Finance Multiple Choice Questions

1 to 10
Question 1 of 20
Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT). Which of the following definitely cannot help explain this decline?

A. a. Sales revenues decreased.
B. b. Costs of goods sold increased.
C. c. Depreciation increased.
D. d. Interest expense increased.
E. e. Taxes increased.

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Question 2 of 20
Which of the following best describes free cash flow?

A. a. Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investements in operating capital have been made.
B. b. Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investements in operating capital have been made.
C. c. Free cash flow is the net change in the cash account on the balance sheet.
D. d. Free cash flow is equal to net income plus depreciation.
E. e. Free cash flow is equal to the cash flow from non-taxable transactions.

Question 3 of 20
Assume that a company currently depreciates its fixed assets over 7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed assets over 10 years instead?

A. a. The company’s tax payment would increase.
B. b. The company’s cash position would increase.
C. c. The company’s net income would increase.
D. d. Answers a and c are correct.
E. e. Answers b and c are correct.

Question 4 of 20
Byrd Lumber has 2 million shares of stock outstanding. On the balance sheet the company has $40 million worth of common equity. The company’s stock price is $15 a share. What is the company’s Market Value Added (MVA)?

A. a. ($80 million)
B. b. ($20 million)
C. c. ($10 million)
D. d. $20 million
E. e. $80 million

Question 5 of 20
West Corporation has $50,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 6 percent; Exxon bonds yielding 9.5 percent; GM preferred stock with a dividend yield of 9 percent. West’s corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.)

A. a. 8.06%
B. b. 7.13%
C. c. 6.18%
D. d. 6.55%
E. e. 6.00%

Question 6 of 20
Corporations face the following corporate tax schedule:
Taxable Income Tax on Base Rate
Taxable income Tax on Base       Rate
$ 0 – $ 50,000 $ 0      15%
$ 50,000 – $ 75,000 $7,500 25%
$ 75,000 – $100,000 $13,750 34%
$100,000 – $335,000 $22,250 39%
Company Z has $80,000 of taxable income from its operations, $5,000 of interest income, and $30,000 of dividend income from preferred stock it holds in other corporations. What is Company Z’s tax liability?
Corporations face the following corporate tax schedule:

A. a. $12,250
B. b. $13,750
C. c. $16,810
D. d. $20,210
E. e. $28,100
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Question 7 of 20
Mays Industries was established in 2002. Since its inception, the company has generated the following levels of earnings before taxes (EBT) (losses are shown in parentheses):
Year EBT $
2002 50,000
2003 40,000
2004 30,000
2005 20,000
2006 (60,000)
2007 60,000
Assume that each year the company has faced a 40 percent income tax rate. Also, assume that current carry back and carry forward provisions were available in prior years. What is the company’s tax liability for 2007?

A. a. $20,000
B. b. $21,000
C. c. $22,000
D. d. $24,000
E. e. $26,000

Question 8 of 20
Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company’s tax rate will remain at 40 percent. If the company’s forecast is correct, how much will net income increase or decrease, as a result of the expansion?

A. a. No change.
B. b. $40,000 increase.
C. c. $60,000 increase.
D. d. $100,000 increase.
E. e. $180,000 increase.

Question 9 of 20
Coolidge Cola is forecasting the following income statement:
Sales $30,000,000
Operating costs excluding depreciation 20,000,000
Depreciation 5,000,000
Operating income (EBIT) $ 5,000,000
Interest expense 2,000,000
Taxable income (EBT) $ 3,000,000
Taxes (40%) 1,200,000
Net income $ 1,800,000
Assume that, with the exception of depreciation, all other non-cash revenues and expenses sum to zero.
Congress is considering a proposal which will allow companies to depreciate their equipment at a faster rate. If this provision were put in place, Coolidge’s depreciation expense would be $8,000,000 (instead of $5,000,000). This proposal would have no effect on the economic value of the company’s equipment, nor would it affect the company’s tax rate, which would remain at 40 percent. If this proposal were to be implemented, what would be the company’s net cash flow?

A. a. $2,000,000
B. b. $4,000,000
C. c. $6,800,000
D. d. $8,000,000
E. e. $9,800,000
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Question 10 of 20
Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet for 2006. In 2007, the company’s earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of stock outstanding. What will be the level of retained earnings on the company’s 2007 balance sheet?

A. a. $400,000
B. b. $500,000
C. c. $600,000
D. d. $700,000
E. e. $800,000

Question 11 of 20
Ryngaert & Sons, Inc. has operating income (EBIT) of $2,500,000. The company’s depreciation expense is $450,000, its interest expense is $120,000, and it faces a 40 percent tax rate. What is the company’s net income?

A. a. $1,890,000
B. b. $1,575,000
C. c. $1,428,000
D. d. $1,248,000
E. e. $1,358,000

Question 12 of 20
A firm purchases $10 million of corporate bonds that paid a 16 percent interest rate, or $1.6 million in interest. If the firm’s marginal tax rate is 40 percent, what is the after-tax interest yield?

A. a. 9.60%
B. b. 8.74%
C. c. 7.40%
D. d. 12.90%
E. e. 13.20%

Question 13 of 20
A firm invests in the common stock of another company having a 16 percent before-tax dividend yield. If the firm’s marginal tax rate is 40 percent what is the after-tax dividend yield?

A. a. 8.63%
B. b. 9.64%
C. c. 10.40%
D. d. 14.08%
E. e. 13.10%

Question 14 of 20
The Carter Company’s taxable income and income tax payments are shown below for 2003 through 2006:
Year  Taxable Income Tax Payment
2003 $10,000 $1500
2004 5,000     750
2005 12,000   1,800
2006 8000   1,200
Assume that Carter’s tax rate for all 4 years was a flat 15 percent; that is, each dollar of taxable income was taxed at 15 percent. In 2007, Carter incurred a loss of $19,000. Using corporate loss carry-back, what is Carter’s adjusted tax payment for 2006?

A. a. $230
B. b. $150
C. c. $630
D. d. $550
E. e. $830

Question 15 of 20
A firm can undertake a new project that will generate a before-tax return of 20 percent or it can invest the same funds in the preferred stock of another company that yields 13 percent before taxes. If the only consideration is which alternative provides the highest relevant (after-tax) return and the applicable tax rate is 40 percent, should the firm invest in the project or the preferred stock?

A. a. Preferred stock; its relevant return is 11.44 percent.
B. b. Project; its relevant return is 0.56 percentage points higher.
C. c. Project; its after-tax return is 12 percent.
D. d. Either alternative can be chosen; they have the same relevant return.
E. e. All of the above are correct except a and d.

Question 16 of 20
Cooley Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between MCI bonds which yield 10 percent, state of Colorado municipal bonds which yield 7 percent, and MCI preferred stock with a dividend yield of 8 percent. Cooley’s corporate tax rate is 40 percent, and 70 percent of its dividends received are tax exempt. What is the after-tax rate of return on the highest yielding security?

A. a. 7.04%
B. b. 7.0%
C. c. 8.43%
D. d. 6.9%
E. e. 6.0%

Question 17 of 20
GPD Corporation has operating income (EBIT) of $300,000, total assets of $1,500,000, and its capital structure consists of 40 percent debt and 60 percent equity. Total assets were equal to total operating capital. The firm’s after-tax cost of capital is 11 percent and its tax rate is 40 percent. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of stock is $30.00. What is the firm’s Market Value Added (MVA)?

A. a. $87,000
B. b. $29,500
C. c. $470,810
D. d. $600,000
E. e. $910,000

Question 18 of 20
GPD Corporation has operating income (EBIT) of $300,000, total assets of $1,500,000, and its capital structure consists of 40 percent debt and 60 percent equity. Total assets were equal to total operating capital. The firm’s after-tax cost of capital is 11 percent and its tax rate is 40 percent. The firm has 50,000 shares of common stock currently outstanding and the current price of a share of stock is $30.00. What is the firm’s Economic Value Added (EVA)?

 

A. a. $15,000
B. b. $17,000
C. c. $87,410
D. d. $183,210
E. e. $14,500

Question 19 of 20
An individual with substantial personal wealth and income is considering the possibility of opening a new business. The business will have a relatively high degree of risk, and losses may be incurred for the first several years. Which legal form of business organization would probably be best?

A. a. Proprietorship
B. b. Corporation
C. c. Partnership
D. d. S corporation
E. e. Limited partnership

Question 20 of 20
Which of the following statements is correct?

A. a. In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.
B. b. Under our current tax laws, when investors pay taxes on their dividend income, they are being subjected to a form of double taxation.
C. c. The fact that a percentage of the interest received by one corporation, which is paid by another corporation, is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.
D. d. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tadeductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
E. e. Statements b and d are both correct.

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