Financial Statements, Cash Flow, and Taxes1

Financial Statements, Cash Flow, and Taxes1 - Financial...

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes Page 1 of 44 Pages Financial Statements, Cash Flow, and Taxes 1. An increase in a firm’s debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. A. True B. False 2. An increase in the DSO, other things held constant, would generally lead to an increase in the total assets turnover ratio. A. True B. False 3. One drawback of economic value added (EVA) as a performance measure is that it mistakenly assumes that equity capital is free. A. True B. False 4. If you look at two firms that are identical from an operational perspective (assets, costs, sales, etc.), except for their use of debt financing, then the firm with the higher debt ratio will also have the lower basic earnings power ratio. A. True B. False 5. One way to increase economic value added (EVA) is to maintain the same operating income with less capital. A. True B. False 6. Given recent changes in the tax laws, the marriage penalty (for a married couple, filing jointly) no longer exists. A. True B. False 7. The enterprise value of the firm, at least as we have defined it in class, can be determined by discounting the firm’s free cash flows by its weighted average cost of capital. A. True B. False
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Old Exam Questions - Financial Statements, Cash Flow, and Taxes Page 2 of 44 Pages 8. Because they both are based on NOPAT (or OCF), as well as on the investments made in the operating assets of the firm, a firm with a negative free cash flow (FCF) will also have a negative economic value added (EVA). 9. A firm’s dividend policy can have an impact on the value of the firm, since a decrease in dividends paid out in any year will decrease the firm’s free cash flow for that year which, in turn, will reduce the firm’s enterprise value and the value of the firm’s stock. 10. A decrease in NOPAT does not necessarily lead to a decrease in economic value added (EVA), since the capital charge may also decrease if the firm has less capital outstanding. 11. A decrease in debt (while holding equity constant) will lead to a higher equity-to-value ratio, a decrease in interest expense, and an increase in the equity multiplier. Therefore, if a firm decreases its debt we should observe both an increase in return on assets (ROA) and an increase in return on equity (ROE). A. True B. False
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