Question Details

Which of the following would be most likely to occur 


1.	Which of the following statements is CORRECT?

a.	Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net working capital.
b.	Changes in working capital have no effect on free cash flow.
c.	Free cash flow (FCF) is defined as follows:

	FCF =	EBIT(1 - T)
		+ Depreciation
		- Capital expenditures required to sustain operations
		- Required changes in net working capital.

d.	Free cash flow (FCF) is defined as follows:

FCF = EBIT(1 - T) + Capital expenditures.

e.	Managers should be less concerned with free cash flow than with accounting net income.  Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors  both creditors and stockholders.

2.	Which of the following statements is CORRECT?

a.	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.
b.	All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
c.	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- income as personal income and pay taxes on that income.
d.	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.
e.	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.

3.	Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet.  Which of the following factors could explain this situation?

a.	The company had a sharp increase in its inventories.
b.	The company had a sharp increase in its accrued liabilities.
c.	The company sold a new issue of common stock.
d.	The company made a large capital investment early in the year.
e.	The company had a sharp increase in depreciation expenses.

4.	Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives?  Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.

a.	Companies’ after-tax operating profits would decline.
b.	Companies’ physical stocks of fixed assets would increase.
c.	Companies’ cash flows would increase.
d.	Companies’ cash positions would decline.
e.	Companies’ reported net incomes would decline.

5.	Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate.  Prior to the new provision, BBI- net income was forecasted to be $4 million.  Which of the following best describes the impact of the new provision on BBI- financial statements versus the statements without the provision?  Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

a.	The provision will reduce the company- cash flow.
b.	The provision will increase the company- tax payments.
c.	The provision will increase the firm's operating income (EBIT).
d.	The provision will increase the company- net income.
e.	Net fixed assets on the balance sheet will decrease




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