chapter 11 smartbook
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
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%
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%
Which of the following statements are true regarding the price/earning (P/E) ratio?
A high P/E ratio usually means that investors expect the firm to have strong future earnings and dividend growth. Diluted earnings per share is usually the denominator of the P/E calculation.
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 cost and capital structures
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 debt/equity ratio is usually calculated by dividing the:
year-end liabilities by year-end stockholders' equity.
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).
Blank 1: ending Blank 2: sales
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 madeCurrent and recent payment experience of the firm
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.
Which of the following statements are true regarding the price/earning (P/E) ratio?
Low P/E ratios usually indicate poor earnings expectations. Firms with high P/E ratios generally have strong investor confidence.
What physical or combined physical/financial measures of activity are sometimes disclosed in the notes to the financial statements?
Number of employees Sales in units Gross profit per square foot of selling space
Financial leverage magnifies a firm's (ROI/ROE) relative to its (ROI/ROE).
ROE, ROI
Identify the true statements about credit-rating firms.
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.
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:
an accelerated depreciation method and the LIFO cost flow assumption.
To calculate the days' sales in inventory, you would normally divide the:
ending inventory by the average day's cost of goods sold.
Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:
operating income per employee plant operating expenses per square foot sales dollars per employee
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%
Firm D had total stockholders equity of $1,000,000 at the end of Year 1 and $1,400,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 60,000 shares issued, and 50,000 shares outstanding. What was Firm D's book value per share at the end of Year 2?
$28 per share
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
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:
$800,000 / (($300,000 + $500,000) / 2) = 2.0 times
Firm E had total stockholders' equity of $600,000 at the end of Year 1 and $800,000 at the end of Year 2. Throughout Year 2, there were 100,000 shares of common stock authorized, 50,000 shares issued, and 40,000 shares outstanding. What was Firm E's book value per share at the end of Year 2?
$800,000 / 40,000 = $20 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
Sales for Year 1 and Year 2 amounted to $1,200,000 and $1,500,000, respectively. Plant and equipment was $700,000 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.
$1,500,000 / (($700,000 + $500,000) / 2) = 2.5 times
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
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%
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.
Financial leverage is considered positive if the interest rate paid on borrowed money is (more/less) than the rate of return (ROI) earned on that money.
less
Dividends that are stable, or gradually changing, and periodic in nature are known as _____ dividends.
regular
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.
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%
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.
$400,000 / ($1,400,000 / 365) = 104.3 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 price/earnings ratio?
$90 / $5 = $18 per share
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 debt ratio is usually calculated by dividing the:
year-end liabilities by year-end liabilities + stockholders' equity.
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:
$600,000 / (($100,000 + $150,000) / 2) = 4.8 times
Sales for Year 1 and Year 2 amounted to $500,000 and $600,000, respectively. Plant and equipment was $150,000 at the end of Year 1 and $250,000 at the end of Year 2. The plant and equipment turnover for Year 2 (rounded to one decimal) was:
$600,000 / (($150,000 + $250,000) / 2) = 3.0 times
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 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. Firm H's times interest earned for the year (rounded to one decimal) was:
($180,000 + $30,000) / $30,000 = 7.0 times
To calculate the inventory turnover, you divide (sales/cost of goods sold) by the (beginning/ending/average) inventory.
cost of goods sold, average
The ratios used to facilitate the interpretation of an entity's financial position and results of operations can be grouped into which four categories?
Debt (or financial leverage) Activity Liquidity Profitability
Identify the correct statements about vertical common size financial statement analysis.
Each asset is expressed as a percentage of total assets. Each financial statement is examined from top to bottom on an annual basis. Each stockholders' equity item is expressed as a percentage of total assets.
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
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
The LIFO reserve is the difference between the inventory valuation as reported under:
LIFO and the amount that would have been reported under FIFO.
Why is operating income frequently substituted for net income in the calculation of ROI and ROE?
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.
Identify the correct statements about vertical common size financial statement analysis.
The balance sheet and income statement are expressed in a percentage format. Total current assets are expressed as a percentage of total assets. Each item on the income statement is expressed as a percentage of sales.
Sales for Year 1 and Year 2 amounted to $1,200,000 and $1,500,000, respectively. Plant and equipment was $700,000 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:
2.7??
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 accounts receivable turnover for Year 2 (rounded to one decimal) was:
$800,000 / (($100,000 + $150,000) / 2) = 6.4 times
In (horizontal/vertical) common size analysis, the base year selected impacts how the trends of a company's financial results in recent years are portrayed.
horizontal
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.
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
To calculate the plant and equipment turnover, you would divide:
sales by the average plant and equipment.
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%
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%
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.
To calculate the accounts receivable turnover, you would divide:
sales by the average accounts receivable.
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 market segmentation strategies selected accounting methods
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
