Financial Statements questions and answers

Question: In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Answer Choices:

Answer: B – False

Question: The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Answer Choices:

Answer: A – True

Question: The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

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Answer: B – False

Question: The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm’s shareholders at the target’s cost of equity reflecting any changes to its capital structure as a result of the merger.

Answer Choices:

Answer: A – True

Question: The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks’ ability to differentiate themselves and because different banks operate in different parts of the country.

Answer Choices:

Answer: B – False

Question: A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Answer Choices:

Answer: A – True

Question: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.

Answer Choices:

Answer: A – True

Question: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.

Answer Choices:

Answer: A – True

Question: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

Answer Choices:

Answer: B – False

Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.

Answer Choices:

Answer: A – True

Question: 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 amounts at which the assets are carried on the books.

Answer Choices:

Answer: A – True

Question: The amount shown on the December 31, 2015, balance sheet as “retained earnings” is equal to the firm’s net income for 2015 minus any dividends it paid.

Answer Choices:

Answer: B – False

Question: The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash flow for the same period.

Answer Choices:

Answer: A – True

Question: If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

Answer Choices:

Answer: A – True

Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”

Answer Choices:

Answer: A – True

Question: EBITDA stands for earnings before interest, taxes, debt, and assets.

Answer Choices:

Answer: B – False

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 Choices:

Answer: B – False

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 Choices:

Answer: A – True

Question: 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.

Answer Choices:

Answer: A – True

Question: The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.

Answer Choices:

Answer: A – True