Answer:
Options:
Question: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
b. After-tax operating income is calculated as EBIT(1 – T) + Depreciation.
c. Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
d. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.
e. Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.
Answer:
a. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
Question: The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
Answer:
Options
Question: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders’ claims against the firm’s existing assets. Put another way retained earnings are stockholders’ reinvested earnings.
Answer:
Options:
Question: 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 Choices:
a. The division’s basic earning power ratio is above the average of other firms in its industry.
b. The division’s total assets turnover ratio is below the average for other firms in its industry.
c. The division’s total debt to total capital ratio is above the average for other firms in the industry.
d. The division’s inventory turnover is 6x, whereas the average for its competitors is 8x.
e. The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
Answer:
a
Question: The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of the stock market’s overall performance.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
Answer:
Options:
Question: The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan’s life, the greater the percentage of the payment that will be a repayment of principal.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
Answer:
Options:
Question: Assume that in recent years both expected inflation and the market risk premium (rM – rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?
Answer:
Options for Question 86:
Question: Which of the following factors could explain why Michigan Energy’s cash balance increased even though it had a negative cash flow last year?
Answer:
Options:
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer:
Options:
Question: Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Last year Besset Company’s operations provided a negative cash flow, 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 (GAAP)?
Answer Choices:
a. The company repurchased some of its common stock.
b. The company dramatically increased its capital expenditures.
c. The company retired a large amount of its long-term debt.
d. The company sold some of its fixed assets.
e. The company had high depreciation expenses.
Answer:
d. The company sold some of its fixed assets.
Question: A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
Answer Choices:
a. The company’s current stock price is $20.
b. The company’s dividend yield 5 years from now is expected to be 10%.
c. The constant growth model cannot be used because the growth rate is negative.
d. The company’s expected capital gains yield is 5%.
e. The company’s expected stock price at the beginning of next year is $9.50.
Answer:
e
Question: The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project’s life, other things held constant.
Answer:
Options
Question: Typically, the statement of stockholders’ equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.
Answer:
Options:
Question: If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: 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:
Options: