Question Details

Below is the common equity section (in millions) of Timeless Technology- last two year-end 


1.	Below are the 2007 and 2008 year-end balance sheets for Tran Enterprises:

Assets:		2008			2007	
Cash	$  200,000	$  170,000
Accounts receivable	864,000	700,000
Inventories	 2,000,000	 1,400,000
  Total current assets	$3,064,000	$2,270,000
Net fixed assets	 6,000,000	 5,600,000
Total assets	$9,064,000	$7,870,000

Liabilities and equity:
Accounts payable	$1,400,000	$1,090,000
Notes payable	 1,600,000	 1,800,000
  Total current liabilities	$3,000,000	$2,890,000
Long-term debt	 2,400,000	 2,400,000
Common stock	 3,000,000	 2,000,000
Retained earnings	   664,000	   580,000
  Total common equity	$3,664,000	$2,580,000
Total liabilities and equity	$9,064,000	$7,870,000

The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2007.  As of the end of 2008, none of the principal on this debt had been repaid.  Assume that the company- sales in 2007 and 2008 were the same.  Which of the following statements must be CORRECT?

a.	The firm increased its short-term bank debt in 2008.
b.	The firm issued long-term debt in 2008.
c.	The firm issued new common stock in 2008.
d.	The firm repurchased some common stock in 2008.
e.	The firm had negative net income in 2008.

2.	On its 12/31/08 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year.  Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

a.	If the company lost money in 2008, it must have paid dividends.
b.	The company must have had zero net income in 2008.
c.	The company must have paid out half of its 2008 earnings as dividends.
d.	The company must have paid no dividends in 2008.
e.	Dividends could have been paid in 2008, but they would have had to equal the earnings for the year.

3.	Below is the common equity section (in millions) of Timeless Technology- last two year-end balance sheets:

		2008			2007	
Common stock	$2,000	$1,000
Retained earnings	 2,000	 2,340
Total common equity	$4,000	$3,340

The firm has never paid a dividend to its common stockholders.  Which of the following statements is CORRECT?

a.	The company- net income in 2008 was higher than in 2007.
b.	The firm issued common stock in 2008. 
c.	The market price of the firm's stock doubled in 2008.
d.	The firm had positive net income in both 2007 and 2008, but its net income in 2008 was lower than it was in 2007.
e.	The company has more equity than debt on its balance sheet.

4.	Which of the following statements is CORRECT?

a.	Typically, a firm- DPS should exceed its EPS.
b.	Typically, a firm- net income should exceed its EBIT.
c.	If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.
d.	If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.
e.	The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

5.	Which of the following statements is CORRECT?

a.	The more depreciation a firm reports, the higher its tax bill, other things held constant.
b.	People sometimes talk about the firm- cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line.”
c.	Depreciation reduces a firm- cash balance, so an increase in depreciation would normally lead to a reduction in the firm- cash flow.
d.	Operating income is derived from the firm's regular core business.  Operating income is calculated as Revenues less Operating costs.  Operating costs do not include interest or taxes.
e.	Depreciation is not a cash charge, so it does not have an effect on a firm- reported profits.




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