Answer Choices:
a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
b. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
c. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder’s viewpoint, than the return on total assets (ROA).
d. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth.
e. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A’s total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin.
Answer:
b
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Consider each of the following bonds: Bond A: 8-year maturity with a 7% annual coupon. Bond B: 10-year maturity with a 9% annual coupon. Bond C: 12-year maturity with a zero coupon. Each bond has a face value of $1,000 and a yield to maturity of 8%. Which of the following statements is NOT correct? Bond A sells at a discount, while Bond B sells at a premium. If the yield to maturity on each bond falls to 7%, Bond C will have the largest percentage increase in its price. Bond C has the most reinvestment risk. Bond C has the most price risk. If the yield to maturity is constant, the price of Bond A will continue to increase over its life until it finally sells at par.
Answer:
Options:
Question: Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:
Answer Choices:
a. Real risk-free rate differences.
b. Tax effects.
c. Default and liquidity risk differences.
d. Maturity risk differences.
e. Inflation differences.
Answer:
c. Default and liquidity risk differences.
Question: Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
Answer:
Options:
Question: A loss incurred by a corporation
Answer Choices:
a. Must be carried forward unless the company has had 2 loss years in a row.
b. Can be carried back 2 years, then carried forward up to 20 years following
the loss.
c. Can be carried back 5 years and forward 3 years.
d. Cannot be used to reduce taxes in other years except with special permission from the IRS.
e. Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.
Answer:
b. Can be carried back 2 years, then carried forward up to 20 years following the loss.
Question: Below is the common equity section (in millions) of Timeless Technology’s last two year-end balance sheets: Common stock 2014 – $2,000 2013 – $1,000
Answer:
Options:
Question: The next-to-last line on the income statement shows the firm’s earnings, while the last line shows the dividends the firm issues.
Answer:
Options:
Question: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
Answer:
Options
Question: Other things held constant, firms that use assets that can be sold easily (like trucks) tend to use more debt than firms whose assets are harder to sell (like those engaged in research and development).
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
c. Common equity includes common stock and retained earnings, less accumulated depreciation.
d. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends.
e. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer:
b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
Question: Which of the following statements is most correct?
Answer Choices:
a. Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders.
b. 70% of the interest received by corporations is excluded from taxable income.
c. 70% of the dividends received by corporations is excluded from taxable income.
d. Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain.
e. The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.
Answer:
c. 70% of the dividends received by corporations is excluded from taxable income.
Question: The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. However, only the CAPM method always provides an accurate and reliable estimate.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: The “over-the-counter” market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? If interest rates increase, a 10-year zero coupon bond’s price will drop by a greater percentage than will a 10-year, 8% coupon bond. One nice thing about zero coupon bonds is that individual investors do not have to pay any taxes on a zero coupon bond until it matures, even if they are not holding the bonds as part of a tax-deferred account. If a bond with a sinking fund provision has a yield to maturity greater than its coupon rate, the issuing company would prefer to comply with the sinking fund by calling the bonds in at par rather than buying the bonds back in the open market. Because of the IRS’s tax treatment of zero coupon bonds, pension funds and other tax-exempt entities rarely, if ever, invest in zero coupon bonds. Interest must be paid on a zero coupon bond’s accrued value, but while the first year’s interest is taxable at the ordinary income tax rate, subsequent years are taxed at the long-term capital gains rate (since they are received after more than a year).
Answer:
Options: