QUESTION: 1709

New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Basic EPS equals ________.

8.5
none of these answers
6.62
10.4

Answer(s): C

Explanation:

The preferred dividends = 100,000*5%*100*9/12 = 375,000 (they were outstanding for 9 months). Therefore, Basic EPS = (Net Income - Preferred dividends)/weighted # of common shares = (1,700,000 - 375,000)/200,000 = 6.62

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QUESTION: 1710

Dilutive warrants are ________ included in the calculation of Diluted EPS.

never
often
always
sometimes

Answer(s): C

Explanation:

Diluted EPS reflects all securities that are potential shares and which decrease earnings per share. Also remember that all anti-dilutive securities are ignored. A dilutive security, by definition, is one that decreases EPS. Therefore, dilutive warrants are always included in the calculation of Diluted EPS.

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QUESTION: 1711

Two otherwise identical firms, A and B, have one difference. A has a higher interest expense than B, arising from its higher reliance on debt financing. All other accounting statistics, including net sales and expenses are equal for the two firms. The return on total capital for firm A will be __________ that for firm B.

same as
insufficient information to answer the question
lower than
higher than

Answer(s): D

Explanation:

The return on total capital equals the net income before interest expense as a fraction of the average total capital invested. Therefore, if interest expenses were not tax deductible, the two firms would have exactly the same return on total capital. However, due to tax advantages of interest expenses, firm A will show a higher net income and hence, a higher return on capital.

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QUESTION: 1712

Where is Unearned Revenue reported in the financial statements?

liability section of the balance sheet
asset section of the balance sheet
operating expense section of the income statement
revenue section of the income statement

Answer(s): A

Explanation:

Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.

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Free CFA-Level-I Exam Braindumps (page: 428)

QUESTION: 1709

Explanation:

QUESTION: 1710

Explanation:

QUESTION: 1711

Explanation:

QUESTION: 1712

Explanation: