On Jan 1, a firm had 700 stocks outstanding. On May 1, it issued 300 more shares. On October 1, it repurchased 100 shares. If the firm's net income was 12,000 and it paid a preferred dividend of 1,400, its reported EPS is ________.
Answer(s): D
For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares To calculate the weighted # of shares, note that 600 shares remained outstanding for 12 months, 100 shares for 9 months and 300 shares for 8 months. Therefore, weighted shares = 12/12*600 + 9/12*100 + 8/12*300 = 875. EPS = (12,000 - 1,400)/875 = 12.11.
Which of the following is/are true about pension plans?
Answer(s): C
In a defined benefit contribution plan, the employee makes definite contributions to the pension plan from the regular salary. Investment of these contributions is at the discretion of the employee and the size of the benefits paid out depends upon the total contributions made and the fund performance. Thus, in this plan, the risk of pension plan performance is borne by the employee and not the employer.
Regarding financial accounting for public companies, the role of the SEC as currently practiced is to
The SEC has authority to regulate external financial reporting. However, its role is to promote disclosure rather than to exercise its power to establish accounting recognition and measurement principles. Its objective is to allow the accounting profession (through FASB) to establish accounting principles.
Which of the following methods is the best way of conducting a comparative financial statement analysis?
An index-number trend series analysis is quite useful when comparing financial statements that cover more than two or three periods with a year-to-year change analysis. The year-to-year change analysis method can be cumbersome when attempting to compare three or more periods.
A firm's financial statements reveal the following data:operating profit margin 41%interest expense ratio 4.2%debt-to-equity ratio 0.45total asset turnover 1.6tax rate 45%The firm's ROE equals ________.
Answer(s): B
ROE = Net income/EquityNow, Net Income = (Operating profits - interest expense)*(1 - tax rate) Therefore, ROE = (Operating profits/equity - interest expense/equity) *(1 - tax rate) interest expense/equity = (interest expense/assets)*(assets/equity) = interest expense ratio*(1+debt/equity) = 4.2%*(1+0.45) = 6.09% Operating profits/equity = (Operating profits/sales)*(sales/assets)*(assets/equity) = 41%*1.6*1.45 = 95.12% Thus, ROE = (95.12% - 6.09%)*(1-45%) = 48.97%
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