Question

34. Assume that Pappas Company commenced operations on January 1, 2007, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2007 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2007 financial statements based on this new information. How would the new depreciation assumption statements? a. b. affect the company's financial The firm's reported net fixed assets would increase. The firm's EBIT would increase. The firm's reported 2007 earnings per share would increase. The firm's cash position in 2007 and 2008 would increase. The firm's net liabilities would increase. c. d. e. 35. A start-u p firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is cons that would require the firm to depreciate the equipment over 7 years. If the legislation becomes the following would occur in the year following the change? which of a. The firm's operating income (EBIT) would increase. b. The firm's taxable income would increase. The firm's net cash flow would increase. c. d· The firm's tax payments would increase. The firm's reported net income would increase. The CFO of Shalit Industries plans to have the company issue $300 million of the proceeds to pay off some of its outstanding bonds. Assume that the company, which dividends, takes this action, and that total assets, operating income (EBIT), and constant. Which of the following would occur? e. 36. new common stock and use does not pay any its tax rate all remain a. b. c. d. e. The company's taxable income would fall. The company's interest expense would remain constant. The company would have less common equity than before. The company's net income would increase. The company would have to pay less taxes. t year Roussakis Company's operations provided a negative net cash flow, yet the cash shown on its balance company's financial statements were prepared under generally accepted accounting principles? a. The company repurchased some of its common stock. b. The company dramatically increased its capital expenditures. c- The company retired a large amount of its long-term debt. d. The company sold some of its fixed assets. e. The company had high depreciation expenses. Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ? sheet increased. Which of the following statements could explain the increase in cash, assuming the 38. $27.50 a. b. $28.88 c. $30.32 d. $31.83 e. $33.43

Answer 1

34)	(d) The firms's cash position would in 2007 & 2008 would increase
	Reason: since we depreciate asset in 10 yrs instead of 15 yrs,we will claim
	higher depreciation comparetively. Higher depreciation will result
	in low net income and ultimately lower amount of tax will be paid.
	hence cash outflow will be lower and cash balance will increase.
35)	© The firm net cash flow will increase
	Reason	same as above
36)	(d) the company net income will increase
	Reason : since there will be no debt now,the interest expense will be saved
	and company's net income would increase
37)	(d) the company sold some of its fixed assets.
	Reason: sale fixed asset does not come under cash flow from operations.
	Hence the increased balance of cash could be due to this reason.
38)	(a)	$27.50
	solution :book value =$3125000/125000=$25
		difference$52.5-$25=$27.5
39)	(b)	$22
	solution: [$2,050,000+($250,000-150,000)]/100,000
	=	$22
40)	(d)	$5,635
	solution: cash flow=net income+ non cash expenses
		cash flow=$4750+885=$5635
41)	(b)	$1,530
	solution: $2250-575-145=$1530
		Remaining $ 300 was financed by short term finance(notes payable)
42)	(d)	3830.94
	solution : [15000-7500-1200-(6500*0.0625)]*(1-0.35)
	=	$3,830.94
43)	(a)	$77,000
	solution:	($187500-$132250)+$21750
	=	$77,000
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