smartbook quiz 11

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. Firm D's book value per share at the end of Year 2 was:

$1,400,000 / 50,000 = $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. Firm B's price/earnings ratio is:

$72 / $8 = 9.0 per share

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. Firm E's book value per share at the end of Year 2 was:

$800,000 / 40,000 = $20 per share

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. Firm A's price/earnings ratio is:

$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 categories:

- activity - liquidity - profitability - debt (or financial leverage)

The difference between the inventory valuation as reported under LIFO and the amount that would have been reported under FIFO is called the LIFO ______________ (backlog/reserve/stockpile).

reserve

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 LIFO reserve is the difference between the inventory valuation as reported under:

LIFO and the amount that would have been reported under FIFO.

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.

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

Identify the correct statements about vertical common size financial statement analysis.

- Each stockholders' equity item is expressed as a percentage of total assets. - Each financial statement is examined from top to bottom on an annual basis. - Each asset is expressed as a percentage of total assets.

Financial leverage:

- is considered positive if the interest rate paid on borrowed money is less than the rate of return (ROI) earned on that money. - magnifies the return to the owners (ROE) relative to the return on assets (ROI). - is provided by debt and preferred stock because the interest cost (or dividend rate) is fixed. - adds risk to the operation of the firm.

Operating income is frequently substituted for net income in the calculation of ROI and ROE because:

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

Examples of physical or combined physical/financial measures of activity that are sometimes disclosed in the notes to the financial statements include:

- sales dollars per employee - operating income per employee - plan operating expenses per square foot - number of employees - sales in units - gross profit per square foot of selling space

Book value per share of common stock is usually calculated by dividing a company's _____________ (average/year-end) total stockholders' equity by the _______________ (average/year-end) number of shares of common stock ____________ (authorized/issued/outstanding).

year-end year-end outstanding

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

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