Describe the actual results of the transactions


Question 1. On its 1999 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million.  On its 2000 balance sheet, the balance of retained earnings was also equal to $510 million.  Which of the following statements is most correct?

a. The company must have had net income equal to zero in 2000.
b. The company did not pay a dividend in 2000.
c. If the company’s net income in 2000 was $200 million, dividends paid must have also equaled $200 million.
d. If the company lost money in 2000, they must have paid a dividend.
e. None of the statements above is correct

Question 2. Scranton Shipyards has $20 million in total net operating capital. The company’s WACC is 10 percent. The company has the following income statement:

Sales                             $10.0 million

Operating costs                 6.0 million

Operating income (EBIT)    $ 4.0 million

Interest expense                    2.0 million

Earnings before taxes (EBT)   $ 2.0 million

Taxes (40%)                          0.8 million

Net income                           $ 1.2 million


What is Scranton’s EVA?

a. $ 400,000
b. -$ 800,000
c. $1,200,000
d. $2,000,000
e. $4,000,000

Question 3: Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5.  Both firms want to "window dress" their coming end-of-year financial statements.  As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account.  Which of the statements below best describes the actual results of these transactions?

a. The transactions will have no effect on the current ratios.
b. The current ratios of both firms will be increased.
c. The current ratios of both firms will be decreased.
d. Only Pepsi Corporation's current ratio will be increased.
e. Only Coke Company's current ratio will be increased.

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Finance Basics: Describe the actual results of the transactions
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