Which of the following will likely result in a greater use of external financing

Question

Which of the following will likely result in a greater use of external financing?
Higher corporate profits and higher interest rates
Lower corporate profits and lower interest rates
Higher corporate profits and lower interest rates
Lower corporate profits and higher interest rates

2. The income statement for Brit, Inc. Indicates that tax expense was $20,000. The balance sheet indicates that taxes payable for the same year increased by $ 5,000. What amount did Brit, Inc. actually pay in taxes during this year?
$ 15,000
$ 20,000
$ 25,000
Cannot be determined without the cash balance

3. Which of the following transactions will increase a corporation’s operating return on assets?
Sell stock and use the money to pay off some long term debt
Sell 10 year bonds and use the money to pay off current liabilities
Negotiate a new contract that lowers raw materials cost by 10 %
Increase sales by 10 %

4. Which of the following statements about depreciation is true?

a. Depreciation is a noncash expense, but it is important because it affects a
corporation’s tax liability.

b. Depreciation must be calculated the same way for financial reporting and tax
purposes.

c. The choice of depreciation method had no impact on a firm's value because the
same amount of depreciation is taken over the life of an asset regardless of the
method used.

d. A shareholder wealth maximizing corporation prefers to defer depreciation
expense in order to increase current reported profits.

5. Global.Com has cash of $75,000; short term notes payable of $100,000; accounts receivable of $275,000; accounts payable of $135,000; inventories of $350,000; and accrued expenses of $75,000. What is Global’s net working capital?
$ 390,000
$ 175,000
$ 700,000
$ 210,000

6. Company A reports sales of $100,000 and net income of $15,000. Company B reports sales of $100,000 and net income of $10,000. Therefore, __________

a. Company A’s cash flow may be higher or lower than Company B’s cash flow
even though A’s net income is higher.
b. Company A’s cash flow is $ 5,000 more than Company B’s cash flow.
c. Company B is creating less value for its shareholders than Company A
d. Company B’s accounts receivable must be higher than Company A’s accounts
receivable.

7. The December 31, 2007 balance sheet shows net fixed assets of $100,000 and the December 31, 2008 balance sheet shows net fixed assets of $140,000. Depreciation expense for 2007 is $15,000 and depreciation expense for 2008 is $20,000. Based on the information, the cost of fixed assets purchased during 2008 is ________
$ 60,000
$ 20,000
$ 40,000
$ 75,000

8. The quick ratio of a firm would be increased by which of the following?
a. $20,000 short term bank loan is used to pay current accounts payable
b. Equipment is purchased, financed by long term debt issue
c. Inventories are sold for cash
d. Inventories are sold in exchange for a long term note.

9. When a company repurchases its own common stock, it is likely that ______

a. The stock price will increase because the company views the stock as
undervalued
b. The stock price will decrease because the company is creating artificial
demand for the stock.
c. The stock price will remain the same as this is simply an internal transaction
d. The board of directors will be fired for incompetence.

10. Project A is expected to generate positive cash flow of $ 1 million in 10 years while Project B is expected to generate $ 500,000 in 5 years. Therefore, _______

a. Project A is preferred because shareholder value is based on cash flow.
b. Project B is preferred because its cash flow is expected to be received sooner
than the cash flow from Project A.
c. Both projects have equal value because they average $100,000 per year.
d. Project B may be preferred to Project A if the opportunity cost of money is
high enough.

Explanation / Answer

1) 2nd option 2) 1st option 3) 3rd option 4) option (a) 5) 1st option 6) option (a) 7) 2nd option 8) option (c) 9) option (a) 10) option (a)

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