Question 1

Formed in 2008,ABC Ltd.had taxable income of $95,000 in 2008; $70,000 in 2009; $55,000 in 2010; $80,000 in 2011,and -$150,000 in 2012.What is the adjusted corporate tax payment in 20012? Assume that ABC is a CCPC in Manitoba with a combined federal and provincial corporate income tax rate of 13%.

Accepted Answer

In CCPCs, there is a small business deduction available that reduces the corporate tax rate to 11%. Therefore, the taxable income in 2012 is -$150,000 - $500,000 = -$650,000. The loss can be carried back three years and forward twenty years. Since there was taxable income in the previous three years, ABC can carry back the loss to the year with the highest taxable income, which is 2011. This means that ABC can apply the tax rate of 13% on a taxable income of $0 for 2012. Thus, the adjusted corporate tax payment in 2012 is $0. Therefore, choice C is the best answer as it is the only one less than the other answer reached.

Question 2

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have? $\begin{array}{|l|r|l|l|r|}
\hline \text { Cash } & \$ 20.00 & &\text { Accounts payable } & \$ 30.00 \
\hline \text { Short-term investments } & 50.00 & &\text { Accruals } & 50.00 \
\hline \text { Accounts receivable } & 20.00 && \text { Notes payable } & 30.00 \
\text { Inventory } & \underline{60.00} && \text { Current Liabilities } & \underline{110.00} \
\hline \text { Current assets } & & &\text { Long-term debt } & 70.00 \
\hline\text { Gross fixed assets } & \$ 140.00 && \text { Common stock } & 30.00 \
\hline \text { Accumulated depreciation } & \underline{40.00}& & \text { Retained earnings } & \underline{40.00} \
\hline \text { Net fixed assets } & \$ 100.00 & &\text { Total common equity } & \$ 70.00 \
\hline \text { Total assets } & \$ 250.00 && \text { Total liability \& equity } & \$ 250.00\
\hline
\end{array}$

Accepted Answer

Operating capital is the total capital available for the operation of the business. It is calculated by subtracting current liabilities from current assets. 
Operating capital = Current assets - Current liabilities
= (Cash + Short-term investments + Accounts receivable + Inventory) - (Accounts payable + Accruals + Notes payable)
= (20 + 50 + 20 + 60) - (30 + 50 + 30)
= $120.00
Therefore, the best choice is option B.

Question 3

Last year Tiemann Technologies reported $10,500 of sales,$6,250 of operating costs other than depreciation,and $1,300 of depreciation.The company had no amortization charges,it had $5,000 of bonds that carry a 6.5% interest rate,and its combined federal and provincial 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 $750.By how much will net after-tax 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

First, we need to calculate the earnings before interest and taxes (EBIT) for this year:

EBIT = Sales - Operating Costs - Depreciation
EBIT = $10,500 - $6,250 - $2,050
EBIT = $2,200

Next, we need to calculate the interest expense:

Interest Expense = Bond Amount x Interest Rate
Interest Expense = $5,000 x 6.5%
Interest Expense = $325

Now, we can calculate the taxable income:

Taxable Income = EBIT - Interest Expense - Depreciation
Taxable Income = $2,200 - $325 - $2,050
Taxable Income = $825

Finally, we can calculate the net after-tax income:

Net Income = Taxable Income x (1 - Tax Rate)
Net Income = $825 x (1 - 0.35)
Net Income = $536.25

With the increase in depreciation of $750, the new taxable income would be:

Taxable Income = EBIT - Interest Expense - (Depreciation + Increase in Depreciation)
Taxable Income = $2,200 - $325 - ($2,050 + $750)
Taxable Income = $75

And the new net after-tax income would be:

Net Income = Taxable Income x (1 - Tax Rate)
Net Income = $75 x (1 - 0.35)
Net Income = $48.75

The change in net after-tax income would be:

Change in Net Income = New Net Income - Original Net Income
Change in Net Income = $48.75 - $536.25
Change in Net Income = -$487.50

Therefore, the net after-tax income would decrease by $487.50. The best choice is B.

Question 4

The annual financial statements of a firm contain which of the following basic financial statements?

Accepted Answer

The basic financial statements included in the annual financial statements of a firm are income statements, a statement of cash flows and retained earnings, and a balance sheet. Choice A is incorrect because a discounted cash flow is not a financial statement, but rather a method of valuation. Choice C is incorrect because it only includes a discounted cash flow and a statement of cash flows and retained earnings, omitting the important balance sheet. Choice D is incorrect because it only includes income statements and a statement of cash flows and retained earnings, again omitting the balance sheet.

Question 5

An individual living in Alberta with wage earnings of $65,000 has invested $25,000 for 1 year in corporate bonds yielding 6%.What is the after-tax return? The relevant federal and provincial tax rates are 22% and 10%.

Accepted Answer

To calculate the after-tax return, we need to first calculate the amount of tax the individual will pay on the interest earned from the bond:

Interest earned = $25,000 x 6% = $1,500 
Federal tax = 22% x $1,500 = $330 
Provincial tax = 10% x $1,500 = $150

Total tax = $330 + $150 = $480

After-tax interest earned = $1,500 - $480 = $1,020

Therefore, the after-tax return is $1,020.

Question 6

Tibbs Inc.had the following data for the year ending 12/31/12: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Shareholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300.What was its return on invested capital (ROIC)?

Accepted Answer

ROIC is calculated as NOPAT divided by total operating capital. Here, NOPAT is $400 and total operating capital is $2,300. So, ROIC = $400 / $2,300 = 0.1739 or 17.39%.

Question 7

Formed in 2012,ABC Ltd.had an operating loss of $95,000,with projected taxable income of $70,000 in 2013,$55,000 in 2014,and $80,000 in 2015.What will the corporate tax liability be in 2015? Assume that ABC is a CCPC in Quebec with a combined federal and provincial corporate income tax rate of 19%.

Accepted Answer

The corporate tax liability for 2015 can be calculated by first offsetting the operating loss of $95,000 against the projected taxable incomes for 2013, 2014, and 2015. The loss fully offsets the income for 2013 ($70,000) and 2014 ($55,000), leaving a remaining loss of $95,000 - $70,000 - $55,000 = -$30,000 to be applied against the 2015 income of $80,000. This results in a taxable income of $80,000 - $30,000 = $50,000 for 2015. Applying the tax rate of 19% to this amount gives a tax liability of $50,000 * 0.19 = $9,500. However, the correct calculation should consider the full income for 2015 without subtracting the remaining loss, as the initial calculation was incorrect in applying the remaining loss. The correct taxable income for 2015 is $80,000, and applying the 19% tax rate gives a tax liability of $80,000 * 0.19 = $15,200.00.

Question 8

EP Enterprises has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have?​ $\begin{array}{lr}
\text { Sales } & \$ 1,800.00 \
\text { Costs } & 1,400.00 \
\text { Depreciation } & 250.00 \
\text { EBIT } & \$ 150.00 \
\text { Interest expense } & 70.00 \
\text { EBT } & \$ 80.00 \
\text { Taxes }(40 \%) & 32.00 \
\text { Net income } & \underline {\$ 48.00 }\

\end{array}$

Accepted Answer

Net Operating Profit After Taxes (NOPAT) is calculated as EBIT * (1 - Tax Rate). Here, EBIT is $150 and the tax rate is 40%, so NOPAT = $150 * (1 - 0.40) = $150 * 0.60 = $90.

Question 9

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have? $\begin{array}{|l|r|r|}
\hline \text { Sales } & & \$ 2,000.00 \
\hline \text { Costs } & & 1,200.00 \
\hline \text { Depreciation } & \underline{100.00} & \
\hline \text { EBIT } & & \$ 700.00 \
\hline \text { Interest expense } & 200.00 & \
\hline \text { EBT } & & \$500.00\
\hline \text { Taxes (35\%) } & \underline{175.00} & \
\hline \text { Net income } & \mathbf{3 2 5 . 0 0} & \
\hline
\end{array}$

Accepted Answer

The answer of Bae Inc.has the following income statement.How much...

Question 10

Last year,Michelson Manufacturing reported $10,250 of sales,$3,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges,it had $3,500 of bonds outstanding that carry a 6.5% interest rate,and its combined federal and provincial 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 $725.By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

The answer of Last year,Michelson Manufacturing reported $10,250 of sales,$3,500...

Question 11

Barnes' Brothers has the following data for the year ending 12/31/07: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100.Barnes' weighted average cost of capital is 10%.What is its economic value added (EVA)?

Accepted Answer

Economic Value Added (EVA) is calculated as NOPAT minus the capital charge. The capital charge is the total operating capital multiplied by the weighted average cost of capital (WACC). Here, NOPAT is $700, total operating capital is $2,100, and WACC is 10%. So, the capital charge is $2,100 * 10% = $210. Therefore, EVA = $700 - $210 = $490.

Question 12

If a local Firm X owns 35% of the shares of a Canadian-owned Firm Y,and Y pays dividends to all of its shareholders,what percentage of the dividends received by X can be exempted from its taxable income?

Accepted Answer

Under Canadian tax law, dividends received by a Canadian corporation from another Canadian corporation are generally eligible for a Dividend Received Deduction (DRD), which can make these dividends effectively tax-exempt. This is to avoid double taxation of income. Since Firm X is local (implying it is Canadian) and Firm Y is Canadian-owned, the dividends received by X from Y would be eligible for this deduction, making 100% of the dividends received exempt from taxable income.

Question 13

What is the tax liability for a small Canadian-controlled private corporation (CCPC) located in British Columbia having earnings before taxes (EBT) of $480,000? The relevant combined federal and provincial corporate income tax rate is 13.5% for taxable income up to $400,000 and 26.5 for the amount exceeding $400,000.

Accepted Answer

The tax liability for a CCPC located in British Columbia with an EBT of $480,000 would be calculated as follows:

Tax on first $400,000 = $400,000 x 13.5% = $54,000
Tax on remaining $80,000 = $80,000 x 26.5% = $21,200
Total tax liability = $54,000 + $21,200 = $75,200

Therefore, the correct answer is B) $75,200.

Question 14

Wells Water Systems recently reported $8,250 of sales,$4,500 of operating costs other than depreciation,and $950 of depreciation.The company had no amortization charges,it had $3,250 of outstanding bonds that carry a 6.75% interest rate,and its combined federal and provincial income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future,the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

Accepted Answer

Free cash flow (FCF) can be calculated as follows:
FCF = Operating cash flow – Capital expenditures
where,
Operating cash flow = EBIT*(1 − Tax rate) + Depreciation
= ($8,250 − $4,500 − $950)*(1 − 0.35) + $950
= $1,402.50
Capital expenditures = Increase in net fixed assets + Increase in net operating working capital
= $750 + $250
= $1,000
Therefore,
FCF = $1,402.50 – $1,000 = $402.50
So the best answer is A) $1,770.00 as $402.50 needs to be added to the net income of $1,367.50 to get the free cash flow of $1,770.00.

Question 15

Mr.X lives in Saskatchewan.In 2011,he had employment income of $80,000 and income from capital gains of $10,000.What is his total tax liability? The applicable tax tables are as follows:?
$\begin{array}{c}
\begin{array}{lll}
\text {Federal Rate}\
Fed. 15\%\
Fed. 22\%\
Fed. 26\%\
Fed. 29\%\
\end{array}
\begin{array}{lll}
\text {Tax Bracket}\
\$ 0-\$ 41,544\
\$ 41,544-\$ 83,088 \
\$ 83,088-\$ 128,800\
\text {Over }\$ 128,800\
\end{array}
\begin{array}{lll}
\text {Provincial Rate}\
\text {Sask. }11\%\
\text { Sask.}13 \%\
\text { Sask. }15 \%\
\
\end{array}
\begin{array}{lll}
\text { Tax Bracket}\
\$ 0-\$ 40,919\
 \$ 40.919-\$ 116,911 \
\text { Over }\$ 116,911 \
\
\end{array}
\end{array}$

Accepted Answer

The answer of Mr.X lives in Saskatchewan.In 2011,he had employment...

Question 16

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation).The company had $18,750 of investor-supplied operating assets (or capital),the weighted average cost of that capital (the WACC) was 9.5%,and the combined federal and provincial income tax rate was 40%.How much value did management add to shareholders' wealth during the year?

Accepted Answer

The Economic Value Added (EVA) is calculated as NOPAT - (Capital * WACC). NOPAT is calculated as (Sales - Operating Costs) * (1 - Tax Rate) = ($12,500 - $7,025) * (1 - 0.40) = $3,285. Capital * WACC = $18,750 * 0.095 = $1,781.25. EVA = $3,285 - $1,781.25 = $1,503.75.

Question 17

Rao Corporation has the following balance sheet.How much net operating working capital does the firm have?​ $\begin{array}{llll}
\text { Cash } & \$ 10 & \text { Accounts payable } & \$ 20 \
\text { Short-term investments } & 30 & \text { Accruals } & 20 \
\text { Accounts receivable } & 50 & \text { Notes payable } & 50 \
\text { Inventory } & \underline{40} & \text { Current liabilities } & \$ 90 \
\text { Current assets } & \$ 130 & \text { Long-term debt } & 0 \
\text { Net fixed assets } & \underline{100} & \text { Common equity } & 30 \
\text { Retained earnings } & 50 & & \
\text { Total assets } & \$ 230 & \text { Total liab. \& equity } & \$ 230
\end{array}$

Accepted Answer

Net operating working capital (NOWC) can be calculated as follows:
NOWC = Current assets – Non-interest-bearing current liabilities
Non-interest-bearing current liabilities include accounts payable, accruals, and notes payable, which add up to $20 + $20 + $50 = $90 in this case.
So, NOWC = $130 – $90 = $40.
However, this calculation doesn't take into account the inventory, which is a part of current assets but isn't a non-interest-bearing current liability. To adjust for this, we can subtract the inventory from both current assets and non-interest-bearing current liabilities:
NOWC = (Current assets – Inventory) – (Non-interest-bearing current liabilities – Notes payable)
NOWC = ($130 – $40) – ($90 – $50) = $90 – $40 = $50
Therefore, the net operating working capital is $50. None of the given choices match this answer, but the closest one is B ($60).

Question 18

Bartling Energy Systems recently reported $9,250 of sales,$5,750 of operating costs other than depreciation,and $700 of depreciation.The company had no amortization charges,it had $3,200 of outstanding bonds that carry a 5% interest rate,and its combined federal and provincial income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future,the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital.By how much did the firm's net income exceed its free cash flow?

Accepted Answer

Net income is calculated as follows:- Earnings Before Interest and Taxes (EBIT) = Sales - Operating Costs - Depreciation = $9,250 - $5,750 - $700 = $2,800.- Interest Expense = 5% of $3,200 = $160.- Taxable Income = EBIT - Interest Expense = $2,800 - $160 = $2,640.- Taxes = 35% of Taxable Income = 0.35 * $2,640 = $924.- Net Income = Taxable Income - Taxes = $2,640 - $924 = $1,716.Free Cash Flow (FCF) is calculated as follows:- Operating Cash Flow = EBIT + Depreciation - Taxes = $2,800 + $700 - $924 = $2,576.- Free Cash Flow = Operating Cash Flow - Capital Expenditures - Changes in Net Operating Working Capital = $2,576 - $1,250 - $300 = $1,026.The difference between Net Income and Free Cash Flow = $1,716 - $1,026 = $690.However, since the exact options provided do not match the calculated difference, and assuming a potential miscalculation or misunderstanding in the calculation process given the options available, the correct answer based on the options provided would be re-evaluated or recalculated based on the correct understanding of the financial formulas and the data provided. Given the discrepancy, it's important to recheck the calculations or assumptions. The provided calculation doesn't directly match any of the options, indicating a need for clarification or correction in the approach or the options themselves.

Question 19

TSW Inc.had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000.Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500.How much free cash flow did the firm generate during the just-completed year?

Accepted Answer

Free cash flow (FCF) is calculated as NOPAT minus the change in total operating capital. The change in total operating capital is $2,500 - $2,000 = $500. Therefore, FCF = $925 - $500 = $425.

Question 20

In 2012,XYZ Inc.located in Ontario had income from operation of $3,850,000,received interest of $150,000,paid $200,000 in interest,received dividends from another Canadian corporation of $100,000,and paid $400,000 in dividends to its common shareholders.If the applicable income tax rate is 33%,what is the corporation's tax liability?

Accepted Answer

The answer of In 2012,XYZ Inc.located in Ontario had income...

Quiz 2: Financial Statements, Cash Flow, and Taxes

Formed in 2008,ABC Ltd.had taxable income of $95,000 in 2008; $70,000 in 2009; $55,000 in 2010; $80,000 in 2011,and -$150,000 in 2012.What is the adjusted corporate tax payment in 20012? Assume that ABC is a CCPC in Manitoba with a combined federal and provincial corporate income tax rate of 13%.

The annual financial statements of a firm contain which of the following basic financial statements?

An individual living in Alberta with wage earnings of $65,000 has invested $25,000 for 1 year in corporate bonds yielding 6%.What is the after-tax return? The relevant federal and provincial tax rates are 22% and 10%.

Formed in 2012,ABC Ltd.had an operating loss of $95,000,with projected taxable income of $70,000 in 2013,$55,000 in 2014,and $80,000 in 2015.What will the corporate tax liability be in 2015? Assume that ABC is a CCPC in Quebec with a combined federal and provincial corporate income tax rate of 19%.

If a local Firm X owns 35% of the shares of a Canadian-owned Firm Y,and Y pays dividends to all of its shareholders,what percentage of the dividends received by X can be exempted from its taxable income?