Question 1 answers
The company repurchases common stock.
The company pays a dividend.
The company issues new common stock.
The company gives customers more time to pay their bills.
The company purchases a new piece of equipment.
Question 2 text
The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
Question 2 answers
The company’s taxable income would fall.
The company’s interest expense would remain constant.
The company would have less common equity than before.
The company’s net income would increase.
The company would have to pay less taxes.
Question 3 text
Rao Construction recently reported $23.50 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. What was Rao's operating income, or EBIT, in millions?
Question 3 answers
Question 4 text Question 4 10 points Save
Lintner Beverage Corp. reported the following information from their financial statements:
Operating income (EBIT) = $14,500,000
Interest payments on long-term debt =
Dividend income = $1,000,000
Calculate Lintner's total tax liability using the corporate tax schedule below:
Tax on Base of Bracket
Percentage on Excess above Base
Question 4 answers
Question 5 text
Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $1,500 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net working capital. By how much did the firm's net income exceed its free cash flow?
Question 5 answers
Question 6 text
In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
Question 6 answers
Question 7 text
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value".
Question 7 answers
Question 8 text
If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.
Question 8 answers
Question 9 text
Which of the following actions would be most likely to reduce conflicts of interest between stockholders and bondholders?
Question 9 answers
If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was much discussed, but it did not lead to any important changes in business practices.
If someone deliberately understates costs and thereby causes reported profits to increase, then this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?
Question 10 answers
The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.
The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.
The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
The firm's founder, who is also president and chairman of the board, sells 90% of her shares.
The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.
This question was asked on Jun 13, 2010 and answered on Jun 13, 2010.
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