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The correct answer for each question is indicated by a . I The market price of the common stock of Magnolia Company dropped from $50 to $42 per share. N The dividend paid per share remained unchanged. The company's dividend payout ratio would: C O R R E C T A)be unchanged. B)increase. C)decrease. D)be impossible to determine without more information. I Financial leverage is negative when: N C O R R E C T A)the return on total assets is less than the rate of return on common stockholders' equity. B)the return on total assets is less than the rate of return demanded by creditors. C)total liabilities are less than stockholders' equity. D)total liabilities are less than total assets.

C If Taurus Company converts a short-term note payable into a long-term note payable, this O transaction would: R

R E C T A)decrease the current ratio and decrease the acid-test ratio. B)decrease working capital and increase the current ratio. C)decrease working capital and decrease the current ratio. D)increase working capital and increase the current ratio. Which of the following accounts should be included in the calculation of the acid-test ratio? C O R R A) E B) C T C) D) Accounts Receivable yes yes no no A)Answer A B)Answer B C)Answer C D)Answer D The following data have been taken from Garrett Company's financial records for the current year: C O R R E C T Book value per share Dividend per share Earnings per share Market price per share A)1.67 to 1. $140 $ 12 $20 $180 Inventory no no yes yes Prepaid Expense yes no yes no

The price-earnings ratio is:

B)7.0 to 1. C)9.0 to 1. D)15.0 to 1. Feedback: Price-earnings ratio = Market price per share earrnings per share Price-earnings ratio = 180 20 = 9.0 to 1 C O R R E C T Collins Company's net income last year was $150,000 and its interest expense was $20,000. Total assets at the beginning of the year were $1,300,000 and total assets at the end of the year were $1,220,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:

A)11.9%. B)12.4%. C)13.0%. D)13.5%. Feedback: Return on total assets = [Net income + (Interest expense x (1 - Tax rate)] average total assets Return on total assets = [$150,000 + ($20,000 x (1 - .30)] [($1,300,000 + $1,220,000) 2] Return on total assets = ($150,000 + $14,000) $1,260,000 = 13.0% Selected financial data for Spelling Company appear below: I N C O R Common stock R E Preferred stock C T Retained earnings Account Balances End of Year $800,000 250,000 370,000 Beginning of Year $600,000 240,000 150,000

During the year, the company paid dividends of $20,000 on its preferred stock. The company's net income for the year was $240,000. The company's return on common stockholders' equity for the

year is closest to: A)17%. B)19%. C)23%. D)25%. Feedback: Return on common stockholders' equity = (Net income - Preferred dividends) average common stockholders' equity Return on common stockholders' equity = ($240,000 - $20,000) [(($800,000 + $370,000) + ($600,000 + $150,000)) 2] Return on common stockholders' equity = $220,000 [(($1,170,000 + $750,000) 2] Return on common stockholders' equity = $220,000 $960,000 = 22.92% The following account balances have been provided for the end of the most recent year: Total assets C O Total common stock R R E Total preferred stock C T Total stockholders' equity A)$20. B)$22. C)$25. D)$28. Feedback: Book value per share of common stock = Common stockholders' equity number of shares of common stock outstanding Book value per share of common stock = (Total stockholders' equity - Preferred stock) number of shares of common stock outstanding Book value per share of common stock = ($240,000 - $20,000) $10,000 = $22 $300,000 $100,000 $20,000 $240,000 (10,000 shares) (2,000 shares)

The book value per share of common stock is:

C Selected year-end data for the Melbourne Company are presented below: O Acid-test ratio 2.5 to 1 R

R E C T

Cost of goods sold Current liabilities Current ratio

$1,000,000 $1,200,000 3.0 to 1

The company has no prepaid expenses and inventories remained unchanged during the year. Based on these data, the company's inventory turnover ratio for the year was closest to: A)1.20 times. B)1.67 times. C)2.33 times. D)2.40 times. Feedback: First, determine the amount of current assets using the current ratio as follows: Current ratio = Current assets current liabilities 3.0 = Current assets &1,200,000 Current assets = $3,600,000 Next, determine the amount of quick assets using the acid-test (or quick) ratio as follows: Acid-test ratio = Quick assets current liabilities 2.5 = Quick assets $1,200,000 Quick assets = $3,000,000 Since there are no prepaid expenses in this situation, inventories would be the difference between current assets and quick assets as follows: Inventory = Current assets - Quick assets Inventory = $3,600,000 - $3,000,000 = $600,000 Finally, compute the inventory turnover ratio as follows: Inventory turnover ratio = Cost of goods sold average inventories Inventory turnover ratio = $1,000,000 [($600,000 + $600,000) 2] Inventory turnover ratio = $1,000,000 $600,000 = 1.67 times

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C Sidney Company had $360,000 in sales on account last year. The beginning accounts receivable O balance was $20,000 and the ending accounts receivable balance was $36,000. The company's R average collection period (age of receivables) was closest to:

R E C T A)20.28 days. B)28.39 days. C)36.50 days. D)56.78 days. Feedback: First, calculate the accounts receivable turnover as follows: Accounts receivable turnover = Sales average accounts receivable Accounts receivable turnover = $360,000 [($20,000 + $36,000) 2] Accounts receivable turnover = $360,000 $28,000 = 12.857 Then, calculate the average collection period as follows: Average collection period = 365 days accounts receivable turnover Average collection period = 365 12.857 = 28.389