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1. Which of the following
statements is CORRECT?
a. Typically, a firm’s DPS should
exceed its EPS.
b. Typically, a firm’s EBIT
should exceed its EBITDA.
c. If a firm is more profitable
than average (e.g., Google), we would normally expect to see its stock price
exceed its book value per share.
d. If a firm is more profitable
than most other firms, we would normally expect to see its book value per share
exceed its stock price, especially after several years of high inflation.
e. The more depreciation a firm
has in a given year, the higher its EPS, other things held constant.
2. Which of the following
statements is CORRECT?
a. The statement of cash flows
reflects cash flows from operations, but it does not reflect the effects of
buying or selling fixed assets.
b. The statement of cash flows
shows where the firm’s cash is located; indeed, it provides a listing of all
banks and brokerage houses where cash is on deposit.
c. The statement of cash flows
reflects cash flows from continuing operations, but it does not reflect the
effects of changes in working capital.
d. The statement of cash flows
reflects cash flows from operations and from borrowings, but it does not
reflect cash obtained by selling new common stock.
e. The statement of cash flows
shows how much the firm’s cash--the total of currency, bank deposits, and
short-term liquid securities (or cash equivalents)--increased or decreased
during a given year.
3. Which of the following
statements is CORRECT?
a. Dividends paid reduce the net
income that is reported on a company’s income statement.
b. If a company uses some of its
bank deposits to buy short-term, highly liquid marketable securities, this will
cause a decline in its current assets as shown on the balance sheet.
c. If a company issues new
long-term bonds during the current year, this will increase its reported current
liabilities at the end of the year.
d. Accounts receivable are
reported as a current liability on the balance sheet.
e. If a company pays more in
dividends than it generates in net income, its retained. earnings as reported
on the balance sheet will decline from the previous year's balance.
4. Last year Roussakis Company’s
operations provided a negative net cash flow, yet the cash shown on its balance
sheet increased. Which of the following statements could explain the increase
in cash, assuming the company’s financial statements were prepared under
generally accepted accounting principles?
a. The company repurchased some
of its common stock.
b. The company dramatically
increased its capital expenditures.
c. The company retired a large
amount of its long-term debt.
d. The company sold some of its
fixed assets.
e. The company had high
depreciation expenses.
5. 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 federal-plus-state
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?
a. $673.27
b. $708.70
c. $746.00
d. $783.30
e. $822.47
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