FIN MISC-Finance Exam 1 Practice Problems with Answers

FIN MISC-Finance Exam 1 Practice Problems with Answers Chapter 2 1. A firm has beginning retained earnings of $4,200 and ending retained earnings of $4,550. What is the amount of dividends paid if the firm earned a net income of $1,950? A) $1,600 B) $1,950 C) $1,900 D) $2,000 E) $2,100 Explanation: Dividends paid = $1,950 – ($4,550 – $4,200) = $1,600 2. MLM Enterprises has net income of $984, interest expense of $146, sales of $6,320, addition to retained earnings of $495, selling and general expenses of $1,210, and depreciation of $1,140. What is the amount of dividends paid if the tax rate is 34 percent? A) $1,479 B) $1,162 C) $489 D) $507 E) $783 Explanation: Dividends paid = $984 – $495 = $489 3. Assume sales are $1,300, cost of goods sold is $510, depreciation expense is $80, interest paid is $40, selling and general expenses are $230, dividends paid is $45, and the tax rate is 34 percent. What is the addition to retained earnings? A) $293.40 B) $173.40 C) $166.20 D) $245.40 E) $158.40 Explanation: Net income = (1 – 0.34)($1,300 – $510 – $230 – $80 – $40) = $290.40 Addition to retained earnings = $290.40 – $45 = $245.40 4. Lester's has $33,600 in sales, $17,200 in cost of goods sold, $2,300 in depreciation, $980 in interest expense, and $5,800 in selling, general, and administrative expenses. The firm owes no taxes for this year. What is the amount of the period costs that are included in the operating cash flow? A) $25,300 B) $3,280 C) $23,980 D) $23,000 E) $5,800 Explanation: Period costs = Selling, general, and administrative expenses = $5,800 5. The Down Towner has annual costs of goods sold of $42,600, interest expense of $650, selling and administrative expenses of $7,800, dividends paid of $1,200, depreciation of $1,100, and a tax rate of 34 percent. What is the firm's taxable income if it added $2,500 to retained earnings during the year? A) $2,181.30 B) $8,711.18 C) $3,700.00 D) $5,606.06 E) $10,882.35 Explanation: Net income = $1,200 + $2,500 = $3,700 Taxable income = $3,700 / (1 – 0.34) = $5,606.06 6. Brewster's has annual sales of $11,800, dividends of $270, interest expense of $320, cost of goods sold of $7,230, addition to retained earnings of $510, selling and administrative expenses of $1,940, and a tax rate of 34 percent. What is the amount of the depreciation expense? A) $584.18 B) $1,385.82 C) $1,128.18 D) $1,215.00 E) $1,474.24 Explanation: Net income = $270 + $510 = $780 Taxable income = $780 / (1 – 0.34) = $1,181.82 Earnings before interest and taxes = $1,181.82 + $320 = $1,501.82 Depreciation = $11,800 – $7,230 – $1,940 – $1,501.82 = $1,128.18 7. Assume sales are $2,220; cost of goods sold is $1,055, general expenses are $630, depreciation expense is $210, and the tax rate is 35 percent. What is the net income amount if the firm paid $40 in interest expense? A) $171.25 B) $99.75 C) $185.25 D) $120.25 E) $270.75 Explanation: Net Income = (1 – 0.35)($2,220 – $1,055 – $630 – $210 – $40) = $185.25 8. Atlantic Fisheries has an EBIT of $3,280, depreciation of $1,850, cost of goods sold of $6,920, dividends paid of $750, interest expense of $860, and sales of $6,500. What is the taxable income? A) $2,376 B) $1,805 C) $1,610 D) $1,670 E) $2,420 Explanation: Taxable income = $3,280 – $860 = $2,420 9. Art's Boutique has sales of $610,000 and costs of $480,000. Interest expense is $40,000, dividends paid is $37,000, and depreciation is $60,000. The tax rate is 34 percent and there are 8,500 shares of stock outstanding. What is the earnings per share? A) $1.99 B) $2.33 C) $3.53 D) $4.28 E) $2.67 Explanation: Earnings per share = [($610,000 – $480,000 – $60,000 – $40,000)(1 – 0.34)] / 8,500 = $2.33 10. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $228,610? Taxable Income Tax Rate $0 – 50,000 15% 50,001 – 75,000 25% 75,001 – 100,000 34% 100,001 – 335,000 3