Fundamental Analysis
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 $12,500,000/($4,000,000 + $1,000,000)=2.5 : 1
A corporation declares a cash dividend to shareholders. All of the following choices are affected EXCEPT: A Current Assets B Current Liabilities C Net Worth D Net Working Capital
A Current Assets
An "extraordinary item" would be found on the: A Income Statement B Balance Sheet C Retained Earnings Statement D All of the above
A Income Statement
Fundamental analysts would evaluate which of the following? A Liquidity ratios B Chart movements C Trading volumes D Advance-decline ratios
A Liquidity ratios Fundamental analysts select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc. Technical analysts select investments based on chart movements, trading volumes, advance-decline ratios, etc.
A corporation's "Acid Test" ratio would measure: A liquidity B leverage C profitability D marketability
A liquidity
The defensive interval ratio measures: A liquidity B profitability C leverage D stability
A liquidity
If a corporation issues new stock at a price above par value, the excess above par is termed: A paid in surplus B retained earnings C earned surplus D adjusted par value
A paid in surplus If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Other names for the excess paid above par value are: additional paid in capital or paid in surplus.
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
ABC Corporation splits its stock 3:1. As a result of the split, which of the following will occur? I The earnings per share of ABC stock is reduced II The par value per share of ABC stock is reduced III The retained earnings of ABC Corporation stay the same IV The Price / Earnings ratio for ABC stock stays the same
ALL THE ABOVE
If a corporation declares a stock dividend, which statement is FALSE? A Retained Earnings decreases B Capital in Excess of Par decreases C The number of common shares outstanding increases D Par value per share is unchanged
B Capital in Excess of Par decreases
Which item would NOT be found on a corporation's income statement? A Interest B Dividends C Revenue D Expenses
B Dividends There could be a little more clarity here, but dividends are the best choice. The income statement details all items of revenue and expense to arrive at net income after tax. This is the income figure that is used to compute earnings per share. Dividends are paid out of a corporation's net income after tax.
In an environment of rapid inflation, which inventory method would report the highest net income? A LIFO B FIFO C Average Cost D FISH
B FIFO
All of the following are methods of depreciation EXCEPT: A Double Declining Balance B First In First Out C MACRS D Straight Line
B First In First Out Methods of depreciation include straight line, double declining balance (an accelerated method), and sum of the year's digits (another accelerated method). MACRS is the tax code's Modified Accelerated Cost Recovery System, that gives bigger up-front depreciation deductions on purchased assets used in a business. First-in; first-out (FIFO) is a method of accounting for inventories.
All of the following are methods of depreciation EXCEPT: A Double Declining Balance B Last In; First Out C Sum of Years Digits D Straight Line
B Last In; First Out
Net tangible asset value per share is the same as: A net asset cost per share B book value per share C fair market value of assets per share D net working capital per share
B book value per share
Fundamental analysts would evaluate all of the following EXCEPT: A earnings trends B chart patterns C liquidity ratios D balance sheets
B chart patterns
All of the following will affect the reported net income per share of a corporation EXCEPT: A discontinuance of operations of an operating division B declaration of a common dividend C decrease in the number of common shares outstanding D change in accounting method for valuing inventories
B declaration of a common dividend Since dividends are paid out of reported net income, they have no effect on the amount of net income that the corporation reports. If a corporation discontinues operations of a division, it usually takes a charge to net income to pay for the cost of the shutdown. If the number of common shares is increased, reported net income per share will fall. If a corporation changes accounting methods for valuing inventories, any decrease in inventory value is taken as a charge to net income; while any increase in inventory value will increase reported net income.
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
The reported net income of a company has declined at a faster rate than operating income. This could result only from an increase in: A depreciation expense B interest expense C cost of goods sold D product returns
B interest expense Cost of good sold, product returns, and depreciation expense are all deductions used to arrive at operating income. Once operating income is computed, interest expense is deducted to get Net Income before tax. The only way for net income to fall faster than operating income is for interest expense to increase by a disproportionate amount.
Current assets minus current liabilities equals: A net worth B net working capital C book value D net tangible assets
B net working capital
If total liabilities of a company are subtracted from total assets of a company, the result is the company's: A market value B net worth C capitalization D net working capital
B net worth
Which of the following is NOT a liability on a company's balance sheet? A Deferred Taxes Due B Unfunded Pension Amounts C Capitalized Interest D Subordinated notes
C Capitalized Interest
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 If a company sells additional common shares, the funds from the sale increase cash (thus increasing net working capital) and are credited to the company's capital at par and capital surplus (thus increasing net worth). As the number of outstanding shares increase, earnings per common share will fall (become diluted).
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's long term capital consists of common stockholders' equity (common at par; capital in excess of par; and retained earnings); preferred stockholders' equity; and long term debt. These are all sources of long term capital for the corporation. Current liabilities are just that, bills that must be paid within 1 year. They are not a source of capital for a corporation.
Which of the following is NOT an intangible asset on a company's balance sheet? A Goodwill B Trademarks C Copyrights D Depreciation
D Depreciation
A corporation has an operating margin of profit of 9.50%. What does this mean? A For every $9.50 of expenses, the company had $1 of revenue B For every $9.50 of expenses, the company had $100 of revenue C For every $90.50 of expenses, the company had $1 of revenue D For every $90.50 of expenses, the company had $100 of revenue
D For every $90.50 of expenses, the company had $100 of revenue If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $9.50 for each $100 of revenue ($9.50 / $100 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $100 of revenue, there were $90.50 of expenses. Gross Sales $100.00 -Operating Expenses $90.50 Operating Income $9.50 The Operating Margin is $9.50 / $100 = $9.50%
All of the following ratios measure a company's ability to pay bills as they come due, EXCEPT: A Cash assets ratio B Quick ratio C Current ratio D Inventory turnover ratio
D Inventory turnover ratio
The Return On Assets Ratio is: A Net Sales / Total Assets B Earnings For Common / Total Tangible Assets C Net Income After Tax / Total Assets D Net Income After Tax / Total Tangible Assets
D Net Income After Tax / Total Tangible Assets
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 When the dividend is paid, cash drops (a current asset) and dividends payable drop (a current liability). Because both current assets and current liabilities fall by the same amount, working capital is unchanged. This transaction has no effect on net worth.
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 When bonds are issued, the corporation receives the cash from the sale (increasing current assets) and shows the long term liability to repay the bonds (increasing long term debt). Therefore, Total Assets increase; Total Liabilities increase; Net Working Capital increases because of the increase in current assets. Stockholders' Equity is unaffected since only a profit or loss, or the sale of new equity securities will cause a change in Stockholders' Equity.
Stockholders' Equity (Net Worth) is affected by all of the following EXCEPT: A declaration of a cash dividend B the purchase of Treasury stock C the issuance of new stock D declaration of a stock dividend
D declaration of a stock dividend
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 Corporate earnings that are not paid out as dividends will be credited to the company's retained earnings account at the end of the year. This increases the net worth, and hence the book value of the company.
All of the following terms are synonymous EXCEPT: A capital in excess of par B capital surplus C additional paid in capital D retained earnings
D retained earnings Retained earnings represents accumulated earnings of a corporation that have not been paid out as dividends.
A corporation receives, but has not paid for, a shipment of goods that go into inventory. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital
I and II
Which of the following are methods of accounting for inventory? I First In; First Out II Last In; First Out III Sum of Years Digits IV Straight Line
I and II ONLY
A corporate issuer declares a reverse 2 for 3 stock split. After the split is effected, which statements are TRUE? I The market price of the corporation's shares will increase II The reported earnings per common share will increase III The number of common shares outstanding will increase IV Each common shareholder's proportionate ownership interest will increase
I and II ONLY In a reverse split, the number of outstanding shares of the corporation is reduced. This increases reported earnings per share. If earnings per share increases, this tends to raise the price of the company's stock in the market. After the reverse split, each shareholder's proportionate ownership interest remains the same. The only difference is that the shareholder's ownership interest is represented by fewer shares.
A corporation issues new common stock. Which of the following are affected? I Current Assets II Total Liabilities III Net Worth IV Retained Earnings
I and III If new common stock is issued, cash increases (from the proceeds of the sale) as well as common stock at par and capital in excess of par. This increases net worth. There is no effect on retained earnings - which changes due to profits, losses, and dividend payouts.
Accelerated depreciation deductions: I increase reported expenses in early years II decrease reported expenses in early years III increase reported expenses in later years IV decrease reported expenses in later years
I and IV
A corporation issues convertible debentures at par. Which of the choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital
I and IV If convertible debentures are issued, long term debt increases as does cash, (a current asset) since the proceeds of the sale go to the issuer. If cash increases, working capital increases. There is no effect on net worth; nor on current liabilities.
A corporation buys furniture and fixtures, paying cash. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital
I and IV If furniture is bought with cash, then cash goes down (a current asset) and property, plant and equipment increases (a long term asset). If current assets drop, then working capital drops. There is no effect on current liabilities because the furniture is paid for; net worth is only affected by a profit, loss, dividend payout, or capital structure change.
A corporation would repurchase its debt for which of the following reasons? I To increase the market value of its equity issues II To reduce its sensitivity to earnings fluctuations due to cyclical conditions III To refinance at higher interest rates IV To decrease its capitalization
I, II, IV
Which of the following statements are TRUE about a company that is highly leveraged? I They "trade on the equity," producing a disproportionate increase in earnings per share once earnings cover debt service II The more highly leveraged the company, the lower the credit risk of the issuer III The company has the greatest portion of its capitalization as debt IV If the company's operating earnings are highly variable, it may default in an economic downturn
I, III, IV A highly leveraged company is one having a disproportionate amount of debt in its capital structure. Because interest on debt is a fixed annual amount, and is quite large in highly leveraged companies, if operating earnings drop in a bad year, debt service costs may not be covered. On the other hand, once debt service costs are covered, if earnings increase, all of the increase accrues to the shareholders. Because of this, leveraged companies are said to "trade on the equity" - meaning that once debt service costs are covered, reported earnings per share can rise dramatically. The more highly leveraged a company, the higher the risk of default in bad times, since it may not be able to cover large fixed interest costs.
Accelerated depreciation deductions: I increase reported income in early years II decrease reported income in early years III increase reported expenses in early years IV decrease reported expenses in early years
II and III II decrease reported income in early years III increase reported expenses in early years
Accelerated depreciation deductions: I increase reported income in early years II decrease reported income in early years III increase reported income in later years IV decrease reported income in later years
II and III II decrease reported income in early years III increase reported income in later years
ABC Corporation splits its stock 3:1. As a result of the split, which of the following will occur? I The par value per share of ABC stock stays the same II The par value per share of ABC stock is reduced III The Price / Earnings ratio of ABC stock stays the same IV The Price / Earnings ratio of ABC is reduced
II and III If a corporation splits its stock, the number of shares is increased proportionately; and the par value per share is reduced proportionately. On the "ex" date, the exchange reduces the market price of the stock to reflect the split. There is no effect on Retained Earnings for a split (though there is a reduction to retained earnings if a "dividend" is paid). Finally, the company's "Price / Earnings" ratio will stay the same, because both the stock's market price and earnings per share will be reduced in the same proportion as a result of the split, keeping the ratio constant.
A customer asks about ratings services that rate the performance of individual stocks. The registered representative could refer the customer to which TWO of the following? I Moody's II Standard and Poor's III Morningstar IV Value Line
II and IV
Which of the following are methods of depreciation? I First In; First Out II Double Declining Balance III Last In; First Out IV Straight Line
II and IV
In fundamental analysis, "extraordinary items" are: I found on the balance sheet II found on the income statement III gains and losses from the company's regular business operations IV gains and losses outside the company's regular business operations
II and IV An "extraordinary" item is found on the Income Statement. Extraordinary items are gains or losses that occur outside the company's normal scope of operations and are one time events. For example, a gain from selling part of a business is an Extraordinary Item. These are disclosed separately on the income statement.
If a corporation declares a cash dividend, which of the following statements are TRUE? I Net working capital increases II Net working capital decreases III Stockholders' equity increases IV Stockholders' equity decreases
II and IV If a dividend is declared, then it is not yet paid. Dividends payable increases (a current liability) and net worth (stockholders' equity) decreases (since the dividend is appropriated from retained earnings). If current liabilities increase, then net working capital (current assets - current liabilities) falls.
A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. If all bondholders convert, which of the following choices are affected? I Total Assets II Total Liabilities III Net Working Capital IV Stockholders' Equity
II and IV If all bondholders convert, long term liabilities fall (because the bonds are eliminated) and stockholders' equity increases (because new common shares are issued). There is no effect on Total Assets or Net Working Capital.
