CTC Financial Analysis & Planning 2 — Questions and Answers
Question 1: A corporation has EBIT of $500,000, interest expense of $50,000, and a 21% tax rate. What is the net income?
- $355,500 (Correct answer)
- $395,000
- $450,000
- $500,000
Correct answer: $355,500
EBT = $500,000 - $50,000 = $450,000; Net income = $450,000 × (1 - 0.21) = $355,500.
Question 2: Which ratio measures the number of days a company takes to collect its accounts receivable?
- Days Sales Outstanding (DSO) (Correct answer)
- Current ratio
- Inventory turnover
- Debt-to-equity ratio
Correct answer: Days Sales Outstanding (DSO)
DSO = (Accounts Receivable / Net Credit Sales) × 365, indicating average collection time.
Question 3: Under IRC Section 469, passive activity losses may generally be used to offset:
- Passive activity income only (Correct answer)
- All ordinary income
- Capital gains only
- Self-employment income only
Correct answer: Passive activity income only
Section 469 limits passive activity losses to offsetting passive activity income, with suspended losses carried forward.
Question 4: A company's quick ratio is 1.5 and its current ratio is 2.0. This difference most likely indicates a significant amount of:
- Inventory (Correct answer)
- Accounts payable
- Long-term debt
- Deferred revenue
Correct answer: Inventory
The quick ratio excludes inventory, so a gap between quick and current ratios signals substantial inventory holdings.
Question 5: For tax purposes, a C corporation's net operating loss (NOL) generated after 2017 can be carried forward for:
- Indefinitely, limited to 80% of taxable income (Correct answer)
- 20 years, with no income limitation
- 5 years only
- 2 years back and 20 years forward
Correct answer: Indefinitely, limited to 80% of taxable income
The Tax Cuts and Jobs Act of 2017 eliminated the carryback for most NOLs and allows indefinite carryforward limited to 80% of taxable income.
Question 6: Which financial planning concept describes the process of determining the present value of future cash flows using an appropriate discount rate?
- Discounted cash flow (DCF) analysis (Correct answer)
- Future value compounding
- Payback period analysis
- Break-even analysis
Correct answer: Discounted cash flow (DCF) analysis
DCF analysis converts projected future cash flows into their equivalent present value using a discount rate reflecting risk and time value.
Question 7: A taxpayer sells a rental property held for 10 years at a $120,000 gain. The portion attributable to depreciation recapture is taxed at a maximum federal rate of:
- 25% (Correct answer)
- 20%
- 15%
- 0%
Correct answer: 25%
Under IRC Section 1250, unrecaptured depreciation on real property is taxed at a maximum rate of 25%.
CTC Financial Analysis & Planning 2
A corporation has EBIT of $500,000, interest expense of $50,000, and a 21% tax rate.
What is the net income?