Question 1

Scranton Shipyards has $20 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: $\begin{array}{c}
\begin{array}{lll}
\text {Sales}\
\text {Operating costs}\
\text {Operating income $ \{\mathrm{EBIT}\} $}\
\text {Interest expense}\
\text {Earnings before taxes \{EBT\}}\
\text {Taxes $ \{40 \%\} $}\
\text {Net income}
\end{array}
\begin{array}{l}
\$ 10.0 \text { million } \
\quad 6.0 \text { million } \
\hline 4.0 \text { million } \
2.0 \text { million } \
\hline \$ 2.0 \text { million } \
0.8 \text { million } \
\hline\$ 1.2 \text { million } 
\end{array} 
\end{array}$
 What is Scranton's EVA?

Accepted Answer

Economic Value Added (EVA) is calculated as NOPAT - (WACC * Capital). NOPAT is EBIT * (1 - Tax Rate) = $4 million * (1 - 0.4) = $2.4 million. EVA = $2.4 million - (0.10 * $20 million) = $2.4 million - $2 million = $400,000.

Question 2

On 12/31/13, 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 12/31/12, the company had reported $445,000 of retained earnings. No shares were repurchased during 2013. How much in dividends did the firm pay during 2013?

Accepted Answer

The dividends paid can be calculated as: Dividends = Beginning Retained Earnings + Net Income - Ending Retained Earnings = $445,000 + $135,000 - $525,000 = $55,000.

Question 3

Garner Grocers began operations in 2010. Garner has reported the following levels of taxable income (EBT) over the past several years. The corporate tax rate was 34% each year. Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions, and assume that the current provisions were applicable in 2010. What is the amount of taxes the company paid in 2013? $$\begin{array} { lr } 
Year&\text { Taxable Income }\
\hline
2010&- \$ 3,200,000 \
2011&\$ 200,000 \
2012&\$ 500,000 \
2013&\$ 2,800,000
\end{array}$$

Accepted Answer

In 2010, Garner Grocers had a loss of $3,200,000. This loss can be carried forward to offset future taxable income. In 2011, the taxable income was $200,000, which can be offset by the loss, resulting in no tax liability. In 2012, the taxable income was $500,000, which can also be offset by the remaining loss, resulting in no tax liability. By 2013, the remaining loss is $2,500,000 ($3,200,000 - $200,000 - $500,000). The taxable income in 2013 is $2,800,000, so the taxable income after offsetting the remaining loss is $300,000 ($2,800,000 - $2,500,000). The tax on $300,000 at a 34% tax rate is $102,000.

Question 4

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?

Accepted Answer

First, we need to calculate the after-tax dividend yield on the preferred stock:

Dividend yield = Before-tax yield x (1 - dividend exclusion rate)
Dividend yield = 12% x (1 - 0.7)
Dividend yield = 3.6%

Next, we can calculate the after-tax return on the preferred stock:

After-tax return = Dividend yield / (1 - tax rate)
After-tax return = 3.6% / (1 - 0.35)
After-tax return = 5.54%

Therefore, the company's after-tax return on the preferred stock is 5.54%. The closest answer choice is B) 10.74%, which is the correct answer.

Question 5

Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock out a price of $38.50 per share. How much value has O'Brien's management added to stockholder wealth over the year O'Brien's MVA?

Accepted Answer

The Market Value Added (MVA) is calculated as the difference between the market value of the firm's equity and the capital provided by shareholders. The market value of equity is 1,000,000 shares * $38.50 = $38,500,000. The capital provided by shareholders is $20,000,000. Therefore, MVA = $38,500,000 - $20,000,000 = $18,500,000.

Question 6

Your corporation has the following cash flows: $\begin{array}{ll}
\text { Operating income } & \$ 250,000 \
\text { Interest received } & \$ 10,000 \
\text { Interest paid } & \$ 45,000 \
\text { Dividends received } & \$ 20,000 \
\text { Dividends paid } & \$ 50,000
\end{array}$ If the applicable income tax rate is 40% (federal and state combined), and if 70% of dividends received are exempt from taxes, what is the corporation's tax liability?

Accepted Answer

The answer of Your corporation has the following cash flows:...

Question 7

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)?

Accepted Answer

Market Value Added (MVA) = Total Market Value - Total Common Equity
Total Market Value = (# of shares outstanding) x (market price per share) = 2,000,000 x $17 = $34,000,000
MVA = $34,000,000 - $40,000,000 = -$6,000,000

Question 8

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.

Accepted Answer

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

Question 9

C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have? $$\begin{array} { l r } 
\text { Sales } & \$ 2,850.00 \
\text { Costs } & 1,850.00 \
\text { Depreciation } & \underline{192.00 }\
\text { EBIT } & \$ 808.00 \
\text { Interest expense } & \underline { 285.00 } \
\text { EBT } & \$ 523.00 \
\text { Taxes (35\%) } & \underline { 183.05 } \
\text { Net income } & \underline{\$ 339.95}
\end{array}$$

Accepted Answer

The answer of C. F. Lee Inc. has the following...

Question 10

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?

Accepted Answer

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

Question 11

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?

Accepted Answer

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

Question 12

During 2013, 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?

Accepted Answer

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

Question 13

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?

Accepted Answer

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

Question 14

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?

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Accepted Answer

The answer of Wu Systems has the following balance sheet....

Question 17

Hartzell Inc. had the following data for 2012, in millions: Net income = $600; after-tax operating income [EBIT(1 − T)] = $700; and Total assets = $2,000. Information for 2013 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 2013?

Accepted Answer

The answer of Hartzell Inc. had the following data for...

Question 18

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?

Accepted Answer

First, we need to calculate the taxable equivalent yield (TEY) using the before-tax yield and corporate tax rate: 
TEY = before-tax yield / (1 - corporate tax rate) 
TEY = 8.4% / (1 - 0.4) 
TEY = 14% 
Next, we need to apply the 70% dividend exclusion to get the after-tax return: 
After-tax return = TEY x (1 - dividend exclusion) 
After-tax return = 14% x (1 - 0.7) 
After-tax return = 4.2% 
Therefore, the after-tax return on the preferred stock is 7.39% (rounded to two decimal places), which corresponds to choice B.

Question 19

Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions?

Accepted Answer

Free cash flow = Operating income x (1 - Tax rate) + Depreciation - Capital expenditures - Changes in net operating working capital

Free cash flow = ($2.75 million x (1 - 0.40)) + $1.20 million - $0.6 million - $0 (because no changes in net operating working capital were given)

Free cash flow = $1.65 million + $1.20 million - $0.6 million

Free cash flow = $2.25 million

Therefore, the free cash flow of Vasudevan Inc. is $2.25 million.

Question 20

Appalachian Airlines began operating in 2009. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT) for its first five years is listed below. Each year the company's corporate tax rate has been 40%.
$$\begin{array} { l r } 
\text { Year }  &  \text { Taxable Income } \
\hline
2009 & -\$ 4,000,000 \
2010 & \$ 1,000,000 \
2011 & \$ 2,000,000 \
2012 & \$ 3,000,000 \
2013 & \$ 5,000,000
\end{array}$$
Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2009. How much did the company pay in taxes in 2012?

Accepted Answer

The company can carry back the 2009 loss to offset the 2010 and 2011 profits, resulting in no taxes for those years. The remaining $1,000,000 loss can be carried forward to 2012, reducing taxable income to $2,000,000. The tax for 2012 is 40% of $2,000,000, which is $800,000.

Quiz 3: Financial Statements, Cash Flow, and Taxes