Chapter 16 Mastery Progress Exam

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?

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.

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?

126.3

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:

14 to 1

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?

$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.

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:

40%

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?

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.

Which of the following will not influence the calculation of fully diluted earnings per share?

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.

What term is used when a company sells stock to the public above par value?

Capital surplus

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT:

Cash flow

Which inventory evaluation method shows the greater profit in a period of rising costs?

FIFO

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: I. The company has convertible bonds or convertible preferred stock outstanding II. The company has cumulative and participating preferred stock outstanding III. Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted IV. Earnings per share is calculated on a pretax and after-tax basis

I and III only

A corporation purchases new machinery using cash. Which of the following choices are results of this transaction? I. Working capital is reduced II. Working capital remains the same III. Total assets are reduced IV. Total assets remain the same

I and IV

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? I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT

II and IV

Which of the following items is NOT included in an income statement?

Dividends payable

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:

Dividends to the stockholders will be increased

Which of the following choices is another way of expressing the earnings multiple?

Price-earnings ratio

Money received by a corporation when it sells its stock above its par value is called:

Paid-in capital

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?

90

Regarding cash dividends, which of the following statements is TRUE?

A cash dividend becomes a current liability when it is declared

Which of the following is included on an income statement?

Gross revenues

Which of the following choices is the formula for earnings per share?

Net income less preferred dividends Number of shares of common stock outstanding

The term that's used when a company sells stock to the public above par value is:

Paid-in capital

If a company declares a cash dividend, which of the following is TRUE?

Shareholders' equity decreases

Which of the following items is NOT found by reviewing a company's balance sheet?

The amount of interest paid on the company's bonds outstanding

Cash dividends declared by a corporation:

Are a current liability to the corporation when declared

If a company pays a cash dividend, which of the following is TRUE?

Current assets decrease

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:

Current ratio

Which TWO of the following choices can be calculated by examining the income statement of a company? I. The earnings before interest and tax (EBIT) II. The debt-to-equity ratio III. The operating profit margin IV. The amount of working capital

I and III

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? I. An increase in paid-in capital II. A reduction in the long-term debt ratio III. A reduction in liquidity IV. An increase in fixed assets by $30,000,000

I and II

If a person adds cash, accounts receivable, and marketable securities and then divides by current liabilities, the result is:

Quick asset ratio

What is the basic balance sheet equation?

Total Assets = Total Liabilities + Stockholders' Equity

If a company's total assets remain the same but stockholders' equity decreases, which of the following statements is TRUE?

Total liabilities increase