1) To increase its operating profit margin, a company could:
a. increase sales while maintaining its current product mix.
b. reduce expenses while maintaining its sales level.
c. replace debt with equity financing to lower interest expense.
d. sell more shares of common stock.
2) Which of the following statements is most correct concerning the relationship between a company's cash budget and its income statement?
a. Cash flow could be positive whether net income is positive or negative.
b. If net income is positive, then cash flow must be positive.
c. If net income is positive, then cash flow could be positive or negative, but if net income is negative, cash flow must also be negative.
d. If net income is positive for 3 or more months in a row, then cash flow must be positive.
3) All of the following are potential disadvantages of short-term debt except:
a. a greater risk of illiquidity than long-term debt.
b. short-term debt generally has a higher interest cost than long-term debt.
c. short-term debt must be paid back more quickly than long-term debt.
d. uncertainty of interest costs because short-term debt must be replaced often.
4) Given the following financial statements for ACME Corporation, what is the company's after-tax cash flow from operations?
Income Statement Balance Sheet
Year Ended 12/31/04 12/31/04 12/31/03
Sales $1,500,000 Current Assets $50,000 $35,000
Cost of Goods Sold 700,000 Fixed Assets 450,000300,000
Operating Expenses 400,000 Total Assets $500,000 $335,000
EBIT 200,000 Current Liabilities $25,000 $30,000
Interest Expense 50,000 Long-term Debt 340,000 230,000
EBT 150,000 Common Stock 5,000 5,000
Taxes 45,000 Retained Earnings 130,00070,000
Net Income $ 105,000 Total Liab & Equity $500,000 $335,000