ACC 240 Topic 3

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)?

$4 / $8 = 50%

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)?

$4 / $72 = 5.6%

To calculate the days' sales in inventory, you would normally divide the: average inventory by the average day's sales. ending inventory by the average day's cost of goods sold. ending inventory by the average day's sales. average inventory by the average day's cost of goods sold.

ending inventory by the average day's cost of goods sold.

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; cogs

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)

leveraged buyout

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. Per share Activity Cash flow Profitability Liquidity Debt (or financial leverage)

liquidity profitability debt activity

The debt/equity ratio is usually calculated by dividing the

total liabilities by total stockholders' equity

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)?

$1,200,000 / (30,000 x $100 x 8%) = 5.0 times

Cost of goods sold for Year 2 was $900,000. Sales for Year 2 was $1,500,000. Plant and equipment was $500,000 at the end of Year 1 and $750,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was:

$1,500,000 / (($500,000 + $750,000) / 2) = 2.4 times

Sales for Year 1 and Year 2 amounted to $500,000 and $600,000, respectively. Accounts receivable was $100,000 at the end of Year 1 and $120,000 at the end of Year 2. The days' sales in accounts receivable for Year 2 (rounded to one decimal) was:

$120,000 / ($600,000 / 365) = 73.0 days

For Year 2, sales were $1,000,000, and cost of goods sold was $500,000. Inventories amounted to $100,000 at the end of Year 1 and $140,000 at the end of Year 2. The days' sales in inventory for Year 2 (rounded to one decimal) was:

$140,000 / ($500,000 / 365) = 102.2 days

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:

$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)?

$2 / $5 = 40%

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:

$2,400,000 / (($200,000 + $300,000) / 2) = 9.6 times

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)?

$240,000 / ($240,000 + $400,000) = 37.5%

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)?

$300,000 / $240,000 = 125%

Cost of goods sold was $200,000 and $300,000 in Year 1 and Year 2, respectively. Sales for Year 2 were $500,000. Inventory was $15,000 at the end of Year 1 and $25,000 at the end of Year 2. The inventory turnover for Year 2 (rounded to one decimal) was:

$300,000 / (($15,000 + $25,000) / 2) = 15.0 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 $80. What is Firm C's dividend yield (rounded to one decimal)?

$5 / $80 = 6.3%

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)?

$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)?

$600,000 / ($600,000 + $400,000) = 60%

Sales were $500,000 in Year 1 and $600,000 in Year 2. Accounts receivable was $50,000 at the end of Year 1 and $30,000 at the end of Year 2. The accounts receivable turnover for Year 2 (rounded to one decimal) was:

$600,000 / (($50,000 + $30,000) / 2) = 15.0 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?

$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?

$90 / $5 = $18 per share

Which statements are true regarding the price/earning (P/E) ratio?

-Low P/E ratios usually indicate poor earnings expectations. -A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. -Firms with high P/E ratios generally have strong investor confidence.

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)?

$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)?

($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)?

($180,000 + $30,000) / $30,000 = 7.0 times

Which of the following statements are true regarding the price/earning (P/E) ratio?

-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.

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?

-Cash discounts availed by the firm for prompt payments made -Current and recent payment experience of the firm

What indicators help suppliers and creditors judge the liquidity of a company?

-How promptly the company has been paying its current and recent bills -Whether the company is taking all available cash discounts for prompt payment -How the company is portrayed in Dun & Bradstreet reports

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

-Operating income excludes the effects of discontinued operations and thus provides a more forward looking measure of the firm's profitability. -Operating income excludes income tax expense, which varies from firm to firm based on country-specific tax rates.

Why is operating income frequently substituted for net income in the calculation of ROI and ROE?

-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.

Which statements are true regarding the price/earning (P/E) ratio?

-P/E ratios are significantly influenced by the company's reported earnings. -An above-average P/E ratio indicates that the common stock price is high relative to the firm's current earnings. -A low P/E ratio for a well-established company may be an indicator that the company's stock is undervalued.

Which of the following statements are true regarding the price/earning (P/E) ratio?

-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. -The P/E ratio is a measure of the relative expensiveness of a company's common stock.

Identify the true statements about extra dividends.

-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.

What indicators help suppliers and creditors judge the liquidity of a company? -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

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.

-relative scale of operations -cost and capital structures -life cycle stage of development

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.

-relative scale of operations -selected accounting methods -market segmentation strategies

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

Credit-rating firms gather and report data about which of the following?

Individual companies Segments of the economy Industries

Which of these statements regarding financial leverage are true?

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 LIFO reserve is the difference between the inventory valuation as reported under:

LIFO and the amount that would have been reported under FIFO.

To calculate the inventory turnover, you would normally divide:

cost of goods sold by the average inventory.

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the LIFO (backlog/reserve/stockpile).

Reserve

Which statements are true regarding the price/earning (P/E) ratio?

The P/E ratio should not be the sole, or even principal, consideration in an investment decision. Low P/E ratios usually indicate poor earnings expectations. 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.

Identify the true statements about credit-rating firms. Multiple select question. -They evaluate the common and preferred stock issues of publicly traded companies. -They usually have a rating system and assign a credit risk value based on that system. -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 evaluate the common and preferred stock issues of publicly traded companies. They usually have a rating system and assign a credit risk value based on that system.

How do debt and preferred stock provide financial leverage?

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.

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.

The (pre/after) -tax cost of debt is its interest rate multiplied by the complement of the firm's tax rate.

after

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. -the straight-line depreciation method and the FIFO cost-flow assumption. -an accelerated 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 LIFO cost flow assumption.

an accelerated depreciation method and the LIFO cost flow assumption.

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; earnings

Dividends that are stable, or gradually changing, and periodic in nature are known as

regular

Dividends that are stable, or gradually changing, and periodic in nature are known as Blank______ dividends.

regular

To calculate the plant and equipment turnover, you divide (sales/cost of goods sold) by the (beginning/ending/average) plant and equipment.

sales; average

Earnings multiple is another term used to describe the price/earnings ratio. This term merely reflects that:

the market price of stock is equal to the earnings per share multiplied by the P/E ratio.

The debt ratio is usually calculated by dividing the

total liabilities by total liabilities + stockholders' equity