Question 1

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price?
A) $66.02
B) $69.49
C) $73.15
D) $77.00
E) $80.85

Accepted Answer

The answer of Hayes Corporation has $300 million of common...

Question 2

During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?
A) $71,425
B) $74,996
C) $78,746
D) $82,683
E) $86,818

Accepted Answer

Net income = Retained earnings, end of year - Retained earnings, beginning of year + Dividends= $197,500 - $159,600 + $33,525= $71,425

Question 3

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6%, and Carter's marginal income tax rate is 40%, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
A) 3.42%
B) 3.60%
C) 3.78%
D) 3.97%
E) 4.17%

Accepted Answer

To find the yield on municipal bonds that would make Carter's treasurer indifferent, we need to calculate the after-tax yield on Treasury bonds:

After-tax yield on Treasury bonds = 6% x (1 - 0.4) = 3.6%

This means that if the municipal bonds yield 3.6% or higher, Carter's treasurer would be indifferent between the two because he/she would earn the same after-tax return regardless of which bonds are chosen.

Therefore, the answer is choice B, 3.60%.

Question 4

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?
A) 5.32%
B) 5.60%
C) 5.89%
D) 6.20%
E) 6.51%

Accepted Answer

The answer of A corporation recently purchased some preferred stock...

Question 5

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?
A) 10.20%
B) 10.74%
C) 11.28%
D) 11.84%
E) 12.43%

Accepted Answer

The answer of Your corporation has a marginal tax rate...

Question 6

Emery Mining Inc. recently reported $150,000 of sales, $75,500 of operating costs other than depreciation, and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes.
A) $35,167.33
B) $37,018.24
C) $38,966.57
D) $41,017.44
E) $43,068.31

Accepted Answer

The answer of Emery Mining Inc. recently reported $150,000 of...

Question 7

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?
A) 6.57%
B) 6.92%
C) 7.28%
D) 7.64%
E) 8.03%

Accepted Answer

The answer of Van Dyke Corporation has a corporate tax...

Question 8

Casey Motors recently reported the following information:
• Net income = $600,000.
• Tax rate = 40%.
• Interest expense = $200,000.
• Total investor-supplied operating capital employed = $9 million.
• After-tax cost of capital = 10%.
What is the company's EVA?
A) -$171,000
B) -$180,000
C) -$189,000
D) -$198,450
E) -$208,373

Accepted Answer

The answer of Casey Motors recently reported the following information:
•...

Question 9

On 12/31/12, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/11, the company had reported $445,000 of retained earnings. No shares were repurchased during 2012. How much in dividends did the firm pay during 2012?
A) $49,638
B) $52,250
C) $55,000
D) $57,750
E) $60,638

Accepted Answer

Retained earnings at the end of the year can be calculated as beginning retained earnings plus net income minus dividends. Therefore, dividends paid during the year can be calculated as:

Dividends = Beginning retained earnings + Net income - Ending retained earnings 
Dividends = $445,000 + $135,000 - $525,000 
Dividends = $55,000

Therefore, the answer is C.

Question 10

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?
A) 5.64%
B) 5.93%
C) 6.25%
D) 6.58%
E) 6.90%

Accepted Answer

The answer of A 7-year municipal bond yields 4.8%. Your...

Question 11

Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.70 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
A) -$0.432
B) -$0.455
C) -$0.478
D) -$0.502
E) -$0.527

Accepted Answer

The answer of Last year Almazan Software reported $10.50 million...

Question 12

Hartzell Inc. had the following data for 2011, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2012 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2012?
A) $383
B) $425
C) $468
D) $514
E) $566

Accepted Answer

Free cash flow is calculated as after-tax operating income minus the change in total assets. The change in total assets from 2011 to 2012 is $500 million ($2,500 - $2,000). Therefore, free cash flow for 2012 is $925 million (after-tax operating income) - $500 million (change in total assets) = $425 million.

Question 13

A company with a 15% tax rate buys preferred stock in another company. The preferred stock has a before-tax yield of 8%. What is the preferred stock's after-tax return?
A) 6.90%
B) 7.26%
C) 7.64%
D) 8.02%
E) 8.42%

Accepted Answer

The answer of A company with a 15% tax rate...

Question 14

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?
A) 6.49%
B) 6.83%
C) 7.19%
D) 7.57%
E) 7.95%

Accepted Answer

The answer of Granville Co. recently purchased several shares of...

Question 15

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?
A) 13.85%
B) 14.54%
C) 15.27%
D) 16.03%
E) 16.83%

Accepted Answer

The answer of A bond issued by the State of...

Question 16

Houston Pumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?
A) $10,225
B) $10,736
C) $11,273
D) $11,837
E) $12,429

Accepted Answer

The answer of Houston Pumps recently reported $185,250 of sales,...

Question 17

A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?
A) 35.29%
B) 37.06%
C) 38.91%
D) 40.86%
E) 42.90%

Accepted Answer

To determine the tax rate at which investors would be indifferent between the two bonds, we need to calculate the after-tax yield of the corporate bond and compare it to the yield of the municipal bond. Let's assume the investor is in the 35% tax bracket.

After-tax yield of corporate bond = 8.5% x (1 - 0.35) = 5.53%
Yield of municipal bond = 5.5%

Since the after-tax yield of the corporate bond at a 35% tax rate (5.53%) is greater than the yield of the municipal bond (5.5%), investors would prefer the corporate bond at this tax rate. Any tax rate above 35.29% would make the municipal bond a more attractive choice, and any rate below 35.29% would make the corporate bond a more attractive choice. Therefore, the answer is A) 35.29%.

Question 18

Shrives Publishing recently reported $10,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow?
A) $1,873
B) $1,972
C) $2,076
D) $2,185
E) $2,300

Accepted Answer

The answer of Shrives Publishing recently reported $10,750 of sales,...

Question 19

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?
A) 7.02%
B) 7.39%
C) 7.76%
D) 8.15%
E) 8.56%

Accepted Answer

Step 1: Calculate the after-tax yield on the preferred stock

Before-tax yield = 8.4%
Corporate tax rate = 40%

After-tax yield = before-tax yield * (1 - corporate tax rate) = 8.4% * (1 - 40%) = 5.04%

Step 2: Apply the 70% dividend exclusion

After-tax yield * (1 - dividend exclusion) = 5.04% * (1 - 70%) = 1.512%

Step 3: Add the dividend exclusion back to the after-tax yield

After-tax return on the preferred stock = after-tax yield + dividend exclusion = 1.512% + 70% = 7.39%

Therefore, the answer is B) 7.39%.

Question 20

Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA)?
A) -$5,415,000
B) -$5,700,000
C) -$6,000,000
D) -$6,300,000
E) -$6,615,000

Accepted Answer

The answer of Byrd Lumber has 2 million shares of...

Quiz 3: Financial Statements

Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $162 million, what is the company's stock price?

During 2012, Bascom Bakery paid out $33,525 of common dividends. It ended the year with $197,500 of retained earnings versus the prior year's retained earnings of $159,600. How much net income did the firm earn during the year?

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Casey Motors recently reported the following information: • Net income = $600,000. • Tax rate = 40%. • Interest expense = $200,000. • Total investor-supplied operating capital employed = $9 million. • After-tax cost of capital = 10%. What is the company's EVA?

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return?

A company with a 15% tax rate buys preferred stock in another company. The preferred stock has a before-tax yield of 8%. What is the preferred stock's after-tax return?

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?

A corporate bond currently yields 8.5%. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5%. At what tax rate would investors be indifferent between the two bonds?

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $40 million of common equity on its balance sheet, what is the company's Market Value Added (MVA) ?