1. A company's capital structure refers to
a. the relative proportion of liabilities and stockholders equity of the company.
b. how assets are capitalized for valuation on the balance sheet.
c. the relative proportion of paid-in capital and retained earnings in the balance sheet.
d. the relative proportion of short-term and long-term debt in the balance sheet.
2. A measure of the financial risk of a company is to look at its
a. accounts receivable turnover ratio.
b. gross margin ratio.
c. debt-to-equity ratio.
d. inventory turnover ratio.
3. In its simplest form, the earnings per share computation is determined by dividing net income by the
a. number of common stock shares authorized at the end of the accounting period.
b. number of common stock shares outstanding at the beginning of the accounting period.
c. number of common stock shares outstanding at the end of the accounting period.
d. average number of common stock shares outstanding during the accounting period.
4. Which of the following is not a term the buyer and seller must agree on in a merchandise purchase transaction?
a. Who pays freight and shipping charges?
b. At what location(s) will the delivery be made?
c. What inventory method will be used by the purchaser?
d. What discount is offered if the invoice is paid promptly?
5. If cash discount terms for a purchase of merchandise are 1/10, n/30, the effective interest rate of not paying the invoice within the 10-day discount period is approximately
a. 1%
b. 10%
c. 18%
d. 36%
6. A major advantage of issuing bonds instead of common stock to expand operations is
a. dividends on capital stock are required to be paid annually.
b. interest on bonds is payable only if net income is earned.
c. interest on bonds is tax deductible.
d. dividends on capital stock are tax deductible.
7. Which of the following is not a common feature of a bond?
a. Face value of $1,000.
b. Par value set by the board of directors.
c. Fixed term, such as 10 or 20 years.
d. A fixed rate of interest to be paid.
8. The following selected data was taken from the records of the Grandon Company:
The return on equity for the Grandon Company before the expansion must have been:
a. 33.3%
b. 12.5%
c. 23.3%
d. 30.0%
9. The following selected data was taken from the records of the Grandon Company:
This expansion is considered low risk because it is made up of a small debt component. If instead the expansion were financed by $6,000,000 of bonds and $1,000,000 of common stock, the net income would have been
a. $1,680,000.
b. $3,000,000.
c. $2,030,000.
d. $1,530,000.
10. The following selected data was taken from the records of the Grandon Company:
This expansion is considered low risk because it is made up of a small debt component. If the expansion were instead financed by $6,000,000 of bonds and $1,000,000 of common stock, the new ROE for the Grandon Company would be
a. 22.56%
b. 51.75%
c. 18.67%
d. 42.00%
11. The Clements Company currently has income before interest and taxes of $600,000. The company needs to raise additional funds of $100,000 to replace some obsolete equipment. The company is trying to decide which alternative, borrowing or issuing stock, would provide the highest earnings per share for the stockholders. If the company borrowed $100,000 at 10 percent interest for the year, what would be the company's earnings per share? Assume a tax rate of 30 percent. Currently there are 10,000 shares of common stock outstanding.
a. $59.00 earnings per share
b. $41.30 earnings per share
c. $42.00 earnings per share
d. $37.80 earnings per share
12. The Clements Company currently has income before interest and taxes of $600,000. The company needs to raise additional funds of $100,000 to replace some obsolete equipment. The company is trying to decide which alternative, borrowing or issuing stock, would provide the highest earnings per share for the stockholders. If the company issued 1,000 additional shares of stock at $100 per share to raise the cash, what would be the company's earnings per share? Assume a tax rate of 30 percent. The company already has 10,000 shares of common stock outstanding. Assume the additional shares of stock are issued at the very beginning of the year.
a. $38.18 earnings per share
b. $37.55 earnings per share
c. $420.00 earnings per share
d. $36.88 earnings per share