Finance Final Exam

Financial Statements and reports Is Issued once a year by a corporation and contains basic Financial Statements and an analysis of past performance and future prospects annual report
Financial Statements and reports Provides a quantitative summary of a company’s assets, libs, and net worth at a specific point in time balance sheet
Financial Statements and reports Details changes in the capital received from investors in exchange for stock (paid-in-capital), donated capital, and retained earnings Statement of retained earnings
Financial Statements and reports gives details about the firm’s sales, costs, and profits for the past accounting period income statement
Financial Statements and reports Gives details about company’s cash at the beginning of the year and what is left at the end of the year, including some details about where cash was generated and where it was used during the course of the year statement of cash flows
How much cash is a firm generating through operating, investing, and financing activities? on balance sheet or statement of cash flows? statement of cash flows
How much debt and equity has the firm issued to finance its assets? on balance sheet or statement of cash flows? on balance sheet
if compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to: A) overstate its earningsB) understate its earnings A) overstate its earnings
Financial Statements and reports required by the SEC and includes the audited document that shows the company’s financial results for the past year and management’s discussion about the future outlook and plans annual report
Financial Statements and reports divided into two important parts: operating and non operating sections; also known as the profit and loss statement Income statement
Financial Statements and reports explains the changes in a company’s retained earnings over the accounting year statement of retained earnings
Financial Statements and reports provides details about the flow of funds from operating, investing, and financing activities statement of cash flows
Financial Statements and reports has three segments that when analyzed together give an idea of what the company owns and what it owes balance sheet
Financial Statements and reportsIs published once a year and provides stockholders with details about the company’s performance and financial condition Annual Report
Financial Statements and reports
How profitable has the firm been? on income statement or statement of retained earnings? Income statement
How much the firm’s earnings are left as balance after the firm pays out dividends to its shareholders? on income statement or statement of retained earnings? statement of retained earnings
T/F As long as the info reported follows the generally accepted accounting principles (GAAP) guidelines, accountants in a firm have the liberty to use personal judgment to report transactions in the firm’s financial statements. true
Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised? on balance sheet or statement of cash flows? statement of cash flows
Can the firm meet all its short-term obligations using its current assets?on balance sheet or statement of cash flows? on balance sheet
The annual report is very important for investors, because the info contained in the annual report: A) shows the price at which each investor purchased the company’s stock and bonds B) helps investors forecast expected earnings and dividends B) helps investors forecast expected earnings and dividends
A cost that has been incurred and may be related to a project but should not be a part of the decision to accept/reject a project sunk cost
the cash flows that the asset of project is expected to generate over its life incremental cash flows
the cost of not choosing another mutually exclusive project by accepting a particular project opportunity cost
the effects on other parts of the firm externalities
the specific cash flows that should be considered in a capital budgeting decision relevant cash flows
in general, is the U.S federal tax system progressive or regressive? progressive
You bought 1,000 shares of a stock for $75 per share and sold it for $77.25 per share within the same year. how will your gain or loss be treated when you file your taxes and how much is it? you have a capital gain of $2,250because it was bought and sold in the same year, it will be treated as short-term capital gain.• AS A CAPITAL gain taxed at the current ordinary income tax rate
Depreciation expenses directly affect a company’s taxable income.1) an increase in depreciation expense will lead to a ________ taxable income 2) it will ________ tax deducted from a company’s earnings, thus leading to a __________ operating cash flow Lower Decrease HigherOCF= EBIT + Depreciation – Taxes
Taxpayers must pay the _______ of the Alternative minimum tax (AMT) or regular tax higher
The applicable tax rate for S corporation is based on the: A) stockholders individual tax rate B) corporate tax rate A) stockholders individual tax rate
Which source of investor income is susceptible to double taxations? A) interest earnedB) dividends B) dividends
You bought 1,000 shares of a stock for $60.59 per share and sold it for $82.35 per share after a few year. how will your gain or loss be treated when you file your taxes and how much is it? Capital gain is $21,760Because you sold a stock that you bought more than 12 months ago, it will be treated as long term capital gainAs a capital gain taxed at the long term tax rate
To offset taxable income in a given year, ordinary corporate operating losses can be: a) carried back for 2 years and carried forward for 20 years b) carried back for 5 years and carried forward for 10 years carried back for 2 years and carried forward for 20 years
From a corp point of view, does the tax treatment of dividends and interest paid favor the use of debt financing or equity financing? debt financing
Suppose a firm in the 40% tax bracket needs to pay $1 in dividends to its shareholders. What is the pretax income it should have to pay this dividend? $1/ (1-.4) = 1.67
How are assets supposed to be listed on the balance sheet based on the GAAP? in the order in which they are to be converted into cash
How are debts supposed to be listed on the balance sheet based on the GAAP? in the order in which they are to be repaid
A firm has 100 million in revenues. Does that mean it has generated a cash flow of 100 million dollars? noRevenue of $100 mill could include sales made on credit so it doesn’t mean the comp made that much money
op, invest, or finance a company records a decrease in its total raw materials inventory from the previous year operating
op, invest, or finance a company buys common stock in its suppliers firm with its extra cash investing activity
op, invest, or finance ruth enterprises distributes a holiday bonus to all its employees Operating
op, invest, or finance Yum co uses cash to repurchase 10% of its common stock finance
op, invest, or financeearns revenue from its cash receipts from royalties operating activity
op, invest, or finance day to day actions needed to conduct business operating activity
op, invest, or finance affect a firms cash position operating activity
op, invest, or finance purchase or sale of investment investing activity
op, invest, or finance cash inflow or outflows to repay or obtain capital financing activity
op, invest, or finance distributing dividends to its common stockholders for the first time finance
op, invest, or finance Loss of 70000 dollars on sales of its outdated inventory op
Which of the following is true for the statement of cash flows?a) it reflects revenues when earnedb) it reflects cash generated and used during the reporting period b) it reflects cash generated and used during the reporting period
op, invest, or finance earns revenue from its cash receipts from royalties op
op, invest, or finance buys marketing rights to sell a drug exclusively in East Asain markets investing
op, invest, or finance company reports 10% increase in its accounts payable from the last month operating
op, invest, or finance chain of restaurants conducts an initial public offering to raise funds for expansion financing
If a firm has a lot of net cash flow, does that mean the firm’s balance sheet cash account must be high? no
shareholder’s equity equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years
shareholder’s equity equity is the difference between the companies assets and liabilities
shareholder’s equity equity is the sum of shareholders capital provided by shareholders and retained earnings
Free cash flow:a) residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working capital expendituresb) cash flows generated by operating the business a) residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working capital expenditures
which is NOT a use of FCF? a) acquiring operating assetsb) retiring debt- that is, to pay off debtc) repurchasing common stock a) acquiring operating assets
can a company have negative FCF? yes
Free cash flow:a) the cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations b) the excess cash generated by revs less all operating exp a) the cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations
Free cash flow: a) the amt of firms avail cash that can be used without harming op or the ability to produce future cash flows
evaluates to what extent managers perform their primary task- to create shareholder wealtha)Market Value addedb) economic value added a)Market Value added
evaluates the amt by which profits exceed or fall short of the cost of capital in any one perioda)Market Value addedb) economic value added b) economic value added
MVA = Difference between market value andbook value of a firm’s common equity.(P0 x Number of shares) – Book value.
EVA= Estimate of a business’ true economicprofit for a given year.
Corporate and Personal Taxes Both have a progressive structure (the higher the income, the higher the marginal tax rate).
Dividends are paid out of —- are paid out of net income which has already been taxed at the corporate level, this is a form of “double taxation”.
carry losses back to offset profits in previous years or forward to offset profits in the future. Tax Loss Carry-Back and Carry-Forward – since corporate incomes can fluctuate widely, the Tax Code allows firms to
Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Explain and state the assumptions that underlie your answer. a.It issues $8 million of new common stock.b.It buys new plant and equipment at a cost of $3 million.c.It reports a large loss for the year.d.It increases the dividends paid on its common stock. Statements (b) and (d) will decrease the amount of cash on a company’s balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.
personal judgment is allowed when as long as the information follows the GAAP
Business Risk riskiness of the firm’s assets if no debt is used
financial risk the additional risk placed on the common stockholders as a result of using debt
what is the break-even analysis similar too? sensitivity analysis
financial leverage concentrates firms business risk on stockholders
will changes in debt effect ROIC no
optimal capital structure at a debt ratio that…. both maximizes its stock price ANDminimizes its WACC

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