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True/False Questions
1. Common-size statements are financial statements of companies of similar size.
2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.
3. The gross margin percentage is computed by dividing the gross margin by total assets.
4. The sale of used equipment at book value for cash will increase earnings per share.
5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.
6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.
7. An increase in the number of shares of common stock outstanding will decrease a
company's price-earnings ratio if the market price per share remains unchanged.
8. A company's financial leverage is negative when its return on total assets is less than
its return on common stockholders' equity.
9. When computing return on common stockholders' equity, retained earnings should be
included as part of common stockholders' equity.
10. When a retailing company purchases inventory, the book value per share of the
company increases.
11. If a company's acid-test ratio increases, its current ratio will also increase.
12. Assuming a current ratio greater than 1, acquiring land by issuing more of the
company's common stock will increase the current ratio.
13. If a company successfully implements lean production, its inventory turnover ratio
should decrease.
14. Short-term borrowing is not a source of working capital.
15. Working capital is computed by subtracting long-term liabilities from long-term
assets.
A)
B)
C)
D)
20. The market price of Friden Company's common stock increased from $15 to $18.
Earnings per share of common stock remained unchanged. The company's priceearnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
21. If a company is profitable and is effectively using leverage, which
one of the following ratios is likely to be the largest?
A) Return on total assets.
B) Return on total liabilities.
C) Return on common stockholders' equity.
D) Cannot be determined.
22. Clark Company issued bonds with an interest rate of 10%. The company's return on
assets is 12%. The company's return on common stockholders' equity would most
likely:
A) increase.
B) decrease.
C) remain unchanged.
D) cannot be determined.
24. Book value per common share is the amount of stockholders' equity per outstanding
share of common stock. Which one of the following statements about book value per
common share is most correct?
A) Market price per common share usually approximates book value per common
share.
B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the
future.
C) A market price per common share that is greater than book value per common
share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders
if the company were sold to another company.
25. The ratio of total cash, marketable securities, accounts receivable, and short-term
notes to current liabilities is:
A) the debt-to-equity ratio.
B) the current ratio.
C) the acid-test ratio.
D) working capital.
26. A company has just converted a long-term note receivable into a short-term note
receivable. The company's acid-test and current ratios are both greater than 1. This
transaction will:
A) increase the current ratio and decrease the acid-test ratio.
B) increase the current ratio and increase the acid-test ratio.
C) decrease the current ratio and increase the acid-test ratio.
D) decrease the current ratio and decrease the acid-test ratio.
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will
increase Broca's current ratio?
A) the purchase of inventory for cash.
B) the collection of an account receivable.
C) the payment of an account payable.
D) none of the above.
28. Allen Company's average collection period for accounts receivable was 25 days in
year 1, but increased to 40 days in year 2. Which of the following would most likely
be the cause of this change:
A) a decrease in accounts receivable relative to sales in year 2.
B) an increase in credit sales in year 2 as compared to year 1.
C) a relaxation of credit policies in year 2.
D) a decrease in accounts receivable in year 2 as compared to year 1.
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory
turnover ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
$824,000
477,000
347,000
208,000
139,000
37,000
102,000
30,000
$ 72,000
31. Crandall Company's net income last year was $60,000. The company paid preferred
dividends of $10,000 and its average common stockholders' equity was $480,000. The
company's return on common stockholders' equity for the year was closest to:
A) 12.5%
B) 10.4%
C) 2.1%
D) 14.6%
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............
Dividend payout ratio........
Earnings per share .............
15
30%
$5
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.
C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
38. Bucatini Corporation is contemplating the expansion of operations. This expansion
will generate a 11% return on the funds invested. To finance this operation, Bucatini
can either issue 12% bonds, issue 12% preferred stock, or issue common stock.
Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax
rate is 30%. In which of the financing options above is positive financial leverage
being generated?
A) none of the options generate positive financial leverage
B) the bonds
C) the common stock
D) the preferred stock
39. Consolo Corporation's net income for the most recent year was $809,000. A total of
100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $2.05 per share
and dividends on preferred stock were $1.80 per share. The earnings per share of
common stock is closest to:
A) $2.44
B) $8.09
C) $4.49
D) $6.04
$610,000
350,000
260,000
110,000
150,000
30,000
120,000
36,000
$ 84,000
The beginning balance of total assets was $560,000 and the ending balance was
$580,000. The return on total assets is closest to:
A) 18.4%
14.7%
26.3%
21.1%
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
Year 2
Year 1
$ 100,000 $ 100,000
300,000
300,000
370,000
370,000
480,000
390,000
$1,250,000 $1,160,000
Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in
total and dividends on preferred stock were $23,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A) 9.4%
B) 13.3%
C) 12.4%
D) 14.5%
45. Data from Baca Corporation's most recent balance sheet appear below:
Preferred stock .................................................
Common stock .................................................
Additional paid-in capitalcommon stock ......
Retained earnings ............................................
Total stockholders equity ...............................
$ 100,000
400,000
360,000
580,000
$1,440,000
A total of 400,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A) $3.35
B) $5.00
C) $1.90
D) $3.60
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12
C) 9.40
D) 1.12
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
$150,000
$250,000
$400,000
53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$630,000, its total current liabilities are $230,000, its long-term liabilities are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:
A) 0.62
B) 0.59
C) 1.70
D) 0.79
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash ...................................
Marketable securities .........
Accounts receivable ..........
Inventory ...........................
Prepaid expenses ...............
Current liabilities ...............
$12,000
$29,000
$37,000
$51,000
$20,000
$115,000
56. Data from Millier Corporation's most recent balance sheet and income statement
58. Data from Buker Corporation's most recent balance sheet and income statement
appear below:
$87,000
$49,000
$38,000
$11,000
$27,000
$760,000
$570,000
$190,000