FIN 534 Homework for Chapter 2
1. Which of the following statements is CORRECT?
a. Typically, a firm’s DPS should exceed its EPS. False, EPS tell how much the shares are worth and DPS tells the amount the company paid per share to shareholder that year. Therefore, typical the share worth will exceeds the amount the shareholder is paid in dividends because firms usually invest some of the net income back into the company
b. Typically, a firm’s EBIT should exceed its EBITDA. False, EBITDA is calculated first and use to find EBIT by subtracting depreciation and amortization
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. False, book value per share is the amount/value of the share are issued and stock price reflects what current values that are determine by the marketplace.
e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. False, EPS is calculated using net income; if net come is higher the earnings per share will be higher. Depreciation reduces net income because it is subtracted to get net income. The more depreciation a firm has the lower the EPS.
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. False, statement of cash flow shows the operating, investing, and financing activities of a company not just the operating activities.
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. False, the statement of cash flow show the changes in cash account for a year
c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. False, the statement of cash flow will show the changes of working capital; increases/decrease in current assets other than cash or decrease/increase in cash.
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. False, the statement of cash flow shows the financing activities of affirm and the sale of common stock is a financing activity.
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. False, the calculation of net income does not rely on dividends. Instead net income shows what amount can possible be given to shareholders, companies usually reinvest some of the money.
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. False, cash short-term investments, account receivable, and inventories are type of current assets. Therefore, shifting the value of one journal (cash) to another (short-term investments) will not change the value of current assets, just the value of that particular journal
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. False, current liabilities are liabilities that are paid within a year (accounts payable, note payable, accruals) and since long-term bond is not going to be paid within a year it cannot be a liability.
d. Accounts receivable are reported as a current liability on the balance sheet. False, account receivable is reported as current asset 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. If the company purchase some of its common stock cash on the balance sheet would have decrease (the company is using its cash to pay the stock holders). If it would have sold it would have increase cash. Companies generally sell stock to fund capital expenditures
b. The company dramatically increased its capital expenditures. By increasing the company capital expenditures or expenditures for growth it will reduce the cash but increase the asset journal it was purchase from.
c. The company retired a large amount of its long-term debt. Paying off a long-term debt would decrease cash (since it will take funding to pay off the debt)
d. The company sold some of its fixed assets
e. The company had high depreciation expenses. Depreciation expenses would help lower net income and will not have an impact on cash
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? (Please see Excel sheet for work to support my answer)
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