Question 1

Downtown Development, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $700,000, interest expense = $100,000, and taxes = $168,000. Downtown has no preferred stock outstanding and 50,000 shares of common stock outstanding. What are its 2018 earnings per share?
A)$14.00
B)$12.00
C)$10.64
D)$8.64

Accepted Answer

The answer of Downtown Development, Inc.'s 2018 income statement lists...

Question 2

Which of these is the term for the ease of conversion of an asset into cash at a fair value?
A)liquidity
B)fair Market Value (FMV)
C)book Value
D)current Asset

Accepted Answer

Liquidity is the term used for how easily an asset can be converted into cash at a fair market value without affecting its market price. It is an important aspect of financial management for a company as it represents the ability of a business to pay its short-term obligations. Fair Market Value (FMV) refers to the price that an asset would fetch in the market, while book value is the value of an asset as it appears in a company's accounting records. Current assets are assets that are expected to be converted to cash within one year.

Question 3

Ultra Inc. had $100 million in retained earnings at the beginning of the year. During the year, the firm paid $0.25 per share dividend and generated $2.00 earnings per share. The firm has 10 million shares outstanding. At the end of year, what was the level of retained earnings for GW?
A)$100 million
B)$117.5 million
C)$120 million
D)$145 million

Accepted Answer

The firm paid a total dividend of $0.25 per share * 10 million shares = $2.5 million. It generated earnings of $2.00 per share * 10 million shares = $20 million. The retained earnings at the end of the year would be the beginning retained earnings ($100 million) plus the earnings generated ($20 million) minus the dividends paid ($2.5 million), which equals $117.5 million.

Question 4

For which of the following would one expect the book value of the asset to differ widely from its market value?
A)accounts receivable
B)accounts payable
C)notes payable
D)equity

Accepted Answer

The book value of equity is based on the accounting value of the company's assets minus liabilities. However, the market value of equity is determined by the stock market and is influenced by factors such as supply and demand, investor sentiment, and overall market conditions. Therefore, the book value and market value of equity can differ widely.

Question 5

GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $0.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?
A)$725 million
B)$917 million
C)$882 million
D)$807 million

Accepted Answer

GW Inc. started the year with $800 million in retained earnings. During the year, it generated $1.92 earnings per share on 100 million shares, totaling $192 million in earnings. It paid out $0.75 per share in dividends on 100 million shares, totaling $75 million in dividends. The net increase in retained earnings is $192 million - $75 million = $117 million. Adding this to the starting retained earnings gives $800 million + $117 million = $917 million.

Question 6

A firm has sales of $690, EBIT of $300, depreciation of $40, and fixed assets increased by $265. If the firm's tax rate is 40 percent and there were no increases in net operating working capital, what is the firm's free cash flow?
A)$15
B)$75
C)-$45
D)-$55

Accepted Answer

The answer of A firm has sales of $690, EBIT...

Question 7

Which of the following is the term within the GAAP framework whereby firms can engage in a process of controlling their earnings, otherwise known as "smoothing" their earnings, as long as it's not taken to an extreme.
A)commingling
B)delisting
C)window dressing
D)earnings management

Accepted Answer

The term within the GAAP framework where firms can engage in a process of controlling their earnings, otherwise known as "smoothing" their earnings, is called earnings management. Commingling refers to the mixing of personal and business funds, delisting refers to a company being removed from a stock exchange, and window dressing refers to actions taken by a company to make their financial statements appear more favorable than they actually are.

Question 8

Epic, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $1,000,000, interest expense = $75,000, and taxes = $277,500. Epic has no preferred stock outstanding and 100,000 shares of common stock outstanding. What are its 2018 earnings per share?
A)$10.00
B)$9.25
C)$7.225
D)$6.475

Accepted Answer

The answer of Epic, Inc.'s 2018 income statement lists the...

Question 9

A firm has sales of $50,000, EBIT of $10,000, depreciation of $4,000, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and a $1,000 increase in net operating working capital, what is the firm's free cash flow?
A)$10,000
B)$9,000
C)$8,000
D)$1,200

Accepted Answer

Free Cash Flow = EBIT(1-T) + Depreciation - Capital Expenditures - Increase in Net Operating Working Capital

We are given:
Sales = $50,000
EBIT = $10,000
Depreciation = $4,000
Tax Rate = 30%
Increase in Net Operating Working Capital = $1,000
Fixed Assets Increased = $2,000

First, we need to calculate the capital expenditures:
Capital Expenditures = Increase in Fixed Assets = $2,000

Next, we need to calculate the free cash flow:
Free Cash Flow = $10,000(1-0.30) + $4,000 - $2,000 - $1,000 = $8,000

Therefore, the best choice is C, as it is the only option that correctly calculates the free cash flow based on the given information.

Question 10

A firm has sales of $10,000, EBIT of $3,000, depreciation of $400, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there were no increases in net operating working capital, what is the firm's free cash flow?
A)$7400
B)$600
C)$500
D)-$1,220

Accepted Answer

Free Cash Flow (FCF) is calculated as Net Operating Profit After Taxes (NOPAT) plus Depreciation minus Capital Expenditures. NOPAT is EBIT minus taxes. Taxes are 30% of $3,000 (EBIT), which equals $900. So, NOPAT is $3,000 - $900 = $2,100. Adding back Depreciation ($400) gives $2,500. Subtracting the increase in fixed assets ($2,000) as capital expenditure gives an FCF of $500.

Quiz 2: Reviewing Financial Statements

Downtown Development, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $700,000, interest expense = $100,000, and taxes = $168,000. Downtown has no preferred stock outstanding and 50,000 shares of common stock outstanding. What are its 2018 earnings per share?

Which of these is the term for the ease of conversion of an asset into cash at a fair value?

Ultra Inc. had $100 million in retained earnings at the beginning of the year. During the year, the firm paid $0.25 per share dividend and generated $2.00 earnings per share. The firm has 10 million shares outstanding. At the end of year, what was the level of retained earnings for GW?

For which of the following would one expect the book value of the asset to differ widely from its market value?

GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $0.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?

A firm has sales of $690, EBIT of $300, depreciation of $40, and fixed assets increased by $265. If the firm's tax rate is 40 percent and there were no increases in net operating working capital, what is the firm's free cash flow?

Which of the following is the term within the GAAP framework whereby firms can engage in a process of controlling their earnings, otherwise known as "smoothing" their earnings, as long as it's not taken to an extreme.

Epic, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $1,000,000, interest expense = $75,000, and taxes = $277,500. Epic has no preferred stock outstanding and 100,000 shares of common stock outstanding. What are its 2018 earnings per share?

A firm has sales of $50,000, EBIT of $10,000, depreciation of $4,000, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and a $1,000 increase in net operating working capital, what is the firm's free cash flow?

A firm has sales of $10,000, EBIT of $3,000, depreciation of $400, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there were no increases in net operating working capital, what is the firm's free cash flow?