Question Details

Congress recently passed a provision that will enable Barton's Rare Books 


1.	Which of the following statements is CORRECT?
a.	The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
b.	MVA gives us an idea about how much value a firm's management has added during the last year.
c.	MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
d.	EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1  T)  (Investor-supplied op. capital)  (A  T cost of capital).
e.	EVA gives us an idea about how much value a firm's management has added over the firm's life.


	

	2.	Which of the following statements is CORRECT?
a.	The maximum federal tax rate on personal income in 2010 was 50%.
b.	Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
c.	Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
d.	The maximum federal tax rate on corporate income in 2010 was 50%.
e.	Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.


	3.	Which of the following statements is CORRECT?
a.	All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
b.	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.
c.	All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
d.	Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
e.	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 income and stockholders were taxed again on the income when it was paid to them as dividends.



	4.	Danielle's Sushi Shop last year had (1) a negative net 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 depreciation and amortization expenses.
b.	The company had a sharp increase in its inventories.
c.	The company had a sharp increase in its accrued liabilities.
d.	The company sold a new issue of common stock.
e.	The company made a large capital investment early in the year.



	5.	Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
a.	Net fixed assets on the balance sheet will decrease.
b.	The provision will reduce the company's net cash flow.
c.	The provision will increase the company's tax payments.
d.	Net fixed assets on the balance sheet will increase.
e.	The provision will increase the company's net income.




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