12.4-80 A company wishing to improve its acid-test ratio should:
A) purchase additional inventory for cash.
B) purchase additional inventory on account.
C) sell inventory on account.
D) do all of the above.
12.4-81 Dividend yield can be computed only for ordinary shares.
12.4-82 Value investors rank shares by the ratio of market price to book value, while growth investors
focus more on trends in net income.
12.4-83 Preference shareholders pay special attention to the dividend yield ratio because they invest
primarily to receive dividends.
12.4-84 If a company has a price/earnings ratio of 10, the company’s shares are selling at 10 times its
earnings.
13.4-82 The dividend yield for young, growth-oriented companies is generally high in order to attract
potential investors.
12.4-86 The recorded amount for each ordinary share outstanding is the:
A) price/earnings ratio.
B) return on equity.
C) book value per share of ordinary shares.
D) earnings per share.
12.4-87 The ratio that measures the value that the stock market places on $1 of a company’s earnings is
the:
A) dividend yield.
B) return on equity.
C) price/earnings ratio.
D) earnings per share.
12.4-88 The ratio that measures the percentage of a share’s market value that the company returns to the
shareholders as dividends is the:
A) dividend yield.
B) return on equity.
C) price/earnings ratio.
D) earnings per share.
12.4-89 All of the following ratios directly relate to the analysis of a given share as an investment except
the:
A) earnings per share.
B) dividend yield.
C) book value per share of ordinary shares.
D) current ratio.
12.4-90 The dividend yield is calculated as:
A) dividends per share/book value per ordinary share.
B) dividends per share/number of ordinary shares.
C) dividends per share/earnings per ordinary share.
D) dividends per share/market price per ordinary share.
12.4-91 Which of the following ratios is NOT used to analyze the shares of a company as an investment?
A) Dividend yield
B) Book value per ordinary share
C) Price/earnings ratio
D) Rate of return on debt
12.4-92 Investors can buy shares to:
A) earn a return on their investment.
B) sell the shares at a gain in the future.
C) receive dividends.
D) do all of the above.
12.4-93 The following data represent selected information from the comparative income statement and
balance sheet for Dunkin Company for the years ended December 31, 20X7and 20X6:
20X7
20X6
Cash
$10,000
$15,000
Net accounts receivable
30,000
25,000
Inventory
43,000
40,000
Prepaid expenses
5,000
7,000
Total current assets
88,000
87,000
Total noncurrent assets
112,000
114,000
Total current liabilities
70,000
60,000
Total noncurrent liabilities
40,000
45,000
Share Capital, no-par *
60,000
60,000
Retained earnings
30,000
36,000
Net credit sales
370,000
333,000
Cost of goods sold
150,000
160,000
Gross profit
220,000
173,000
Income from operations
95,000
87,000
Interest expense
8,000
8,000
Net income
70,000
57,000
* 10,000 ordinary shares have been issued and outstanding since the company was established.
They had a market value of $90 per share on December 31, 20X6, and they were selling for
$91.50 on December 31, 20X7.
The price/earnings ratio for Dunkin Company for 20X7, was:
A) 9.50.
B) 13.07.
C) 7.00.
D) .70.
12.4-94 The following data represent selected information from the comparative income statement and
balance sheet for Dunkin Company for the years ended December 31, 20X7 and 20X6:
20X7
20X6
Cash
$10,000
$15,000
Net accounts receivable
30,000
25,000
Inventory
43,000
40,000
Prepaid expenses
5,000
7,000
Total current assets
88,000
87,000
Total noncurrent assets
112,000
114,000
Total current liabilities
70,000
60,000
Total noncurrent liabilities
40,000
45,000
Share Capital, no-par *
60,000
60,000
Retained earnings
30,000
36,000
Net credit sales
370,000
333,000
Cost of goods sold
150,000
160,000
Gross profit
220,000
173,000
Income from operations
95,000
87,000
Interest expense
8,000
8,000
Net income
70,000
57,000
* 10,000 ordinary shares have been issued and outstanding since the company was established.
They had a market value of $90 per share on December 31, 20X6, and they were selling for
$91.50 on December 31, 20X7. Dividends of $6,000 were paid on the ordinary shares each
year.
The dividend yield for Dunkin Company for 20X7, was:
A) 6.56%.
B) 7.85%.
C) 7.50%.
D) 5.25%
12.4-95 The following data represent selected information from the comparative income statement and
balance sheet for Dunkin Company for the years ended December 31, 20X7 and 20X6:
20X7
20X6
Cash
$10,000
$15,000
Net accounts receivable
30,000
25,000
Inventory
43,000
40,000
Prepaid expenses
5,000
7,000
Total current assets
88,000
87,000
Total noncurrent assets
112,000
114,000
Total current liabilities
70,000
60,000
Total noncurrent liabilities
40,000
45,000
Share capital, no-par *
60,000
60,000
Retained earnings
30,000
36,000
Net credit sales
370,000
333,000
Cost of goods sold
150,000
160,000
Gross profit
220,000
173,000
Income from operations
95,000
87,000
Interest expense
8,000
8,000
Net income
70,000
57,000
* 10,000 ordinary shares have been issued and outstanding since the company was established.
They had a market value of $90 per share on December 31, 20X6, and they were selling for $91.50
on December 31, 20X7. Dividends of $6,000 were paid on the ordinary shares in 20X6 and 20X7.
The book value per ordinary share for Dunkin Company for 20X7 was:
A) 6.00.
B) 9.00.
C) 9.30.
D) none of the above.
12.5-1 Economic value added (EVA) can be computed as net income plus interest expense minus capital
charge.
12.5-2 Economic value added is a measure of change in shareholder wealth.
12.5-3 Cost of capital varies with a company’s level of risk.
12.5-4 When determining economic value added (EVA), capital charge is the amount that shareholders
and lenders demand from a company for the use of their money.
12.5-5 The idea behind EVA® is that the returns to the company’s shareholders and to its creditors
should be less than the company’s capital charge.
12.5-6 An efficient capital market is one in which market prices fully reflect all information available to
the public.
12.5-7 The cost of capital is defined as the:
A) weighted average of the returns demanded by the company’s shareholders and lenders.
B) sum of liabilities and shareholders’ equity accounts.
C) rate of return demanded by the shareholders divided by the rate of return demanded by
lenders.
D) rate of return demanded by shareholders times the rate of return demanded by lenders.
12.5-8 The combination of accounting income and corporate finance to measure whether the company’s
operations have increased shareholder wealth is called the:
A) return on equity.
B) economic value added.
C) rate of return demanded by the shareholders.
D) price/earnings ratio.
12.5-9 The cost of capital:
A) is the same for all companies.
B) can be obtained from the financial statements.
C) is higher for a start-up company since it is untested.
D) is all of the above.
12.5-10 Capital charge is computed as:
A) Cost of capital + Notes payable + Loans payable + Long-term debt + Shareholders’ equity.
B) (Notes payable + Loans payable + Long-term debt) × (Shareholders’ equity + Cost of capital).
C) Cost of capital – Notes payable – Loans payable – Long-term debt – Shareholders’ equity.
D) (Notes payable + Loans payable + Long-term debt + Shareholders’ equity) × Cost of capital.
12.5-11 An “efficient capital market” is one where:
A) companies can easily and efficiently raise capital when needed.
B) regulatory bodies are doing a good job of controlling the sale of publicly available shares
securities.
C) share prices are set by the law of supply and demand.
D) stock market prices fully reflect all information available to the public.
12.5-12 Economic value added may be computed as:
A) the change in capital/net income.
B) net income + interest expense – the capital charge.
C) the change in capital × (net income + interest expense).
D) net income/the change in capital.
12.5-13 Which of the following statements is TRUE?
A) A positive EVA® suggests a decrease in shareholder wealth.
B) A positive EVA® suggests an increase in shareholder wealth.
C) A positive EVA® suggests no change in shareholder wealth.
D) EVA® has no relationship to in shareholder wealth.
12.5-14 Red flags in financial statement analysis can include all of the following EXCEPT:
A) an increase in income from continuing operations.
B) decreased cash flows.
C) a debt ratio higher than average.
D) an increase in days’ sales in receivables.
12.5-15 Red flags in financial statement analysis can include:
A) a slowdown in inventory turnover.
B) sales increasing while receivables decrease.
C) debt ratio higher than average.
D) all of the above.
12.5-16 If inventory turnover is decreasing:
A) the company may be unable to move its inventory.
B) the company may be overstating inventory.
C) the company may be understating inventory.
D) both A and B may occur.