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CH 11 SB

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Firm A's common stock has a par value per share of $1, market value per share of $90, earnings per share of $5, dividends per share of $2, and a book value per share of $60. What is Firm A's dividend yield (rounded to one decimal)?

$2 / $90 = 2.2%

Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $80. What is Firm C's dividend payout ratio (rounded to one decimal)?

$5 / $6 = 83.3%

$5 / $80 = 6.3%

$90 / $5 = $18 per share

Firm H's earnings before income taxes for the year was $180,000, cost of goods sold was $240,000, interest expense was $30,000, and income tax expense was $60,000. What was Firm H's times interest earned for the year (rounded to one decimal)? Multiple choice question.

($180,000 + $30,000) / $30,000 = 7.0 times

Which statements are true regarding the price/earning (P/E) ratio? Multiple select question.

A low P/E ratio for a well-established company may be an indicator that the company's stock is undervalued. An above-average P/E ratio indicates that the common stock price is high relative to the firm's current earnings. P/E ratios are significantly influenced by the company's reported earnings.

To calculate the accounts receivable turnover, you divide (sales/CGS) by the (beginning/ending/average) accounts receivable.

sales average

The debt ratio is usually calculated by dividing the Blank______.

total liabilities by total liabilities + stockholders' equity

Credit-rating firms gather and report data about which of the following?

Industries Segments of the economy Individual companies

What physical or combined physical/financial measures of activity are sometimes disclosed in the notes to the financial statements?

Number of employees Sales in units Gross profit per square foot of selling space

How do debt and preferred stock provide financial leverage?

They have a fixed interest cost (or dividend rate). The interest on debt can be deducted as an expense, lowering income taxes.

Identify the true statements about extra dividends.

They indicate to stockholders that they should not expect to receive the larger amount every year. They may be declared and paid after an especially profitable year.

Identify the true statements about credit-rating firms.

They usually have a rating system and assign a credit risk value based on that system. They evaluate the common and preferred stock issues of publicly traded companies.

Identify the correct statements about vertical common size financial statement analysis.

Total current assets are expressed as a percentage of total assets. Each item on the income statement is expressed as a percentage of sales. The balance sheet and income statement are expressed in a percentage format.

The (pre/after) -tax cost of debt is its interest rate multiplied by the complement of the firm's tax rate.

after

A company desiring to increase its total asset turnover could do so by using: Multiple choice question.

an accelerated depreciation method and the LIFO cost flow assumption.

To calculate the inventory turnover, you divide (sales/cost of goods sold) by the (beginning/ending/average) inventory.

cost of goods sold average

The LIFO reserve:

may be disclosed in the notes to the financial statements.

To calculate the days' sales in accounts receivable, you would normally divide the:

ending accounts receivable by the average day's sales.

A transaction in which the present top management of a publicly held firm buys the stock of the nonmanagement stockholders and the firm becomes "privately owned" is known as a(n) Blank______. Multiple choice question.

leveraged buyout

Because firms within a given industry may vary considerably over time in terms of their Blank______, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

life cycle stage of development relative scale of operations cost and capital structures

Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:

plant operating expenses per square foot sales dollars per employee operating income per employee

Sales were $2,000,000 in Year 1 and $2,400,000 in Year 2. Accounts receivable was $400,000 at the end of Year 1 and $200,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:

$2,400,000 / (($400,000 + $200,000) / 2) = 8.0 times

Total liabilities were $200,000 at the beginning of the year and $240,000 at the end of the year. Stockholders' equity was $300,000 at the beginning of the year and $400,000 at the end of the year. What was the debt ratio at the end of the year (rounded to one decimal)? Multiple choice question.

$240,000 / ($240,000 + $400,000) = 37.5%

For Year 2, sales were $300,000 and cost of goods sold was $180,000. Inventories amounted to $20,000 at the end of Year 1 and $30,000 at the end of Year 2. The days' sales in inventory for Year 2 (rounded to one decimal) was:

$30,000 / ($180,000 / 365) = 60.8 days

Total liabilities were $650,000 at the beginning of the year and $600,000 at the end of the year. Stockholders' equity was $300,000 at the beginning of the year and $400,000 at the end of the year. What was the debt/equity ratio at the end of the year (rounded to one decimal)?

$600,000 / $400,000 = 150%

Firm B's common stock has a par value per share of $1, market value per share of $72, dividends per share of $4, earnings per share of $8, and a book value per share of $64. What is Firm B's price/earnings ratio?

$72 / $8 = 9.0 per share

Firm E had total stockholders' equity of $600,000 at the end of Year 1 and $800,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 50,000 shares issued, and 40,000 shares outstanding. What was Firm E's book value per share at the end of Year 2?

$800,000 / 40,000 = $20 per share

Firm G's earnings before income taxes for the year was $140,000, income tax expense was $35,000, interest expense was $20,000, and net income was $105,000. What was Firm G's times interest earned for the year (rounded to one decimal)?

($140,000 + $20,000) / $20,000 = 8.0 times

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

Operating income is a more direct measure of the results of a firm's activities. Operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions.

The P/E ratio is calculated by dividing the (dividends/price/earnings) per share of common stock by the (dividends/price/earnings) per share of common stock.

price earnings

$2 / $5 = 40%

Total liabilities were $330,000 at the beginning of the year and $300,000 at the end of the year. Stockholders' equity was $270,000 at the beginning of the year and $240,000 at the end of the year. What was the debt/equity ratio at the end of the year (rounded to one decimal)?

$300,000 / $240,000 = 125%

$4 / $8 = 50%

Firm C's common stock has a par value per share of $10, earnings per share of $6, dividends per share of $5, a book value per share of $69, and a market value per share of $84. What is Firm C's price/earnings ratio?

$84 / $6 = $14 per share

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into which four categories?

Debt (or financial leverage) Activity Liquidity Profitability

To calculate the plant and equipment turnover, you would divide:

sales by the average plant and equipment.

Which statements regarding financial leverage are true?

It can be arranged via debt and preferred stock, because of their fixed interest cost (or dividend rate). It can lead to bankruptcy if the firm cannot generate enough cash to make payments on the principal and interest of its loans. It adds risk to the operation of the firm.

The LIFO reserve is the difference between the inventory valuation as reported under:

LIFO and the amount that would have been reported under FIFO.

Because firms within a given industry may vary considerably over time in terms of their Blank______, it is difficult to develop reliable rules of thumb for the evaluation of ratio results.

market segmentation strategies relative scale of operations selected accounting methods

The debt/equity ratio is usually calculated by dividing the Blank______.

total liabilities by total stockholders' equity

Cost of goods sold was $200,000 and $300,000 in Year 1 and Year 2, respectively. Sales for Year 2 were $500,000. Inventory was $15,000 at the end of Year 1 and $25,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:

$300,000 / (($15,000 + $25,000) / 2) = 15.0 times

$4 / $72 = 5.6%

Firm D had 20,000 shares of $50 par value and 6 percent cumulative preferred stock authorized, issued, and outstanding during Year 1 and Year 2 but did not pay any preferred or common stock dividends in either year. Net income was $800,000 in Year 1 and $900,000 in Year 2. What is Firm D's preferred dividend coverage ratio for Year 2 (rounded to one decimal)? Multiple choice question.

$900,000 / (20,000 x $50 x 6%) = 15.0 times

What indicators help suppliers and creditors judge the liquidity of a company?

Whether the company is taking all available cash discounts for prompt payment How the company is portrayed in Dun & Bradstreet reports How promptly the company has been paying its current and recent bills

Firm D had total stockholders equity of $1,000,000 at the end of Year 1 and $1,400,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 60,000 shares issued, and 50,000 shares outstanding. What was Firm D's book value per share at the end of Year 2?

$1,400,000 / 50,000 = $28 per share

To calculate the inventory turnover, you would normally divide: Multiple choice question.

cost of goods sold by the average inventory.

The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four (4) categories:

liquidity, activity, profitability, and debt

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

Operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates. Operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability.

Which statements are true regarding the price/earning (P/E) ratio?

The P/E ratio should not be the sole, or even principal, consideration in an investment decision. Low P/E ratios usually indicate poor earnings expectations. An above-average P/E ratio often indicates that investors anticipate relatively favorable future developments, such as increased earnings per share or higher dividends per share.

To calculate the days' sales in inventory, you would normally divide the:

ending inventory by the average day's cost of goods sold.

Book value per share of common stock is usually calculated by dividing a company's total common (stock/stockholders' equity) by the number of shares of (common/preferred) stock (authorized/issued/outstanding).

stockholders' equity common outstanding

Firm E had 30,000 shares of $100 par value and 8 percent cumulative preferred stock authorized, issued, and outstanding during Year 1 and Year 2 but did not pay any preferred or common stock dividends in either year. Net income was $1,000,000 in Year 1 and $1,200,000 in Year 2. What is Firm E's preferred dividend coverage ratio for Year 2 (rounded to one decimal)?

$1,200,000 / (30,000 x $100 x 8%) = 5.0 times

Sales for Year 1 and Year 2 amounted to $500,000 and $600,000, respectively. Accounts receivable was $100,000 at the end of Year 1 and $120,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was:

$120,000 / ($600,000 / 365) = 73.0 days

Sales were $500,000 in Year 1 and $600,000 in Year 2. Accounts receivable was $50,000 at the end of Year 1 and $30,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:

$600,000 / (($50,000 + $30,000) / 2) = 15.0 times

Identify the correct statements about vertical common size financial statement analysis.

Each item on the income statement is expressed as a percentage of sales. The balance sheet and income statement are expressed in a percentage format. Total current assets are expressed as a percentage of total assets.

Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that:

the market price of stock is equal to the earnings per share multiplied by the P/E ratio.

Suppliers or potential suppliers/creditors of a firm consider which of the following to be more important than the aggregate working capital or liquidity ratios of the firm? Multiple select question.

Current and recent payment experience of the firm Cash discounts availed by the firm for prompt payments made

To calculate the accounts receivable turnover, you would divide:

sales by the average accounts receivable.

To calculate the days' sales in accounts receivable, you divide the (beginning/ending/average) accounts receivable by the average day's sales (sales/cost of goods sold).

ending sales

To calculate the plant and equipment turnover, you divide (sales/cost of goods sold) by the (beginning/ending/average) plant and equipment.

sales average

Total liabilities were $650,000 at the beginning of the year and $600,000 at the end of the year. Stockholders' equity was $300,000 at the beginning of the year and $400,000 at the end of the year. What was the debt ratio at the end of the year (rounded to one decimal)?

$600,000 / ($600,000 + $400,000) = 60%

Total liabilities were $650,000 at the beginning of the year and $600,000 at the end of the year. Stockholders' equity was $300,000 at the beginning of the year and $400,000 at the end of the year. What was the debt ratio at the end of the year (rounded to one decimal)? Multiple choice question.

$600,000 / ($600,000 + $400,000) = 60%

Cost of goods sold for Year 2 was $600,000. Sales for Year 2 were $1,000,000. Inventory was $100,000 at the end of Year 1 and $150,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:

$600,000 / (($100,000 + $150,000) / 2) = 4.8 times

Sales for Year 1 and Year 2 amounted to $500,000 and $600,000, respectively. Plant and equipment was $150,000 at the end of Year 1 and $250,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was:

$600,000 / (($150,000 + $250,000) / 2) = 3.0 times

Which of these statements regarding financial leverage are true?

It magnifies the return to the owners (ROE) relative to the return on assets (ROI). It adds risk to the operation of the firm.

Which statements are true regarding the price/earning (P/E) ratio?

Firms with high P/E ratios generally have strong investor confidence. A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. Low P/E ratios usually indicate poor earnings expectations.

Identify a true statement about a leveraged buyout.

In a leveraged buyout, the company goes heavily into debt to obtain the funds needed to buy the shares of the public stockholders.

Identify the correct statements about vertical common size financial statement analysis. Multiple select question.

Each stockholders' equity item is expressed as a percentage of total assets. Each asset is expressed as a percentage of total assets. Each financial statement is examined from top to bottom on an annual basis.

Which of the following statements are true regarding the price/earning (P/E) ratio? Multiple select question.

Diluted earnings per share is usually the denominator of the P/E calculation. The P/E ratio is one of the most important measures used by investors to evaluate the market price of a firm's common stock. Analysts sometimes use expected future earnings per share and the current market price in the calculation to evaluate the prospects for changes in the stock's market price.

horizontal/vertical) common size analysis, the base year selected impacts how the trends of a company's financial results in recent years are portrayed.

horizontal

Financial leverage refers to the use of (debt/equity/revenues) to finance the assets of an entity.

debt

Dividends that are stable, or gradually changing, and periodic in nature are known as Blank______ dividends.

regular

Which of the following statements are true regarding the price/earning (P/E) ratio?

P/E ratios are shown in the stock listing tables of The Wall Street Journal. The P/E ratio is sometimes referred to as earnings multiple. The P/E ratio is a measure of the relative expensiveness of a company's common stock.

The use of an accelerated depreciation method and the LIFO inventory cost flow assumption will usually (increase/decrease) a company's total asset turnover relative to using the straight-line method and FIFO.

CH 11 SB

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