Smartbook Chapter 11
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 dividend yield (rounded to one decimal)? Multiple choice question. $4 / $8 = 50% $4 / $64 = 6.3% $4 / $72 = 5.6% $72 / $4 = 18.0 times
$4 / $72 = 5.6%
Financial leverage refers to the use of _________________ (debt/equity/revenues) to finance the assets of an entity.
debt
To calculate the days' sales in accounts receivable, you would normally divide the: Multiple choice question. ending accounts receivable by the average day's sales. ending accounts receivable by the average day's cost of goods sold. average accounts receivable by the average day's sales. beginning accounts receivable by the average day's cost of goods sold.
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. hostile takeover merger acquisition leveraged buyout
leveraged buyout
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. the straight-line depreciation method and the LIFO cost flow assumption. an accelerated depreciation method and the FIFO cost flow assumption. the straight-line depreciation method and the FIFO cost-flow assumption.
an accelerated depreciation method and the LIFO cost flow assumption.
To calculate the days' sales in inventory, you divide the _________________ (beginning/ending/average) inventory by the average day's _______________________ (sales/cost of goods sold).
ending, Cost of goods sold
Dividends that are stable, or gradually changing, and periodic in nature are known as Blank______ dividends. Multiple choice question. special regular DuPont ad hoc
regular
Because firms within a given industry may vary considerably over time in terms of their ________, it is difficult to develop reliable rules of thumb for the evaluation of ratio results. Multiple select question. selected accounting methods market segmentation strategies relative scale of operations ability to implement effective cost control measures
relative scale of operations
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. Multiple select question. relative scale of operations cost and capital structures life cycle stage of development quality of upper management personnel
relative scale of operations cost and capital structures life cycle stage of development
To calculate the plant and equipment turnover, you would divide: Multiple choice question. sales by the beginning plant and equipment. sales by the ending plant and equipment. sales by the average plant and equipment. cost of goods sold by the average plant and equipment.
sales by the average plant and equipment.
To calculate the plant and equipment turnover, you divide_______________ (sales/cost of goods sold) by the _____________ (beginning/ending/average) plant and equipment.
sales, average
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.
Increase
Why is operating income frequently substituted for net income in the calculation of ROI and ROE? Multiple select question. Operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates. Operating income is more closely related to a company's price/earnings ratio. Operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability. Operating income excludes depreciation and amortization expenses and thus provides a better measure of the firm's cash generating ability.
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.
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, earning
The debt/equity ratio is usually calculated by dividing the Blank______. Multiple choice question. total liabilities by total stockholders' equity total liabilities by average liabilities + stockholders' equity total liabilities by total liabilities + stockholders' equity average liabilities by total stockholders' equity
total liabilities by total stockholders' equity
To calculate the inventory turnover, you divide __________________________(sales/cost of goods sold) by the ___________________________(beginning/ending/average) inventory.
cost of goods sold. average
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)? Multiple choice question. $1,200,000 / (30,000 x $100) = 0.4 times $1,200,000 / (30,000 x $100 x 8% x 2) = 2.5 times (($1,000,000 + $1,200,000) / 2) / (30,000 x $100 x 8%) = 4.6 times $1,200,000 / (30,000 x $100 x 8%) = 5.0 times
$1,200,000 / (30,000 x $100 x 8%) = 5.0 times
Sales for Year 2 were $800,000. Accounts receivable was $100,000 at the end of Year 1 and $150,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was: Multiple choice question. $150,000 / ($800,000 / 365) = 68.4 days (($100,000 + $150,000) / 2) / ($800,000 / 365) = 57.0 days $800,000 / 365 = $2,192 $100,000 / ($800,000 / 365) = 45.6 days
$150,000 / ($800,000 / 365) = 68.4 days
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 payout ratio (rounded to one decimal)? Multiple choice question. $5 / $2 = 2.5 times $2 / $1 = 2.0 times $2 / $90 = 2.2% $2 / $5 = 40%
$2 / $5 = 40%
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)? Multiple choice question. $2 / $5 = 40% $90 / $2 = 45.0 times $2 / $60 = 3.3% $2 / $90 = 2.2%
$2 / $90 = 2.2%
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 / (($200,000 + $300,000 + $240,000 + $400,000) / 2) = 21.1% $240,000 / (($300,000 + $400,000) / 2) = 68.6% $240,000 / $400,000 = 60% $240,000 / ($240,000 + $400,000) = 37.5%
$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: Multiple choice question. (($20,000 + $30,000) / 2) / ($300,000 / 365) = 30.4 days $30,000 / ($300,000 / 365) = 36.5 days (($20,000 + $30,000) / 2) / ($180,000 / 365) = 50.7 days $30,000 / ($180,000 / 365) = 60.8term-16 days
$30,000 / ($180,000 / 365) = 60.8 days
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)? Multiple choice question. $300,000 / (($270,000 + $240,000) / 2) = 117.6% $300,000 / ($300,000 + $240,000) = 55.6% ($330,000 + $300,000) / 2) / $240,000 = 131.3% $300,000 / $240,000 = 125%
$300,000 / $240,000 = 125%
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 dividend payout ratio (rounded to one decimal)? Multiple choice question. $4 / $72 = 5.6% $4 / $8 = 50% $4 / $64 = 6.3% $8 / $4 = 2.0 times
$4 / $8 = 50%
Sales for Year 2 were $1,400,000. Accounts receivable was $350,000 at the end of Year 1 and $400,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was: Multiple choice question. $350,000 / ($1,400,000 / 365) = 91.3 days $1,400,000 / 365 = $3,836 $400,000 / ($1,400,000 / 365) = 104.3 days (($350,000 + $400,000) / 2) / ($1,400,000 / 365) = 97.8 days
$400,000 / ($1,400,000 / 365) = 104.3 days
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)? Multiple choice question. $5 / $69 = 7.2% $5 / $80 = 6.3% $5 / $10 = 50% $5 / $6 = 83.3%
$5 / $6 = 83.3%
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 yield (rounded to one decimal)? Multiple choice question. $10 / $5 = 2.0 times $5 / $6 = 83.3% $5 / $69 = 7.2% $5 / $80 = 6.3%
$5 / $80 = 6.3%
Cost of goods sold was $400,000 and $500,000 in Year 1 and Year 2, respectively. Sales for Year 2 were $1,000,000. Inventory was $60,000 at the end of Year 1 and $40,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was: Multiple choice question. $1,000,000 / (($60,000 + $40,000) / 2) = 20.0 times (($400,000 + $500,000) / 2) / (($60,000 + $40,000) / 2) = 9.0 times $500,000 / (($60,000 + $40,000) / 2) = 10.0 times $500,000 / $40,000 = 12.5 times
$500,000 / (($60,000 + $40,000) / 2) = 10.0 times
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)? Multiple choice question. ($650,000 + $600,000) / 2) / $400,000 = 156.3% $600,000 / $400,000 = 150% $600,000 / (($300,000 + $400,000) / 2) = 171.4% $600,000 / ($600,000 + $400,000) = 60%
$600,000 / $400,000 = 150%
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 / (($650,000 + $300,000 + $600,000 + $400,000) / 2) = 61.5% $600,000 / $400,000 = 150% $600,000 / ($600,000 + $400,000) = 60% $600,000 / (($300,000 + $400,000) / 2) = 171.4%
$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: Multiple choice question. $1,000,000 / (($100,000 + $150,000) / 2) = 8.0 times $600,000 / $150,000 = 4.0 times $600,000 / (($100,000 + $150,000) / 2) = 4.8 times $1,000,000 / $150,000 = 6.7 times
$600,000 / (($100,000 + $150,000) / 2) = 4.8 times
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: Multiple choice question. $1,000,000 / $150,000 = 6.7 times $1,000,000 / (($100,000 + $150,000) / 2) = 8.0 times $600,000 / (($100,000 + $150,000) / 2) = 4.8 times $600,000 / $150,000 = 4.0 times
$600,000 / (($100,000 + $150,000) / 2) = 4.8 times
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? Multiple choice question. $84 / $10 = $8.40 per share $84 / $6 = $14 per share $84 / $5 = $16.80 per share $69 / $6 = $11.50 per shaare
$84 / $6 = $14 per share
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 price/earnings ratio? Multiple choice question. $90 / $60 = $1.50 per share $90 / $2 = $45 per share $90 / $5 = $18 per share $60 / $5 = $12 per share
$90 / $5 = $18 per share
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% x 2) = 7.5 times $900,000 / (20,000 x $50) = 0.9 times (($800,000 + $900,000) / 2) / (20,000 x $50 x 6%) = 14.2 times $900,000 / (20,000 x $50 x 6%) = 15.0 times
$900,000 / (20,000 x $50 x 6%) = 15.0 times
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)? Multiple choice question. ($105,000 + $35,000) / $20,000 = 7.0 times ($140,000 + $20,000) / $20,000 = 8.0 times ($105,000 + $20,000) / $20,000 = 6.3 times ($140,000 + $20,000 + $35,000) / $20,000 = 9.8 times
($140,000 + $20,000) / $20,000 = 8.0 times
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 ($180,000 + $30,000 + $60,000) / $30,000 = 9.0 times ($240,000 - $30,000 - $60,000) / $30,000 = 5.0 times ($180,000 + $60,000) / $30,000 = 8.0 times
($180,000 + $30,000) / $30,000 = 7.0 times
Cost of goods sold for Year 2 was $600,000. Sales for Year 2 were $800,000. Plant and equipment was $300,000 at the end of Year 1 and $500,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was: Multiple choice question. - $800,000 / (($300,000 + $500,000) / 2) = 2.0 times - $800,000 / $500,000 = 1.6 times - $600,000 / (($300,000 + $500,000) / 2) = 1.5 times - $600,000 / $500,000 = 1.2 times
- $800,000 / (($300,000 + $500,000) / 2) = 2.0 times
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 - The firm's ability to fund its day-to-day operations - The firm's ability to meet its short-term financial obligations - Cash discounts availed by the firm for prompt payments made
- Current and recent payment experience of the firm - Cash discounts availed by the firm for prompt payments made
The LIFO reserve is the difference between the inventory valuation as reported under: Multiple choice question. - LIFO and the amount that would have been reported under weighted-average. - weighted-average and the amount that would have been reported under LIFO. - FIFO and the amount that would have been reported under LIFO. - PLIFO and the amount that would have been reported under FIFO.
- LIFO and the amount that would have been reported under FIFO.
The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into which four categories? Multiple select question. - Cash flow - Profitability - Activity - Liquidity - Debt (or financial leverage) - Per share
- Profitability - Activity - Liquidity - Debt (or financial leverage)
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: Multiple choice question. $2,400,000 / (($400,000 + $200,000) / 2) = 8.0 times (($2,000,000 + $2,400,000) / 2) / (($400,000 + $200,000) / 2) = 7.3% $2,400,000 / (($400,000 + $200,000) / 2) = 8.0% (($2,000,000 + $2,400,000) / 2) / (($400,000 + $200,000) / 2) = 7.3 times
2,400,000 / (($400,000 + $200,000) / 2) = 8.0 times
Which statements are true regarding the price/earning (P/E) ratio? Multiple select question. A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. The P/E ratio is sometimes referred to as book value per share. Low P/E ratios usually indicate poor earnings expectations. 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. Firms with high P/E ratios generally have strong investor confidence.
Which statements are true regarding the price/earning (P/E) ratio? Multiple select question. Low P/E ratios usually indicate poor earnings expectations. The P/E ratio should not be the sole, or even principal, consideration in an investment decision. 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. P/E ratios are calculated for both preferred stock and common stock.
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. Low P/E ratios usually indicate poor earnings expectations. The P/E ratio should not be the sole, or even principal, consideration in an investment decision.
Which of the following statements are true regarding the price/earning (P/E) ratio? Multiple select question. 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. 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. The P/E ratio is sometimes referred to as earnings per share. Diluted earnings per share is usually the denominator of the P/E calculation.
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. 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. Diluted earnings per share is usually the denominator of the P/E calculation.
Identify a true statement about a leveraged buyout. Multiple choice question. In a leveraged buyout, the company goes heavily into debt to obtain the funds needed to buy the shares of the public stockholders. In a leveraged buyout, the debt issued is usually considered to be of low risk. In a leveraged buyout, there is a significant change in the top management and operations of the acquired company. In a leveraged buyout, one firm acquires another by issuing stock of the surviving company to the stockholders of the firm being acquired.
In a leveraged buyout, the company goes heavily into debt to obtain the funds needed to buy the shares of the public stockholders.
Credit-rating firms gather and report data about which of the following? Multiple select question. Individual consumers Industries Segments of the economy Individual companies
Industries Segments of the economy Individual companies
Which of these statements regarding financial leverage are true? Multiple select question. It adds risk to the operation of the firm. It protects the firm from bankruptcy. It magnifies the return to the owners (ROE) relative to the return on assets (ROI). It refers to the use of equity to finance the assets of the firm.
It adds risk to the operation of the firm. It magnifies the return to the owners (ROE) relative to the return on assets (ROI).
The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the Blank______. Multiple choice question. FIFO reserve LIFO reserve gross profit cost of goods sold
LIFO reserve
Why is operating income frequently substituted for net income in the calculation of ROI and ROE? Multiple select question. Operating income excludes service revenues and thus focuses on sales revenues, which are more directly comparable from firm to firm. 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. Operating income reveals more about a company's long-term trends, while net income focuses on specific fiscal periods.
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.
Sales for Year 2 were $2,400,000. Accounts receivable was $200,000 at the end of Year 1 and $300,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was: Multiple choice question. $2,400,000 / (($200,000 + $300,000) / 2) = 9.6 times $2,400,000 / $300,000 = 8.0% $2,400,000 / (($200,000 + $300,000) / 2) = 9.6% $2,400,000 / $200,000 = 12.0 times
Sales / (Accounts Receivale Ed of one year1 + Accounts Receivale Ed of year 2)/1 $2,400,000 / (($200,000 + $300,000) / 2) = 9.6 times
Which of the following statements are true regarding the price/earning (P/E) ratio? Multiple select question. The P/E ratio is a measure of the relative expensiveness of a company's common stock. The P/E ratio is sometimes referred to as earnings multiple. Basic earnings per share is usually the denominator of the P/E calculation. P/E ratios are shown in the stock listing tables of The Wall Street Journal.
The P/E ratio is a measure of the relative expensiveness of a company's common stock. The P/E ratio is sometimes referred to as earnings multiple. P/E ratios are shown in the stock listing tables of The Wall Street Journal.
How do debt and preferred stock provide financial leverage? Multiple select question. They have a fixed interest cost (or dividend rate). Fluctuations in the interest rate will magnify ROE. Preferred stock dividends can be deducted as an expense. The interest on debt can be deducted as an expense, lowering income taxes.
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. Multiple select question. They are likely to be incorporated as part of the regular dividend in the future. They may be declared and paid after an especially profitable year. They are considered to be stable, or gradually changing in nature. 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. They indicate to stockholders that they should not expect to receive the larger amount every year.
Identify the true statements about credit-rating firms. Multiple select question. 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. They do not allow the companies being reported on to see the data in their files. They assign ratings to only speculative bonds and stocks.
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.
What indicators help suppliers and creditors judge the liquidity of a company? Multiple select question. Whether the company is taking all available cash discounts for prompt payment How promptly the company has been paying its current and recent bills How the company is portrayed in Dun & Bradstreet reports Whether the company has a favorable price/earnings ratio
Whether the company is taking all available cash discounts for prompt payment How promptly the company has been paying its current and recent bills How the company is portrayed in Dun & Bradstreet reports
The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into four (4) categories: Multiple choice question. liquidity, activity, common size, and profitability activity, productivity, debt, and cash flow liquidity, activity, profitability, and debt liquidity, profitability, debt, and per share
liquidity, activity, profitability, and debt
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. Multiple select question. selected accounting methods relative scale of operations market segmentation strategies ability to implement effective cost control measures
selected accounting methods relative scale of operations market segmentation strategies
Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that: Multiple choice question. the market price of stock is equal to the earnings per share divided by the P/E ratio. the market price of stock is equal to the dividends per share multiplied by the P/E ratio. the market price of stock is equal to the earnings per share multiplied by the P/E ratio. the book value of stock is equal to the earnings per share multiplied by the P/E ratio.
the market price of stock is equal to the earnings per share multiplied by the P/E ratio.
