QUESTION 31 Dell Computer had outstanding stock options of 344 million at the en

Question

QUESTION 31

Dell Computer had outstanding stock options of 344 million at the end of fiscal year 2001 (outstanding shares are 2,601 million). This is a potential problem to investors because:

Potential dilution of common stock of over 13%

Severe leverage problem because of the option obligations

The company is obviously near bankruptcy

Of the huge compensation expense that reduces net income

1 points   

QUESTION 32

Du Pont's 2000 segment reporting showed that Polyester had sales of $2,553 & operating income of $73, while Specialty Fibers had sales of $3,452 & operating income of $690. This indicates that:

Du Pont should discontinue Specialty fibers & concentrate exclusively on Polyester

Specialty fibers had a higher operating return than Polyester (20.0% vs. 2.9%)

Polyester had an operating return of over 30%

Polyester had a higher operating return than Polyester

1 points   

QUESTION 33

Dow Chemical had a Prepaid Pension Obligation of -$65; total assets of $27,645; and net income of $1,513, all for 2000. This means that:

Dow recorded a negative stockholders equity item of -$65

Dow had other comprehensive income of -$65

Dow s pension plan was underfunded by $65 or 0.2% of total assets

Dow recorded a nonrecurring item of -$65 on the income statement

1 points   

QUESTION 34

Gary's Gizmos pays health insurance benefits to employees who retired early. How are these obligations accounted for according to SFAS No. 106?

On a pay-as-you-go basis

Extraordinary items

Other post-employment benefit obligations that are reported only as other comprehensive income

Other post-employment benefit obligations that are liabilities

1 points   

QUESTION 35

Generally, the long-term impact of issuing stock options to employees is:

Stock options are almost never exercised by employees

Dilution of equity, since compensation expense is usually not recorded

The cost of stock options is recorded directly to retained earnings

Compensation expense recorded when exercised for the full exercise price

1 points   

QUESTION 36

ABC has segment information of:

                        Net sales          Operating Profits        Identifiable Assets

Gorks              $15.5                   $1.7                         $10.3

Borks               20.6                       2.1                           13.7

Borks have an operating profit margin (similar to return on sales) of:

2.1%

15.3%

11.0%

10.2%

1 points   

QUESTION 37

Marriott had outstanding stock options of 20 million at the end of fiscal year 2001 (outstanding shares were 245 million). Marriott had net income of $236 million and pro forma net income (treating stock options as expenses) of $187 million. This means:

Severe potential dilution of common stock well over 20%.

The company has severe leverage problems because of the option obligations.

The company is obviously near bankruptcy.

The compensation expense associated with stock options reduces earnings over 20% on a pro forma basis.

1 points   

QUESTION 38

Hilton's 2001 segment reporting note showed that Hotel Ownership has revenue of $1,886 million, operating income of $474 million, and assets of $4,925 million. Managing and Franchising had revenues of $120 million, operating income of $113 million, and assets of $680 million. This indicates that:

Managing & Franchising probably should be sold since the return operating return on sales is extremely low

Hotel Ownership had an operating return on sales ratio below 2%, a possible red flag

Hotel Ownership has a higher operating return on sales than Managing & Franchising

Managing & Franchising s asset turnover ratio at 17.6% suggests inefficiency when compared to Hotel Ownership

1 points   

QUESTION 39

Marriott uses the all-current method for foreign currency translation. The translation adjustment for 2001 was -$14 million (a net loss), and net income was $236 million. The translation adjustment was:

Reported as a loss under income from continuing operations

Reported as a negative equity item as an other comprehensive income item

Reported directing to current liabilities at $14 million

Reported as an extraordinary loss on the income statement

1 points   

QUESTION 40

General Electric (GE) had a Prepaid Pension Asset of $12.4 billion, total assets of $495 billion, and net income of $13.7 billion, all for 2001. This means that:

GE's pension plan was underfunded by $12.4 billion

GE recorded a nonrecurring item on the income statement for $12.4 billion

GE had other comprehensive income of $12.4 billion

GE's pension plan was overfunded by $12.4 billion

a.

Potential dilution of common stock of over 13%

b.

Severe leverage problem because of the option obligations

c.

The company is obviously near bankruptcy

d.

Of the huge compensation expense that reduces net income

Explanation / Answer

31. Answer A

Increase in No.of shares without increase in Earnings will result in Dilution of common stock

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