1. Which of the following statements is CORRECT?

Dividends are always paid by a corporation.

EBIT has already been taxed.

One way of using the excess cash is to pay the shareholders a dividend. Another way might be a firm buying its own stock back.

If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

For profit firms write large checks for depreciation expense.

2. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

The company cut its dividend.

The company made large investments in fixed assets.

The company sold a division and received cash in return.

The company issued new common stock.

The company issued new long-term debt.

3. The Nantell Corporation just purchased an expensive piece of equipment.Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years.Other things held constant, which of the following will occur as a result of this Congressional action?Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Nantell’s taxable income will be lower.

Nantell’s operating income (EBIT) will increase.

Nantell’s cash position will improve (increase).

Nantell’s reported net income for the year will be lower.

Nantell’s tax liability for the year will be lower.

4. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a.   The periodic rate of interest is 2% and the effective rate of interest is 4%.

b.   The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

c.   The periodic rate of interest is 4% and the effective rate of interest is less than 8%.

d.   The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

e.   The periodic rate of interest is 8% and the effective rate of interest is also 8%.