Chapter 16 Custom Exam
Money received by a corporation when it sells its stock above its par value is called: A Excess capital B Earned surplus C Paid-in capital D Stockholders' capital
Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. C Paid-in capital
LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? A 10.9 B 13.6 C 21.8 D 43.6
A 10.9 The price/earnings ratio is found by dividing the market price of $48 by the annual earnings per share. The annual EPS is $1.10 x 4 = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9). The amount of the dividend is not relevant in calculating the price/earnings ratio.
Regarding cash dividends, which of the following statements is TRUE? A A cash dividend becomes a current liability when it is declared B The amount of the dividend may never exceed the current earnings of the corporation C Cash dividends must be paid if the earnings for the year exceed the amount of the regular quarterly dividend D Dividend income may be offset by capital losses
A A cash dividend becomes a current liability when it is declared Of the choices given, the only true statement is that a cash dividend becomes a current liability when it is declared.
If a company pays a cash dividend, which of the following is TRUE? A Current assets decrease B Current assets increase C Shareholders' equity decreases D Shareholders' equity increases
A Current assets decrease As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the: A Current ratio B Acid-test ratio C Inventory turnover D Debt-to-equity ratio
A Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company's ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company's inventories and is usually for a one- to three-month period.
Which inventory evaluation method shows the greater profit in a period of rising costs? A FIFO B LIFO C Depletion D Depreciation
A FIFO The first-in, first-out (FIFO) method of valuing inventories uses the cost of the first item purchased. The last-in, first-out (LIFO) method uses the cost of the last item purchased. In a period of rising prices, the FIFO method, because of the lower cost basis, results in an increase in inventory profits.
Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company? An increase in paid-in capital A reduction in the long-term debt ratio A reduction in liquidity An increase in fixed assets by $30,000,000 A I and II B I and IV C II and III D III and IV
A I and II The company will receive cash from the sale of the stock, so liquidity will increase. The common stock account and the paid-in capital account, which are part of stockholders' equity, will also increase. The long-term debt ratio will fall as the equity capital rises and, since the company is raising cash, current assets will increase. Finally, fixed assets will be unchanged.
Which TWO of the following choices can be calculated by examining the income statement of a company? The earnings before interest and tax (EBIT) The debt-to-equity ratio The operating profit margin The amount of working capital A I and III B I and IV C II and III D II and IV
A I and III EBIT may be found by subtracting the operating expenses from the sales or revenue of a company, and the operating profit margin is found by dividing the sales by the operating expenses. All of this information can be found in the income statement. The debt-to-equity ratio and amount of working capital can be calculated by examining a company's balance sheet.
Which of the following will not influence the calculation of fully diluted earnings per share? A Convertible bonds B Rights C Warrants D Call options
D Call options Convertible bonds, convertible preferred stock, warrants, and rights are convertible into additional shares of an issuer's stock. Fully diluted EPS assumes that all convertible securities have been converted into additional shares of common stock. The exercise of call options doesn't result in the creation of additional shares of common stock. (17073)
When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that: The company has convertible bonds or convertible preferred stock outstanding The company has cumulative and participating preferred stock outstanding Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted Earnings per share is calculated on a pretax and after-tax basis A I and III only B I and IV only C II and III only D II and IV only
A I and III only The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based on the number of outstanding common shares only. The calculation for earnings per share on a fully diluted basis includes the outstanding shares if convertible bonds and preferred stock are converted into common stock.
If a company's total assets remain the same but stockholders' equity decreases, which of the following statements is TRUE? A Total liabilities increase B Accrued expenses decrease C Retained earnings increase D Capital in excess of par increases
A Total liabilities increase When total assets remains the same and stockholders' equity declines, then total liabilities must increase. The correct formula for a balance sheet is: Total Assets = Total Liabilities + Stockholders' Equity
A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: A 25% B 40% C 60% D 100%
B 40% Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.
Cash dividends declared by a corporation: A Are taxed as capital gains B Are a current liability to the corporation when declared C Must be approved for payment by the shareholders D Do not affect working capital
B Are a current liability to the corporation when declared Cash dividends are considered a current liability to a corporation when declared by the board of directors. The board of directors of the corporation has the authority to declare dividends. Working capital (current assets - current liabilities) is reduced since current liabilities are increased. Although dividends are currently taxed at the same rate as capital gains, they are not capital gains. Dividends are taxed as dividends.
Which of the following items is NOT included in an income statement? A Operating expenses B Revenue C Interest expense D Dividends payable
D Dividends payable The income statement of a company includes its sales (revenues), less its operating expenses, less interest paid on its debt, which equals earnings before taxes. Taxes are then deducted to determine its net income, from which dividends may be declared. The income statement also includes non-recurring events such as the closing of a business or extraordinary items. The entry of dividends payable is found on a company's balance sheet.
What term is used when a company sells stock to the public above par value? A Earned surplus B Capital surplus C Paid-in surplus D Shareholders' equity
B Capital surplus Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. (17183)
Which TWO of the following metrics can be calculated by examining the balance sheet of a company? The debt-to-equity ratio The operating profit margin The bond coverage ratio The current ratio A I and III B I and IV C II and III D II and IV
B I and IV The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The current ratio is found by dividing the current assets by the current liabilities. The operating profit margin and the bond coverage ratio can be calculated by examining the income statement.
A corporation purchases new machinery using cash. Which of the following choices are results of this transaction? Working capital is reduced Working capital remains the same Total assets are reduced Total assets remain the same A I and III B I and IV C II and III D II and IV
B I and IV When purchasing machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets do not change. Since total assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not change. Working capital (current assets minus current liabilities) is reduced since current assets are reduced.
Which of the following choices is the formula for earnings per share? A Current market price Earning per share of common stock B Net income less preferred dividends Number of shares of common stock outstanding C Earnings before interest and taxes Net tangible assets D Net income plus preferred dividends Number of shares of common stock outstanding
B Net income less preferred dividends Number of shares of common stock outstanding The formula for earnings per share is net income less preferred dividends divided by the number of shares of common stock outstanding.
If a company declares a cash dividend, which of the following is TRUE? A Shareholders' equity increases B Shareholders' equity decreases C Current assets decrease D Current assets increase
B Shareholders' equity decreases It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
Which of the following items is NOT found by reviewing a company's balance sheet? A The dollar value of the inventory B The amount of interest paid on the company's bonds outstanding C The amount of short-term debt D The value of the treasury stock
B The amount of interest paid on the company's bonds outstanding The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.
A customer purchased an initial public offering of stock at $38 a share. The current market price is $24 and the EPS is 19 cents. If the company has no plans to pay a cash dividend, what is the price/earnings ratio of the company? A The company does not have a price/earnings ratio B 2 C 126.3 D 200
C 126.3 The price/earnings ratio is found by dividing the current market price of $24 by the earnings per share of 19 cents. This equals a price/earnings ratio of 126.3 ($24 / $.19). The IPO price and the amount of the dividend are not relevant in calculating the price/earnings ratio.
XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is: A 2 to 1 B 9.3 to 1 C 14 to 1 D 28 to 1
C 14 to 1 The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).
A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? A 6.5 times B 7.5 times C 8 times D 8.6 times
C 8 times The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.
A corporation is about to go public. Its shares will be quoted on the OTCBB. A broker-dealer selling the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration? A 25 B 40 C 90 D 120
C 90 A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions. If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no prospectus delivery requirement for dealers. If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days. The main purpose of this rule is to provide investors with information concerning an issue of securities. If the issuer was already a reporting company, information is readily available to the public through the SEC's EDGAR system. The OTCBB is not an automatic quotation system and, therefore, the delivery requirement is 90 days for an IPO.
A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: A Net working capital B Common stock ratio C Cash flow D Debt-to-equity ratio
C Cash flow Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.
The American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. All of the following statements are TRUE about this redemption, EXCEPT: A The company's outstanding debt will be reduced B The company's interest expense will be reduced C Dividends to the stockholders will be increased D Investors redeeming the bonds receive a premium to the market price
C Dividends to the stockholders will be increased The effect of the redemption will be to reduce the company's outstanding debt, thereby also reducing the interest expense. Investors will receive 103 1/4 for redeeming the bonds, which is a premium to the 102 3/4 market price. The redemption of the bonds will not affect dividends paid to stockholders.
Which of the following choices is another way of expressing the earnings multiple? A Debt-to-equity ratio B Dividend payout ratio C Price-earnings ratio D Operating profit ratio
C Price-earnings ratio The earnings multiple is also called the price-earnings ratio.
Paid-in capital is BEST defined as which of the following? A The amount that is equal to the stock's par value that is paid by investors for the shares that a corporation sells publicly B The amount of earnings that is not paid out as a dividend by a corporation from its annual income after taxes C The amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly D The amount of any discount below the stock's par value that is paid by investors for the shares that a corporation sells publicly
C The amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly Paid-in capital is the amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly. For example, if a company's IPO is priced at $18.00 and the par value is $5.00, the paid-in capital is $13.00.
ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? A $6.40 B $7.72 C $10.91 D $11.80
D $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.
The term that's used when a company sells stock to the public above par value is: A Earned surplus B Capital excess C Extraordinary earnings D Paid-in capital
Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. Retained earnings can also be referred to as earned surplus. (17072)
A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? The annual interest payments are found on the balance sheet The annual interest payments are found on the income statement The interest payment is deducted from net income The interest payment is deducted from EBIT A I and III B I and IV C II and III D II and IV
The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars. D II and IV
What is the basic balance sheet equation? A Total Assets + Total Liabilities = Stockholders' Equity B Total Liabilities = Total Assets + Stockholders' Equity C Total Assets = Total Liabilities - Stockholders' Equity D Total Assets = Total Liabilities + Stockholders' Equity
The balance sheet equation is: Total Assets = Total Liabilities + Stockholders' Equity. D Total Assets = Total Liabilities + Stockholders' Equity
