978-0134125053 Chapter 12 Part 4

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105) Inventory and prepaid expenses are NOT included in the computation of the:

A) quick ratio.

B) current ratio.

C) debt ratio.

D) working capital ratio.

Question Type: Concept

106) The formula “net income divided by average Stockholders’ Equity” yields:

A) return on equity.

B) return on assets.

C) earnings per share.

D) return on sales.

Question Type: Concept

107) A company’s net income for the year ended was $290,000. Stockholders’ Equity was

$1,600,000 at the end of the year, and $1,400,000 at the beginning of the year. The return on

equity would be: (Round your final answer to two decimal places, X.XX%)

A) 9.67%.

B) 20.71%.

C) 19.33%.

D) 18.13%.

Question Type: Application

108) What is the return on equity if sales are $130,000, net income is $25,700, beginning

Stockholders‘ Equity is $93,000, and ending common Stockholders’ Equity is $87,000? (Round

your final answer to two decimal places, X.XX%)

A) 72.22%

B) 27.63%

C) 29.54%

D) 28.56%

Question Type: Application

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12.3 Use financial analysis to assess the value of a business

1) The interest coverage ratio is an indicator of a company’s ability to repay interest on its debt.

Question Type: Concept

2) Earnings per share and dividends per share are indicators of a company‘s ability to reward

stockholders for the use of their money.

Question Type: Concept

3) The price earnings ratio reflects the relationship of the current market price of a stock to its

earnings per share.

Question Type: Concept

4) A high dividend yield means that stockholders are receiving a large return in the form of

dividends.

Question Type: Concept

5) A low price earnings ratio typically means the future of a business is very bright.

Question Type: Concept

6) If a company’s net cash flow from operations is consistently higher than net income, this could

be a red flag that the company is in trouble.

Question Type: Critical Thinking

7) Market analysis ratios are used to evaluate a company’s ability to generate profits.

Question Type: Concept

8) Solvency ratios measure a company’s ability to meet its long-term obligations or take on more

debt.

Question Type: Concept

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9) Kramerica Industries’ receivables collection period is growing significantly faster than its

competitors. This may be a red flag of an impending cash shortage.

Question Type: Critical Thinking

10) Stella Corp. has a debt ratio that is significantly higher than industry, indicating that they are

better at paying off debt than their competitors.

Question Type: Critical Thinking

11) A measure of how well earnings support dividend payments is:

A) earnings per share.

B) dividend payout ratio.

C) dividends per share.

D) dividend yield.

Question Type: Concept

12) Caesar Coffee Company reported the following for 2016:

Earnings/share:

$18.68

Market price per share of common stock:

$70

Number of shares of common stock outstanding:

74,000

Net income:

$53,000

Dividends/share:

$7.73

What is the dividend yield for Caesar Coffee Company? (Round your final answer to two

decimal places, X.XX%.)

A) 26.69%

B) 11.04%

C) 37.73%

D) 41.38%

Question Type: Application

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13) Sugar’s Candy Company reported the following for 2016:

Earnings/share:

$16.68

Market price per share of common stock:

$64

Number of shares of common stock outstanding:

79,000

Net income:

$57,000

Dividends/share:

$6.73

What is the price earnings ratio for Sugar’s Candy Company? (Round your final answer to two

decimal places.)

A) 9.51

B) 0.16

C) 2.48

D) 3.84

Question Type: Application

14) Sydney Corporation the following for 2016:

Earnings/share:

$21.68

Market price per share of common stock:

$55

Number of shares of common stock outstanding:

55,000

Net income:

$45,000

Dividends/share:

$5.14

What is the dividend yield for Sydney Corporation? (Round your final answer to two decimal

places, X.XX%.)

A) 9.35%

B) 23.71%

C) 48.76%

D) 39.42%

Question Type: Application

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15) Radar Corporation the following for 2016:

Earnings/share:

$20.68

Market price per share of common stock:

$54

Number of shares of common stock outstanding:

55,000

Net income:

$47,000

Dividends/share:

$7.14

What is the price earnings ratio for Radar Corporation? (Round your final answer to two decimal

places.)

A) 2.90

B) 7.56

C) 2.61

D) 0.85

Question Type: Application

16) To determine the ability of a company to pay interest on its debt, you would calculate the:

A) debt ratio.

B) interest coverage ratio.

C) price-earnings ratio.

D) return on assets ratio.

Question Type: Concept

17) Which of the following measures the ability for a company to meet long-term obligations or

take on more debt?

A) Return on equity

B) Debt ratio

C) Current ratio

D) Debt turnover

Question Type: Application

18) Which of the following would NOT be a red flag in a financial statement analysis?

A) Increased Accounts Receivable turnover

B) Decreased cash flow

C) High debt ratio

D) Low inventory turnover

Question Type: Concept

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19) Which of the following would be a red flag in a financial statement analysis?

A) High debt ratio

B) High inventory turnover ratio

C) High price-earnings ratio

D) High earnings per share ratio

Question Type: Concept

20) Which of the following is a profitability ratio?

A) Cash conversion cycle

B) Earnings per share

C) Debt ratio

D) Gross profit percentage

Question Type: Concept

21) Which of the following is a solvency ratio?

A) Cash conversion cycle

B) Earnings per share

C) Debt ratio

D) Gross profit percentage

Question Type: Concept

22) Which of the following is NOT a liquidity ratio?

A) Current ratio

B) Accounts Payable payment period

C) Accounts Receivable turnover ratio

D) Receivables collection period

Question Type: Concept

23) Which of the following is NOT an asset management ratio?

A) Inventory turnover ratio

B) Days-sales-in–inventory ratio

C) Fixed asset turnover ratio

D) Return on assets

Question Type: Concept

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24) Market analysis ratios are used to determine if the business is:

A) Investing its money and using its assets efficiently

B) Earning a net income or loss

C) Generating enough net income to reward stockholders for use of their money

D) Paying off its debts in a reasonable time frame

Question Type: Concept

25) Why would a slow inventory turnover rate be a red flag in a financial statement analysis?

A) The company may have obsolete inventory.

B) The company may have bad salespeople.

C) The company may be overstating inventory.

D) Both A and C are reasons why it would be a red flag.

Question Type: Critical Thinking

26) Why would a high debt ratio be a red flag in a financial statement analysis?

A) The company is borrowing more than it is earning.

B) The company may be unable to pay its debts.

C) The company is paying too much interest.

D) Both A and B are reasons why it would be a red flag.

Question Type: Critical Thinking

27) Two measures that are often looked at in valuing a business are:

A) Earnings per Share and Dividend per Share.

B) Earnings per Share and Dividend Yield.

C) Price Earnings Ratio and Dividend Yield.

D) Price Earnings Ratio and Dividend per Share.

Question Type: Concept

28) When does a business pay dividends?

A) At the end of the year

B) At the end of each quarter or semiannually

C) When stockholders request them

D) When the business doesn’t have a better use for the money

Question Type: Concept

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29) Lannister Corp. has a price earnings ratio of 17 and a dividend yield of 0.33%. Frey Corp.

has a price earnings ratio of 14 and a dividend yield of 3%. Based on this information, it appears

that investors think:

A) Lannister has a bright future, but Frey does not.

B) Frey has a bright future, but Lannister does not.

C) Both companies have a bright future, but Lannister is expected to grow more than Frey.

D) Both companies have a bright future, but Frey is expected to grow more than Lannister.

Question Type: Critical Thinking

30) Lions, Inc. has a price earnings ratio of 11 and a dividend yield of 2.2%. Stag, Inc. has a

price earnings ratio of 16 and a dividend yield of 0.46%. Based on this information, it appears

that investors think:

A) Lions, Inc. has a bright future, but Stag, Inc. does not.

B) Stag, Inc. has a bright future, but Lions, Inc. does not.

C) Both companies have a bright future, but Lions, Inc. is expected to grow more than Stag, Inc.

D) Both companies have a bright future, but Stag, Inc. is expected to grow more than Lions, Inc.

Question Type: Critical Thinking