Top off SEVEN
KPT, Inc. is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I. Tax rate. II. Cash dividend. III.Allowance for bad debts. IV. Retained earnings. A)I and III. B)II and IV. C) I and II. D) II and III.
A Explanation Higher taxes mean less net income. The allowance for bad debts is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings which have no effect on the net income the company reports.
When analyzing a company's balance sheet, you notice that it is using the first in, first out (FIFO) accounting method to value its inventory. This information is most likely shown A) in a footnote to the balance sheet B) at the end of the balance sheet in a summary statement required by the SEC C) on the cover of the balance sheet or at the top of the first page D) next to the inventory listing in the current assets portion of the balance sheet
A) in a footnote to the balance sheet Explanation Notations regarding accounting methods used, such as those for valuing inventory, would generally be found in the footnotes of the balance sheet.
Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A)Earnings per share (EPS). B)Book value per share. C)Cash flow per share. D)Price-earnings (P/E).
A). Earnings per share (EPS). Explanation Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines earnings per share (EPS).
SSS Corporation's total assets amount to $780,000 of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A) $410,000. B) $170,000. C) $980,000. D) $1,150,000.
A);$410,000 Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).
Market timing is normally associated with which of the following portfolio management styles? A)Tactical asset allocation B)Strategic asset allocation. C)Passive management. D)Modern portfolio theory.
A)Tactical asset allocation Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy.
An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style? A)Conservative B)Aggressive C)Moderate D)Moderate/Aggressive
B)Aggressive All facets of the portfolio point toward aggressive. The dominate factor would be that over one-third of the portfolio consists of securities considered speculative in nature. Those would include derivative products such as options and futures, high yield bonds (i.e., junk bonds), and others. Then note that the equity/debt allocation leans more toward aggressive than moderate, and certainly isn't conservative in any way.
Which of the following best describes ALPHA for an investor's portfolio? A)It is the prediction of performance aligning with the risk of a known benchmark. B)It is a measure of performance that adjusts for risk, relative to a known benchmark. C)It is a measure of risk that adjusts in accordance with the performance of a known benchmark. D)It is a measure of each portfolio assets risk to arrive at the risk associated with the entire portfolio.
B)It is a measure of performance that adjusts for risk, relative to a known benchmark. ALPHA is a measure of performance that adjusts for risk, relative to a known benchmark. The ALPHA for any investment type, a particular asset, or portfolio is the abnormal rate of return on the investment in relation to what would normally be predicted by the benchmark.
A corporation has a net income of $5.2 million after taxes. If 4 million shares of common stock are outstanding, the earnings per share is: A) $1.78. B) $5.20. C) $1.30. D) $0.80.
C) $1.30 Explanation Earnings per share equals net income (less preferred dividends) divided by the number of common shares outstanding. In this case, $5.2 million divided by 4 million equals an EPS of $1.30. Reference: 3.5.9 in the License Exam Manual
Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) by contacting the Internal Revenue Service (IRS) B) on a firm's income statement by subtracting preferred dividends from EBIT C) on the firm's income statement indicated as earnings before interest and taxes (EBIT) D) on the firm's most recent balance sheet
C) on the firm's income statement indicated as earnings before interest and taxes (EBIT) Explanation Earnings before interest and taxes (EBIT) is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company. Reference: 3.5.9 in the License Exam Manual
If XYZ common stock has a $4 dividend, a yield of 4.2%, a PE ratio of 12, and is trading at $96, its approximate earnings per share (EPS) is: A)$50.40. B)$4.00. C)$8.00. D)$48.00.
C)$8.00. Explanation The stock's PE ratio is price to earnings per share (EPS). Dividing the stock's price by the PE will give the earnings per share ($96 / 12 = $8 EPS).
Question #50 of 71 Question ID: 1132917 Which of the following is the most stringent test of liquidity taken from a corporations balance sheet? A)Current ratio B)Current assets / current liabilities. C)(Current assets - inventory) / current liabilities. D)Assets / current liabilities.
C)(Current assets - inventory) / current liabilities. Explanation Of the answers given, the quick ratio (or the acid test) is the most stringent because it excludes inventory in the calculation. The current ratio is defined as current assets/current liabilities.
In portfolio theory, the alpha of a security or a portfolio is A)the risk of the portfolio associated with the macroeconomic factors that affect all risky assets B)the portfolio's average return divided by the security's beta C)the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved D)a measure of the variance in returns of a portfolio divided by its average return
C)the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns.
XYZ Corporation has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ will be: A) 3 B) 5 C) 45 D) 15
D)15 Explanation Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the PE ratio unchanged (new price = $15, new EPS = $1).
Which of the following balance sheet entries may be affected when a company pays a cash dividend? I. Shareholders' equity. II. Total assets. III. Total liabilities. IV. Working capital. A)I and IV. B)II and IV. C)I and III. D)II and III.
D)II and III. Explanation When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity, or net worth, is also not affected when the dividend is paid.
An investor's portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely: A)increased by 10.85%. B)decreased by 11.76%. C)increased by 8.5%. D)decreased by 8.5%.
D)decreased by 8.5%. A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 × .85).
A client, who is a manager of a large pension plan, has recently changed the plan's portfolio weighting from 80% equities and 20% fixed income to 40% equities, 40% short-term Treasury debt and 20% cash and cash equivalents. More than likely, this is an indication that the client's outlook concerning the market is: A)bearish. B)unknown. C)bullish. D)neutral.
A)bearish. Because the client has reallocated the portfolio into highly conservative assets, one would think manager is expecting a bear market. This new allocation is an attempt to protect against incurring losses from the anticipated market decline.
All of the following ratios are measures of the liquidity of a corporation EXCEPT: A)debt/equity ratio. B)current ratio. C)acid-test ratio. D)quick ratio.
A)debt/equity ratio. Explanation Liquidity ratios measure a firm's ability to meet its current financial obligations and include the current ratio and acid-test (quick) ratio. However, the debt/equity ratio is a capitalization ratio and measures the amount of leverage compared to equity in a company's overall capital structure.
The dividend payout ratio of common stock is found by dividing the annual dividend per share by: A) the book value. B) the capitalization per share. C) the market price. D) the earnings per share.
D) the earnings per share. Explanation The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.
A company reported annual earnings of $2.40 per share and paid annual dividends of $.60. If the dividends were distributed quarterly, what was the amount and payout rate? A)$.15 at 25%. B)$.60 at 25%. C)$.60 at 10%. D) $.15 at 6.25%.
A)$.15 at 25%. Explanation One quarter of $.60 is $.15. $.60 is 25% of $2.40.
Which of the following may be affected when a company declares a cash dividend? I. Shareholders' equity. II. Total assets. III. Total liabilities. IV. Current assets. A) II and IV. B) I and III. C)I and II. D)III and IV.
B) I and III. Explanation When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.
A company's balance sheet dated December 31 shows retained earnings of $100,000. You can deduce from this information that the company: A)has at least $100,000 in cash. B)earned a profit of $100,000 for this year. C)has had $100,000 in undistributed profits since its inception. D)has had total net income of $100,000 since its inception.
C)has had $100,000 in undistributed profits since its inception. Explanation Retained earnings represent the accumulated total of all earnings that have been retained in the company since its inception. It is quite possible that the company did not earn $100,000 in that particular year and does not have $100,000 in cash.
To reduce a client's exposure to systematic risk in his equity portfolio, you would look at which of the following factors? A)Earnings history B)Credit rating C)Investment return compared to the inflation rate D)Beta
D) Beta Beta is a measure of a portfolio's volatility compared to the volatility of the overall market. Because systematic risk is risk associated with investing in the market, lowering the client's volatility (beta) relative to that of the market should lower his exposure to market risk. Credit rating is used to measure default risk on debt securities, and earnings history would assist you in the measurement of business risk (unsystematic risk).
Which items would change if a company buys equipment for cash? I. The working capital. II. The total assets. III. The total liabilities. IV. The shareholders' equity. A)IV only. B)I and II. C)III and IV. D) I only.
D) I ONLY Explanation The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.
The capital asset pricing model assumes A)that those who participate in smaller transactions are generally wrong in regards to timing purchases and sales B)that prices are influenced by supply and demand only C)that no type of risk can be diversified away D) investors are averse to risk and expect to be rewarded for taking risk
D) investors are averse to risk and expect to be rewarded for taking risk CAPM takes into account systematic risk, the type of risk that cannot be reduced through diversification. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it and, therefore, the pricing of an asset must reflect that.
All of the following are liquidity measures EXCEPT: A) cash equivalents and receivables divided by current liabilities. B)annual dividends per share divided by EPS. C)current assets divided by current liabilities. D)current assets minus inventory divided by current liabilities.
. B)annual dividends per share divided by EPS Explanation Liquidity is the ability to convert an asset into cash. All of the options listed are used to measure the liquidity of a company except for the dividend payout ratio which would tell you nothing about liquidity. Reference: 3.5.6 in the License Exam Manual
Which of the following statements is TRUE? A)A measure of a stock or portfolio's volatility is beta and a measure of its performance is alpha. B)Both alpha and beta each use different measures of overall performance expectations but cannot be used to measure volatility. C)A measure of a stock or portfolio's volatility is alpha and a measure of its performance is beta. D)Both alpha and beta are measures of volatility only and neither measures performance.
A) A measure of a stock or portfolio's volatility is beta and a measure of its performance is alpha. A stock's beta is a measure of its volatility in relation to the overall market. Alpha is a measure of performance that adjusts for risk, relative to a known benchmark.
If your customer is pursuing an aggressive stock buying strategy, which of the following is most suitable for him? A)GHI stock with a beta coefficient of 1.20. B)DEF stock with a beta coefficient of .93. C)ABC stock with a beta coefficient of 1.0. D)Convertible bonds of a mid-cap company.
A)GHI stock with a beta coefficient of 1.20. Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta is, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and the temperament to withstand downturns in the market.
An investor with a $120,000 investment portfolio split 60%/40% between a blue-chip stock fund and a utility fund wants to invest an additional $20,000 in equities only. Increasing diversification within the equities positions and further spreading the overall risk associated with the portfolio is the objective for the new investment dollars. Which of the following investments will further diversify using equities and align with spreading the risk? A)International stock fund B)Silicon Valley sector fund C)Money market fund D)Balanced fund
A)International stock fund While an international stock fund is considered a higher risk investment, combining it with the equity securities already owned will increase diversification and spread the overall risk for the restructured portfolio. A sector fund targets portfolio assets in the sector defined by the fund and therefore reduces overall diversification. Balanced funds and money market funds include debt instruments that do not align with the equities-only criteria.
Which of the following describes additional paid-in capital? A)Total of all residual claims that stockholders have against the corporation's assets. B)Also called earned surplus. C)The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value. D)Total of all earnings since a corporation was formed, less dividends.
C) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value. Explanation Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings. Reference: 3.5.3 in the License Exam Manual
