Unit 15 SIE Industries and Companies

Which of the following is used to calculate a company's net worth?

Assets − liabilities Net worth is calculated by taking the business's assets less its liabilities (creditors' claims).

growth industry

A business that seems to be disconnected from the business cycle; does well regardless to the economy

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Balance sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. difference between these two is the corporation's equity or net worth shows if the company is improving or deteriorating

Preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Acid Ratio

Also called quick ratio; tests the company's liquidity if everything goes badly: (Current Assets - Inventory) / Current Liabilities

Retained Earnings

An amount earned by a corporation and not yet distributed to stockholders.

Which of the following is not a measure of a company's short-term liquidity?

Debt ratio Debt ratio is the measure of a company's long-term debt as a percentage of net worth. The others are derived from current asset and current liabilities, focusing on a company's short-term liquidity and cash demands.

Which of the following is considered to be the order of the stages in a business cycle?

Expansion, peak, contraction, trough The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order.

Which of the following would likely be classified as a countercyclical industry?

Gold mining Precious metals and the companies that produce them are countercyclical (i.e., going up when the economy is shrinking, and down as the economy grows).

long-term liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

The economy appears to be moving into a strong expansion. Which of the following companies will likely benefit the most from this expansion?

Old Bess Steel, Inc. The steel plant is an example of a cyclical industry and will likely do well in the upcoming expansion. Daisy and Dino are both producers of consumable goods and the defensive industry; the gold miner is countercyclical.

In what order do the following economic phases typically occur? 1. Recovery 2. Trough 3. Decline 4. Prosperity

Recovery, Prosperity, Decline, Trough Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.

Working Capital

This is the amount of money a company can spend (or lose) and remain operational current assets - current liabilities=working capital

A toy company is experiencing sudden strong demand for a game. Purchasing this company's stock may prove profitable in the short run. This company's stock might best be termed as

a special situation. Special situations arise when a company shows unusual profit potential resulting from nonrecurring circumstances. These situations might include new management, the discovery of a valuable natural resource on corporate property, patents pending, or the introduction of a new product.

intangible assets

assets that do not have physical substance

Assets = liabilities + net worth is the

basic balance sheet equation. This is the basic balance sheet equation: assets = liabilities + net worth.

In order to calculate the earnings per share you would need information from

both the balance sheet and the income statement. Earnings per share (EPS) is earning available to the common shareholder (from the income statement) divided by the number of outstanding shares (found in the net worth section of the balance sheet). The stock's current market value is not used in the calculation.

An industry whose products stay in high demand, and whose companies grow, without regard to the business cycle are called

growth industries. Growth industries do just that, grow. The business cycle has less impact on these growing businesses.

cyclical industries

industries with above-average sensitivity to the state of the economy (business trends and inflation) this industry mainly produces durable goods; such as heavy machinery/raw materials, during recessions these products decline because of lack of investments ex: steel autos heavy equipment capital goods

Defensive Industries

industries with below-average sensitivity to the state of the economy but they do not grow fast either

long-term solvency

it is a measure of how much of a corporation's net worth is derived from long-term debt. When a corporation with a debt ratio that is higher than the industry average is considered highly leveraged. Debt ratio formula: Long-term debt / (long-term debt + net worth)= debt ratio(%)

capital in excess of par

money received from the sale of common stock in excess of the par value

A company's net worth belongs to its

stockholders. A company's net worth (assets − liabilities) belongs to the business owners (its stockholders).

Countercyclical

tend to turn down as the economy heats up, and rises when the economy turns down people buy this when they are looking for safety and they are scared ex: gold buy gold when the economy is weak and buy less once it strengths

Current Ratio

this figure is better to figure to use when comparing the liquidity of a company current assets: current liabilities = current ratio

ABC has the following recorded on its balance sheet: Current Assets $50,000 Fixed Assets. $100,000. Notes payable. $40,000 Accounts Payable $25,000 ABC's net worth is

$85,000. Net worth is assets - liabilities. Therefore, ABC's net worth is 150,000 - 65,000 = 85,000.

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's price-to-earnings ratio is higher, that would indicate

ABC's net income is less than MNO's. If ABC's price-to-earnings ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

Reports of rising inventories generally occur during which period of the business cycle?

Contraction Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand. During expansion or recovery, demand is high and goods are less likely to remain in inventory.

Where on a balance sheet would you find the estimated value of a retail company's inventory?

Current assets Inventory is reported in the current assets of a company's balance sheet.

ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result?

Current assets When equity securities are issued, cash (a current asset) and net worth increases. Fixed assets and liabilities remain unchanged as a result of the offering.

What is the formula for calculating working capital?

Current assets - current liabilities Working capital = current assets - current liabilities.

Industries are divided into four classes:

Cyclical, non cyclical, countercyclical, and growth

ABC Corporation's earnings remained steady while its shares outstanding increased by 5%. How does this impact ABC's earnings per share (EPS)?

EPS has decreased EPS is calculated by dividing the company's earnings by the number of outstanding shares. If earnings remain the same while the number of shares increase, then the result (EPS) must decrease.

When the economy shows high unemployment and is failing to expand as measured by a lack of consumer demand and business activity, but prices for goods and services are still rising, this could be described as what?

Stagflation Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy is not growing and there is a lack of consumer demand and business activity, yet prices for goods continue to rise.

Common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase; par value of the common stock

Special Situation

applied to a specific company, but it could apply to an industry as a whole; are situational some specific circumstance affecting them ex: hostile takeover or a cultural shift may not be a positive condition

Noncyclical industries

are least affected by normal business cycle, they generally produce nondurable consumer goods ex: food, utilities, clothing, drugs, tobacco, liquor during recession there is less of a decline; less risk

fixed assets

assets that are difficult to liquidate ex: real estate, and equiptment

current assets

cash and other assets expected to be exchanged for cash or consumed within a year securities, accounts receivable, and the company's inventory are examples of this

Seabird Coffee Company has just reported an unexpected increase in EBITDA this past quarter. This means they experience an increase in

earnings before interest, taxes, depreciation, and amortization. EBITDA is an acronym referring to earnings before interest, taxes, depreciation, and amortization.

Irksome Inc., makes components and peripherals for smart phones. Their line of bright florescent sparkly earbuds has taken off in Asia and is starting to gain popularity in the Americas and Europe, even in countries experiencing harder economic times. Irksome is an example of a

growth company. Irksome is considered a growth company because its products are selling well and steadily everywhere, even in contracting economies. The company's future looks bright.

A company very concerned about liquidity would want

high current ratio. The current ratio is a measure of liquidity. The higher the ratio, the more liquid the company. This has no bearing on whether high or low price-to-earnings ratios are desirable.

Current Liabilities

liabilities due within a short time, usually within a year ex: accrued wages, accrued taxes, accounts payable, or interest payments

Companies in defensive industries would be the manufactures of

pharmaceuticals. Defensive industries are those that make products that are not as sensitive to economic cycles because people use the same amount of these products regardless of the condition of the economy. Other examples would be food and utilities.

All the following are cyclical industries except

precious metals. Cyclical industries are those that grow during expansions and shrink during declines. Automobiles, home appliances, and heavy equipment are all cyclical industries. Precious metals are the exact opposite—they grow during declines and contract during expansions in the business cycle, and are termed countercyclical.