Question

. Using financial leverage: All of the following are correct except: a. results in a fixed...

. Using financial leverage: All of the following are correct except:

a.

results in a fixed charge that may materially affect earnings available to common shareholders.

b.

decreases risk to the firm as interest rates rise and returns to shareholders decrease.

c.

may be favorable when earnings generated by use of borrowed funds exceeds borrowing costs.

d.

requires reviewing planned business transactions for the potential impact they may have on operating income and the ability to cover fixed interest charges.

e.   

increases risk to the firm as interest rates rise and returns to shareholders decrease

_____2. The following information is available for Gumball Company:

                                                                                                            20XX

             Market price per share of common stock                           $145.00

                Diluted Earnings per share of common stock                     $     2.85

    Basic Earnings per share of common stock                         $     2.79

Dividends per share of common stock                                $    1.85

   

Calculate:

  1. Price-earnings ratio_________________

  1. Dividend payout ratio______________

  1. Dividend yield ________________

  1. T or F   The price/earnings ratio is used to assess the past earnings performance of the firm. (If false, identify and correct the error)

  1. ______3. a. _____ T or F Stock options are recorded as compensation expense over the periods during which the employee provides associated service to vest in the options

  1.   b. _____ T or F Stock appreciation rights are a contractual commitment to provide the employee with compensation at the present date. Compensation is tied to current stock price.

_____4. The following data were gathered from the annual report of NICK, Inc.

Market price per share

$  58.00

Number of common shares

14,000

Preferred stock, 4% $100 par

$ 10,000

Total Stockholders’ Equity

$375,000

I. The book value per share is:

a.

$0.00

b.

$36.50

c.

$26.07

d.

$26.78

e.

$58.00
    1. II._____T or F   Book value per share differs from market price per share. Book value measures the future potential of the firm and market value is based on historical values and financial reporting concepts reported in the income statement.

    _____5. Jasper Corp, has the following Stockholders’ Equity account balances and activity for Year 2.

    Net income

    $14,655,000

    Retained earnings

    $16,500,000

    Preferred stock shares outstanding

    2,000

    Common stock shares outstanding at January 1, Year 2

    7,375,000

    Additional Common shares issued at July 1, Year 2

    30,000

    4-for-1 stock split at December 31, Year 2

    Preferred Dividends

    $10,000

    Common Dividends

    $75,000

    Year 1 EPS

    $3.60

    Earnings per share =         __________________ / ___________________* = ________

    * Compute Denominator: Weighted average common shares outstanding

    Date

    Shares

    Portion of year

    Weighted Average Shares

    January 1, Y2

    7,375,000

    July 1, Y2

    Weighted Average December 31 before split

    Stock split 4-for-1

    *Total Weighted Average, 12/31/Y2

    Note: Year 1 restated

    $3.60 / 4 =_____

    Is performance better or worse (circle) in Year 2 $ _____ as compared to Year 1 $ _____ ? Why?

    Business   Accounting   
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    Homework Answers

    Answer #1

    Only first 4 parts are solved.

    Answer to Question 1

    Financial leverage is computed as "Operating income before interest / Income after interest". So, when interest rate rises and earnings reduces, there is high risk when financial leverage exists.

    Hence, The statement (b) is not correct.

    Answer to Question 2

    Price earning ratio = MPS / Basic EPS = 145/2.79 = 51.97 times

    Dividend payout ratio = DPS / Basic EPS = 1.85/2.79 = 66.31%

    Dividend Yield = DPS / MPS = 1.85/145 = 1.28%

    Price earning ratio is used to assess future performance of the company. The given statement is False.

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