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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 1

True/False

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Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

A) True
B) False

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Question 2

Multiple Choice

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Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its combined federal and provincial income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

A) -$404.04; $217.56
B) -$425.30; $229.01
C) -$447.69; $241.06
D) -$471.25; $253.75

E) A) and C)
F) B) and D)

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D

Question 3

Multiple Choice

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On its 2009 balance sheet, Barngrover Books 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?

Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?

JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets?

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

The FIFO method leads to a higher balance sheet inventory value, but a lower cost of goods sold in the income statement.

Which of the following statements best describes the financial statements?

The fact that interest income received by a corporation is 50% taxable encourages firms to use more debt financing than equity financing.

If a local Firm X owns 35% of the shares of a Canadian-owned Firm Y, and Y pays dividends to all of its shareholders, what percent of the dividends received by X can be exempted from its taxable income?

When the tax rules come into effect in 2011, an income trust purchases corporate bonds having a before-tax interest yield of 16%. If the marginal tax rate is 31.5%, what is the after-tax interest yield?

Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?

On 12/31/09, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/08, the company had reported $555,000 of retained earnings. No shares were repurchased during 2009. How much in dividends did Heaton pay during 2009?

Which of the following statements best describes the statement of cash flows?

Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is for operation only.

NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets. All of these assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR's total investor-provided operating capital?

Calculate the tax liability for a small Canadian-controlled private corporation (CCPC) located in British Columbia having earnings before taxes (EBT) of $480,000. The relevant combined federal and provincial corporate income tax rates are 15.5% for taxable income up to $400,000 and 18.6% for the amount exceeding $400,000.

TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?

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.

Barnes' Brothers has the following data for the year ending 12/31/07: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA) ?