Question 1

Assuming a tax rate of 30%, the after-tax cost of a $100,000 dividend payment is

Accepted Answer

Dividends are paid from after-tax profits, so the tax rate does not affect the amount of the dividend payment itself. The after-tax cost of a $100,000 dividend payment is still $100,000.

Question 2

Farah Snack Co. has earnings after taxes of $150,000. Interest expense for the year was $20,000; preferred dividends paid were $20,000; and common dividends paid were $30,000. Taxes were $22,500. The firm has 100,000 shares of common stock outstanding. Earnings per share on the common stock was

Accepted Answer

Earnings after taxes − Preferred stock dividends = Earnings available to common
$150,000 − $20,000 = $130,000 EAC
Earnings per share = Earnings available to common/number of shares outstanding
$130,000/100,000 = $1.30

Question 3

An increase of $100,000 in inventory would result in a(n)

Accepted Answer

Increasing inventory requires spending more cash to acquire the inventory. This means there will be a decrease in net cash flow, as cash is being used for the inventory purchase.

Question 4

The best indication of the operational efficiency of management is

Accepted Answer

Earnings before interest and taxes (EBIT) is considered the best indication of operational efficiency because it measures the profit generated from a company's core operations, without the influence of financing decisions or taxes. It helps to assess the management's ability to generate profits from sales and control operating expenses. Net income can be affected by one-time events or non-operating activities, while gross profit only reflects the profitability of sales and does not consider expenses. Earnings per share can be influenced by factors such as share buybacks or stock options.

Question 5

Hoover Inc. has current assets of $350,000 and fixed plant assets of $650,000. Current liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. Compute book value (net worth) per share

Accepted Answer

The answer of Hoover Inc. has current assets of $350,000...

Question 6

Which of the following would indicate an accurate statement of cash flows?

Accepted Answer

The statement of cash flows is a financial statement that reports a company's inflows and outflows of cash for a specific period of time. The net cash flow is the difference between the company's inflows and outflows of cash during the period. Therefore, the best choice is D, which states that the net cash flow is equal to the change in the cash balance._CHOICES_

Question 7

Assuming a tax rate of 40%, the after-tax cost of interest expense of $1,000,000 is

Accepted Answer

The after-tax cost of interest is calculated by multiplying the interest expense by (1 - tax rate). So, $1,000,000 * (1 - 0.40) = $600,000.

Question 8

Given the following, what is free cash flow? Cash flow from operating activities $200,000
Cash flow from investing activities $140,000
Cash flow from financing activities $56,000
Building purchases$50,000
Dividends Paid $20,000

Accepted Answer

Free cash flow is calculated as cash flow from operating activities minus capital expenditures (building purchases). So, $200,000 - $50,000 = $150,000. However, the closest option is $130,000, which might consider other adjustments not specified.

Question 9

Assuming a tax rate of 40%, depreciation expenses of $500,000 will

Accepted Answer

Depreciation expenses reduce taxable income, which in turn reduces the amount of taxes owed. The amount of tax savings will depend on the tax rate. In this case, a tax rate of 40% means that $500,000 in depreciation expenses will reduce taxes by $200,000.

Question 10

Gerry Co. has a gross profit of $1,200,000 and depreciation expense of $400,000. Selling and administrative expense is $250,000. Given that the tax rate is 40 percent, compute the cash flow from operations for Gerry Co.

Accepted Answer

The cash flow from operations is calculated as follows:

Gross Profit - Selling and Administrative Expenses - Depreciation Expense = Operating Income

$1,200,000 - $250,000 - $400,000 = $550,000

Then, we multiply this operating income by (1-Tax Rate) to get the cash flow from operations:

$550,000 x (1-0.40) = $330,000

Therefore, the cash flow from operations for Gerry Co. is $730,000 ($550,000 + $330,000).

Question 11

Compute the cash flows from operations using the indirect method if Star Corporation had $250,000 in net income, $30,000 in depreciation expense, a decrease of $20,000 in accounts receivable and an increase in bonds payable of $50,000.

Accepted Answer

Cash flow from operations = Net income + Depreciation + Decrease in A/R = $250,000 + $30,000 + $20,000 = $300,000.

Question 12

Hoover Inc. has current assets of $350,000 and fixed plant assets of $650,000. Current liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. What is the firm's total equity?

Accepted Answer

Equity = Assets − Liabilities or 350,000 + 650,000 − 100,000 − 250,000. The preferred stock is ignored.

Question 13

One of the primary factors evaluated when a company is pursuing a leveraged buyout is

Accepted Answer

Free cash flow is the cash available for a company to use for various purposes including debt repayment or funding buyouts. Therefore, it is an important factor evaluated when pursuing a leveraged buyout. Net cash flow, cash flow from financing activities, and cash flow from investing activities can also provide valuable information but are not necessarily the primary factors evaluated in a leveraged buyout.

Quiz 2: Review of Accounting