2024 – FIN 534 Quiz 5 Question 1 Which of the following items is NOT included

FIN 534 Quiz 5

Question 1 

Which of the following items is NOT included in current assets?

Answer 

Accounts receivable.

Inventory.

Bonds.

Cash.

Short-term, highly liquid, marketable securities.

2 points 

Question 2 

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?

Answer 

The company sold a new issue of bonds.

The company made a large investment in new plant and equipment.

The company paid a large dividend.

The company had high amortization expenses.

The company repurchased 20% of its common stock.

2 points 

Question 3 

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?

Answer 

The company’s operating income declined.

The company’s expenditures on fixed assets declined.

The company’s cost of goods sold increased.

The company’s depreciation and amortization expenses declined.

The company’s interest expense increased.

2 points 

Question 4 

Which of the following statements is CORRECT?

Answer 

Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.

A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.

Common equity includes common stock and retained earnings, less accumulated depreciation.

The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.

2 points 

Question 5 

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Answer 

The company cut its dividend.

The company made a large investment in a profitable new plant.

The company sold a division and received cash in return.

The company issued new common stock.

The company issued new long-term debt.

2 points 

Question 6 

Which of the following statements is CORRECT?

Answer 

Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.

Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.

The maximum federal tax rate on corporate income in 2008 was 50%.

Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

The maximum federal tax rate on personal income in 2008 was 50%.

2 points 

Question 7 

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:

Assets: 2009 2008 

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 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 

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 2008. As of the end of 2009, none of the principal on this debt had been repaid. Assume that the company’s sales in 2008 and 2009 were the same. Which of the following statements must be CORRECT?

Answer 

Wolken increased its short-term bank debt in 2009.

Wolken issued long-term debt in 2009.

Wolken issued new common stock in 2009.

Wolken repurchased some common stock in 2009.

Wolken had negative net income in 2009. 

2 points 

Question 8 

Which of the following statements is CORRECT?

Answer 

One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.

If a firm reports positive net income, its EVA must also be positive.

One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.

One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

Actions that increase reported net income will always increase net cash flow.

2 points 

Question 9 

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.

Answer 

Companies’ net operating profits after taxes (NOPAT) would decline.

Companies’ physical stocks of fixed assets would increase.

Companies’ net cash flows would increase.

Companies’ cash positions would decline.

Companies’ reported net incomes would decline.

2 points 

Question 10 

Which of the following statements is CORRECT?

Answer 

In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.

Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.

In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.

In the statement of cash flows, depreciation charges are reported as a use of cash.

In the statement of cash flows, a decrease in inventories is reported as a use

of cash.

2 points 

Question 11 

Which of the following statements is CORRECT?

Answer 

Operating cash flow (OCF) is defined as follows: 

(1-T) – Depreciation and Amortization.

Changes in working capital have no effect on free cash flow.

Free cash flow (FCF) is defined as follows: 

(1 – T) 

+ Depreciation and Amortization 

– Capital expenditures required to sustain operations

– Required changes in net operating working capital.

Free cash flow (FCF) is defined as follows:

(1-T)+ Depreciation and Amortization + Capital expenditures.

Operating cash flow is the same as free cash flow (FCF).

2 points 

Question 12 

For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT?

Answer 

The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.

The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions’ performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.

The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.

The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.

The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.

2 points 

Question 13 

Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

Answer 

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

The company purchases a new piece of equipment.

2 points 

Question 14 

A security analyst obtained the following information from Prestopino Products’ financial statements:

− Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.

− The company does not pay dividends.

– The company’s depreciation expense is its only non-cash expense; it has no amortization charges.

– The company has no non-cash revenues.

–The company’s net cash flow (NCF) for 2010 was $150,000.

On the basis of this information, which of the following statements is CORRECT?

Answer 

Prestopino had negative net income in 2010.

Prestopino’s depreciation expense in 2010 was less than $150,000.

Prestopino had positive net income in 2010, but its income was less than its 2009 income.

Prestopino’s NCF in 2010 must be higher than its NCF in 2009.

Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.

2 points 

Question 15 

Which of the following statements is CORRECT?

Answer 

The balance sheet for a given year, say 2008, is designed to give us an idea of what happened to the firm during that year.

The balance sheet for a given year, say 2008, tells us how much money the company earned during that year.

The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders’ equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).

For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

A typical industrial company’s balance sheet lists the firm’s assets that will be converted to cash first, and then goes on down to list the firm’s longest lived assets last.

2 points 

Question 16 

Which of the following statements is CORRECT?

Answer 

A reduction in inventories held would have no effect on the current ratio.

An increase in inventories would have no effect on the current ratio.

If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.

2 points 

Question 17 

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Answer 

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable.

Issue new common stock and use the proceeds to increase inventories.

Speed up the collection of receivables and use the cash generated to increase inventories.

Use some of its cash to purchase additional inventories.

Issue new common stock and use the proceeds to acquire additional fixed assets.

2 points 

Question 18 

HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?

Answer 

Without more information, we cannot tell if HD or LD would have a higher or lower net income.

HD would have the lower equity multiplier for use in the Du Pont equation.

HD would have to pay more in income taxes.

HD would have the lower net income as shown on the income statement.

HD would have the higher net income as shown on the income statement.

2 points 

Question 19 

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

Answer 

Company HD pays less in taxes.

Company HD has a lower equity multiplier.

Company HD has a higher ROA.

Company HD has a higher times interest earned (TIE) ratio.

Company HD has more net income.

2 points 

Question 20 

Considered alone, which of the following would increase a company’s current ratio?

Answer 

An increase in net fixed assets.

An increase in accrued liabilities.

An increase in notes payable.

An increase in accounts receivable.

An increase in accounts payable.

2 points 

Question 21 

Companies E and P each reported the same earnings per share (EPS), but Company E’s stock trades at a higher price. Which of the following statements is CORRECT?

Answer 

Company E probably has fewer growth opportunities.

Company E is probably judged by investors to be riskier.

Company E must have a higher market-to-book ratio.

Company E must pay a lower dividend.

Company E trades at a higher P/E ratio.

2 points 

Question 22 

Which of the following statements is CORRECT?

Answer 

Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.

Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.

The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.

Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.

2 points 

Question 23 

Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

Answer 

Borrow using short-term notes payable and use the proceeds to reduce accruals.

Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Use cash to reduce accruals.

Use cash to reduce short-term notes payable.

Use cash to reduce accounts payable.

2 points 

Question 24 

If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT?

Answer 

The lower the company’s EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

2 points 

Question 25 

Which of the following statements is CORRECT?

Answer 

The use of debt financing will tend to lower the basic earning power ratio, other things held constant.

A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.

If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.

Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

All else equal, increasing the debt ratio will increase the ROA.

2 points 

Question 26 

Which of the following statements is CORRECT?

Answer 

If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.

There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.

2 points 

Question 27 

Which of the following statements is CORRECT?

Answer 

If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.

If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.

Other things held constant, the higher a firm’s expected future growth rate, the lower its P/E ratio is likely to be.

The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).

If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

2 points 

Question 28 

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Answer 

The division’s basic earning power ratio is above the average of other firms in its industry.

The division’s total assets turnover ratio is below the average for other firms in its industry.

The division’s debt ratio is above the average for other firms in the industry.

The division’s inventory turnover is 6, whereas the average for its competitors is 8.

The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30.

2 points 

Question 29 

Which of the following statements is CORRECT?

Answer 

If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.

If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.

If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.

If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

2 points 

Question 30 

Other things held constant, which of the following alternatives would increase

a company’s cash flow for the current year?

Answer 

Increase the number of years over which fixed assets are depreciated for tax purposes.

Pay down the accounts payables.

Reduce the days’ sales outstanding (DSO) without affecting sales or operating costs.

Pay workers more frequently to decrease the accrued wages balance.

Reduce the inventory turnover ratio without affecting sales or operating costs.

2 points