Analysis: Fundamental Analysis Review Questions

All of the following items are found on a company's income statement EXCEPT: A: Depreciation Expense B: Current Liabilities C: Cost of Goods Sold D: Bond Interest Expense

B: Current Liabilities

Total Capitalization

-long term debt & preferred stock & common equity

Bond interest coverage ratio

Total operating and non-operating income / annual bond interest expense

Common Stock Ratio:

common equity / total capitalization

Common Equity

-common stock @ par & capital in excess of par & retained earnings

Quick Ratio or "acid ratio"

= (current assets - inventory & prepaid expenses) / current liabilities

Current Ratio:

= current assets/current liabilities --measures liquidity

A company has reported operating income of $12,500,000. 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: A: 2.5:1 B: 5:1 C: 12.5:1 D: 25:1

A: 2.5:1 = operating income / interest expense + principal repayments

If net income before tax falls at a faster rate than operating income, then which statement is TRUE? A: Bond interest expense is increasing at a faster rate than operating expenses B: Bond interest expense is decreasing at a faster rate than operating expenses C: Dividends are increasing at a faster rate than operating income D: Dividends are decreasing at a faster rate than operating income

A: Bond interest expense is increasing at a faster rate than operating expenses

All of the following are methods of depreciation EXCEPT: A: First In; First Out B: Double Declining Balance C: Sum of Years Digits D: Straight Line

A: First In; First Out

corporation issues a stock dividend. All of the following are affected EXCEPT: A: Net Worth B: Capital in Excess of Par C: Common at Par D: Retained Earnings

A: Net Worth

A corporate issuer declares a reverse 2 for 3 stock split. After the split is effected, which statement is TRUE? A: The market price of the corporation's shares will increase B: The reported earnings per common share will decrease C: The number of common shares outstanding will increase D: Each common shareholder's proportionate ownership interest will increase

A: The market price of the corporation's shares will increase

ABC Corporation splits its stock 4:1. As a result of the split, which of the following will occur? A: The per share price of ABC stock is reduced B: The par value of ABC stock remains unchanged C: The retained earnings of ABC Corporation are reduced D: The Price / Earnings ratio for ABC stock is reduced

A: The per share price of ABC stock is reduced

All assets minus all liabilities equals: A: net worth B: net working capital C: book value D: net tangible assets

A: net worth

Publicly traded companies are: A: required to use accrual accounting B: required to use cash accounting C: required to use cost accounting D: have a choice of using either accrual, cash, or cost accounting

A: required to use accrual accounting

If a corporation issues new stock at a price above par value, the excess above par is termed: A: surplus capital B: retained earnings C: earned surplus D: adjusted par value

A: surplus capital

A corporation receives, but has not paid for, a shipment of goods that go into inventory. Which of the following choices is TRUE? A: Current Assets decreases B: Current Liabilities increases C: Cash decreases D: Net Working Capital increases

B: Current Liabilities increases

If a convertible bond is converted, what is the effect on the issuing company's balance sheet? A: Both Current Assets and Stockholders' Equity increase B: Total Liabilities decreases and Stockholders' Equity increases C: Net Working Capital decreases and Stockholders' Equity increases D: Net Working Capital increases and Total Liabilities decreases

B: Total Liabilities decreases and Stockholders' Equity increases -bonds are exchanged for common stock

A corporation would repurchase its debt for all of the following reasons EXCEPT to: A: refinance at lower interest rates B: increase its capitalization C: increase the market value of its equity issues D: reduce its sensitivity to earnings fluctuations due to cyclical conditions

B: increase its capitalization

If a corporation has an operating margin of profit of 9.50%, this means that for every $1 of revenue, the company has: A: $.095 of expenses B: $.95 of expenses C: $.905 of expenses D: $.0905 of expenses

C: $.905 of expenses •1 x 9.5% = .095 •1 - .095 = 0.905

All of the following will affect the reported net income per share of a corporation EXCEPT: A: Decrease in the number of common shares outstanding B: Change in accounting method for valuing inventories C: Declaration of a common dividend D: Discontinuance of operations of an operating division

C: Declaration of a common dividend

If a corporation repurchases its debt, which statement is TRUE? A: The corporation's capitalization will increase B: Interest costs will rise C: The company will be deleveraged D: The market value of the common stock will decrease

C: The company will be deleveraged -"deleveraged" means company reduced debt load

XYZ Company has 100,000,000 authorized common shares. 25,000,000 shares have been issued and another 10,000,000 shares are currently in registration. The sale of the 10,000,000 shares will result in all of the following EXCEPT a(n) A: decrease in earnings per share B: increase in net worth C: decrease in net working capital D: increase in the number of shares outstanding

C: decrease in net working capital

Bond interest expense of a corporation is : A: deductible before operating expenses B: deducted before computing operating income C: deductible before taxes D: not deductible since these are not tax free issues

C: deductible before taxes

Accelerated depreciation deductions: A: increase reported income in early years B: do not impact the income statement since these are balance sheet items C: increase reported income in later years D: increase each quarter

C: increase reported income in later years

The formula for Net Working Capital is: A: (Total Assets - Inventory) / Total Liabilities B: Total Assets - Total Liabilities C: (Current Assets - Inventory) / Current Liabilities D: Current Assets - Current Liabilities

D: Current Assets - Current Liabilities

All of the following are components of total long term capital of a corporation EXCEPT: A: Common Stockholders' Equity B: Preferred Stockholders' Equity C: Long Term Bonded Debt D: Current Liabilities

D: Current Liabilities

A corporation has previously declared a cash dividend. When the dividend is actually paid, all of the following choices are affected EXCEPT: A: Cash B: Current Assets C: Current Liabilities D: Net Working Capital

D: Net Working Capital - cash drops (current asset) and dividend payables drops (current liability) by same amount

A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. Upon issuance, all of the following are affected EXCEPT: A: Total Assets B: Total Liabilities C: Net Working Capital D: Stockholders' Equity

D: Stockholders' Equity -long term debt increases, short term assets increase

If a corporation has a dividend payout ratio of 75%, the undistributed earnings (25%) will: A: increase earnings per share B: decrease book value C: increase capital in excess of par D: increase retained earnings

D: increase retained earnings