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Chapter 8

Terms in this set (80)

Stockholders in a publicly held corporation have limited liability
True
Corporate retained earnings are taxed on the individual investors federal income form
False
Both corporate earnings and cash dividends received by stockholders are taxed by the federal government
True
Cumulative voting gives more power to minority stockholders
True
Some firms have more than one class of common stock
True
If a firm retains earnings, total equity increases
True
If a firm operates at a loss its retained earnings are decresed
True
The total payout ratio is dividends divided by earnings
True
Dividend increases usually occur prior to an increase in retained earnings
False
Managements are often reluctant to reduce dividends because reductions may be viewed as indicating financial weakness
True
Cash dividends are subject to federal income taxes
True
If stockholders receive dividends in their traditional individual retirement account, the income tax is deferred
False
If an investor buys stock on the ex-dividend date that person will not receive the dividend
True
The price of a stock general adjusts downward for the distribution of dividends
True
Stock dividends reduce the firms total equity
False
Stock dividends increase the firms cash
False
A two for one split doubles the number of shares and their price
False
Stock splits and stock dividends increase the earning capacity of the firm
False
A two for one reverse split increases the stocks price but not its total value
True
Repurchases of shares may be viewed as an alternative to paying cash dividends
True
A major disadvantage associated with dividend reinvestment plans is forced saving
True
A higher payout ratio implies a lower growth rate
True
Preferred stock is legally equity and represents ownersship
True
Since preferred stock represents equity, it generally has the right to vote
False
Preferred stock pays a fixed amount of interest
False
Preferred stock dividends are usually cumulative
True
The current ratio and the quick ratio are measures of asset usage
False
The quick ratio excludes inventory, plant, and equipment
True
The quick ratio is a better measure of liquidity than the current ratio for manufacturers
True
An inventory turnover of 3.0 suggests that inventory is sold every four months
True
If inventory is sold for cash, inventory turnover is increased, but inventory turnover is not affected if inventory is sold on credit
False
If accounts receivable are collected more rapidly, the average collection period (days sales outstanding) is reduced
True
Coverage ratios may be used to measure the safety of debt and other fixed obligations
True
The gross profit margin on sales tends to exceed the operating profit margins on sales
True
The return on assets employs operating income instead of net income
False
The return on equity measures earnings before interest and taxes
False
The proportion of a firms assets that are financed by debt is measured by the debt ratio
True
An increase in retained earnings will increase the debt to equity ratio
False
An increase in assets financed by equity increases the debt ratio
False
The greater the numerical value of the debt ratio, the riskier the firm
True
Firms with too much debt are undercapitalized
True
The more financially leveraged a firm, the smaller is its debt ratio
False
When a firm makes a profitable sale, its total assets increase
True
If the ratio of debt to equity increases, the proportion of assets financed by debt is increased
True
The net profit margin increases as the firms interest expense declines
True
Cash flow depends on depreciation as well as the firms earnings
True
Lower depreciation increases earnings and cash flow
False
Lower cash flow may be the result of higher depreciation expense
False
An increase in an asset is a cash flow
False
Advantages of the corporate form of business include
a. limited liability for stockholders
b. avoidance of state taxation
c. limited life
d. deductibility of dividends
A
Stockholders generally have which of the following
rights?
1. right to vote
2. right to share in the firm's earnings
3. right to sell the stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
D
Cumulative voting permits a stockholder to
a. collect extra dividends
b. vote all the shares for one individual
c. cast the total number of votes for one individual
d. vote by proxy
C
Earnings are
a. retained
b. distributed
c. invested
d. retained and/or distributed
D
Pre emptive rights permit stockholders to
a. collect dividends before they are reinvested
b. participate in dividend reinvestment plans
c. maintain the proportionate share of ownership
d. vote their shares
C
Cash dividends
1. are paid from earnings
2. increase the capacity of the firm to grow
3. reduce the firm's assets
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
B
Dividend policy depends on
1. the firm's earnings
2. investment opportunities available to the firm
3. corporate income taxes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
A
Stock dividends increase
a. the number of shares outstanding
b. the firm's assets
c. the firm's equity
d. the stock's price
A
Stock dividends cause
a. the price of a share of stock to rise
b. the price of a share of stock to fall
c. the value of the firm to rise
d. the value of the firm to fall
B
Which of the following occurs when a stock is split
two for one?
a. the price of the stock decreases
b. the firm's assets decrease
c. the firm's liabilities decrease
d. the firm's equity decreases
A
Which of the following occurs when a 10 percent
stock dividend is paid?
a. the firm's retained earnings decrease
b. the firm's equity is increased
c. the stock's par value is decreased
d. the stock's price is increased
A
If a firm has substantial excess cash, it may
1. repurchase some of its shares
2. increase its cash dividends
3. increase its liabilities
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
A
Dividend reinvestment plans offer which advantages?
1. deferment of federal income taxes
2. a convenient means to accumulate shares
3. dollar cost averaging
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
C
Preferred stock generally pays
a. a variable dividend
b. a fixed dividend
c. a stock dividend
d. no dividend
B
Preferred stock and long term bonds are similar
because
a. they both have voting power
b. interest and dividend payments are fixed
c. interest and dividend payments are legal
obligations
d. interest and dividend payments are tax deductible
expenses
B
Preferred stock dividends are
1. a legal obligation
2. not a legal obligation
3. exempt from federal income taxation
4. not exempt from federal income taxation
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
D
Analysis of preferred stock uses
a. operating income (EBIT)
b. earnings after dividends to common stock
c. earnings after taxes
d. earnings after interest but before taxes
C
Earnings per preferred share are
a. earnings before interest and taxes
b. the ratio of earnings to number of preferred
shares
c. the ratio of EBIT to number of preferred shares
d. the ratio of preferred shares to common shares
B
The current ratio is unaffected by
a. using cash to retire an account payable
b. the collection of an account receivable
c. selling inventory for a profit
d. selling bonds and using the funds to
finance inventory
B
The quick ratio
a. excludes accounts payable
b. excludes accounts receivable
c. includes inventory
d. includes cash and cash equivalents
D
Inventory turnover may increase if
a. the firm increases its accounts payable
b. the firm uses less debt financing
c. the firm increases its inventory
d. the firm lowers the prices of its goods
D
Days sales outstanding (average collection
period or receivables turnover) measures
a. the speed with which accounts payable are paid
b. the speed with which accounts receivable
are collected
c. the safety of accounts receivable
d. the safety of accounts payable
B
Coverage ratios measure a firm's
a. ability to use debt financing
b. use of plant and equipment
c. ability to cover (i.e., sell) its inventory
d. ability to meet fixed payments such as interest
D
As the debt ratio increases,
1. fewer assets are debt financed
2. more assets are debt financed
3. the ratio of debt to equity increases
4. the ratio of debt to equity decreases
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
C
The return on equity
a. is the ratio of sales to equity
b. measures what the firm earns on assets
c. is the ratio of net income to equity
d. measures what the firm earns on sales
C
The debt ratio is a measure
1. of financial leverage
2. of the use of debt financing
3. of asset utilization
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
A
Creditors would prefer
1. a quick ratio of 1.2 to a quick ratio of 0.8
2. a quick ratio of 0.8 to a quick ratio of 1.2
3. days sales outstanding of 46 to a
days sales outstanding of 35
4. days sales outstanding of 35 to a
days sales outstanding of 46
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
B
Operating income is not affected by
a. depreciation
b. cost of goods sold
c. rent payments
d. interest earned
D
Which of the following has no impact on cash flow?
a. the firm's equity
b. depreciation expense
c. taxes paid
d. net income
A
Which of the following is a cash inflow?
a. distributing a stock dividend.
b. retiring an account payable
c. collecting an account receivable
d. paying property taxes
C
Which of the following is a cash outflow?
a. splitting the stock two for one
b. acquiring inventory
c. retaining earnings
d. switching from straight-line depreciation
to accelerated depreciation
B
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