QUESTION: 2121

The following data have been obtained from a firm's financial statements:

operating profit margin 34%
interest expenses 465
depreciation expenses 123
debt-to-equity ratio 0.60
total assets 2,375
total sales 4,109

tax rate 37%

The firm's ROE equals ________.

19.17%
22.88%
56.32%
34.44%

Answer(s): D

Explanation:

The answer to this requires you to know the extended duPont system. However, you should NOT rely on your memory for complex formulas. Rather, start from the primary quantity needed (ROE here) and use some basic definitions and common sense. This approach will ensure that you are not caught by surprise during the exam.
You need to calculate net income and total equity to obtain ROE, since ROE = net income/total equity.
Operating profits equal earnings before depreciation, interest and taxes (EBDIT). The operating profit margin expresses EBDIT as a fraction of total sales and indicates the level of profitability of the firm. In this case, EBDIT = 4109*34% = 1,397. Since interest expenses are taxdeductible, EBT = 1,397 - interest expense - depreciation = 1,397 - 465 - 123 = 809. Therefore, net income after taxes = 809*(1 - 37%) = 510. Also, debt + equity = total assets and debt = 0.6*equity (given). So total assets = 2,375 = 1.6*equity, giving equity = 2,375/1.6 = 1,484. Finally, ROE = 510/1484 = 34.34%.

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QUESTION: 2122

A defined benefit pension plan:

pays defined benefits for a certain period after retirement.
disburses benefits based on the returns on the fund's investments.
promises to pay retirees a specific income stream.
none of these answers.

Answer(s): C

Explanation:

In a defined benefit pension plan, the retirement benefits are "predefined." The employer commits to providing the benefits regardless of the performance of the pension plan. Thus, in this plan, the risk of pension plan performance is borne by the employer and not the employee.

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QUESTION: 2123

At the end of a fiscal period, any revenue that has been earned but the company has not received payment for should be debited to an appropriate

asset account
expense account
liability account
revenue account

Answer(s): A

Explanation:

Revenue should be recognized in the period in which it is earned and is credited to the appropriate revenue account. If payment has not been received, then a debit entry to Accounts Receivable must be booked.

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QUESTION: 2124

Which of the following is/are FALSE about Basic EPS and Diluted EPS?

Basic EPS excludes anti-dilutive securities but Diluted EPS must include these.
II. Basic EPS ignores instruments like convertible bonds and warrants but Diluted EPS does not.
III. The Treasury stock method, when applied to Basic EPS, compares the average stock price during the period to the strike price in determining conversion.
III only
I & III
I, II & III
II only

Answer(s): B

Explanation:

Note that the questions asks for false statements. (I) is false since both methods exclude anti-dilutive securities from computations. Further, since the Basic EPS ignores all potentially dilutive securities and takes into account only simple capital structure instruments (stocks, bonds, preferred equity), it has no need for the Treasury Stock method i.e. the Treasury stock method is never used in the computation of Basic EPS.

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QUESTION: 2121

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QUESTION: 2122

Explanation:

QUESTION: 2123

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QUESTION: 2124

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