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Chap 01_4ce Indicate whether the statement is true or false. 1. Three disadvantages of a proprietorship are (1) the relative difficulty of raising new capital, (2) the owner’s

unlimited personal liability for the business’s debts, and (3) that the proprietorship is easily but expensively formed. a. True b. False 2. Limited partners who are too involved in the business operation can keep their limited liability status. a. True b. False 3. Two key advantages to a proprietorship are that, as a business, it pays no corporate income tax and it is easy

for a proprietorship to obtain the capital needed for growth. a. True b. False 4. If an individual investor trades currently outstanding common shares through a broker, this is a primary market

transaction. a. True b. False 5. Today, banks can never provide trustee services and the difference between trusts and banks has become

clear over time. a. True b. False 6. Equity instruments are a claim upon a residual value, but preferred shares have some features like debt and

some like equity. a. True b. False 7. In a limited liability partnership (LLP), only some partners enjoy limited liability with regard to their business

partners’ professional negligence, and their potential losses are limited to their investment in the LLP. a. True b. False 8. If Firm A’s business is to obtain funds from savers in exchange for its own securities and then to use the money

to invest in other businesses’ securities, Firm A is a financial intermediary. a. True b. False

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Chap 01_4ce 9. Since a company’s value is determined by properties of its cash flows, managers could increase the size of the

expected cash flows or speed up their receipt to maximize the firm’s value. a. True b. False 10. The form of organization of a business is an important issue that reflects in some typical stages in the corporate

life cycle. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 11. Which of the following statements best describes financial instruments? a. Investors will exchange cash for a financial instrument even if they expect to receive an unacceptable

rate of return. b. Debt instruments usually do not have specified payments and a specified maturity. c. Equity instruments typically have specified payments and a specified maturity. d. Shareholders are entitled to cash flows after bondholders, creditors, and other claimants have been satisfied. 12. In Canada, the Canada Deposit Insurance Corporation (CDIC) insures personal bank account balances up to

$100,000. What is the primary reason for this provision? a. This can encourage banking institutions to expand their business. b. This can prevent a “bank run” and ensure stability in times of economic uncertainty. c. This would give the government more control over the banking system. d. This is a common practice in the U.S. and all other developed economies. 13. Which statement regarding corporations is most accurate? a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of businesses

begin as corporations. b. Large corporations have more tax advantages than partnerships. c. Due to legal considerations related to ownership transfers and limited liability, most business is conducted by corporations in spite of large corporations’ often less favourable tax treatment. d. Corporate shareholders have unlimited liability when the corporation becomes bankrupt.

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Chap 01_4ce 14. Which of the following statements best describes corporate goals and issues? a. The proper goal of the financial manager should be to attempt to maximize the firm’s expected cash

flows, because this will add the most to the wealth of the individual shareholders. b. Potential agency problems can arise between shareholders and managers, because managers hired as agents to act on behalf of the owners may instead make decisions favourable to themselves rather than the shareholders. c. Large, publicly owned firms like Tesla and Apple are controlled by their management teams. Ownership is generally widely dispersed; hence, managers have great freedom in how they run the firm. Managers may operate in the shareholders’ best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the shareholders’ best interests. d. The primary goal of the corporation should be to maximize shareholder wealth, which means the managers should be unmindful of employee welfare or community concerns. 15. What should be done to maximize shareholder wealth and thus the value of the firm? a. Reduce the size of expected cash flows of the company. b. Increase the free cash flows of the business. c. Increase the risk level of the firm. d. Arrange for cash to be received later. 16. Which of the following statements is true regarding hedge funds and private equity funds? a. Hedge funds own shares in other companies and often control those companies, but private equity funds

usually own many different types of securities. b. Investing in hedge funds is far riskier than investing in private equity funds. c. Private equity funds are highly regulated, while there are even more controls over the activities of hedge funds. d. Both are limited to a relatively small number of large investors. 17. Recently, Hale Corporation, a public company, announced the sale of 4.5 million newly issued common shares

at a price of $32 per share. Hale sold the stock to an investment banker, which in turn sold it to individual and institutional investors. What is the name of the market for this transaction? a. private market b. primary market c. IPO market d. secondary market

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Chap 01_4ce 18. Which of the following statements best describes interest rates? a. If an investment opportunity’s future cash flows are very uncertain and might be much lower than

expected, providers require a lower expected return. b. The cost of money to fund users is basically determined by the rate of return required by fund providers. c. If companies have more good investment opportunities, interest rates are likely to decrease. d. If expected inflation decreases, interest rates are likely to increase. 19. What should be the primary operating goal of a publicly owned firm interested in serving its shareholders? a. maximize the firm’s expected sales revenue b. maximize the stock price during a specific period c. maximize the stock price per share, which is the stock’s fundamental value, over the long run d. maximize the firm’s expected EPS 20. What is traded on money markets? a. corporate shares b. short-term, highly liquid debt securities c. intermediate-term debt securities d. long-term bonds 21. Which of the following statements best describes financial markets? a. Rates of return on Government of Canada Treasury bills are the highest among all major financial

securities. b. Corporate bonds are riskier than Canadian government debt and their risk depends on the strength of the issuer. c. Capital markets are markets for short-term, highly liquid debt securities. d. Commercial paper is illiquid. 22. Which of the following financial intermediaries is a depository institution? a. commercial bank b. investment bank c. securities firm d. finance company 23. Suppose the Bank of Canada announces plans to issue $100 billion of new bonds. Assuming the

announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates? a. Prices would decrease and interest rates would increase. b. Prices and interest rates would both increase. c. Prices would increase and interest rates would decrease. d. Prices and interest rates would both decrease. Copyright Cengage Learning. Powered by Cognero.

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Chap 01_4ce 24. Which of the following is true of stock ownership in Canada? a. Most Canadian households directly own stock. b. 80% of Canadian households directly own stock. c. 61% of Canadian households directly own stock. d. 10% of Canadian households directly own stock. 25. What is one of the drawbacks of switching from a partnership to the corporate form of organization? a. It makes the firm’s investors subject to unlimited potential personal liabilities. b. It makes its income taxable only as a part of the proprietor’s personal income. c. It makes it more difficult for the firm’s investors to transfer their ownership interests. d. It subjects the firm to additional regulations. 26. Which of the following services will NOT be offered by life insurance companies? a. line of credit b. investing funds in shares, bonds, real estate, and mortgages c. offering a variety of tax-deferred savings plans d. making payments to beneficiaries 27. Which of the following statements best describes firm organization? a. One of the advantages of a corporation is that managers are always acting in the best interests of the

owners, rather than their own best interests. b. It is generally more difficult to transfer one’s ownership interest in a corporation than in a partnership. c. One of the advantages of the corporate form of organization is that its income is subject to only corporate taxation, rather than being taxed as a part of the proprietor’s personal income. d. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 28. Which circumstance would most likely lead to an increase in interest rates in the economy? a. The economy is experiencing a deflation. b. The economy falls into a recession. c. There is an increase in expected inflation. d. The federal government decides to promote economic activity. 29. Which of the following statements best describes firm organization? a. Corporate shareholders are exposed to unlimited liability, and the losses may be amplified by the double

taxation of incorporation. b. A corporation will stop operating if its original owners and managers are deceased. c. Partnerships generally face more regulations than corporations. d. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a partnership.

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Chap 01_4ce 30. Which of the following statements best describes partnerships and/or corporations? a. In a regular partnership, a partner’s liability for the firm’s debts is limited to the amount they have

invested in the business. b. Corporations are at a disadvantage relative to partnerships because the earnings of the corporation are taxed at the firm level, not at the individual level. c. There must be at least one general partner in a limited partnership. d. A slow-growth business would be more likely to set up as a corporation for its business organization than would a fast-growth business. 31. Which of the following is NOT a primary disadvantage of a regular partnership? a. ease in transferring ownership b. limited life of the organization c. unlimited life of the organization d. difficulty in transferring ownership 32. Which of the following statements best describes articles of incorporation and bylaws? a. The articles of incorporation are concerned with things like the share class description, whereas the

bylaws are concerned with things like procedures for electing the board of directors. b. An initial registered office address and first board of directors form can be omitted when filed with Corporations Canada. c. A professional corporation formed by professionals such as doctors or lawyers can relieve the participation of professional (malpractice) liability. d. The corporate bylaws are a standard set of rules established by the state of incorporation, so these rules are identical for all corporations. 33. Which of the following best describes the market price of a stock? a. the price observed by investors on financial websites b. the price at which a security first trades when an exchange opens for the day c. the price observed in the broad financial markets d. the price predicted by analysts in research reports 34. Which of the following statements is correct? a. A good goal for a firm’s management is maximization of stock price at a target date. b. Many Canadian companies’ boards have directors who specifically represent the interests of employees

and not just shareholders. c. Agency problems easily arise between shareholders and managers in corporations, but they can be addressed by corporate governance. d. Income trust cash distributions are taxed at both the trust and individual levels.

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Chap 01_4ce 35. Share price maximization is good for society because consumers benefit. Which of the following best describes

this idea? a. Firms that maximize share price minimize costs and produce high-quality goods and services that consumers demand. b. Firms that maximize share price minimize costs and produce low-quality goods and services, which benefits only producers. c. Firms that maximize share price maximize costs and produce high-quality goods and services, which benefits society. d. Firms that maximize share price maximize costs and produce low-quality goods and services, which benefits society. 36. Which of the following statements would most people in business agree with? a. A firm’s commitment to business ethics can only be measured by the tendency of its employees to

adhere to laws and regulations. b. Legal and ethical considerations make firms’ profits and ethics always consistent. c. Canada’s federal government passed the Sarbanes-Oxley Act, with a provision designed to protect “whistleblowers.” d. Although moral character is developed differently, it is useful to educate people about the adverse consequences of unethical behaviour to themselves, their firms, and the nation. 37. Which of the following statements is true regarding a firm’s value? a. A manager’s primary job is to increase the company’s EPS. b. The intrinsic value is the present value of the firm’s expected free cash flows, discounted at the WACC. c. To increase the intrinsic value, a firm should increase WACC. d. To increase the intrinsic value, a firm should reduce FCF. 38. Which of the following best describes the position of the bondholders of an incorporated firm? a. They are creditors of the firm and thus expect to be paid interest on their investment according to their

bond indenture (contract). b. They have voting rights. c. They have the same rights and privileges as the preferred shareholders of the firm. d. They are owners of the firm, but they do not receive dividends.

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Chap 01_4ce 39. Which of the following statements best describes income trusts? a. Since the goal is to distribute as little free cash flow as possible, businesses that have required significant

capital expenditures in the past have been the best candidates. b. Whereas dividends received by investors are taxed at both the corporate and individual levels, income trust cash distributions are taxed only at the corporate level. c. An income trust is an equity investment created to distribute all of a business’s free cash flow to investors in a tax-efficient manner. d. Cash-producing assets such as real estate make up only a minority of income trusts. 40. What is the rate of return normally required by investors when investing in a firm? a. yield to maturity (YTM) b. weighted average cost of capital (WACC) c. internal rate of return (IRR) d. policy interest rate 41. In which type of organization do all partners enjoy limited liability regarding negligence and potential losses

limited to their investment in the partnership? a. limited liability partnership (LLP) b. income trust c. sole proprietorship d. general partnership 42. Which of the following statements best describes partnerships and/or corporations? a. Corporations can attract large capital more easily due to factors such as limited liability, and the liquidity

of the owners’ interests. b. In a regular partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the partnership. c. A fast-growth business, with great need for new capital, would be less likely to organize as a corporation than would a slow-growth business. d. A major disadvantage of partnerships relative to corporations is the fact that taxes must be paid by the partners and the firm itself. 43. You recently sold 500 shares of Alphabet stock; the transfer was made through a broker, and the trade

occurred on the TSX. Which type of transaction is this? a. a futures market transaction b. an IPO market transaction c. a primary market transaction d. a secondary market transaction

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Chap 01_4ce 44. Which of the following is an example of providers of cash? a. entrepreneurs with ideas b. individuals who are saving for retirement c. corporations with growth plans d. students wishing to borrow money for tuition 45. What does the separation theorem demonstrate? a. Firms that separate goods’ prices and cost minimize costs and thus produce more goods, which benefits

society. b. Firms should separate their management decisions between those that benefit consumers and those that benefit shareholders. c. Investors that prefer to receive dividend income now should be separated from investors that prefer to forgo dividends currently. d. All investors are better off when firms separate their investment decisions from the preferences of their owners/investors. 46. Why might a business choose to operate as a corporation rather than as a sole proprietorship or a

partnership? a. Less of a corporation’s income is generally subjected to taxes than would be true if the firm were a sole proprietorship. b. It is difficult for a corporation to obtain the capital needed for growth. c. Corporate shareholders escape unlimited liability for the firm’s debts, but this factor may be offset by the double taxation of the corporation. d. Corporations can be easily formed and generally face relatively few regulations. 47. Which of the following statements best describes firm organization? a. One of the disadvantages of a corporation is that the owners have unlimited liability when the firm goes

bankrupt, which means losses can exceed the actual funds invested. b. In a sole proprietorship, the proprietor has limited personal liability for the business’s debts and losses are limited to the money the proprietor invested in the business. c. Sole proprietorships and partnerships generally have a tax advantage over corporations, especially large ones. d. In both regular and limited partnerships, all partners are liable for the debts of the partnership.

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Chap 01_4ce 48. Which of the following statements is NOT correct? a. The initial public offering (IPO) market is a subset of the primary market. b. The Toronto Stock Exchange is a secondary market, since it deals in outstanding as opposed to newly

issued shares. c. Since the transactions in private markets are private, they may be structured in any manner that appeals to the two parties. d. “Going public” establishes a firm’s true intrinsic value, and it also ensures that a highly liquid market will always exist for the firm’s shares. 49. Which of the following statements best describes financial markets? a. Financial asset markets include only long-term debt and common shares. b. Money market mutual funds have no default risk. c. Foreign banks are now less restricted from operating in Canada than in the past. d. The original maturity of a mortgage can go up to 40 years. 50. Which of the following represents the most significant reason for the collapse of the U.S. investment banks in

2008? a. In the 1990s, most large U.S. investment banks were reorganized into public trading companies (or were acquired and then operated as subsidiaries of public companies). b. In the 2000s, most investment banks started to generate most of their income from fees charged for underwriting, M&A consulting, asset management, and brokerage activities. c. New regulations introduced in the 2000s placed more restrictions on the operations of investment banks. d. A relaxation of regulations in the 2000s allowed investment banks to issue unprecedented amounts of debt to finance their activities. 51. If the market price of a stock reflects all relevant information, what does its market price reflect? a. the stock’s historical value b. the stock’s intrinsic value c. the stock’s current value d. the stock’s extrinsic value 52. Which of the following statements best describes financial markets? a. If an investor buys shares through a broker, then this would be an indirect finance transaction. b. Commercial paper is issued by firms to larger investors and guaranteed by a bank. c. Bankers’ acceptances have a high degree of default risk. d. Money market mutual funds have maturities longer than one year.

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Chap 01_4ce 53. Besides strong relationships with groups outside the company, what else supports good businesses? a. adequate inventories b. adequate funding c. adequate self-interest d. adequate rules and laws 54. Which of the following statements best describes hedge funds? a. Hedge funds always have low risk because they hedge their investments. b. Like mutual funds, hedge funds can have thousands of investors. c. Hedge funds are risky, although they may be market-neutral. d. Hedge funds are more regulated than mutual funds since they use derivatives to form portfolios. 55. Which of the following is an example of a primary market transaction? a. Apple issues 10,000,000 new shares and sells them to the public through an investment banker. b. You invest $20,000 in a mutual fund, which then uses the money to buy $20,000 of Apple shares on the

TSX. c. One financial institution sells 300,000 Apple shares to another institution with the help of an investment banker. d. You sell 500 Apple shares on the TSX through your broker. 56. Cheers Canada operates as a partnership. What will be the effect if the partners decide to convert the business

into a regular corporation? a. The transfer of ownership interests of Cheers Canada will be more difficult. b. Cheers Canada will be subject to more regulations. c. Cheers Canada will find it more difficult to obtain the capital needed for growth. d. Cheers Canada shareholders (the ex-partners) will be exposed to more liability. 57. Which of the following statements best describes financial markets? a. If Apple issues an additional 1,000,000 shares through an investment banker, this would be a secondary

market transaction. b. Capital market transactions involve highly liquid debt securities with maturities of less than one year. c. The IPO market is a major part of the primary market. d. Bank loans and private placements of debt with insurance companies are examples of private public market transactions.

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Chap 01_4ce 58. Which of the following statements best describes firm organization? a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than

in a regular partnership and sole proprietorship. b. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. c. It is generally more expensive to form a partnership than a corporation because a partnership requires extensive legal documents. d. In a limited partnership, the limited partners and general partners are liable only for the amount of their investment in the partnership. 59. You recently sold 200 shares of your new company, ABC Corporation, to your brother at a family reunion. At

the reunion your brother gave you a cheque for the shares and you gave your brother the share certificates. Which of the following best describes this transaction? a. a direct transfer of capital b. an indirect transfer of capital through investment bankers c. an indirect transfer through a financial intermediary d. an exchange of physical assets 60. The primary goal of a company’s management is the maximization of which of the following? a. net profit b. market share c. dividends d. fundamental share price 61. Which of the following is NOT a variable used in the calculation of free cash flow (FCF)? a. sales revenues b. interest and dividends c. required investments in operating capital d. operating costs

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Chap 01_4ce Answer Key 1. False 2. False 3. False 4. False 5. False 6. True 7. False 8. True 9. True 10. True 11. d 12. b 13. c 14. b 15. b 16. d 17. b 18. b 19. c 20. b 21. b 22. a 23. a 24. d 25. d 26. a

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Chap 01_4ce 27. d 28. c 29. d 30. c 31. c 32. a 33. c 34. c 35. a 36. d 37. b 38. a 39. c 40. b 41. a 42. a 43. d 44. b 45. d 46. c 47. c 48. d 49. c 50. d 51. b 52. a 53. b 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 01_4ce 55. a 56. b 57. c 58. a 59. a 60. d 61. b

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Chap 02_4ce Indicate whether the statement is true or false. 1. The balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time, while the income statement measures a company’s performance over a certain time period. a. True b. False 2. As a good measurement for comparing managers’ performance, net operating profit after taxes (NOPAT) is the profit a company would generate from its operations if it had no debt and held no financial assets. a. True b. False 3. The intrinsic value of a company is determined by the stream of cash flows that investors expect to receive now and in the future. So, the way for managers to make their companies more valuable is to increase free cash flow now and in the future. a. True b. False 4. According to regulations, income statements must be prepared on an annual or quarterly basis. a. True b. False 5. Retained earnings is the existing shareholders’ reinvested profit and does not represent cash, nor is it “available” for the payment of dividends or anything else. a. True b. False 6. In terms of how free cash flow (FCF) is used, FCF is equal to after-tax operating profit minus the amount of new expenditures necessary to sustain the business. a. True b. False 7. The FIFO method always leads to a lower balance sheet inventory value, but a higher cost of goods sold in the income statement. a. True b. False 8. A firm needs $1 of pre-tax income to pay $1 of interest, but if it is in the 27% federal-plus-British Columbia tax bracket, it must earn $1.37 of pre-tax income to pay $1 of dividends. a. True b. False 9. Interest income received by a corporation is taxed at its regular corporate tax rate, whereas such income earned by a Canadian-controlled private corporation (CCPC) is taxed at a lower rate than the CCPC’s regular tax rate. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 02_4ce 10. Unlike the balance sheet, which is a snapshot of a firm during a period, the income statement reflects performance at a point in time. a. True b. False 11. The term “amortization” is usually used to describe the depreciation of intangible assets, while “depletion” is used to refer to the depreciation of natural resources such as oil or natural gas. a. True b. False 12. The dividends paid by a corporation are deducted from its operating income to obtain its taxable income, but interest paid is not deductible. a. True b. False 13. If some marketable securities mature very soon and can be converted quickly into cash at prices close to their book values, they are regarded as “cash equivalents” and are included with cash. a. True b. False 14. The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position over a period of time, the income statement shows results at a given point in time, and the statement of cash flows reflects changes in the firm’s accounts over that period of time. a. True b. False 15. A business’s net cash flow generally differs from its accounting profit, and the net cash flow equals net income plus noncash revenues minus noncash charges. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 16. What is the tax liability for a small Canadian-controlled private corporation (CCPC) located in British Columbia having earnings before taxes (EBT) of $590,000? The relevant combined federal and provincial corporate income tax rate is 13% for taxable income up to $500,000 and 27% for the amount exceeding $500,000. a. $89,300 b. $90,700 c. $91,250 d. $92,060

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Chap 02_4ce 17. Formed in 2008, ABC Ltd. had taxable income of $103,000 in 2017; $82,000 in 2018; $60,000 in 2019; $90,000 in 2020, and –$170,000 in 2021. What is the tax recovery for 2021? Assume that ABC is a CCPC in Manitoba with a combined federal and provincial corporate income tax rate of 12.5%. a. $18,260 b. $19,833 c. $21,250 d. $21,530 18. Which of the following statements is correct? a. Since working capital is usually small, changes in working capital have no effect on free cash flow. b. Free cash flow (FCF) can be calculated as follows: FCF = EBIT(1 – T) + Depreciation and amortization – Gross investment in fixed assets – Investment in NOWC c. Free cash flow (FCF) can be calculated as follows: FCF = EBIT(1 – T) – Depreciation and amortization + Capital expenditures d. Free cash flow (FCF) can be calculated as follows: FCF = EBIT(1 – T) + Depreciation and amortization – Net investment in fixed assets + Investment in NOWC 19. Which statement about the balance sheet is true? a. A balance sheet lists the most liquid assets first and the least liquid assets last. b. The balance sheet for a given year tells us how the company’s activities affect its cash positions during that year. c. The amounts shown on the balance sheet are often book values, which are the same as the market values of the company’s stock. d. The difference between the total assets and liabilities reported on the balance sheet tells us the current market value of the shareholders’ equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 20. T-road Aircraft recently announced that its net income decreased from the previous year, yet its net cash flow from operations increased. What could explain this performance? a. The company’s depreciation and amortization expenses increased. b. The company’s expenditures on equipment increased. c. The company’s cost of goods sold decreased. d. The company’s interest expense decreased.

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Chap 02_4ce 21. Rao Corporation has the following balance sheet. How much net operating working capital does the firm have? Cash Short-term investments Accounts receivable Inventory Current assets Net fixed assets Total assets

$20 20 60 50 150 100 $250

Accounts payable Accruals Notes payable Current liabilities Long-term debt Common equity Retained earnings Total liab. and equity

$30 30 60 120 0 40 90 $250

a. $70.00 b. $71.85 c. $72.52 d. $73.04 22. Last year, Tiemann Technologies reported $14,500 of sales, $7,050 of operating costs other than depreciation, and $1,450 of depreciation. The company had no amortization charges, it had $6,000 of bonds that carry a 7% interest rate, and its combined federal and provincial income tax rate was 33%. This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $820. By how much will net aftertax income change as a result of the change in depreciation? Assume for this question that the company uses the same depreciation calculations for tax and shareholder reporting purposes. a. –$513.96 b. –$527.50 c. –$549.40 d. –$562.47 23. A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment is being depreciated on a straight-line basis over 6 years, but now in Year 2 the company must depreciate the equipment over 9 years. Assume for this question that the company uses the same depreciation method for tax and shareholder reporting purposes. What would occur in Year 2? a. The firm’s taxable income would decrease. b. The firm’s reported net income would decrease. c. The firm’s tax payments would decrease. d. The firm’s net cash flow would decrease.

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Chap 02_4ce 24. Mr. X lives in Saskatchewan. In 2021, he had employment income of $90,000 and income from capital gains of $18,000. What is his total tax liability? The applicable tax tables are as follows: Federal Rate Tax Bracket Provincial Rate Tax Bracket Fed. 15% $0 – $49,020 Sask. 10.5% $0 – $33,723 Fed. 20.5% $49,021 – $98,040 Sask. 12.5% $33,724 – $72,885 Fed. 26% $98,041 – $151,978 Sask. 14.5% Over $72,885 a. $29,552 b. $29,875 c. $31,249 d. $32,774 25. Companies generate income from their “regular” operations and from other sources such as interest earned on the securities they hold, which is called nonoperating income. Lindley Textiles recently reported $17,500 of sales, $8,450 of operating costs other than depreciation, and $2,000 of depreciation. The company had no amortization charges and no nonoperating income. It had $9,000 of bonds outstanding that carry a 6.5% interest rate, and its combined federal and provincial income tax rate was 38%. How much was Lindley’s operating income, or EBIT? a. $6,531 b. $7,050 c. $8,062 d. $8,946 26. What would be most likely to occur in the year when companies have to depreciate equipment over shorter lives? Assume for this question that sales, other operating costs, and tax rates are not affected, and the same depreciation method is used for tax and shareholder reporting purposes. a. Companies’ NOPAT would increase. b. Companies’ cash positions would increase. c. Companies’ cash flows would decrease. d. Companies’ reported net income would increase. Copyright Cengage Learning. Powered by Cognero.

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Chap 02_4ce 27. Below are the 2019 and 2020 year-end balance sheets for Wolken Enterprises:

Assets: Cash Accounts receivable Inventories Total current assets Net fixed assets Total assets

2020 $ 200,000 864,000 2,000,000 $3,064,000 6,000,000 $9,064,000

2019 $ 170,000 700,000 1,400,000 $2,270,000 5,600,000 $7,870,000

Liabilities and equity: Accounts payable Notes payable Total current liabilities Long-term debt Common shares Retained earnings Total common equity Total liabilities and equity

$ 1,400,000 1,600,000 $3,000,000 2,400,000 3,000,000 664,000 $3,664,000 $9,064,000

$1,090,000 1,800,000 $2,890,000 2,400,000 2,000,000 580,000 $2,580,000 $7,870,000

Wolken has never paid a dividend on its common shares, and it issued $2,400,000 of 15-year non-callable, longterm debt in 2019. As of the end of 2020, none of the principal on this debt had been repaid. Assume that the company’s sales in 2019 and 2020 were the same. Which of the following statements must be correct? a. Wolken issued long-term debt in 2020. b. Wolken issued new common shares in 2020. c. Wolken made a loss in 2020. d. Wolken repurchased some common shares in 2020. 28. In 2021, XYZ Inc. located in Ontario had income from operations of $4,650,000, received interest of $220,000, paid $350,000 in interest, received dividends from another Canadian corporation of $220,000, and paid $510,000 in dividends to its common shareholders. If the applicable income tax rate is 35%, what is the corporation’s tax liability? a. $1,265,000 b. $1,391,000 c. $1,470,000 d. $1,582,000

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Chap 02_4ce 29. Why are annual reports important to finance professionals and investors? a. Annual reports are skewed in favour of management and professionals, and thus are not important to investors. b. Annual reports are used by investors and finance professionals when they form expectations about a firm’s future cash flows, profits, and distributions. c. Annual reports are important only to management because investors do not trust management and investors rely only on the recommendation of financial analysts. d. None of the above is the reason that annual reports are important. 30. Which statement about the income statement is true? a. The income statement for a given year is designed to give us an idea of how much profit the company made in that year. b. Since neither depreciation nor amortization is paid in cash, EBITDA is a worse measure of financial strength than is net income. c. Other comprehensive income (OCI) is generally a large amount, and all companies have OCI to report. d. Amortization applies to tangible assets, such as plant and equipment, whereas depreciation applies to intangible assets such as patents, copyrights, and trademarks. 31. Which statement regarding the tax system is true? a. For small Canadian-controlled private corporations, income less than $6400,000 is exempt from taxes. Thus, government receives no tax revenue from these businesses. b. Tax rates placed on corporations vary based on their size, location, and type of income being earned. The various tax rates partly reflect governments encouraging the establishment of certain types of businesses. c. All businesses, regardless of their legal form of organization and their location, are taxed by the Canada Revenue Agency (CRA). d. All corporations other than nonprofit corporations are subject to corporate income taxes, which are 26.5% for the lowest amounts of income and 33% for the highest amounts of income. 32. Hunter Manufacturing Inc.’s December 31, 2020, balance sheet showed total common equity of $3,250,000 and 150,000 shares outstanding. During 2021, Hunter had $950,000 of net income, and it declared $200,000 in dividends. What was the book value per share at December 31, 2021, assuming that Hunter neither issued nor retired any common shares during 2021? a. $26.67 b. $27.00 c. $28.34 d. $29.15

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Chap 02_4ce 33. Which statement regarding financial statements is true? a. Accounts receivable are reported as a current liability on the balance sheet. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause an increase in its current assets as shown on the balance sheet. c. If a company pays less in dividends than it generates in net income, its retained earnings as reported on the balance sheet will increase from the previous year’s balance. d. If a company issues new long-term bonds during the current year, this will decrease its reported current liabilities at the end of the year. 34. Meric Mining Inc. recently reported $21,000 of sales, $9,200 of operating costs other than depreciation, and $1,400 of depreciation. The company had no amortization charges, it had $8,200 of outstanding bonds that carry a 7% interest rate, and its combined federal and provincial income tax rate was 33%. How much was the firm’s net income after taxes? Assume for this question that Meric uses the same depreciation expense for tax and shareholder reporting purposes. a. $6,284.73 b. $6,457.12 c. $6,583.42 d. $6,830.94 35. Bartling Energy Systems recently reported $12,650 of sales, $7,250 of operating costs other than depreciation, and $900 of depreciation. The company had no amortization charges, it had $4,500 of outstanding bonds that carry a 6% interest rate, and its combined federal and provincial income tax rate was 33%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,850 of capital expenditures on new fixed assets and to invest $500 in net operating working capital. By how much did the firm’s net income exceed its free cash flow? a. $998.05 b. $1,045.23 c. $1,176.40 d. $1,269.10 36. Which of the following statements is correct? a. EVA stands for economic value added, and it is defined as follows: EVA = NOPAT – (Total net operating capital)(WACC) b. MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding)(Stock price) + Total common equity c. MVA gives us an idea about the managerial effectiveness in a given year. d. EVA gives us an idea about the difference between the market value of the firm’s stock and the amount of equity capital that was supplied by shareholders.

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Chap 02_4ce 37. TSW Inc. had the following data for last year: Net income = $1,000; Net operating profit after taxes (NOPAT) = $850; Total assets = $4,300; and Total operating capital = $3,100. Information for the just-completed year is as follows: Net income = $1,400; Net operating profit after taxes (NOPAT) = $1,075; Total assets = $3,600; and Total operating capital = $3,400. How much free cash flow did the firm generate during the just-completed year? a. $740 b. $759 c. $762 d. $775 38. Which statement about net cash flow is true? a. The firm’s net cash flow is often called “the bottom line” since it is the lowest entry on the income statement. b. Depreciation reduces a firm’s asset balance, so an increase in depreciation would normally lead to a decrease in the firm’s net cash flow. c. Net Cash Flow = Net Income – Depreciation and Amortization Charges. d. Net Cash Flow = Net Income + Noncash Charges – Noncash Revenues. 39. Which of the following is included in calculating total investor-supplied capital? a. preferred shares b. accounts payable c. short-term bonds d. retained earnings 40. Which of the following statements is correct? a. Free cash flow (FCF) equals NOPAT plus net investment in operating capital. b. Other things held constant, if the tax rate increases, NOPAT would increase. c. Net operating working capital (NOWC) is defined as operating current assets plus operating current liabilities. d. The standard financial statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. 41. The annual financial statements of a firm contain which of the following basic financial statements? a. a balance sheet, an income statement, a statement of cash flows, and a statement of shareholders’ equity b. a balance sheet, an income statement, and a statement of net cash flow c. a balance sheet, an income statement, and a statement of net cash flow and changes in equity d. a balance sheet, an income statement, and a statement of net cash flow and retained earnings

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Chap 02_4ce 42. EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales Costs Depreciation EBIT Interest expense EBT Taxes (35%) Net income

$2,700 1,800 450 450 120 330 115.50 $214.50

a. $292.50 b. $294.71 c. $296.08 d. $297.30 43. If a local Firm X owns 42% of the shares of a Canadian-owned Firm Y, and Y pays dividends to all of its shareholders, what percentage of the dividends received by X can be exempted from its taxable income? a. 10% b. 42% c. 75% d. 100% 44. To estimate a firm’s cash flow from operations, depreciation is added back to net income. Which of the following is true regarding depreciation? a. Depreciation is an extraordinary expense that is not always deducted when calculating net income, and it should not be added back to net income when calculating a firm’s cash flow from operations. b. Depreciation is an extraordinary expense that is not always deducted when calculating net income, and it must be added back to net income when calculating a firm’s cash flow from operations. c. Depreciation is a noncash expense resulting from the purchase of fixed assets, but it should not be added back to net income when determining a firm’s cash flow from operations. d. Depreciation is a noncash expense resulting from the purchase of fixed assets, and it must be added back to net income when determining a firm’s cash flow from operations. 45. Tibbs Inc. had the following data for the year ended December 31, 2020: Net income = $500; Net operating profit after taxes (NOPAT) = $600; Total assets = $3,400; Short-term investments = $400; Shareholders’ equity = $2,200; Total debt = $1,200; and Total operating capital = $2,800. What was its return on invested capital (ROIC)? a. 19.96% b. 20.07% c. 21.43% d. 22.39%

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Chap 02_4ce 46. Which of the following items can be found on a firm’s balance sheet under current liabilities? a. long-term lease obligations b. long-term bonds c. notes payable d. cost of goods sold 47. According to the fundamental equation of accounting, total assets should equal which of the following? a. long-term debt and shareholders’ equity b. working capital and shareholders’ equity c. total liabilities and shareholders’ equity d. total liabilities and total cash 48. Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales Costs Depreciation EBIT Interest expense EBT Taxes (33%) Net income

$3,000 1,900 250 850 220 630 207.90 $422.10

a. $554.01 b. $569.50 c. $574.36 d. $580.25 49. HHH Inc. reported $23,500 of sales and $11,050 of operating costs (including depreciation). The company had $20,250 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 10%, and the combined federal and provincial income tax rate was 38%. How much value did management add to shareholders’ wealth during the year? a. $5,532.17 b. $5,694.00 c. $5,730.08 d. $5,813.69

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Chap 02_4ce 50. Which statement regarding retained earnings is true? a. Since depreciation is a source of funds, the less depreciation a company has, the smaller its retained earnings will be, other things held constant. b. If a firm reports a zero profit on its income statement, then the retained earnings shown on the balance sheet will be zero. c. The retained earnings as shown on the balance sheet represents cash and is “available” for the payment of dividends or anything else. d. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. 51. Which statement regarding the tax system is true? a. Capital gains are taxed at one-half the rate of ordinary income, and a capital gain on the sale of your principal residence is also subject to any capital gains tax in Canada. b. In Canada, the maximum federal personal tax rate in 2021 is 31%. c. Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate. d. Ordinary corporate operating losses can be carried back to each of the preceding 3 years and forward for the next 10 years and used to offset taxable income in those years. 52. Which statement regarding EVA is true? a. One way to increase EVA is to achieve the same level of operating income but with more investorsupplied capital. b. If a firm reports positive net income, its EVA must also be positive. c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. d. One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital. 53. Tucker Electronic System’s current balance sheet shows total common equity of $4,785,000. The company has 165,000 shares outstanding, and they sell at a price of $54.50 per share. By how much do the firm’s market and book values per share differ? a. $23.95 b. $24.88 c. $25.50 d. $26.73 54. IBC Corporation just purchased an expensive piece of equipment. Originally, the firm planned to depreciate the equipment over 11 years on a straight-line basis, but now wants to depreciate the equipment on a straight-line basis over 8 years. Other things held constant, what will occur as a result of this change? Assume for this question that the company uses the same depreciation method for tax and shareholder reporting purposes. a. IBC’s reported net income will increase. b. IBC’s cash flow will decrease. c. IBC’s net fixed assets as shown on the balance sheet will be lower at the end of the year. d. IBC’s income tax expense for the year will increase.

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Chap 02_4ce 55. Which statement regarding the statement of cash flows is correct? a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of transactions involving short-term financial investments. b. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital, like accounts payable. c. The statement of cash flows separates a company’s activities into three categories—operating, investing, and financing—and shows how much the firm’s cash increased or decreased during a given year. d. The statement of cash flows reflects cash flows from operations and from investing, but it does not reflect cash used for share repurchases. 56. During 2021, Bascom Bakery Inc. paid out $36,910 of common dividends. It ended the year with $214,500 of retained earnings versus the prior year’s retained earnings of $146,250. How much net income did the firm earn during the year? a. $102,840 b. $103,220 c. $104,370 d. $105,160 57. The CFO of Sasa Industries plans to have the company issue $400 million common shares and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? a. The company’s net income would decrease. b. The company would have the same common equity. c. The company’s interest expense would remain constant. d. The company’s taxable income would increase. 58. Assume that Cool Beverages Inc. can reduce its depreciation expense by half for the upcoming year while sales revenue and the tax rate remain unchanged. Prior to the change, the company’s net income after taxes was forecast to be $5 million. What impact will this change have on the company’s financial statements? Assume that the company uses the same depreciation method for tax and shareholder reporting purposes. a. Net fixed assets on the balance sheet will increase. b. Net fixed assets on the balance sheet will decrease. c. The provision will decrease the company’s tax payments. d. The provision will decrease the company’s net income.

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Chap 02_4ce 59. Below is the common equity section (in millions) of Teenie Technology’s last two year-end balance sheets: 2020

2019 Common shares $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 Teenie has never paid a dividend to its common shareholders. Which of the following statements is correct? a. The company’s net income in 2019 was lower than in 2020. b. The market price of Teenie’s stock doubled in 2020. c. Teenie issued some common shares in 2020. d. The company had positive net income in both years, but the net income in 2020 was lower than that in 2019. 60. Which of the following items is NOT included in current assets? a. long-term investments b. inventory c. net plant and equipment d. intellectual property 61. Last year, Michelson Manufacturing reported $23,150 of sales, $7,500 of operating costs other than depreciation, and $3,350 of depreciation. The company had no amortization charges, it had $4,500 of bonds outstanding that carry a 7% interest rate, and its combined federal and provincial income tax rate was 37%. This year’s data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $865. By how much will the depreciation change cause the firm’s net after-tax income and its net cash flow to change? Assume for this question that the company uses the same depreciation calculations for tax and shareholder reporting purposes. a. –$524.63; $309.84 b. –$536.18; $313.01 c. –$544.95; $320.05 d. –$552.75; $341.02 62. JBS Inc. recently reported net income of $6,450 and depreciation of $1,035. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets? a. $5,912 b. $6,085 c. $7,485 d. $8,635

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Chap 02_4ce 63. Last year, CBS Company’s operations provided a negative net cash flow, but the cash shown on its balance sheet increased. What could be a reason for the increase in cash, assuming the company followed generally accepted accounting principles? a. The company used cash to repurchase some of its common shares. b. The company sold one of its large plants. c. The company had large capital expenditures. d. The company had large amortization expenses. 64. Net income available to shareholders excludes which of the following? a. gains or losses on foreign exchange b. investment income c. common share dividends d. sales revenue 65. On its 2020 balance sheet, Hope Books showed $620 million of retained earnings, and exactly that same amount was shown the following year. Assuming that there were no earnings restatements, which of the following statements is correct? a. The company must have had zero net income in 2020 due to poor management. b. The company must have paid no dividends in 2020. c. The company might have paid out more than half of its 2020 earnings as dividends. d. The company might have paid out the whole earnings for the year as dividends. 66. CAD Corp Inc. reported $29,000 of sales and $10,000 of operating costs (including depreciation). The company had $23,150 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 11%, and the combined federal and provincial income tax rate was 35%. How much value did management add to shareholders’ wealth during the year? a. $9,504.26 b. $9,605.11 c. $9,716.20 d. $9,803.50 67. Assume for this question that Pappas Company commenced operations on January 1, 2020, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 12 years, but in December 2020 management realized that the assets would last for 17 years. The firm’s accountants plan to report the 2020 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements? a. The firm’s reported net fixed assets would decrease. b. The firm’s cash position in 2020 would decrease. c. The firm’s reported 2020 earnings per share would decrease. d. The firm’s EBIT would decrease.

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Chap 02_4ce 68. On December 31, 2021, Heaton Industries Inc. reported retained earnings of $845,000 on its balance sheet, and it reported $341,500 of net income during the year. On its previous balance sheet, at December 31, 2020, the company had reported $637,000 of retained earnings. No shares were repurchased during 2021. How much in dividends did Heaton pay during 2021? a. $133,500 b. $145,670 c. $152,830 d. $169,020 69. An individual living in Alberta with wage earnings of $89,000 has invested $36,000 for 1 year in corporate bonds yielding 7%. What is the after-tax return? The relevant federal and provincial tax rates are 21% and 12%. a. $1,688.40 b. $1,679.68 c. $1,664.21 d. $1,655.90 70. Other things held constant, which action would decrease the amount of cash on a company’s balance sheet? a. The company sells a piece of equipment. b. The company issues new common shares. c. The company gives customers less time to pay their bills. d. The company repurchases its common shares. 71. Which of the following statements is correct? a. If a firm is more profitable than other firms, the stock price of the company will exceed its book value per share. b. If a firm is more profitable than other firms, the book value per share of the company will exceed its stock price. c. Typically, a firm’s EPS is less than its DPS. d. Typically, a firm’s EBITDA is less than its EBIT. 72. Wells Water Systems recently reported $9,750 of sales, $4,800 of operating costs other than depreciation, and $1,150 of depreciation. The company had no amortization charges, it had $4,150 of outstanding bonds that carry a 6.25% interest rate, and its combined federal and provincial income tax rate was 33%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $830 to buy new fixed assets and to invest $290 in net operating working capital. How much free cash flow did Wells generate? a. $2,207.00 b. $2,341.50 c. $2,491.43 d. $2,576.00

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Chap 02_4ce 73. Formed in 2021, ABC Ltd. had an operating loss of $125,000, with projected taxable income of $80,000 in 2022, $79,000 in 2023, and $96,000 in 2024. What will the corporate tax liability be in 2024? Assume that ABC is a CCPC in Quebec with a combined federal and provincial corporate income tax rate of 18%. a. $16,732 b. $17,280 c. $18,410 d. $19,620 74. Last year, Future Technologies had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which factor could explain this situation? a. The company had a sharp increase in accrued employee wages. b. The company had a sharp increase in depreciation expenses. c. The company purchased new equipment early in the year. d. The company sold a new issue of common shares. 75. Which of the following reporting standards are used by publicly traded Canadian firms when reporting their financial results? a. Accounting Standards for Private Enterprises (ASPE) b. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) c. International Financial Reporting Standards (IFRS) d. Generally Accepted Accounting Principles (GAAP) 76. Frederickson Office Supplies recently reported $17,500 of sales, $8,450 of operating costs other than depreciation, and $2,000 of depreciation. Assume for this question that the company uses the same depreciation method for tax and shareholder reporting purposes. The company had no amortization charges and no nonoperating income. It had $9,000 of bonds outstanding that carry a 6.5% interest rate, and its combined federal and provincial income tax rate was 38%. How much was the firm’s taxable income, or earnings before taxes (EBT)? a. $3,921 b. $4,336 c. $5,570 d. $6,465 77. A firm reports net income of $340,000. Its board of directors declared preferred dividends of $46,000. If the firm has 110,000 common shareholders, what would be the firm’s EPS for the fiscal year? a. $2.67 b. $2.71 c. $2.80 d. $2.95

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Chap 02_4ce 78. Barnes Brothers has the following data for the year ended December 31, 2021: Net income = $800; Net operating profit after taxes (NOPAT) = $900; Total assets = $2,800; Short-term investments = $230; Shareholders’ equity = $1,900; Total debt = $900; and Total operating capital = $2,400. Barnes’ weighted average cost of capital is 11%. What is its economic value added (EVA)? a. $620.11 b. $636.00 c. $648.50 d. $659.02 79. Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?

Cash Short-term investments Accounts receivable Inventory Current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets

$ 30 20 35 75 160 170 50 120 $280

Accounts payable Accruals Notes payable Current liabilities Long-term debt Common shares Retained earnings Total common equity Total liabilities and equity

$ 45 55 30 130 70 35 45 80 $280

a. $39 b. $143 c. $157 d. $160 80. Which of the following is considered a “positive” use of free cash flow? a. paying senior management bonuses b. repaying debtholders c. selling other nonoperating assets d. issuing new shares 81. Over the years, Janjigian Corporation’s shareholders have provided $28,350 of capital, part when they purchased new share issues and part when they allowed management to retain some of the firm’s earnings. The firm now has 1,200 common shares outstanding selling at a price of $56 per share. How much value has Janjigian’s management added to shareholder wealth over the years; that is, what is Janjigian’s MVA? a. $37,235 b. $38,850 c. $39,613 d. $40,927

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Chap 02_4ce 82. Consider the balance sheet of Wilkes Industries as shown below. Wilkes has $1,200,000 in common equity. As a result, which of the following can we state regarding Wilkes? Cash Inventory Accounts receivable Total current assets Net fixed assets

$ 150,000 200,000 250,000 600,000 1,000,000

Total assets

$1,600,000

Accounts payable Accruals Total current liabilities Debt Common shares Retained earnings Total liab. and equity

$ 100,000 100,000 200,000 200,000 300,000 900,000 $1,600,000

a. 25% of Wilkes’ shareholders’ equity comes from accumulated profitable earnings of prior years’ operations. b. 75% of Wilkes’ shareholders’ equity comes from issuing more shares. c. 19.75% of Wilkes’ shareholders’ equity comes from issuing more shares. d. 75% of Wilkes’ shareholders’ equity comes from accumulated profitable earnings of prior years’ operations. .

83. Swinnerton Clothing Company’s balance sheet showed total current assets of $3,050, all of which were required in operations. Its current liabilities consisted of $625 of accounts payable, $500 of 7% short-term notes payable to the bank, and $183 of accrued wages and taxes. What was its net operating working capital that was financed by investors? a. $2,242 b. $2,350 c. $2,407 d. $2,571 84. NNR Inc.’s balance sheet showed total current assets of $2,465,000 plus $5,065,000 of net fixed assets. All of these assets were required in operations. The firm’s current liabilities consisted of $515,000 of accounts payable, $465,000 of 7% short-term notes payable to the bank, and $180,000 of accrued wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR’s total investor-provided operating capital? a. $5,017,000 b. $6,835,000 c. $7,349,000 d. $8,142,000

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Chap 02_4ce 85. Which statement about financial statements is correct? a. The balance sheet reflects the firm’s performance over a period of time. b. The income statement gives us a picture of the firm’s financial position at a point in time. c. The statement of cash flows tells us the amount of cash and cash equivalents entering and leaving a company during a given period. d. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits. 86. Which statement regarding the statement of cash flows is true? a. In the statement of cash flows, depreciation charges are subtracted from net income in operating activities. b. In the statement of cash flows, an increase in inventories is added to net income in operating activities. c. In the statement of cash flows, an increase in accounts receivable is added to net income in operating activities. d. In the statement of cash flows, an increase in accounts payable is added to net income in operating activities. 87. Saskatchewan Corporation has the following balance sheet. How much net operating working capital does the firm have? Cash $35 Accounts payable $50 Short-term investments 40 Accruals 25 Accounts receivable 85 Notes payable 75 Inventory 50 Current liabilities 150 Current assets 210 Long-term debt 0 Net fixed assets 130 Common equity 120 Retained earnings 70 Total assets $340 Total liab. and equity $340

a. $91 b. $94 c. $95 d. $98 88. Analysts who follow Honey Industries recently noted that, relative to the previous year, the company’s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which factor could explain this situation? a. The company paid no dividends. b. The company issued new long-term debt. c. The company issued new common shares. d. The company purchased a profitable new plant.

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Chap 02_4ce 89. A security analyst obtained the following information from Austin Products’ financial statements: – Retained earnings at the end of 2019 were $900,000, but retained earnings at the end of 2020 had declined to $510,000 – The company does not pay dividends. – The company’s depreciation expense is its only non-cash expense; it has no amortization charges. – The company has no non-cash revenues. – The company’s net cash flow for 2020 was $180,000. On the basis of this information, which of the following statements is correct? a. The company’s depreciation expense in 2020 was less than $180,000. b. The company had negative net income in 2020. c. The company had positive net income in 2020, and its income was greater than its 2019 income. d. The company’s cash on the balance sheet at the end of 2019 must be higher than the cash it had at the end of 2020. 90. Which of the following is correct regarding the payment of dividends by a corporation? a. Dividends are paid out of EBIT and thus are not tax deductible by the corporation. b. Dividends are paid out of net after-tax income and thus are not tax deductible by the corporation. c. Dividends are paid out of net after-tax income and thus are tax deductible by the corporation in the following tax year. d. Dividends are paid out of EBIT and thus are tax deductible by the corporation. 91. Which factor could explain why Alectra Energy had a negative net cash flow last year, even though the cash on its balance sheet increased? a. The company had large depreciation expenses. b. The company purchased some new intellectual property. c. The company sold a new issue of bonds. d. The company repurchased 30% of its common shares. 92. An individual made $62,000 last year, paying $17,350 in taxes. What is the taxpayer’s average tax rate? a. 25.71% b. 26.49% c. 26.03% d. 27.98%

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Chap 02_4ce Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. True 12. False 13. True 14. False 15. False 16. a 17. c 18. b 19. a 20. a 21. a 22. c 23. d 24. b 25. b 26. b

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Chap 02_4ce 27. b 28. d 29. b 30. a 31. b 32. a 33. c 34. c 35. d 36. a 37. d 38. d 39. a 40. d 41. a 42. a 43. d 44. d 45. c 46. c 47. c 48. b 49. b 50. d 51. c 52. d 53. c 54. c Copyright Cengage Learning. Powered by Cognero.

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Chap 02_4ce 55. c 56. d 57. d 58. a 59. c 60. b 61. c 62. c 63. b 64. c 65. d 66. d 67. b 68. a 69. a 70. d 71. a 72. d 73. b 74. d 75. c 76. d 77. a 78. b 79. d 80. b 81. b 82. d Copyright Cengage Learning. Powered by Cognero.

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Chap 02_4ce 83. a 84. b 85. c 86. d 87. c 88. d 89. b 90. b 91. c 92. d

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Chap 03_4ce Indicate whether the statement is true or false. 1. If a firm finances with only debt and common equity, and if its equity multiplier is 4.0, then its debt ratio must be 0.75. a. True b. False 2. The current ratio and the quick ratio both help measure a firm’s liquidity. The quick ratio measures the relationship of a firm’s current assets to its current liabilities, while the current ratio subtracts inventory from other current assets. a. True b. False 3. Other things held constant, a decrease in sales and a simultaneous decrease in financial leverage must result in a higher profit margin. a. True b. False 4. The inventory turnover ratio is a ratio used to assess how effectively a firm is managing its assets, but days’ sales outstanding (DSO) is not. a. True b. False 5. An increase in a firm’s inventory turnover ratio suggests that it is managing its inventory less efficiently and that its liquidity position is deteriorating; that is, it is becoming less liquid. a. True b. False 6. Trends indicate whether a firm’s financial condition is likely to improve or to deteriorate. A trend analysis can be done simply by plotting a ratio over time. a. True b. False 7. To take full advantage of the credit term provided, management should try to lengthen the average payables period with cautions. a. True b. False 8. Profitability is the net result of a number of policies and decisions, which can be reflected by profitability ratios. a. True b. False 9. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, and the sales. With this information, the firm can calculate the amount of operating costs required to achieve its target TIE ratio. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chap 03_4ce 10. If a firm uses financial leverage and earns more on investments financed with borrowed funds than it pays in interest, then its shareholders’ returns are “leveraged,” but their risks are also magnified. a. True b. False 11. The inventory turnover ratio and the current ratio are related. The combination of a low current ratio and a high inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False 12. The basic earning power ratio (BEP) is unsuitable for comparing firms with different tax situations and different degrees of financial leverage since it will be influenced by financial leverage and tax effects. a. True b. False 13. Assume inflation is prevalent. If we compare Company A, which chooses to show PPE at net book value, with Company B, which shows PPE at fair value, we will probably find that Company A has a higher fixed assets turnover ratio. a. True b. False 14. An example of seasonal factors influencing ratio analysis is that the inventory turnover ratio for a food processor will be radically different if the balance sheet figure used for inventory is the one just before versus just after the close of the canning season. a. True b. False 15. Market value ratios are a way to measure the value of a company’s stock relative to that of another company. a. True b. False 16. One problem with ratio analysis is that relationships can be manipulated. For example, if the current ratio is 1.8, then using some cash to pay off some current liabilities would cause the current ratio to increase and thus make the firm look stronger. a. True b. False 17. Creditors count on the owner supplied funds to provide a margin of safety, so the higher the proportion of funding supplied by shareholders, the higher the risk creditors face. a. True b. False

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Chap 03_4ce 18. It is particularly useful to use average inventory in calculating inventory turnover if the firm’s business is highly seasonal, or if there has been a strong upward or downward sales trend during the year. a. True b. False 19. Although the ROA measures the firm’s effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT may have different ROAs. a. True b. False 20. The average payables period (APP) tells the average length of time that the firm takes to pay suppliers. a. True b. False 21. Different accounting practices, such as different methods of inventory valuation, can affect financial statements and thus distort comparisons between businesses. a. True b. False 22. Since a full liquidity analysis requires the use of a cash budget, the current and quick ratios cannot measure a firm’s liquidity position quickly. a. True b. False 23. Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, firms that have high asset turnover ratios will tend to have low profit margins, and firms with low asset turnover ratios will tend to have high profit margins. a. True b. False 24. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decrease. a. True b. False 25. Even though Firm A’s current ratio exceeds that of Firm B, Firm B’s quick ratio might exceed that of A. However, if A’s quick ratio exceeds B’s, A’s current ratio might be less than that of B. a. True b. False 26. One problem with ratio analysis is that relationships can be manipulated. For example, if the current ratio is 0.8, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to decrease. a. True b. False

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Chap 03_4ce 27. The basic earning power ratio (BEP) reflects the earning power of the firm’s assets inclusive of the effects of leverage and taxes. Therefore, this ratio measures the net earning power of the firm reflecting the magnitude of the leverage employed. a. True b. False 28. Firms A and B have the same current ratio, 0.83; the same sales, $1,000,000; and the same current liabilities, $600,000. However, Firm B has less inventories than A. Therefore, we can conclude that B’s quick ratio must be smaller than A’s. a. True b. False 29. The times-interest-earned ratio is the only measure of a firm’s ability to meet its long-term and short-term debt obligations. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

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Chap 03_4ce

Scenario: Pettijohn Inc. The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets Cash and securities Accounts receivable Inventories Total current assets Net plant and equipment Total assets Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total debt Common shares Retained earnings Total common equity Total liabilities and equity Income Statement (Millions of $) Net sales Operating costs except depr’n Depreciation Earnings before interest and taxes (EBIT) Less interest Earnings before taxes (EBT) Taxes Net income Other data: Shares outstanding (millions) Common dividends Interest rate on notes payable & L-T bonds Federal plus provincial income tax rate Year-end stock price

2020 $2,305.0 8,950.0 16,200.0 27,455.0 21,545.0 $49,000.0 $8,100.0 6,700.0 5,300.0 20,100.0 10,900.0 31,000.0 7,370.0 10,630.0 18,000.0 $49,000.0 2020 $69,500.0 62,850.0 1,250.0 5,400.0 1,232.0 4,168.0 1375.4 $2,792.6 200 $730 7% 33% $88.50

30. Refer to Scenario: Pettijohn Inc. What is the firm’s current ratio? a. 1.37 b. 1.45 c. 1.60 d. 1.82 Copyright Cengage Learning. Powered by Cognero.

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Chap 03_4ce

31. LeCompte Corp. has $406,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $750,000, and its net income after taxes was $30,200. Shareholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 18%. What profit margin would LeCompte need in order to achieve the 18% ROE, holding everything else constant? a. 9.52% b. 9.60% c. 9.74% d. 9.88% 32. Last year, Rosenberg Corp. had $247,000 of assets, $21,580 of net income, and a debt-to-total-assets ratio of 38%. Now suppose the new CFO convinces the president to increase the debt ratio to 52%. Sales and total assets will not be affected, but interest expense would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE? a. 4.05% b. 4.11% c. 4.29% d. 4.30% 33. Amram Company’s current ratio is 2.4. Considered alone, which action would reduce the company’s current ratio? a. use cash to reduce accruals b. use cash to reduce accounts payable c. borrow using short-term notes payable and use the proceeds to reduce accrued taxes d. borrow using short-term notes payable and use the proceeds to purchase new equipment 34. Companies X and Y each reported the same earnings per share (EPS), but Company X’s stock trades at a lower price. Which of the following statements is correct? a. Company X must have a lower market-to-book ratio than Company Y. b. Company X trades at a lower P/E ratio than Company Y. c. Company X probably has more growth opportunities than Company Y. d. Company X is probably judged by investors to be safer than Company Y. 35. Which of the following statements is correct? a. If a firm sold some inventory on credit, there is no reason to think that either its current or quick ratio would change. b. If a firm sold some inventory for cash and left the proceeds in its bank account, its current ratio would probably not change much, but its quick ratio would decrease. c. The inventory turnover ratio and days’ sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. d. If a firm sold some inventory on credit, its current ratio would probably not change much but its quick ratio would decrease.

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Chap 03_4ce 36. Refer to Scenario: Pettijohn Inc. What is the firm’s debt ratio? a. 61.85% b. 63.27% c. 66.30% d. 68.00% 37. Refer to Scenario: Pettijohn Inc. What is the firm’s inventory turnover ratio, using sales because cost of goods sold is unknown? a. 3.85 b. 4.12 c. 4.29 d. 4.50 38. Which of the following statements is correct? a. If a firm has the highest price/cash flow ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should be displeased with the performance. b. Other things held constant, the lower a firm’s expected future growth rate, the higher its price/cash flow ratio is likely to be. c. If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should be pleased with the performance. d. Other things held constant, the lower a firm’s expected future growth rate, the higher its P/E ratio is likely to be. 39. Which of the following statements is correct? a. If two firms have the same ROA, the firm with less debt can be expected to have the higher ROE. b. An increase in the DSO, other things held constant, could be expected to decrease the total assets turnover ratio. c. An increase in the DSO, other things held constant, could be expected to increase the ROE. d. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to increase the profit margin. 40. Which statement about comparative ratios is correct? a. Comparative ratios are available from a number of sources, and the ratios presented by different sources have the same definitions. b. In a ratio analysis, we only need to compare a company’s ratios with those of other firms in the same industry; that is, with industry average figures. c. The technique of comparing a company’s ratios with industry average figures is called benchmarking. d. In a ratio analysis, many companies also benchmark various parts of their overall operations against top companies, whether they are in the same industry or not.

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Chap 03_4ce 41. Refer to Scenario: Pettijohn Inc. What is the firm’s book value per share? a. $84.92 b. $87.50 c. $90.00 d. $93.00 42. Vang Corp.’s stock price at the end of last year was $52.80 and its earnings per share for the year was $3.25. What was its P/E ratio? a. 13.92 b. 14.64 c. 15.70 d. 16.25 43. Harper Corp.’s sales last year were $502,000, and its year-end receivables were $65,000. Harper sells on terms that call for customers to pay 33 days after the purchase, but many delay payment beyond Day 33. On average, how many days late do customers pay? Base your answer on this equation: DSO – Allowed credit period = Average days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments. a. 13.63 b. 14.26 c. 15.70 d. 16.09 44. Ziebart Corp.’s EBITDA last year was $470,000 (EBIT + depreciation + amortization), its interest charges were $11,500, it had to repay $30,000 of long-term debt, and it had to make a payment of $20,300 under a longterm lease. The firm had no amortization charges. What was the EBITDA coverage ratio? a. 7.61 b. 7.75 c. 7.80 d. 7.93 45. Which of the following is an example of window dressing? a. using some of the firm’s cash to reduce long-term debt b. offering early shipment discounts to customers who pay with cash rather than buy on credit, and then using the funds that come in quicker to purchase additional inventories c. borrowing on a 3-year basis in late December and holding the proceeds of the loan as cash d. borrowing by using short-term notes payable and then using the proceeds to retire long-term debt

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Chap 03_4ce 46. Aziz Industries has sales of $200,000 and accounts receivable of $21,000, and it gives its customers 30 days to pay. The industry average DSO is 30 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 9% on any cash freed up by this change, how would that affect its net income, assuming other things are held constant? a. $392.60 b. $405.03 c. $410.55 d. $429.00 47. Last year, Central Chemicals had sales of $315,000, assets of $183,000, a profit margin of 6.1%, and an equity multiplier of 1.4. The CFO believes that the company could reduce its assets by $32,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt ratio, sales, and costs remained constant, by how much would the ROE have changed? a. 2.50% b. 2.85% c. 3.08% d. 3.16% 48. Nikko Corp.’s total common equity at the end of last year was $702,000, and its net income after taxes was $150,000. What was its ROE? a. 21.37% b. 22.04% c. 23.80% d. 24.45% 49. Bonner Corp.’s sales last year were $530,000, and its year-end total assets were $403,000. The average firm in the industry has a total assets turnover ratio (TATO) of 3.1. Bonner’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant? a. $221,420 b. $232,032 c. $245,330 d. $260,080 50. Which of the following would generally indicate a deterioration in a company’s financial position, other things held constant? a. the EBITDA coverage ratio increases b. the TIE ratio decreases c. the current ratio increases d. the total assets turnover ratio increases

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Chap 03_4ce 51. Pace Corp.’s assets are $730,000, and its total debt outstanding is $202,000. The new CFO wants to employ a debt ratio of 60%. How much debt must the company add, without changing total assets, to achieve the target debt ratio? a. $217,082 b. $225,311 c. $236,000 d. $240,050 52. Orono Corp.’s sales last year were $680,000, its operating costs were $417,500, and its interest charges were $30,700. What was the firm’s times-interest-earned (TIE) ratio? a. 7.36 b. 8.55 c. 9.51 d. 10.02 53. Crindle Canada’s stock price at the end of last year was $280.60, and its book value per share was $109.37. What was its market/book ratio? a. 2.57 b. 2.78 c. 3.00 d. 3.45 54. Refer to Scenario: Pettijohn Inc. What is the firm’s equity multiplier? a. 2.14 b. 2.50 c. 2.72 d. 2.93 55. Last year Altman Corp. had $318,000 of assets, $421,000 of sales, $29,810 of net income, and a debt-to-totalassets ratio of 45%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $203,000. Sales, costs, and net income would not be affected, and the firm would maintain the 45% debt ratio. By how much would the reduction in assets improve the ROE? a. 9.66% b. 10.15% c. 10.42% d. 10.70% 56. Canada Corp. recently reported total assets of $230,000 and total common equity of $82,000 on its balance sheet. If the firm’s P/E ratio is 17, what is the firm’s equity multiplier? a. 2.80 b. 2.95 c. 3.20 d. 3.69

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Chap 03_4ce 57. Refer to Scenario: Pettijohn Inc. What is the firm’s TIE ratio? a. 4.25 b. 4.38 c. 4.50 d. 4.71 58. Walter Industries’ current ratio is 0.9. Considered alone, which of the following actions would increase the company’s current ratio? a. Use cash to purchase inventories. b. Borrow using short-term notes payable and use the cash to purchase marketable securities. c. Use cash to reduce accrued taxes. d. Use cash to reduce long-term bonds outstanding. 59. Refer to Scenario: Pettijohn Inc. What is the firm’s dividends per share? a. $3.20 b. $3.65 c. $3.80 d. $4.15 60. Other things held constant, which of the following alternatives would increase a company’s cash flow for the current year? a. Pay down short-term notes payable. b. Pay suppliers more frequently to decrease the accounts payable. c. Increase the inventory turnover ratio without affecting sales or operating costs. d. Increase the number of years over which fixed assets are depreciated for tax purposes. 61. Chambliss Corp.’s total assets at the end of last year were $540,000 and its EBIT was $130,200. What was its basic earning power (BEP)? a. 22.06% b. 23.50% c. 24.11% d. 25.20% 62. Arshadi Corp.’s sales last year were $67,000, and its total assets were $31,000. What was Arshadi’s total assets turnover ratio (TATO)? a. 2.16 b. 2.25 c. 2.30 d. 2.49

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Chap 03_4ce 63. Stewart Inc.’s latest EPS was $4.20, its book value per share was $28.34, it had 355,000 shares outstanding, and its debt ratio was 51%. How much debt was outstanding? a. $10,232,960 b. $10,385,004 c. $10,471,341 d. $10,620,715 64. Which of the following is correct regarding Canadian household debt? a. Average overall Canadian household debt has varied between 34% and 50% of assets over the past 30 years. b. A Canadian household’s debt-to-assets level has no relationship with the likelihood of financial distress. c. Statistics Canada inferred that the household debt-to-assets ratio may be a better predictor of financial distress than the more commonly used debt-to-income measure. d. Average overall Canadian household debt has kept increasing since 2017. 65. You observe that a firm’s ROE is below the industry average, but its profit margin and debt ratio are both above the industry average. Which of the following statements is correct? a. Its total assets turnover must be above the industry average. b. Its TIE ratio must be above the industry average. c. Its return on assets must equal the industry average. d. Its total assets turnover must be below the industry average. 66. Last year, Swensen Corp. had sales of $421,800, operating costs of $302,300, and year-end assets of $256,000. The debt-to-total-assets ratio was 30%, the interest rate on the debt was 9%, and the firm’s tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 48% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure? a. 11.65% b. 12.11% c. 13.50% d. 14.02% 67. Companies HD and LD have the same tax rate, total sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a lower debt ratio and, therefore, a lower interest expense. Which of the following statements is correct? a. Company HD has a higher times-interest-earned (TIE) ratio than Company LD. b. Company HD has a lower ROA than Company LD. c. Company HD pays less in taxes than Company LD. d. Company HD has a higher equity multiplier than Company LD.

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