Question 40

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Answer True False

2 points

Question 41

Shrives Publishing recently reported $9,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow?

Answer

$1,716

$1,469

$1,271

$1,650

$1,683

2 points

Question 42

The balance sheet and income statement shown below are for Koski 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

2007

Cash and securities

$1,290

Accounts receivable

9,890

Inventories

13,760

Total current assets

$24,940

Net plant and equipment

$18,060

Total assets

$43,000

Liabilities and Equity

Accounts payable

$8,170

Notes payable

6,020

Accruals

4,730

Total current liabilities

$18,920

Long-term bonds

$8,815

Total debt

$27,735

Common stock

$5,805

Retained earnings

9,460

Total common equity

$15,265

Total liabilities and equity

$43,000

Income Statement (Millions of $)

2007

Net sales

$51,600

Operating costs except depreciation

48,246

Depreciation

903

Earnings bef interest and taxes (EBIT)

$2,451

Less interest

927

Earnings before taxes (EBT)

$1,524

Taxes

533

Net income

$990

Other data:

Shares outstanding (millions)

500.00

Common dividends (millions of $)

$346.67

Int rate on notes payable & L-T bonds

6.25%

Federal plus state income tax rate

35%

Year-end stock price

$23.77

What is the firm's inventory turnover ratio?

Answer

3.75

3.98

3.19

3.23

3.79

2 points

Question 43

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Answer

Maximize its expected total corporate income.

Maximize its expected EPS.

Minimize the chances of losses.

Maximize the stock price per share over the long run, which is the stock's intrinsic value.

Maximize the stock price on a specific target date.

2 points

Question 44

Which of the following statements is CORRECT?

Answer

The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits.

All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.

Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income.

Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation's income and stockholders were taxed again on this income when it was paid to them as dividends.

All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest amounts.

2 points

Question 45

Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.

Answer True False

2 points

Question 46

There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

Answer True False

2 points

Question 47

Which of the following statements is CORRECT?

Answer

A hostile takeover is the main method of transferring ownership interest in a corporation.

A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.

Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt.

2 points

Question 48

If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Answer True False

2 points

Question 49

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

Answer True False

2 points

Question 50

The balance sheet and income statement shown below are for Koski 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

2007

Cash and securities

$1,290

Accounts receivable

9,890

Inventories

13,760

Total current assets

$24,940

Net plant and equipment

$18,060

Total assets

$43,000

Liabilities and Equity

Accounts payable

$8,170

Notes payable

6,020

Accruals

4,730

Total current liabilities

$18,920

Long-term bonds

$8,815

Total debt

$27,735

Common stock

$5,805

Retained earnings

9,460

Total common equity

$15,265

Total liabilities and equity

$43,000

Income Statement (Millions of $)

2007

Net sales

$51,600

Operating costs except depreciation

48,246

Depreciation

903

Earnings bef interest and taxes (EBIT)

$2,451

Less interest

927

Earnings before taxes (EBT)

$1,524

Taxes

533

Net income

$990

Other data:

Shares outstanding (millions)

500.00

Common dividends (millions of $)

$346.67

Int rate on notes payable & L-T bonds

6.25%

Federal plus state income tax rate

35%

Year-end stock price

$23.77

What is the firm's current ratio?

Answer

1.17

1.04

1.28

1.32

1.11