Chapter 8 Stock
TRUE/FALSE
incorporation is specified in the bylaws.
limited liability.
individual investor’s federal income form.
by stockholders are taxed by the federal government.
stockholders.
are decreased.
pre–emptive rights.
increase in earnings.
because reductions may be viewed as indicating financial
weakness.
traditional individual retirement account, the income tax
is deferred.
that individual will not receive the dividend.
the distribution of dividends.
shares and their price.
earning capacity of the firm.
price but not its total value.
federal income tax on dividends.
alternative to paying cash dividends.
reinvestment plans is forced saving.
ownership.
generally has the right to vote.
is said to be in arrears.
of asset usage.
equipment.
ratio is unaffected.
than the current ratio for manufacturers.
is sold every four months.
increased, but inventory turnover is not affected if
inventory is sold on credit.
retires an account payable, the quick ratio increases.
the average collection period (days sales outstanding) is
reduced.
outstanding (average collection period) is 60, then it
takes approximately five months for newly acquired
inventory to generate cash.
will not be paid.
debt and other fixed obligations.
section types of analysis.
operating profit margins on sales.
instead of net income.
interest and taxes.
by debt is measured by the debt ratio.
debt to equity ratio.
the debt ratio.
the riskier the firm.
is its debt ratio.
assets increase.
proportion of assets financed by debt is increased.
interest expense declines.
firm’s earnings.
management’s ability to retire debt.
depreciation expense.
MULTIPLE CHOICE
a. limited liability for stockholders
b. avoidance of state taxation
c. limited life
d. deductibility of dividends
rights?
1. right to vote
2. right to share in the firm’s earnings
3. right to sell the stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. collect extra dividends
b. vote all the shares for one individual
c. cast the total number of votes for one individual
d. vote by proxy
a. retained
b. distributed
c. invested
d. retained and/or distributed
a. collect dividends before they are reinvested
b. participate in dividend reinvestment plans
c. maintain the proportionate share of ownership
d. vote their shares
1. are paid from earnings
2. increase the capacity of the firm to grow
3. reduce the firm’s assets
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
does not include
a. the ex–dividend date
b. the date of record
c. the settlement date
d. the date of announcement
1. the firm’s earnings
2. investment opportunities available to the firm
3. corporate income taxes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. the number of shares outstanding
b. the firm’s assets
c. the firm’s equity
d. the stock’s price
a. the price of a share of stock to rise
b. the price of a share of stock to fall
c. the value of the firm to rise
d. the value of the firm to fall
two–for–one?
a. the price of the stock decreases
b. the firm’s assets decrease
c. the firm’s liabilities decrease
d. the firm’s equity decreases
stock dividend is paid?
a. the firm’s retained earnings decrease
b. the firm’s equity is increased
c. the stock’s par value is decreased
d. the stock’s price is increased
1. repurchase some of its shares
2. increase its cash dividends
3. increase its liabilities
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
1. deferment of federal income taxes
2. a convenient means to accumulate shares
3. dollar cost averaging
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
a. a variable dividend
b. a fixed dividend
c. a stock dividend
d. no dividend
because
a. they both have voting power
b. interest and dividend payments are fixed
c. interest and dividend payments are legal
obligations
d. interest and dividend payments are tax–deductible
expenses
1. a legal obligation
2. not a legal obligation
3. exempt from federal income taxation
4. not exempt from federal income taxation
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. operating income (EBIT)
b. earnings after dividends to common stock
c. earnings after taxes
d. earnings after interest but before taxes
a. earnings before interest and taxes
b. the ratio of earnings to number of preferred
shares
c. the ratio of EBIT to number of preferred shares
d. the ratio of preferred shares to common shares
a. using cash to retire an account payable
b. the collection of an account receivable
c. selling inventory for a profit
d. selling bonds and using the funds to
finance inventory
a. excludes accounts payable
b. excludes accounts receivable
c. includes inventory
d. includes cash and cash equivalents
a. how rapidly assets flow through the firm
b. how frequently the firm’s stock is traded
c. how rapidly employees turn over
d. the profitableness of accounts receivable
a. the firm increases its accounts payable
b. the firm uses less debt financing
c. the firm increases its inventory
d. the firm lowers the prices of its goods
period or receivables turnover) measures
a. the speed with which accounts payable are paid
b. the speed with which accounts receivable
are collected
c. the safety of accounts receivable
d. the safety of accounts payable
a. ability to use debt financing
b. use of plant and equipment
c. ability to cover (i.e., sell) its inventory
d. ability to meet fixed payments such as interest
1. fewer assets are debt financed
2. more assets are debt financed
3. the ratio of debt to equity increases
4. the ratio of debt to equity decreases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. bondholders’ position deteriorates
b. net income decreases
c. interest payments become more assured
d. taxes decrease
a. is the ratio of sales to equity
b. measures what the firm earns on assets
c. is the ratio of net income to equity
d. measures what the firm earns on sales
1. of financial leverage
2. of the use of debt financing
3. of asset utilization
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. a debt ratio of 60 percent to a debt ratio of
40 percent
2. a debt ratio of 40 percent to a debt ratio of
60 percent
3. a times–interest–earned of 5.1 to a
times–interest–earned of 3.9
4. a times–interest–earned of 3.9 to a
times–interest–earned of 5.1
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
1. a quick ratio of 1.2 to a quick ratio of 0.8
2. a quick ratio of 0.8 to a quick ratio of 1.2
3. days sales outstanding of 46 to a
days sales outstanding of 35
4. days sales outstanding of 35 to a
days sales outstanding of 46
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. depreciation
b. cost of goods sold
c. rent payments
d. interest earned
a. the firm’s equity
b. depreciation expense
c. taxes paid
d. net income
a. distributing a stock dividend.
b. retiring an account payable
c. collecting an account receivable
d. paying property taxes
a. splitting the stock two for one
b. acquiring inventory
c. retaining earnings
d. switching from straight–line depreciation
to accelerated depreciation
statement of changes in financial position (cash flows)?
a. earnings
b. deprecation
c. dividends paid
d. inventory
PROBLEMS
1. A firm’s stock sells for $100 a share. What will be the
price after a
a. two–for–one split
b. four–for–one split
c. one–for–two reverse split?
2. A firm’s balance sheet has the following entries:
Cash $30,000,000
Total assets 100,000,000
Common stock (10,000,000 20,000,000
shares outstanding, $2 par)
Additional paid–in capital 5,000,000
Retained earnings 35,000,000
What will be each of these balance sheet entries after a
a. $2 a share cash dividend
b. four–for–one split
c. 5 percent stock dividend (current price of the
stock is $20)?