft Company's balance sheet is consistent with U.S. Generally Accepted Accounting Principles (GAAP)?

The company's debts are listed in the order in which they are to be repaid.

Statement #2: On December 31 of Year 2, Blue Hamster Manufacturing Inc. had $5,766 million of actual money that it could have spent immediately.

The funds recorded in Blue Hamster's cash and equivalents account represents funds that are either cash or can be converted into cash almost immediately

(True/False) An increase in accounts payable represents an increase in net cash provided by operating activities, an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.

True

(True/False) 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

(True/False) Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

True

(True/False) 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.

True

(True/False) To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation.

True

True or False: As long as the information reported follows the generally accepted accounting principles (GAAP) guidelines, accountants in a firm have the liberty to use personal judgment to report transactions in the firm's financial statements.

True

If Cold Goose has 400,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from $________in Year 1 to $_________ in Year 2.

Year 1: $12.66 =5,065,000/400,000(Earning available to common shareholders/shares) Year 2: $15.52 = 6,206,875/400,000

Cold Goose's earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from $________ in Year 1 to $________ in Year 2.

Year 1: $9,000,000 = $7,800,000+1,200,000 (EBT + interest expense) Year 2: $11,250,000 = $10,050,000+1,200,000

That makes sense. So, what makes this value important to investors is that it is __________________ value that can change—but only due to a couple of events, including the ______________ of Treasury stock, the sale of new common or preferred shares, and the payment of ___________________. Equally important, it __________________ change in response to changes in the market prices of the firm's shares.

a historical; repurchase; dividends; will not

Is required by the SEC and includes the audited document that shows the company's financial results for the past year and management's discussion about the future outlook and plans.

annual report

Can the firm meet all its short-term obligations using its current assets?

balance sheet

Has three segments that when analyzed together give an idea of what the company owns and what it owes.

balance sheet

During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Market Value Added, or MVA, to better assess management's performance in maximizing their shareholders' wealth. To achieve this, a firm's MVA is computed as the ___________ between (of) the ________ value and the ________ value of Extensive's shareholders' equity. OK, now here's a question for you: Compared to the book value, what is the advantage of the MVA as a means of evaluating management's performance?

difference; market; book

Well, because Extensive's book value ________, with changes in the market price of the firm's shares, the firm's book value __________, reflect management's efforts to maximize the shareholder wealth and therefore ________________ be used to evaluate management's performance. Now, what about "Market Value Added"?

does not change; cannot; should not

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

higher

The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece of equipment, book value refers to the asset's _________________________, adjusted for any accumulated depreciation or amortization expense. The ____________ value, or difference between these two values, is called the asset's book value.

historical value, or difference between these two values, is called the asset's book value. ; net

Is divided into two important parts: operating and non-operating sections; also known as the profit and loss statement.

income statement

It is _____________ to say that Cold Goose's net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company's annual contribution to retained earnings, $3,485,500 and $4,284,812, respectively. This is because ____________ of the items reported in the income statement involve payments and receipts of cash.

incorrect; all but one

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

Well, I would say that because the market value of Extensive's shareholders' equity is calculated by multiplying the shares' ________ by the number of shares ______________, then it will fluctuate depending on how the market perceives management's performance. A negative assessment will result in ________________ market price and MVA.

market price; outstanding; a decreased

In contrast, when the term refers to the entire company, it means the total value of the company's ______________________, as reported in the firm's _____________________.

shareholders' equity; balance sheet

Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised?

statement of cash flows

Provides details about the flow of funds from operating, investing, and financing activities

statement of cash flows