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1. Which of the following best describes the goal of the firm?
 

a) Maximizing the value of the firm.
b) Maximizing the firm’s profits.
c) Minimizing the risk of the firm’s common stock.
d) Minimizing taxes.
e) All of the above are equally acceptable.

 

Use the following balance sheet and income statement for the next three questions
Balance Sheet Income Statement
Assets:
Cash $9,000 Sales (all credit) $255,000
Accounts Receivable 21,000 Cost of Goods Sold (153,000)
Inventories 19,500
Land 44,000 Operating Expenses (45,000)
Other Fixed Assets 70,000 Depreciation (3,000)

Liabilities & Owners’ Equity Interest Expense (9,000)
Accounts Payable 12,000
Long Term Debt 53,400 Taxes (15,300)
Common Stock (Par) 4,000
Paid In Capital 78,000
Retained Earnings 16,100

 

2. What is the firm’s operating income return on investment?
 

a) 31.1% c) 27.5% e) 40.0%
b) 33.0% d) 62.6%
 

3. Calculate the firm’s current ratio.

a) 4.1 c) 4.5 e) 0.76
b) 7.8 d) 2.5
 

4. What is the firm’s return on equity?
 

a) 27.5% c) 18.2% e) 45.1%
b) 36.2% d) 30.3%
 

5. Kingston Corporation had sales of $1,855,000 in 2002. The firm’s costs of goods sold amounted to 70% of sales. Kingston also paid operating expenses of $225,000, and $26,500 in interest expense. Also, the firm received $40,000 in dividend income and experienced a $10,000 capital gain on the sale of property. Compute the corporation’s tax payment.
 

a) $111,180 d) $106,880
b) $99,430 e) $96,030
c) $110,780
 

6. Net operating losses may be:
 

a) carried back 2 years or carried forward up to 20 years.
b) carried back 5 years or carried forward up to 5 years.
c) deducted from the current year’s earnings.
d) allocated over the next 3 years.
e) carried back 3 years or carried forward up to 5 years.
 

7. In 2002, Pulaski Corporation had sales of $5 million, cost of goods sold of $3 million, operating expenses of $175,000 and depreciation of $125,000. The firm received $40,000 in dividend income. Pulaski has $2.5 million in 8% coupon bonds outstanding. Also, Pulaski sold stock during the year, receiving a $60,000 gain on stock owned 6 years, but losing $40,000 on stock owned 4 years. What is the firm’s tax payment?
 

a) $527,680 d) $507,280
b) $529,200 e) $520,880
c) $514,080

 

8. Sand Point Corporation had 2002 sales of $65 million. The firm’s operating expenses amounted to $20 million and costs of goods sold totaled $24 million. In addition, Sand Point received $80,000 in dividend income, and paid $300,000 in dividends to its stockholders. Sand Point has $25 million in 9% bonds outstanding. The firm also had $3 million in depreciation expense, and sold land for $3.5 million that had been purchased for $4 million several years earlier. What is the firm’s tax payment?
 

a) $5,520,900 d) $5,420,900
b) $5,363,160 e) $5,444,120
c) $4,895,900
 

9. Which of the following items is NOT included in current assets?
a. Short-term, highly liquid, marketable securities.
b. Accounts receivable.
c. Inventory.
d. Bonds.
e. Cash.

 

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

a. Accrued payroll taxes.
b. Accounts payable.
c. Short-term notes payable to the bank.
d. Accrued wages.
e. Cost of goods sold.

 

11. Which of the following statements is CORRECT? 

a. Depreciation and amortization are not cash charges, so neither of them has an effect on a firm’s reported profits.
b. The more depreciation a firm reports, the higher its tax bill, other things held constant.
c. People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry on the income statement, hence it is often called “the bottom line.”
d. Depreciation reduces a firm’s cash balance, so an increase in depreciation would normally lead to a reduction in the firm’s net cash flow.
e. Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
 

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12. Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
 

a. Companies’ reported net incomes would decline.
b. Companies’ net operating profits after taxes (NOPAT) would decline.
c. Companies’ physical stocks of fixed assets would increase.
d. Companies’ net cash flows would increase.
e. Companies’ cash positions would decline.

 

13. Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?
 

a. The company’s operating income declined.
b. The company’s expenditures on fixed assets declined.
c. The company’s cost of goods sold increased.
d. The company’s depreciation and amortization expenses declined.
e. The company’s interest expense increased.

 

14. Which of the following statements is CORRECT?
 

a. Net cash flow (NCF) is defined as follows
NCF = Net income – Depreciation and Amortization.
b. Changes in working capital have no effect on free cash flow.
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1  T)
+ Depreciation and Amortization
 Capital expenditures required to sustain operations
 Required changes in net operating working capital.
d. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1  T)+ Depreciation and Amortization + Capital expenditures.
e. Net cash flow is the same as free cash flow (FCF).

 

15. Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT?
 

a. $3,462
b. $3,644
c. $3,836
d. $4,038
e. $4,250

 

16. 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?
 

a. $4,831.31
b. $5,085.59
c. $5,353.25
d. $5,635.00
e. $5,916.75

 

17. Swinnerton Clothing Company’s balance sheet showed total current assets of $2,250, all of which were required in operations. Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes. What was its net operating working capital that was financed by investors?
 

a. $1,454
b. $1,530
c. $1,607
d. $1,687
e. $1,771
 

18. Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm’s net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.
 

a. $3,284.55
b. $3,457.42
c. $3,639.39
d. $3,830.94
e. $4,022.48

 

19. 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?
 

a. $383
b. $425
c. $468
d. $514
e. $566

 

20. Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was its net cash flow?
 

a. $3,284.75
b. $3,457.63
c. $3,639.61
d. $3,831.17
e. $4,032.81

 

21. Arshadi Corp.’s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?
 

a. 2.03
b. 2.13
c. 2.25
d. 2.36
e. 2.48

 

22. Hutchinson Corporation has zero debtit is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
 

a. $155,800
b. $164,000
c. $172,200
d. $180,810
e. $189,851
 

23. Orono Corp.’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm’s times interest earned (TIE) ratio?
 

a. 4.72
b. 4.97
c. 5.23
d. 5.51
e. 5.80

 

24. Rappaport Corp.’s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?
 

a. 6.49%
b. 6.83%
c. 7.19%
d. 7.55%
e. 7.92%

 

25. Branch Corp.’s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?
 

a. 7.22%
b. 7.58%
c. 7.96%
d. 8.36%
e. 8.78%
 

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