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Price earnings ratio, earnings per share & acid test ratio

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1. 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.

2. 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.

3. Ardor Company's net income last year was $500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to:
a. $3.33
b. $3.19
c. $2.33
d. $3.47

4. Richmond Company has 100,000 shares of $10 par value common stock issued and outstanding. Total stockholders' equity is $2,800,000 and net income for the year is $800,000. During the year Richmond paid $3.00 per share in dividends on its common stock. The market value of Richmond's common stock is $24. What is the price-earnings ratio?
a. 3.0
b. 3.5
c. 4.8
d. 8.0

5. Perkins Company estimates that an investment of $500,000 would be needed to produce and sell 25,000 units of Product A each year. At this level of activity, the unit product cost would be $40. Selling and administrative expenses would total $300,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 20% rate of return on investment is desired, then the required markup for Product A would be:
a. 10%
b. 20%
c. 30%
d. 40%

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Solution Summary

Answer contains calculation of return on equity,return on assets,acid test ratio,earnings per share,price earnings ratio,mark up under absorption costing.