Chapter 8
The primary sources of capital are known as debt and EPS. T/F
False
Determining an appropriate mix of debt and equity in a firm's capital structure is an important strategy-________ decision.
Implementation
Two primary sources of capital are
Debt and equity
Performing a(n) ________ analysis is a common way to determine the appropriate capital structure needed.
EPS/EBIT
All firms have treasury stock. T/F
False
All items on the income statement can be forecasted using the percentage-of-sales method. T/F
False
On a balance sheet, bonds are included in the current liabilities row. T/f
False
To determine the price-earnings ratio, divide the Earnings per Share (EPS) by the stock price. T/F
False
Which item is included in net worth?
Retained earnings, common stock, and additional paid-in capital
The denominator of EPS is
Shares outstanding
Another term for earnings is profits. T/F
True
Financial ratios are an important tool used to access a firm's financial situation at one point in time. T/F
True
The year 2016 was the sixth straight year that a record dollar value of bonds was sold in the United States. T/f
True
An IPO ________ the owners' control of the firm.
Dilutes
The other name for operating income is
Earnings-before-interest-and-taxes
Financial ratios are an important tool used to access a firm's financial situation
At one point in time
If an initial stock issuance is $800,000, what would be the expected cost paid to lawyers, accountants, and underwriters, based on the average for IPOs in this range?
$200,000
Which one of the following statements regarding stock issuances is true? A) They are not always better than debt for raising capital. B) Their effect on stock price is not a concern. C) They do not require a company to share future earnings with new shareholders. D) Dilution of ownership is not a special concern. E) Issuing stock when interest rates are low is a sound strategy.
A) They are not always better than debt for raising capital.
The amount by which retained earnings changes is obtained by subtracting A) any dividends to be paid for that year from net income. B) net income from EBIT. C) taxes from EBIT. D) interest expense from EBIT. E) EBIT from CGS.
A) any dividends to be paid for that year from net income.
In preparing projected statements, to project cost of goods sold in the income statement, which of these methods is recommended? A) Net Worth Method B) Net Income Method C) Percentage-of-Sales Method D) Price-Earnings Ratio method E) Outstanding Shares Method
C) Percentage-of-Sales Method
Which method of determining a firm's net worth divides the market price of the firm's stock by the annual earnings per share, and multiplies this number by the firm's average net income for the past five years? A) Debt/Equity Method B) Current Ratio Method C) Price-Earnings Ratio Method D) Long-term Asset Method E) Outstanding Shares Method
C) Price-Earnings Ratio Method
Which of the following is NOT an accepted approach for determining a business's worth? A) The Net Worth Method B) The Net Income Method C) The Return on Investment Method D) The Price-Earnings Ratio Method E) The Outstanding Shares Method
C) The Return on Investment Method
If a company's ________ ratio skyrockets or plummets versus industry averages, then cash (and other short-term assets) must be managed.
Current
Which element in the projected income statement CANNOT be forecasted using the percentage-of-sales method? A) Cost of goods sold B) Selling expense C) Administrative expense D) Interest expense E) Operating expenses
D) Interest expense
In low-earning periods, too much ________ in the capital structure of an organization can endanger stockholders' return and jeopardize company survival.
Debt
After completing an EPS/EBIT analysis, what conclusions would you make if the debt line is above the stock line throughout the range of EBIT on the graph?
Debt appears to be the best financing alternative.
Which of the following is NOT given as an example of a decision that may require finance/accounting policies? A) To extend the time of accounts receivable B) To establish a certain percentage discount on accounts within a specified period of time C) To lease or buy fixed assets D) To use LIFO, FIFO, or a market-value accounting approach E) To be a price leader or a price follower
E) To be a price leader or a price follower
Which is NOT a step in performing a projected financial analysis? A) Prepare the projected income statement before preparing the balance sheet B) Forecast sales as accurately as possible C) Use the percentage-of-sales method to project CGS D) Subtract from the net income any dividends to be paid for that year and bring this retained earnings amount over to the balance sheet E) Use the revenue account as the plug figure
E) Use the revenue account as the plug figure
Net income divided by number of shares outstanding is
EPS
What is the most widely used technique for determining the best combination of debt and stock?
Earnings Per Share/Earnings Before Interest and Taxes Analysis
A conservative rule of thumb is to establish a business' worth to be 10 times the firm's most current annual profit. T/F
False
A way to raise capital for new projects is to acquire existing businesses. T/f
False
All the methods for determining a business' worth can be grouped into three basic approaches: what a firm earns, what a firm spends, and what a firm will bring in the market. T/F
False
Although acquiring needed capital can be an important task, it is not seen as central to strategy implementation. T/F
False
Another term for earnings is gross margin. T/F
False
As a balance sheet entry, goodwill represents the favor a business has acquired through its environmentally conscious and socially responsible actions T/F
False
Bonds are a good way to raise capital when a company's credit rating is not very good. T/f
False
Circumstances dictate which fixed debt obligations need to be met. T/F
False
Determining an appropriate mix of debt and equity in a firm's capital structure is an important strategy-formulation decision. T/F
False
EBIT is the same as net income. T/F
False
EPS/EBIT analysis is a widely used technique for determining a firm's competitive threats. T/F
False
Financial ratios based on projected financial statements reveal strengths and weaknesses of the firm. T/F
False
Four common corporate Valuation methods are the Net Worth Method, the Net Income Method, the Gross Income Method, and the Outstanding Shares Method. T/F
False
If a company's leverage ratio skyrockets versus industry averages, then cash (and other short-term assets) must be managed. T/F
False
If the net income is the same, an increase in treasury stock lowers the EPS. T/F
False
Knowing what a firm is worth protects only the seller. T/F
False
One of the four recommended approaches for determining a firm's worth is to base the analysis on the selling price of a similar company T/F
False
One of the issues that may require finance and accounting policies, decisions, analyses, and actions in implementing strategies is the selection of the CEO t/f
False
One of the ways by which top executives manipulate financial statements is by overstating liabilities T/F
False
Recording revenue prematurely understates profits. T/F
False
Return on Assets is the most widely used technique for determining whether debt, stock, or a combination of debt and stock is the best alternative for raising capital to implement strategies. T/F
False
Shares authorized are normally less than the number of shares outstanding. T/F
False
Shares outstanding is the same as treasury stock. T/F
False
Stock issuances are always better than debt for raising capital. T/F
False
The only costs involved in going public are the initial costs. T/F
False
The only reasons businesses have for determining their worth is preparing to be sold or to buy other companies. T/F
False
The percentage-of-sales method should be used for projecting interest and taxes, but not dividends, in the income statements. T/F
False
Too much debt in the capital structure of an organization can endanger stockholders' returns and jeopardize company survival, particularly in periods of high earnings. T/F
False
When additional stock is issued to finance implementation of strategy, the existing stockholders' ownership and control of the enterprise are strengthened. T/F
False
When performing projected financial analysis, the balance sheet should be prepared before the income statement. T/F
False
A conservative rule of thumb is to establish a business' worth as ________ the firm's current annual profit.
Five times
If a firm incurs a loss during a particular year, or if the firm paid out more in dividends than it had in net income, what happens to the retained earnings (RE) amount?
It decreases
________ is/are the number of shares a firm has approval to issue in total.
Share authorized
A projected financial analysis can be used to forecast the impact of various implementation decisions. T/F
True
A reason for concern about the dilution of ownership is the possibility of hostile takeover. T/F
True
Additional capital is often required for successful strategy implementation. T/F
True
An EPS/EBIT chart can be constructed to determine the break-even point, where one financing alternative becomes more attractive than another T/F
True
Buying a company is like buying a house in that paying a "premium" is usually not financially prudent. T/F
True
Corporate bond prices are less sensitive to daily or quarterly firm operations compared to stock prices. T/f
True
Decisions about an initial public offering are better described as being finance and accounting matters than as marketing matters. T/F
True
Dividends and taxes cannot be forecasted using the percentage-of-sales method. T/F
True
Even if earnings remain the same, an increase in treasury stock impacts the EPS positively. T/F
True
Four common corporate Valuation methods are the Net Worth Method, the Net Income Method, the Price-Earnings Ratio Method, and the Outstanding Shares Method. T/F
True
In low earning periods, too much debt in the capital structure of an organization can endanger stockholders' returns and jeopardize company survival. T/F
True
In low-earning periods, excessive debt in the capital structure of an organization can endanger stockholders' returns and jeopardize company survival. T/F
True
It is generally not recommended for companies with less than $10 million in sales to go public. T/F
True
Smaller firms or firms with negative earnings will also likely have higher rates associated with their bonds, possibly resulting in issuing bonds (debt) to be a more expensive alternative than equity. T/f
True
Strategies can be implemented successfully only when an organization manages its finances t/f
True
The Starbucks Corporation does not have any treasury stock. T/F
True
The cash account is used as the plug figure in projected balance sheets. T/F
True
The percentage-of-sales method should be used for projecting the cost of goods sold in the income statements. T/F
True
Theoretically, an enterprise should carry enough debt in its capital structure to boost its return on investment in projects earning more than the cost of the debt. T/F
True
Two primary sources of capital are debt and equity. T/F
True
When employees understand the thinking that went into strategy formulation, and understand their roles, they will be more inclined to accept the work required for strategy implementation. T/F
True
Going public is not recommended for companies with less than $________ million in sales because the initial costs can be too high for the firm to generate sufficient cash flow to make going public worthwhile.
10
Omega Corporation had a net income of $560,000. If it had 140,000 shares outstanding, its EPS was $
4
With the merger and acquisition boom this decade, S&P 500 firms experienced a ________ percent increase in goodwill.
70
Which of the following reflects the common "maximizing shareholders' wealth" overarching corporate objective? A) EPS B) EBIT C) Operating income D) Gross margin E) EBITDA
A) EPS
The proportion of debt to equity on a balance sheet is often referred to as a firm's
Capital Structure
Operating income is sometimes also called
EBIT
To be a price leader or a price follower is a decision that may require finance/accounting policies. T/F
False
The first step in performing projected financial analysis is to
Forecast sales as accurately as possible
What is a central strategy-implementation technique that allows an organization to examine
Projected financial statement analysis
What tends to become a more attractive financing technique when interest rates are high?
Stock issuance
In projected financial statements, what is used as a plug figure?
The Cash Account
A benefit of using projected balance sheets and income statements is that
The impact of various implementation decisions can be forecasted.
Stock that a firm has repurchased is called ________ stock.
Treasury
The Dynamo Company recently repurchased $4 million of its own stock. This is the Dynamo Company's ________ stock.
Treasury
A popular way for a company to raise capital is to issue corporate bonds. T/F
True
In the context of a balance sheet, goodwill represents
a premium paid over the book value for an acquisition.
Projected financial analysis is an important strategy-implementation technique because.
it allows an organization to examine the expected results of strategies being implemented.
Evaluating the worth of a firm
requires both qualitative and quantitative skills.