1.Which of the following statements is most accurate? a. Retained earnings, as shown on the balance sheet, indicate the cash available for a company to distribute as dividends to shareholders b. 70% of the interest income earned by corporations is exempt from taxable income c. 70% of the dividends received by corporations are excluded from taxable income d. Investors must pay the highest individual tax rate on long-term capital gains because taxes are due only when the gain is realized e. The corporate tax system encourages equity financing, as dividend payments are tax-deductible for corporations 2. Last year, Tulip Industries reported (1) negative cash flow from operations, (2) negative free cash flow, and (3) an increase in cash on its balance sheet. Which of the following factors might account for this scenario? a. The company experienced a significant rise in its inventory levels b. The company saw a notable increase in its accrued liabilities c. The company issued new common stock d. The company made a substantial capital investment early in the year e. The company had a large increase in depreciation expenses 3. MikeRow Software's balance sheet indicates total common equity of $5,125,000. The company has 530,000 shares of stock in circulation, with each share priced at $27.50. What is the difference between the firm's market value and book value per share? a. $17.83 b. $18.72 c. $19.66 d. $20.64 e. $21.67
Answer (1)
1. Retained earnings don’t represent cash for dividends (eliminating a). Interest income is not 70% tax-exempt (b is incorrect). Capital gains are taxed lower than ordinary income (d is incorrect). Dividends are not tax-deductible (e is incorrect). The correct answer is c because corporations can exclude 70% of dividends received from taxable income.2. A company with negative cash flow from operations and negative free cash flow but higher cash balance likely issued new stock to raise money. This aligns with option c. Increasing inventory (a) and capital investment (d) would decrease cash. Accrued liabilities (b) and depreciation (e) wouldn’t increase cash significantly.3. Book value per share = Total equity ÷ Shares outstanding = $5,125,000 ÷ 530,000 = $9.67Market value per share = $27.50Difference = $27.50 - $9.67 = $17.83So, the correct answer is A.
