Chapter 11 - SB

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)?

$2 / $90 = 2.2%

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

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:

$2,400,000 / (($400,000 + $200,000) / 2) = 8.0 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%

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:

$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)?

$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 yield (rounded to one decimal)?

$4 / $72 = 5.6%

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%

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:

$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)?

$5 / $6 = 83.3%

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:

$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)?

$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%

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 price/earnings ratio?

$72 / $8 = 9.0 per share

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 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

Select all that apply The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into which four categories?

- Liquidity - Debt (or financial leverage) - Profitability - Activity

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

- Operating income excludes interest expense, which varies from firm to firm based on their capital structure decisions. - Operating income is a more direct measure of the results of a firm's activities. - 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.

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

regular

Select all that apply 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.

relative scale of operations life cycle stage of development market segmentation strategies cost & capital structures selected accounting methods

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/equity ratio is usually calculated by dividing the:

year-end liabilities by year-end stockholders' equity.

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

Firms with high P/E ratios generally have strong investor confidence. Low P/E ratios usually indicate poor earnings expectations. The P/E ratio reflects the amount an average investor is willing to pay per dollar of current earnings for a company. The P/E ratio should not be the sole, or even principal, consideration in an investment decision.

Identify a true statement about a leveraged buyout.

In a leveraged buyout, the company goes heavily into debt to obtain the funds needed to buy the shares of the public stockholders.

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the _______.

LIFO reserve

Financial leverage magnifies a firm's _______ (ROI/ROE) relative to its ______ (ROI/ROE).

ROE ROI

Select all that apply 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.

A company desiring to increase its total asset turnover could do so by using:

an accelerated depreciation method and the LIFO cost flow assumption.

To calculate the inventory turnover, you would normally divide:

cost of goods sold by the average inventory.

Select all that apply Financial leverage:

is provided by debt and preferred stock because the interest cost (or dividend rate) is fixed. adds risk to the operation of the firm.

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 four (4) categories:

liquidity, activity, profitability, and debt

The LIFO reserve:

may be disclosed in the notes to the financial statements.

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

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

To calculate the days' sales in accounts receivable, you divide the _______ (beginning/ending/average) accounts receivable by the average day's ______ (sales/cost of goods sold).

ending sales

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