1. Which of the following statements about depreciation is true?
A. Depreciation is a non-cash expense, but it is important because it affects a corporation's tax liability
B. Depreciation must be calculated the same way for financial reporting and tax purposes
C. The choice of depreciation method has no impact on a firm's value because the same amount of depreciation is taken over the life of an asset regardless of the method used
D. A shareholder wealth maximizing corporation prefers to defer depreciation expense in order to increase current reported profits
2. A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is most correct?
A. The manager should select project A because it maximizes profits
B. The manager should select the project that maximizes long-term profits, not just one year of profits
C. The manager should select project A or he is irrational
D. The manager should select the project that causes the stock price to increase the most, which could be either A or B
3. When evaluating an investment project, which of the following best describes the financial information needed by the decision maker?
A. After tax accounting profits
B. After tax incremental cash flows to the company as a whole
C. Incremental cash flows before taxes so the decision will not be biased by a tax code that may change in the future
D. Pre tax accounting profits adjusted for any accounting method changes
4..Two companies have identical assets and operating activities. Which of the following statements is true?
A. Both companies have same net income
B. The company with more debt will have lower operating income due to interest expense
C. The company with more debt will have higher operating income due to leverage
D. The company with more debt will have lower net income due to interest expense
5. HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible?
A. Markets are inefficient and fail to recognize the benefits of leverage
B. The increased debt resulted in interest payments that made HighLevs operating income drop even though return on equity increased
C. Shareholders are not interested in return on equity
D. the high levels of debt increased the riskiness HighLev relative to its competitors
6. The present value of a single future sum:
A. increases as the number of discount periods increases
B. is generally larger than the future sum
C. depends on the number of discount periods
D. increases as the discount rate increases
8. Which of the following ratios would be the best way to determine how customers are paying for their purchases?
A. Inventory Turnover
B. Total Asset Turnover
C. Current Ratio
D. Average Collection Period
The problem set deals with issues in accounting: Depreciation, present value, ratios etc.
Ratios, Scattergraph and Net Present Value Computation
A corporation has the following balance sheet items for the year ending December 31, 2011:
Accounts Receivable 20,000
Prepaid Expenses 10,000
Property Plant and Equipment 80,000
Total Assets $170,000
Accounts Payables 30,000
Long Term Notes Payable 70,000
Stockholders' Equity 70,000
Total Liabilities and Equity $170,000
The income statement for the year ending December 31, 2011 is as follows:
Cost of Goods Sold (50,000)
Gross Margin $ 60,000
Selling Expenses (20,000)
Administrative Expenses (10,000)
Interest Expenses ( 5,000)
Net Income $25,000
Calculate the current ratio
Calculate the acid test/quick ratio
Calculate the debt to equity ratio
Calculate the profit margin ratio
Calculate the times interest earned ratio
A corporation is considering the purchase of a new equipment costing $90,000. The projected after-tax annual net income from the equipment is $3,600, after deducting $30,000 depreciation. Assume that revenue is to be received at each year-end, and the machine has a useful life of three years with zero salvage value. Management requires a 12% return on its investments. What is the net present value of this machine? (use tables on next page)
What is the estimated fixed costs based upon the scattergraph?