_____ 1. Using financial leverage: a. results in a fixed charge that can materia

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_____ 1. Using financial leverage:

results in a fixed charge that can materially affect earnings available to common shareholders.

increases risk to the firm as interest rates rise and returns to shareholders decreases.

may be favorable when earnings generated by use of borrowed funds exceeds borrowing costs.

requires reviewing planned business transactions for the potential impact they may have on operating income and the ability to cover fixed interest charges.

All of the above answers are correct.

_____2. The following information is available for Schanna Company:

20XX

Market price per share of common stock $38.75

Diluted Earnings per share of common stock $ 1.33

Dividends per share of common stock $ 0.55

Calculate:

Price-earnings ratio_____________________

Dividend payout ratio_________________________

Dividend yield ________________

T or F The price/earnings ratio is a measure to assess future earning ability of a firm. (If false, identify and correct the error)

_____3. The following data were gathered from the annual report of EML, Inc.

Market price per share

$ 36.00

Number of common shares

9,500

Preferred stock, 5% $100 par

$ 15,000

Total Stockholders’ Equity

$225,000

I. The book value per share is:

$36.00

$23.68

$25.26

$14.36

$22.10

Accy 306 Quiz #9, page 2 of 3

II._____T or F Market value per share differs from book value per share. Market value fluctuates based on investors' perception of a firm's future potential. Book value is based on the balance sheet. (if false, identify and correct the error)

_____4. Evie Corp, has the following Stockholders’ Equity account balances and activity for Year 2.

Net income

$8,500,000

Retained earnings

$5,955,000

Preferred stock shares outstanding

1,000

Common stock shares outstanding at January 1, Yr 2

3,750,000

Additional Common shares issued at July 1, Yr 2

10,000

2-for-1 stock split at December 31, Yr 2

Preferred Dividends

$15,000

Common Dividends

$75,000

Year 1 EPS

$2.20

Earnings per share = __________________ / ___________________* = ________

* Compute Denominator: Weighted average common shares outstanding

Date

Shares

Portion of year

Weighted Average Shares

January 1, Y2

3,750,000

July 1, Y2

Weighted Average December 31 before split

Stock split 2-for-1

*Total Weighted Average, 12/31/Y2

Note: Year 1 restated

$2.20 / 2 =_____

______5. a. _____ T or F Stock options are recorded as paid-in-capital over the period during which the employee provides associated service to vest in the options. (if false, identify and correct the errors)

b. _____ T or F Stock appreciation rights give the employee compensation at a future date, based on the market price at the date of exercise in excess of a pre-established price. (if false, identify and correct the errors)

Accy 306 Quiz #9, page 3 of 3

Module 10—Statement of Cash Flows

______6. a._____ T or F Certificates of deposit, commercial paper and U.S. Treasury Bills with original maturity of 6 months or less are examples of highly liquid investments and are classified as cash equivalents. (if false, identify and correct error)

b. _____ T or F Depreciation expense reduces operating income but does not require the use of cash. In the Statement of Cash Flows it is separately stated as an addition to net income. (if false, identify and correct error)

_____7. Bons Fish Company had cash sales of $55,000, increase in accounts payable of $18,000, decrease in accounts receivable of $5,000, increase in inventories of $8,000, and depreciation expense of $2,000. What was the cash collected from customers?

$55,000

$50,000

$60,000

$42,000

$58,000

8. Place an X in the appropriate columns for each of the following situations.

Non-

Cash Flows Classification

Effect on

cash

Operating

Investing

Financing

Cash

Trans-

Transaction

Activity

action

Sale of land for cash

Issuance of bonds for cash

Paying off accounts payable

Acquired land using common stock

Paid $10,000 cash dividend

Collected $1,000 accounts receivable

Purchased building using cash

Net Income

Sales of inventory on account

Issue common stock to retire bonds

results in a fixed charge that can materially affect earnings available to common shareholders.

increases risk to the firm as interest rates rise and returns to shareholders decreases.

may be favorable when earnings generated by use of borrowed funds exceeds borrowing costs.

requires reviewing planned business transactions for the potential impact they may have on operating income and the ability to cover fixed interest charges.

All of the above answers are correct.

Explanation / Answer

1 e All of the above answers are correct (Increase in borrowed funds increase financial leverage which affects the company as the fixed interest outgo would be payable even during difficult times when earnings drop. At the same time, it is beneficial if the earnings of the firm is greater than the rate of interest payable on borrowed funds.) 2 a Market price of the stock (P) 38.75 EPS ( E) 1.33 DPS (D) 0.55 Price Earning ratio = Price/Earnings = 38.75/1.33 = 29.14 b (it is the measure of proportion of earnings distrbuted as dividends) Dividend Payout Ratio = dividend per share/ earning per share = 0.55/1.33 0.414 = 41.4% c Dividend Yield = Dividend per share/ Market price of the share =0.55/38.75 1.42% Price earning ratio is a measure to assess future earning ability of a firm. (False) Price earning ratio is the measure of how much price the investor is ready to pay for the each dollar of the earnings. 3 Preferred Stock $ 15000 Total stock holders equity 225000 (it includes Preferred stock + Common stock + retained earnings) Book value per share = Total stock holders equity/ No. of common shares 23.68421 (225000/9500)

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