AFM482 Lecture 7: Chapter05.doc

100 views43 pages

fuchsiaalligator904

25 Oct 2014

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM482

Professor

...

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Subsidiary net income is after payments to the debtholders and hence the calculation of return on net investment (which is equivalent to return on equity) is on a return-on-equity basis. Calculate net investment and residual income to equity in each year: Net investment = (a l) = net income roi. Subsidiary net income less: cost of capital on net investment. The calculation shows that residual income, like roi, is rising. The subsidiary has been leveraging up adding debt to its capital structure and reducing net investment. Therefore, the improving roi is the result of financing changes, not operating performance. Assuming phipps has positive taxable income in low country against which to offset the loss of transferring the boards at variable cost, then the variable cost transfer pricing method minimizes the combined tax liability. An implicit assumption in taking eva to the shop floor is that on average firms are overly centralized.

Related Questions

1. In preparing the Statement of Cash Flows

	a	deprecation is added to net income when calculating Cash FromOperations (under the Indirect Method).
		B.deprecation is added to net income when calculating Cash FromOperations (under the Indirect Method) because depreciation is anon-cash expense.
		C. Investing Activities and Financing Activities do not requireany adjustments to net income.
	d	All of the above.

Why do some companies prefer the use of residual income overreturn on investment in decision making?

	a.	The concept.
	b.	ROI can motivate managers to make investment decisions that arenot necessarily in the companyâs best interest.
	c.	The calculations for economic profit are easier.
	d.	The data needed to calculate return on investment are not alwaysavailable.

byzantiumrhinoceros149

1) The statement of cash flows is used for _____.

A. showing the relationship of net income to changes in currentassets

B. determining a company%u2019s acceptable level of debtfinancing

C. revealing commitments that may restrict future courses ofaction

D. evaluating the creditworthiness of the organization

2) Nonoperating items on the income statement _____.

A. are revenues and expenses arising from adjusting entries

B. include interest income and expense

C. appear only on corporate income statements

D. appear on the income statement immediately after grossprofit

3) The difference between a single-step and multiple-step incomestatement is that a single-step income statement _____.

A. groups all revenues together and all expenses together, whereasa multiple-step income statement separates certain revenues andexpenses from each other and presents subtotals

B. calculates net income using one method, whereas a multiple-stepincome statement calculates net income using two or moremethods

C. calculates gross profit and operating income, whereas amultiple-step income statement does not

D. shows only 1 year's net income, whereas a multiple-step incomestatement shows multiple years' net income

4) Which one of the following statements is true?

A. The statement of cash flows reports the cash receipts but notcash payments of an entity over a period of time.

B. Both the statement of cash flows and the income statementdetermine the net income for a company.

C. Transactions affecting the sale and the purchase or productionof goods and services are reported in the financing activitiessection of the statement of cash flows.

D. Investing activities in the statement of cash flows includeacquiring and selling long-term assets.

5) The _____ accounting convention uses the acquisition cost minusdepreciation in valuing an asset on the balance sheet.

A. continuity

B. conservatism

C. cost-benefit

D. materiality

6) A new corporation issuing a common, no-par value stock for cashwould include a journal entry a debit to _____.

A. paid-in capital and a credit to retained earnings.

B. cash and a credit to common stock.

C. retained earnings and a credit to cash.

D. cash and a credit to retained income.

7) Which type of organization would most likely havework-in-process inventory?

A. A retail store

B. A manufacturing company

C. A service organization

D. A real-estate investment trust

8) _____ is a measure of income or profit divided by the investmentrequired to obtain that income or profit.

A. Return on sales

B. Capital turnover

C. Return on investment

D. Residual income

9) The following information is available for the PeterCompany:

Sales: $150,000

Invested capital: $156,250

ROI: 10%

The return on sales is _____.

A. 10.00%

B. 10.42%

C. 62.50%

D. 9.60%

10) The following information is available for the PeterCompany:

Sales: $500,000

Invested capital: $312,500

ROI: 10%

The return on sales is _____.

A. 10.00%

B. 6.250%

C. 1.000%

D. 62.50%

The goal of the firm is to ____ because _____. Answer maximize shareholders' wealth; it considers all risks invest funds in real estate; the return is longer maximize shareholders' profit; it is a short term outlook closely matching management goals Mike is paying $8,000 a year on his mortgage at 6% nominal annual interest. He has 15 more years to make payments. He wants to sell his house today. The lowest [minimum] price he can sell the house without losing any money on the house would be about ___. Answer $120,000 $ 50,000 $77,698 $ 186,208 A firm's net income before tax, EBT [NIBT] (on the income statement) is affected by _____. Answer taxes interest dividends Common Stock as listed on the Balance Sheet could include which of the following? Answer A) retained earnings B) additional paid in capital over par value C) preferred capital Both A) and B) If an asset is sold for ___ than its basis, the tax effect would be ____. Answer A) more; capital gain and depreciation recapture B) less; depreciation recapture C) more; capital loss Both A) and B) The main reason for a firm to have assets is to _______. Answer generate revenue match the liabilities and equity both of the above be able to borrow money and pay its debts none of the above The only risk you would NOT have in loaning money to the United States Government (Uncle Sugar) is _____ risk. Answer liquidity maturity default A(n) ____ shows _____. Answer balance sheet; sources and uses of funds income statement; net income as of a specific date cash flow statement; how well the firm is doing relative to its competition You can compare dollars _____ because ______. Answer computed using equations; any math is always correct at any point in time; time is never a factor if they are at nominal value; that is when decisions are made only at the same point in time; dollars can be invested to earn interest There ___ a tax benefit to the company with paying preferred dividends because _______. Answer is; investors can write them off is not; investors declare them as income is; the company can use the payments as an expense is not; the company cannot use the payments as an expense XYZ issued a 6% coupon, $1,000 par, 30 year to maturity bond. It is now 6 years to maturity. What is the price of the bond if the yield to maturity [market interest rate] is 10%? Answer $1,000 $659.46 $825.79 $705.33 The valuation process can be described as ______. Answer calculating the present value of an expected future cash flow using the investor's required rate of return as the discount rate calculating the future value of an expected future cash flow using the investor's required rate of return as the discount rate amortizing the value of the asset over its holding period The ______ is the minimum required rate of return a firm must earn on its investments. Answer net present value opportunity cost of capital or weighted average cost of capital. internal rate of return gross profit margin The value of an asset is the _____ dollar price someone is willing to pay for it. Answer usual maximum minimum Companies use ____ in capital budgeting project analysis because ________. Answer accounting profit; that is the total net income after tax cash flow; that is what the owners would receive from the project and reinvest accounting profit; that is what the owners would receive from the project and reinvest after tax cash flow; that is the result of prudent accounting When borrowing money, you want to know the ____ interest rate because ____. Answer nominal; it is the easiest to find. effective; it is the true cost of borrowing risk free; that is what the government pays Fed funds; that is what you would pay the bank Cash available to pay out to the investors after the firm pays for new investments or additions to working capital is _____. Answer a statement of cash flows operating after tax cash flow free cash flow net income An organization that raises money from investors and provides financing for individuals and businesses is a ___. Answer factor federal government regulatory unit state government taxing authority financial intermediary Negatives/cons of the Net Present Value (NPV) technique include: Answer least conservative reinvestment assumption multiple rates of return for non-conventional cash flows all of the above none of the above A fixed exchange rate means a country _____. Answer can only use gold coins as money is limited in the amount of paper money it can print can print money as the economy demands Your company is considering an investment with the following expected cash flows: Initial Investment = $407,596 Operating Cash Flows = $73,428 per year Terminal Cash Flow = $11,872. The company's WACC is 11% for similar risk projects. The proposed project would have an expected life of 9 years. Your boss asks you to do the analysis. You would tell your boss this proposed project ___ because ____. Answer is acceptable; NPV is about $3,620 is acceptable; NPV is zero should be rejected; NPV is about -$5,660 [negative $5,660]. should be rejected; NPV is zero All ratios are ___ and a reason to analyze ratios is ____. Answer good; to continue to look productive good and bad; because seemingly good ratios can be masking something bad bad; to try to rework the numbers to have them look good basically irrelevant; there really is no need to analyze financial statements When analyzing financial statements, ratio analysis gives ____ and provides insight into ____. Answer very little useful information; practically nothing good practice in logical thinking; what has occurred and the logic behind it financiers something to do during slow periods; how the financier spends his time accountants a reason to provide financial statements; why accountants do what they do while at work Given: Economic State[i]: Good Average Expected Return[i]: 10% 8% Probability[i]: 30% 70% What is the Standard Deviation? Answer 3% 8.4% 0.92% 5.6% Chapter 9: XYZ has a projected project to install a new press. The expected cash revenue is $175,000 per year. Expected yearly expenses are: Operatinf costs of $50,000; Rental of $17,000; Utilities of $20,500; and Depreciation of $10,000. The tax rate is 35%. What is the expected After-Tax Operating Cash Flow for the first year? Answer $65,500 $60,375 $77,500 $97,500 A stock just paid a dividend of $1.60 per year. The dividend is expected to grow at 3% per year indefinately. Equally risky stocks offer expected rates of return of 8%. What should be the stock price? Answer 53.33 $16.00 $32.96 None of the above. A plot of the CAPM is the _____. Answer wrong thing to do Security Market Line a function showing how to calculate TVM All of the above. Derivatives are used to ___. Answer divide one number by another find old ways to do things hedge risk none of the above With the end of the Gold Standard in the 1970's, what new risk did business face in the international market? Answer Comjpetition Exchange rate Worker compensation Property taxes One of the positive aspects [pros] of a Floating Exchange Rate System is ____. Answer money can be printed as needed to support financial/economic growth no/reduced inflation economic growth is reduced as a result of reduced liquidity [lower money supply] business planning is more difficult A(n) ____ contract obligates the seller to execute the contract and the contract is executed. Answer backwards forward future option What policies did countries institute after the Great War that help lead to the Great Depression? Answer A. Mandatory military service B. Trade restrictions C. High tariffs D. Isolationism Only B., C. and D. All of the above

bluemarten153

AFM482 Lecture 7: Chapter05.doc

Document Summary

Get access

Related Documents

ADM 2341 Lecture Notes - Lecture 31: Financial Statement, Uptodate, Income Approach

ACCT 2200 Study Guide - Marginal Cost, Profit Margin, Transfer Pricing

ACCT1022 Lecture Notes - Tertiary Education Fees In Australia, Diode, Accounts Receivable

Related Questions