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Finance:Return on equity,financial leverage etc.

1.The ________ measures the return on owners' (both preferred and common stockholders) investment in the firm.

1. 1. return on total assets
2. 2. price/earnings ratio
3. 3. return on equity
4. 4. net profit margin

2.If Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then average purchases per day are ________ and the average payment period is ________.

1. 1. 833.3; 36.0
2. 2. 36.0; 833.3
3. 3. 821.9; 36.5
4. 4. 36.5; 821.9

3.________ is a term used to describe the magnification of risk and return introduced through the use of fixed cost financing such as preferred stock and long-term debt.

1. 1. Financial leverage
2. 2. Fixed-payment coverage
3. 3. Operating leverage
4. 4. The acid-test

4.If Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________.

1. 1. 10; 36.5
2. 2. 36.5; 10
3. 3. 36.0; 10
4. 4. 10; 36.0

5.Retained earnings on the balance sheet represents

1. 1. cash.
2. 2. the cumulative total of earnings reinvested in the firm.
3. 3. net profits after taxes minus preferred dividends.
4. 4. net profits after taxes.

6.The ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods.

1. 1. net profit margin
2. 2. earnings available to common shareholders
3. 3. gross profit margin
4. 4. operating profit margin

7.The ________ ratio may indicate poor collections procedures or a lax credit policy.

1. 1. average collection period
2. 2. quick
3. 3. average payment period
4. 4. inventory turnover

8.The two basic measures of liquidity are

1. 1. inventory turnover and current ratio.
2. 2. current ratio and total asset turnover.
3. 3. current ratio and quick ratio.
4. 4. gross profit margin and ROE.

9.The ________ ratio measures the firm's ability to pay contractual interest payments.

1. 1. debt
2. 2. times interest earned
3. 3. average payment period
4. 4. fixed-payment coverage

10. On December 31, 2006, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $335,000 for her accounting services. She had two employees: a bookkeeper and a clerical assistant. In addition to her monthly salary of $6,434, Ms. Chen paid annual salaries of $38,604 and $28,953 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $25,831 for the year. Expenses for office supplies, including postage, totaled $8,121 for the year. In addition, Ms. Chen spent $16,116 during the year on tax-deductible travel and entertainment associated with client visits and new business development. Lease payments for the office space rented (a tax-deductible expense) were $2,576 per month. Depreciation expense on the office furniture and fixtures was $14,770 for the year. During the year, Ms. Chen paid interest of $15,000 on the $120,000 borrowed to start the business. She paid an average tax rate of 30 percent during 2006.

a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2006 (round all answers to the nearest dollar).

Sales revenue
Salaries
Employment taxes and benefits
Supplies
Travel and entertainment
Lease expense
Depreciation expense
Total operating expense
Operating profits (EBIT)
Interest expense
Net profit before taxes
Taxes (rate = 30%)
Net profit after taxes

11. Philagem, Inc., ended 2006 with a net profit before taxes of $205,000. The company is subject to a 40% tax rate and must pay $32,000 in preferred stock dividends before distributing any earnings on the 85,000 shares of common stock currently outstanding

What is the amount of taxes ?
What is the net profit after tax?
Calculate the earnings available to common stockholders.
Calculate Philagem's 2006 earnings per share (EPS).

12. Beck Corporation has one issue of preferred stock and one issue of common stock outstanding. The preferred stock account has $125,000, the common stock account has $375,000 ($1.00 par, 375,000 shares outstanding), and the paid-in capital in excess of par account has $2,600,000.

What was the total amount of equity capital raised from the common stock issuance?
What was the original price per share when the firm issued its common stock?

13.Beck Corporation has one issue of preferred stock and one issue of common stock outstanding. The preferred stock account has $3,250,000, the common stock account has $590,000 ($.50 par, 1,180,000 shares outstanding), and the paid-in capital in excess of par account has $5,750,000.

What was the total amount of equity capital raised from the common stock issuance?
What was the original price per share when the firm issued its common stock?

Solution Summary

The problem set include questions of multiple choice nature on financial leverage,return on equity, average payment eriod etc.

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