FIN 534 QUIZ 2 MULTIPLE CHOICE QUESTIONS answers

QUIZ 2 MULTIPLE CHOICE QUESTIONS answers

QUIZ 2 MULTIPLE CHOICE QUESTIONS answers Question Which of the following statements is CORRECT? Answer

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.

MVA gives us an idea about how much value a firm’s management has added during the last year.

MVA stands for market value added, and it is defined as follows:

MVA = (Shares outstanding)(Stock price) + Book value of common equity.

EVA stands for economic value added, and it is defined as follows:

EVA = EBIT(1 – T) – (Investor-supplied op. capital) x (A – T cost of capital).

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?

Answer

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.

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.

All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.

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.

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.

3. Which of the following statements is CORRECT?

Answer

The statement of cash flows shows how much the firm’s cash?the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)?increased or decreased during a given year.

The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.

The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.

The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.

The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

4. Which of the following statements is CORRECT?

 

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