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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 1

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Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation.The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 25%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

A) $2,050.00
B) $2,152.50
C) $2,260.13
D) $2,373.13
E) $2,491.79

F) A) and D)
G) B) and C)

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Question 2

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Jessie's Bobcat Rentals' operations provided a negative net cash flow last year, 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?

A) The company had high depreciation expenses.
B) The company repurchased some of its common stock.
C) The company dramatically increased its capital expenditures.
D) The company retired a large amount of its long-term debt.
E) The company sold some of its fixed assets.

F) D) and E)
G) C) and E)

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Question 3

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On the balance sheet, total assets must always equal total liabilities and equity.

In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance, the primary emphasis is also on net income because that is what investors use to value the firm.However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow provided (used) by operations year, even though the cash on its balance sheet increased?

Below are the year-end balance sheets for Wolken Enterprises: $\begin{array}{c}\begin{array}{lll} \text {Assets:}\\ \text {Cash}\\ \text {Accounts receivable}\\ \text {Inventories}\\ \text {Total current assets}\\ \text {Net fixed assets}\\ \text {Total assets}\\\\\underline{ \text {Liabilities and equity:}}\\ \text {Accounts payable}\\ \text {Notes payable}\\ \text {Total current liabilities}\\ \text {Long-term debt}\\ \text {Common stock}\\ \text {Retained earnings}\\ \text {Total common equity}\\ \text {Total liabilities and equity}\end{array}\begin{array}{r}2020 \\200,000 \\864,000 \\\underline{2,000,000}\\ \$ 3,064,000 \\6,000,000 \\\underline{\$ 9,064,000 }\\\\\\\$ 1,400,000 \\1,600,000 \\\underline{\$ 3,000,000 }\\ 2,400,000 \\3,000,000 \\\underline{664,000} \\ \$ 3,664,000 \\\underline{\$ 9,064,000 }\\\end{array}\begin{array}{r}2019 \\\$ 170,00 \\7000,00 \\\underline{1,400,000} \\ \$ 2,270,00 \\5,600,00 \\\underline{\$ 7,870,00}\\\\\\\$ 1,090,00 \\1,800,00 \\\underline{\$ 2,890,000} \\2,400,00 \\2,000,00 \\\underline{580,00 }\\\$ 2,580,00 \\\underline{\$ 7,870,00 }\\\end{array} \end{array}$ Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2019.As of the end of 2020, none of the principal on this debt had been repaid.Assume that the company's sales in 2019 and 2020 were the same.Which of the following statements must be CORRECT?

DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility.Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years.If the legislation becomes law, which of the following would occur in the year following the change?

Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share.How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA?

Barnes' Brothers has the following data for the year ending 12/31/2015: 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) ?

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

Tibbs Inc.had the following data for the most recent year: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300.What was its return on invested capital (ROIC) ?

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have? $\begin{array}{lr}\text { Sales } & \$ 2,000.00 \\\text { Costs } & 1,200.00 \\\text { Depreciation } & 100.00 \\\text { EBIT } & \$ 700.00 \\\text { Interest expense } & 200.00 \\\text { EBT } & \$ 500.00 \\\text { Taxes }(25 \%) & 125.00 \\\text { Netincome } & \$ 375.00\end{array}$

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT) , and its tax rate all remain constant.Which of the following would occur?

The LeMond Corporation just purchased a new production line.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.

Which of the following statements is CORRECT?

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Which of the following statements is CORRECT?

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?

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 25%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.