Series 7: Analysis (Fundamental Analysis)

What is ACME Corporation's Earnings Per Common Share?

$.47 Earnings for common is Net Income After Tax minus any preferred dividends paid. This company has $2,880,000 of Net Income After Tax and paid preferred dividends of $80,000, so Earnings for Common is $2,800,000. There is $6,000,000 of common stock ($1 par) on the balance sheet, so 6,000,000 common shares are outstanding. The Earnings Per Common Share are: earnings for common / earning common shares outstanding = earning per common share $2,800,000 / 6,000,000 = $.47

A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. Upon issuance, all of the following are affected EXCEPT:

Stockholders' Equity When bonds are issued, the corporation receives the cash from the sale (increasing current assets) and shows the long term liability to repay the bonds (increasing long term debt). Therefore, Total Assets increase; Total Liabilities increase; Net Working Capital increases because of the increase in current assets. Stockholders' Equity is unaffected since only a profit or loss, or the sale of new equity securities will cause a change in Stockholders' Equity.

A corporation's "Acid Test" ratio would measure:

The "Acid Test" ratio measures a corporation's ability to pay its bills as they come due, and hence is a measure of liquidity. It is the ratio of: (current assets - inventories and prepaid expenses) / current liabilities = acid test or quick assets ratio

If a corporation has an operating margin of profit of 9.50%, this means that for every $1 of revenue, the company has:

$.905 of expenses An income statement starts with revenues and deducts all operating expenses to arrive at operating income. The "margin" is a profitability or loss percentage. Gross Sales - Operating Expenses = Operating Income The "margin" is a profitability or loss percentage. The Operating Margin of Profit is: Operating Income / Revenues. (Also note that the term "Operating Margin of Profit" is a wording that is now rarely used - instead the current wording is simply Operating Profit Margin or Operating Margin - but it may still be used on the exam.) If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $.095 for each $1 of revenue ($.095 / $1 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $1 of revenue, there were $.905 of expenses.

A corporation's capitalization is: 1st Mortgage Bonds 9% M '45 $10,000,000 Preferred Stock 8% 5,000,000 Common Stock ($.10 par) 200,000 Capital in Excess of Par 800,000 Retained Earnings 6,000,000 For this year, the corporation reports earnings before interest and taxes of $5,000,000. The company is in the 34% tax bracket. The company's reported earnings per share is:

$1.15 Earnings Before Interest and Taxes $5,000,000 - Interest Expense (9%) 900,000 = Earnings Before Taxes $4,100,000 - - Taxes at 34% 1,394,000 Earnings After Tax $2,706,000 - Preferred Dividend (8%) 400,000 Earnings For Common $2,306,000 $200,000 Common at Par / $.10 par per share = 2,000,000 shares shares Earnings per share = $2,306,000/ 2,000,000 shares = $1.15

ACME Corporation has Net Tangible Assets per common share of:

$2.83 per share The Common Equity for this firm is $19,000,000, consisting of Common at Par + Capital in Excess of Par + Retained Earnings = $6,000,000 + $7,800,000 + $5,200,000 = $19,000,000. Deducting $2,000,000 of intangible assets, net tangible equity is $17,000,000. Since there are 6,000,000 ($1 par) common shares outstanding, Net Tangible Assets per share is: $17,000,000 Net Tangible Assets / 6,000,000 common shares = $2.83 per common share

Assuming the company is in the 50% tax bracket, and that the debentures are convertible at $50 per share, what is the company's fully diluted earnings per share?

$3.50 To compute Diluted Earnings Per Common Share, the income statement must be recast to eliminate the payments to convertible security holders who would have converted into common shares and to increase the number of common shares due to conversion. Operating Margin$3,000,000 Bond Interest Expense 0 Net Income Before Tax3,000,000 Taxes at 50% = 1,500,000 Net Income After Tax 1,500,000 Preferred Dividend 100,000 Earnings For Common $1,400,000 The number of new shares issued due to conversion is $10,000,000 of debentures divided by $50 conversion price ($1,000 par/20 conversion ratio) = 200,000 additional shares. Number of Common Shares Outst. 400,000 shares (200,000 original plus 200,000 from conversion) Diluted Earnings Per Common Share = $3.50

Assuming the company is in the 50% tax bracket, what is the company's reported Earnings Per Common Share?

$4.50 To compute Earnings per Common share, the income statement must be completed and the preferred dividend deducted to get Earnings For Common. Net Income Before Tax $2,000,000 Taxes at 50% 1,000,000 Net Income After Tax. $1,000,000 Preferred Dividend 100,000 Earnings For Common $900,000 Number of Common Shares Outstanding 200,000 shares ($1,000,000 at par/$5 par value) Earnings per Common Share = $900,000 / 200,000 shares = $4.50

PDQ Corporation Income Statement Net Sales$30,000,000 Cost of Goods Sold15,000,000 Gross Margin15,000,000 Operating Expenses5,000,000 Operating Income10,000,000 Bond Interest2,000,000 Net Income Before Tax8,000,000 Tax at 50%4,000,000 Net Income After Tax$4,000,000 PDQ's capitalization consists of $20,000,000 of 10% Debentures - $1,000 par, maturing 2040, convertible at $40; and $500,000 of Common at $1 Par outstanding. What is PDQ's fully diluted earnings per common share?

$5.00 o compute Diluted Earnings Per Share, the income statement must be recast to include the effect of bond conversion. The adjusted income statement is: Gross Margin$15,000,000 Operating Expenses 5,000,000 Operating Income10,000,000 Bond Interest Expense 0 10,000,000 Taxes at 50% 5,000,000 Net Income After Tax$5,000,000 Since the $20,000,000 of bonds are convertible at $40, then 500,000 ($20,000,000/$40) new shares will be issued. Diluted earnings per share is: Adjusted earnings per common / adjusted shares outstanding = diluted earnings per share $5,000,000 / 500,000 + 500,000 = $5,000,000 / 1,000,000 = $5.00 per share

What is PDQ Corporation's Current Ratio?

1.84:1 The formula for the Current Ratio is: Current assets / current liabilities = current ratio $178,000,000 / $97,000,000 = 1.84:1

What is ABC Corporation's Return on Common Equity?

11.1% The formula for Return on Common Equity is: earnings for common / common stockholder equity = return on common equity $1,000,000$9,000,000=11.11% Common Stockholders' Equity consists of Common at Par ($2,000,000), Capital In Excess of Par ($3,000,000) and Retained Earnings ($4,000,000).

XYZ common stock is currently trading at $96 per share. Last year, XYZ common stock earned $8.00 per share, giving the company a Price / Earnings Ratio of 12:1. If XYZ splits 3 for 1, the new Price / Earnings ratio will be:

12:1 A stock split or dividend will have no effect on the Price / Earnings ratio of an issuer. The market price is adjusted on "ex date" for the split; and the earnings per share are restated downward to reflect the increased number of shares that will be issued. Since both decrease proportionately, the ratio stays the same.

A company has reported operating income of $5,000,000. The bond interest expense for the year is $500,000 and principal repayments on bonds totaled $1,500,000. The company's debt service coverage ratio is:

2.5:1 The debt service coverage ratio determines if operating income is sufficient to pay not only interest on the bonds but upcoming principal repayments (within the coming year). The ratio is: operating income / annual interest cost + principal repayments = debt service coverage ratio $5,000,000 / ($500,000 + $1,500,000) = 2.5 : 1

What is XYZ Corporation's Preferred Stock Ratio?

24% The formula for the Preferred Stock Ratio is: preferred equity / long term capital = preferred stock ratio $80,000,000 / $338,000,000 = 24% Common equity consists of common at par ($10,000,000), capital in excess of par ($64,000,000), and retained earnings ($124,000,000) for a total of $198,000,000. Total Long Term Capital consists of long term debt ($60,000,000), preferred stock ($80,000,000) and common equity ($198,000,000).

A corporation's capitalization is: 1st Mortgage Bonds 10% M '32 $10,000,000 Preferred Stock 6% 10,000,000 Common Stock ($.10 par) 200,000 Capital in Excess of Par 800,000 Retained Earnings 6,000,000 The company's common stock ratio is:

26% The formula for the common stock ratio is: common equity / total capital = (Common @ par + capital in excess of par + retained earnings) / (common equity + preferred stock + long term debt) = common stock RATIOOOO $200,000 + $800,000 + $6,000,000=$7,000,000= 26%$7,000,000 + $10,000,000 + $10,000,000$27,000,000

Assuming that PDQ Corporation has annual net sales of $303,000,000 and annual cost of goods sold of $202,000,000, what is the inventory turnover ratio for PDQ Corporation?

2:1 The formula for the inventory turnover ratio is: annual cost of sales / year end inventory = inventory turnover ratio $202,000,000 / $101,000,000 = 2 : 1

ABC Corporation's Bond Interest Coverage Ratio is:

3.75x The formula for the Interest Coverage Ratio is: total operating and non-operating income / annual bond interest expense = interest coverage ratio $3,000,000 / $800,000=3.75 x

What is ACME Corporation's Debt or Bond Ratio?

33% The formula for the "Debt Ratio" is: long term debt / long term total capital = debt ratio $10,000,000$ / 30,000,000 = 33% Long Term Capital consists of $10,000,000 of long term debt + $1,000,000 of preferred stock and $19,000,000 of common equity.Common equity consists of common at par ($6,000,000), capital in excess of par ($7,800,000), and retained earnings ($5,200,000) for a total of $19,000,000.

What is ABC Corporation's Quick Ratio?

4 to 1 The formula for the "Quick" Ratio is: (Current assets - inventories and pre paid expenses) / current liabilities This is the Quick Ratio or acid test. 15,000,000 - $3,000,000 = $12,000,000 $12,000,000 / $3,000,000 =4:1

What is PDQ Corporation's Common Stock Ratio?

59% The formula for the Common Stock Ratio is: common equity / total long term capital = Common stock Ratio $213,000,000 / $363,000,000 = 59% Common equity consists of common at par ($20,000,000), capital in excess of par ($68,000,000), and retained earnings ($125,000,000) for a total of $213,000,000. Total Long Term Capital consists of long term debt ($50,000,000), preferred stock ($100,000,000) and common equity ($213,000,000).

A company has reported operating income of $25,000,000. The bond interest expense for the year is $4,000,000 and principal repayments on bonds totaled $1,000,000. The company's debt service coverage ratio is:

5:1 The debt service coverage ratio determines if operating income is sufficient to pay not only interest on the bonds but upcoming principal repayments (within the coming year). The ratio is: operating income / annual interest cost + principal repayments = debt service coverage ratio $25,000,000 / ($4,000,000 + $1,000,000) = 5 : 1

DEF Corporation has earned $962,500 after tax. Using the information below, what is DEF Corporation's Return on Common Equity? DEF Corporation Capitalization: Debentures - $1,000 par, 11.75% Matures 2040, Convertible at $20. $10,000,000 Common at Par ($1) 275,000 shares outstanding 275,000 Capital In Excess Of Par 2,725,000 Retained Earnings 12,000,000

6.42% Return on Common Equity is: earnings for common / common stockholder equity = return on common equity $962,500 / $15,000,000 = 6.42% Remember that common stockholders' equity consists of common at par + capital in excess of par + retained earnings.

What is the accounts receivable turnover ratio for ABC Corporation?

6x The formula for the accounts receivable turnover ratio is: annual net sales / accounts receivable = accounts receivable turnover ratio $18,000,000 / $3,000,000 = 6 times

ACME Corporation's dividend payout ratio is:

7% The dividend payout ratio is: common dividends / earnings per common = dividend payout ratio $200,000 / $2,800,000 = 7% dividend payout ratio

If net income before tax falls at a faster rate than operating income, then which statement is TRUE?

Bond interest expense is increasing at a faster rate than operating expenses The basic corporate income statement is: Gross Sales - Operating Expenses = Operating Income - Bond Interest = Net Income Before Tax - Taxes = Net Income After Tax If net income before tax falls at a faster rate than operating income, then bond interest expenses must be increasing at a faster rate than operating expenses such as cost of goods sold and depreciation. Dividends are paid out of after tax net income and would not impact either operating income or reported net income.

Net tangible asset value of common stock is synonymous with which of the following?

Book Value Book value of a company is synonymous with Net tangible asset value - which is all assets minus intangibles and minus all liabilities. It is a measure of liquidation value of the company.

Which of the following is NOT a liability on a company's balance sheet?

Capitalized Interest Unfunded pension amounts are payments owed into the company pension plan to fund expected retirement benefits. These are a liability. Deferred taxes due are a liability that occurs when a company uses accelerated depreciation for its tax return, but straight line depreciation for its book financial reporting. The accelerated depreciation deductions reduce the amount of taxes due in the early years; but these taxes must be paid in the later years - so they are shown as a liability due in later years. Subordinated notes are a liability that has a lower claim in a liquidation than other debt issued by that company. Finally, capitalized interest is an asset that is part of the cost of building. Any interest paid during the construction period cannot be deducted - rather, it is capitalized into the total cost of the building shown as an asset on the company's balance sheet.

The formula for Net Working Capital is:

Current Assets - Current Liabilities net working capital = current assets - current liabilities (In contrast, the formula for Net Worth is: Total Assets minus Total Liabilities.)

Which ratio is the least stringent test of liquidity?

Current ratio The cash assets ratio is the ratio of cash to current liabilities; this is the most stringent test of liquidity. The quick ratio (or "acid test") is the ratio of current assets - inventories and prepaid expenses to current liabilities. This is a less stringent test than the cash assets ratio. The current ratio is the ratio of all current assets to current liabilities. This is the least stringent test of liquidity.

Which of the following is NOT an intangible asset on a company's balance sheet?

Depreciation Intangible assets include the value of patents, trademarks, copyrights, intellectual property and goodwill (goodwill is any excess paid above book value in an acquisition of another company). Depreciation is an income statement expense item deducted annually to reflect the declining value of an asset as it is used up. The accumulated amount shows on the balance sheet as a reduction of fixed asset value.

Which item would NOT be found on a corporation's income statement?

Dividends There could be a little more clarity here, but dividends are the best choice. The income statement details all items of revenue and expense to arrive at net income after tax. This is the income figure that is used to compute earnings per share. Dividends are paid out of a corporation's net income after tax. Interest income from investments is a revenue item on the income statement; interest expense on bonds outstanding is a deduction. The question does not say whether the interest is income or an expense, but in either case, they are income statement items. The actual dividends paid are shown in a different smaller financial statement - the retained earnings statement. This starts with year prior retained earnings; then adds that year's net income after tax; then subtracts dividends paid; to arrive at the year-end retained earnings for that company.

In an environment of rapid deflation, which inventory method would report the lowest net income?

FIFO When prices are rapidly falling, "first-in, first-out" accounting for inventory will result in the lowest reported profit. This occurs because the "older" more expensive inventory is the first to be taken out of inventory and matched to sales revenue when a sale occurs, while the "newer" less expensive inventory stays in inventory and is taken out and matched to revenue after the older (more expensive) items are depleted. (For those of you with a sense of humor, FISH stands for "First In, Still Here" - a jokey term for inventory that is slow to move.)

All of the following are methods of depreciation EXCEPT:

First In First Out Methods of depreciation include straight line, double declining balance (an accelerated method), and sum of the year's digits (another accelerated method). MACRS is the tax code's Modified Accelerated Cost Recovery System, that gives bigger up-front depreciation deductions on purchased assets used in a business. First-in; first-out (FIFO) is a method of accounting for inventories.

Which of the following is a method of accounting for inventories?

First In; First Out First-in; first-out (FIFO) is a method of accounting for inventories. Methods of depreciation include straight line, double declining balance (an accelerated method), and sum of the year's digits (another accelerated method).

A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. Upon issuance, which of the following are affected? I Total Assets II Total Liabilities III Net Working Capital IV Stockholders' Equity

I, II, III When bonds are issued, the corporation receives the cash from the sale (increasing current assets) and shows the long term liability to repay the bonds (increasing long term debt). Therefore, Total Assets increase; Total Liabilities increase; Net Working Capital increases because of the increase in current assets. Stockholders' Equity is unaffected since only a profit or loss, or the sale of new equity securities will cause a change in Stockholders' Equity.

Which statements are TRUE regarding a company's use of leverage in its capital base? I The greater the leverage, the greater the percentage increase in Earnings Per Share as revenues increase II The greater the leverage, the smaller the percentage increase in Earnings Per Share as revenues increase III The greater the leverage, the greater the percentage decrease in Earnings Per Share as revenues decrease IV The greater the leverage, the smaller the percentage decrease in Earnings Per Share as revenues decrease

I and III "Leverage" is the use of debt in a company's capital base. The greater the "leverage" the greater the percentage change in Earnings Per Share as a company's revenues increase or decrease. This happens because the interest cost paid to bondholders is fixed and does not change as revenues increase or decrease. Thus, as revenues increase, interest cost stays the same, and the proportion of revenues that flows to shareholders increases, similarly increasing Earnings Per Share (and vice-versa).

A corporation issues new common stock. Which of the following are affected? I Current Assets II Total Liabilities III Net Worth IV Retained Earnings

I and III If new common stock is issued, cash increases (from the proceeds of the sale) as well as common stock at par and capital in excess of par. This increases net worth. There is no effect on retained earnings - which changes due to profits, losses, and dividend payouts.

A corporate issuer declares a reverse stock split. After the split is effected, which of the following statements are TRUE? I The market price of the corporation's shares will increase II The market price of the corporation's shares will decreaseI II The reported earnings per common share will increase IV The reported earnings per common share will decrease

I and III In a reverse split, the number of outstanding shares of the corporation is reduced. This increases reported earnings per share. If earnings per share increases, this tends to raise the price of the company's stock in the market. After the reverse split, each shareholder's proportionate ownership interest remains the same. The only difference is that the shareholder's ownership interest is represented by fewer shares.

Accelerated depreciation deductions: I increase reported expenses in early years II decrease reported expenses in early years III increase reported expenses in later years IV decrease reported expenses in later years

I and IV Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will increase reported expenses in those years; while the lower deductions in later years will decrease reported expenses for those years.

Accelerated depreciation deductions: I increase reported income in later years II decrease reported income in later years III increase reported expenses in later years IV decrease reported expenses in later years

I and IV Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

A corporation issues convertible debentures at par. Which of the choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital

I and IV If convertible debentures are issued, long term debt increases as does cash, (a current asset) since the proceeds of the sale go to the issuer. If cash increases, working capital increases. There is no effect on net worth; nor on current liabilities.

A corporation buys furniture and fixtures, paying cash. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital

I and IV If furniture is bought with cash, then cash goes down (a current asset) and property, plant and equipment increases (a long term asset). If current assets drop, then working capital drops. There is no effect on current liabilities because the furniture is paid for; net worth is only affected by a profit, loss, dividend payout, or capital structure change.

Which of the following are components of common stockholders' equity? I Common at Par II Capital in Excess of Par III Retained Earnings IV Intangibles

I, II, III If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Retained earnings and earned surplus are different names for the same account - corporate earnings that are not paid out as dividends are credited annually to retained earnings; this is technically owned by the common shareholders. Intangibles are assets of a corporation, such as the value of copyrights, patents or trademarks. They are not a component of common stockholders' equity.

Which of the following are components of total long term capital of a corporation? I Common at Par II Capital in Excess of Par III Long Term Bonded Debt IV Preferred Stockholders' Equity

I, II, III, IV A corporation's long term capital consists of common stockholders' equity (common at par; capital in excess of par; and retained earnings); preferred stockholders' equity; and long term debt. These are all sources of long term capital for the corporation.

Which of the following statements are TRUE about a company that is highly leveraged? I The more highly leveraged the company, the higher the credit risk of the issuer II These corporations "trade on the equity," producing a disproportionate increase in earnings per share once earnings cover debt service III If the company's operating earnings are highly variable, it may default in an economic downturn IV The company has the greatest portion of its capitalization as debt

I, II, III, IV A highly leveraged company is one having a disproportionate amount of debt in its capital structure. The more highly leveraged a company, the lower the credit rating because of increased default risk. Because interest on debt is a fixed annual amount, and is quite large in highly leveraged companies, if operating earnings drop in a bad year, debt service costs may not be covered. On the other hand, once debt service costs are covered, if earnings increase, all of the increase accrues to the shareholders. Because of this, leveraged companies are said to "trade on the equity" - meaning that once debt service costs are covered, reported earnings per share can rise dramatically.

A corporation is preparing a registration statement for a new issue offering consisting of 300,000 new shares and 200,000 existing shares held by officers. The Public Offering Price is $30 per share. The spread taken by the underwriters is $2 per share. Which of the following will be changed as a result of the offering? I Net working capital II The number of outstanding shares III Retained earnings (earned surplus) IV Net worth

I, II, IV The company receives $8,400,000 from the offering, increasing net working capital. An additional 300,000 shares will be outstanding, increasing the Common Stock and Capital in Excess of Par accounts by $8,400,000. Retained Earnings remains unaffected. (The items that affect retained earnings are net income or loss for the year and dividend payouts)

Accelerated depreciation deductions: I increase reported income in early years II decrease reported income in early years III increase reported income in later years IV decrease reported income in later years

II and III Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

A convertible bondholder converts. Which of the following choices are affected? I Current Assets II Total Liabilities III Net Worth IV Retained Earnings

II and III If a convertible bondholder converts, then long term debt falls and common stock increases. Since common stock increases, net worth rises. There is no cash payment upon conversion and so current assets are unaffected. Retained earnings is only affected by income or loss; or dividend payments.

A corporation issues a stock dividend. Which of the following statements are TRUE? I Par value per common share will decrease II Par value per common share will remain the same III Retained earnings will decrease IV Retained earnings will remain the same

II and III If a corporation declares a stock dividend, the dividend is appropriated from retained earnings (reducing retained earnings) and used to increase the number of common shares outstanding. Par value per share remains the same, but since there are more shares outstanding, aggregate par value increases (as does capital in excess of par). The dollar decrease in retained earnings exactly equals the increase in common at par, and capital in excess of par, so the net result is a "wash," with no dollar change in total stockholders' equity.

If a corporation repurchases its debt, which of the following statements are TRUE? I The corporation's capitalization will increase II The corporation's capitalization will decrease III The market value of the common stock will increase IV The market value of the common stock will decrease

II and III If a corporation repurchases its debt, then its capitalization will decrease (a corporation's long term capital consists of equity and long term debt). Corporations will repurchase debt to refinance at lower interest rates (not higher ones); to increase the market value of the corporation's common stock (since the corporation has less debt, the common stock would be valued more highly by the market); and to reduce the corporation's earnings fluctuation's due to cyclical conditions. Corporate sales decrease due to cyclical conditions, but fixed interest charges do not. This causes earnings for common shareholders to fall greatly or become non-existent in period of falling sales. To reduce this possibility, a corporation can repurchase its debt.

A corporation issues a stock dividend. Which of the following statements are TRUE? I Total stockholders' equity will increase II Total stockholders' equity will remain the same III Par value per common share will decrease IV Par value per common share will remain the same

II and IV If a corporation declares a stock dividend, the dividend is appropriated from retained earnings (reducing retained earnings) and used to increase the number of common shares outstanding. Par value per share remains the same, but since there are more shares outstanding, aggregate par value increases (as does capital in excess of par). The dollar decrease in retained earnings exactly equals the increase in common at par, and capital in excess of par, so the net result is a "wash," with no dollar change in total stockholders' equity.

If a corporation declares a cash dividend, which of the following statements are TRUE? I Net working capital increases II Net working capital decreases III Stockholders' equity increases IV Stockholders' equity decreases

II and IV If a dividend is declared, then it is not yet paid. Dividends payable increases (a current liability) and net worth (stockholders' equity) decreases (since the dividend is appropriated from retained earnings). If current liabilities increase, then net working capital (current assets - current liabilities) falls.

A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. If all bondholders convert, which of the following choices are affected? I Total Assets II Total Liabilities III Net Working Capital IV Stockholders' Equity

II and IV If all bondholders convert, long term liabilities fall (because the bonds are eliminated) and stockholders' equity increases (because new common shares are issued). There is no effect on Total Assets or Net Working Capital.

A customer asks about ratings services that rate stock performance. The registered representative should refer the customer to: I Morningstar II Standard and Poor's III Lipper Analytical Services IV Member Firm In-House Research Reports

II and IV Lipper and Morningstar are ratings services that rate mutual funds and ETFs. Standard and Poor's rates bonds mutual funds and individual stock issues. Finally, member firm research departments produce reports that rate individual stock issues.

An "extraordinary item" would be found on the:

Income Statement An "extraordinary" item is found on the Income Statement. Extraordinary items are gains or losses that occur outside the company's normal scope of operations and are one time events. For example, a gain from selling part of a business is an Extraordinary Item. These are disclosed separately on the income statement.

Fundamental analysts would evaluate which of the following?

Liquidity ratios Fundamental analysts select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc. Technical analysts select investments based on chart movements, trading volumes, advance-decline ratios, etc.

Corporate earnings that are not paid to shareholders as a dividend are credited to:

Retained Earnings Any corporate earnings that are not paid to shareholders as a dividend are credited to the corporation's Retained Earnings for that year.

The defensive interval ratio measures:

how long the company can operate without any new business coming in The defensive interval ratio is a variation on the Current Ratio that measures liquidity. It takes Current Assets and divides it by Daily Operating Expenses to find the number of days that a company can continue to run if it were not able to bring in any more current assets. This is the period of time, or "defensive interval" that the company could continue running in a "worst case" scenario where business has collapsed and it was not generating current assets. For example, a company with daily operating expenses of $100,000 and total current assets of $5,000,000 can operate for $5,000,000 / $100,000 = 50 days before it runs out of money. Choice A defines the Current Ratio, which is Current Assets / Current Liabilities. Choice C defines the Accounts Receivable Turnover Ratio Choice D has no clear definition, but a company's Debt to Total Capital Ratio looks at the company's leverage, and this would be an indicator of whether the company has the capacity for more borrowing.

All assets minus all liabilities equals:

net worth net worth = assets - liabilities (In contrast, the formula for Net Working Capital is: Current Assets minus Current Liabilities.)

Bond interest is deducted from:

operating income The basic corporate income statement is: Gross Sales - Operating Expenses = Operating Income - Bond Interest = Net Income Before Tax Therefore, bond interest is deducted from operating income.