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Question(s) / Instruction(s):

1. Retained earnings is:

a. the amount of cash the firm currently has available for reinvestment.

b. is the total amount of income over time that has been reinvested in the firm.

c. is the total book value of the shareholder’s equity position


2.  Net cash flow is generally defined as net income plus:

a. retained earnings

b. taxes paid

c. interest paid

d. depreciation and amortization


3.  Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year.  Which of the following could explain this performance?

a. The company’s taxes increased.

b. The company’s depreciation expense declined.

c. The company’s operating income declined.

d. All of the statements above are correct.

e. None of the statements above is correct.


4.  Financial statements are primarily designed for use by managers.

a. True

b. False


5.  Net operating profit after taxes:

a. is equal to net income

b. is equal to net cash flow

c. is the amount of profit a firm would generate if it had no debt and held no nonoperating assets

d. all of the above


6.  Free cash flow is:

a. equal to net income

b. equal to net cash flow

c. equal to cash available for distribution to investors after the company has made all investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.

d. none of the above


7.  Market value added (MVA) is:

a. equal to the firm’s retained earnings

b. equal to the total market value of the firm’s stock

c. equal to the total common equity

d. equal to the total market value of the firm’s stock minus the total common equity.


8.  Whereas economic value added focuses on the effects of managerial action since the inception of the company, market value added focuses on managerial effectiveness in a given year.

a. True

b. False


9.  Economic value added differs from accounting profit in that it:

a. considers taxes while accounting profit does not.

b. considers interest charges while accounting profit does not.

c. considers the cost of equity capital while accounting profit does not.

d. none of the above are correct.


10.  Interest on most state and local government securities (municipals or munis) is not subject to federal income taxes.

a. True

b. False

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