Exam 1 Solutions - Summer 2002 Exam 1 1. Which of the...

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Summer 2002 Exam 1 1. Which of the following statements is most correct? A. Personal taxes are of a regressive nature. That is, the lower your income, the more you pay as a percentage of your taxable income. B. Individuals are allowed to deduct 70 percent of any dividend income received before calculating taxes. That is, they will pay taxes on only 30 percent of the dividend income received. C. The “marriage penalty” reflects the fact that married couples can be taxed up to a maximum rate of 43 percent, while individuals have a maximum rate of only 39.6 percent. * D. Since corporations are allowed to deduct interest before calculating their taxable income, we say that interest is paid with before-tax dollars. E. Corporations are allowed to deduct 70 percent of any dividend they pay out before calculating taxes. Like interest, this creates a tax shelter for the corporation. 2. Assume that a firm has just completed Year 2002 (its second year of operations) and depreciated its fixed assets on a 20-year straight-line basis. Also assume that the firm is profitable (positive net income), makes no additional investment in fixed assets during Year 2003, and that all other factors (sales, other expenses, interest, current assets and liabilities, etc.) are constant from Year 2002 through Year 2003, but that there may be changes in the firm’s equity account. Which of the following would you most expect to observe, comparing results for Year 2002 to Year 2003, if the firm changes its depreciable life assumption from 20 years to 10 years for Year 2003? A. Net operating working capital (NOWC) would decrease. B. Net operating profit after tax (NOPAT) would increase. * C. Total operating capital (TOC) would decrease. D. Operating cash flow (OCF) would decrease. E. Net income (NI) would increase. 3. Assume that a firm is profitable (positive net income) and that it increases its use of short-term debt (notes payable) and invests the proceeds in assets that earn a return greater than the firm’s weighted average cost of capital. Which of the following would you most expect to observe? A. An increase in its current ratio (CR). B. A decrease in market value added (MVA). C. No change in its net operating profit after taxes (NOPAT). D. A decrease in market value added (MVA) * E. An increase in economic value added (EVA) 4. Dissagregation of ROA and ROE allows us to do all of the following except: FIN 3403 - 2002 Summer Term – Exam 1 Page 1 of 13
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* A. Determine whether the firm has effectively traded off its current ratio against its debt ratio to maximize its ROE. B. Determine how the firm’s ROA and ROE compares with itself over time. C. Determine how the firm’s ROA and ROE compares with other firms or the industry. D.
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Exam 1 Solutions - Summer 2002 Exam 1 1. Which of the...

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