QUESTION: 1593

A firm has convertible bonds, preferred equity, common equity and straight bonds in its capital structure. Its net income equals 7,800. The interest payments on straight debt equal 423 and that on convertible debt equals 680. The preferred equity holders received 220 in dividends. If the weighted number of shares for Diluted EPS equals 1,300 and the firm is in the 40% tax bracket, the Diluted EPS equals _________. Assume the convertibles are dilutive.

5.31
6.14
5.52
6.35

Answer(s): B

Explanation:

The earnings available for distribution amongst common stock holders and convertible bond holders equals Net income - preferred dividends + interest payments on convertible net of taxes. Therefore, earnings in the numerator = 7,800 - 220 +680*(1-40%) = 7,988. The Diluted EPS then equals 7,988/1,300 = 6.14.

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QUESTION: 1594

Which of the following is usually not a feature of cumulative preferred stock?

Has priority over common stock with regard to assets.
Has priority over common stock with regard to earnings.
None of these answers.
Has the right to receive dividends in arrears before common stock dividends can be paid.
Has voting rights.

Answer(s): E

Explanation:

Preferred stock does not usually have voting rights. Preferred shareholders are usually given the right to vote for directors only if the company has not paid the preferred dividend for a specified period of time, such as 10 quarters.

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QUESTION: 1595

A firm's ROE equals 47%. Its financial leverage equals 1.8 and its asset turnover is 0.8. If the firm's total net sales equal $1.35 million, its net income equals ________.

1,427,625
440,625
352,500
282,000

Answer(s): B

Explanation:

ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (net income/sales)*(asset turnover)*(financial leverage) Therefore, net income = 0.47*1.35/(0.8*1.8) million = 440,625.

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QUESTION: 1596

An increase in the LIFO reserves implies which of the following?

Prices may have risen.
II. More goods might have been sold than purchased.
III. Firm may have changed inventory accounting from FIFO to LIFO.
IV. The firm may have indulged in excess purchasing to reduce taxes.
II, III & IV
I & II
I & IV
none of them

Answer(s): C

Explanation:

The LIFO Reserve equals the difference in the inventory value under FIFO and under LIFO. This reserve will increase if either prices have risen sufficiently to cause a high ending inventory value or if the firm purchased more goods than it sold in times of rising prices. Note that II represents a LIFO liquidation, not an increase in the reserves. III does not lead to a change in LIFO reserves. Finally, remember that IV is one way firms using LIFO can manipulate earnings and taxes, by changing the purchasing behavior at year-end.

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QUESTION: 1593

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QUESTION: 1594

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QUESTION: 1595

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QUESTION: 1596

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