SS #8 Review

What is contra account? Amtrak Wrote: ------------------------------------------------------- > Yea, I see that now…I meant shareholder’s equity > before (pref, cs, add. PIC, RE and Treasury Stock) > and I forgot that Treasury Stock is a contra > account. Thanks for the help!

Equity =- 40%, Total Debt = 100%-40% = 60% Total Debt to Equity Ratio = 60/40=1.5 ? > What is Delta’s total-debt-to-equity ratio? > > > A) 1.0. > > B) 1.5. > > C) 2.0. > > D) 2.5.

Given the following information about a firm: Net Sales = $1,000 Cost of Goods Sold = $600 Operating Expenses = $200 Interest Expenses = $50 Tax Rate = 34% What are the gross and operating profit margins? Gross Operating Margin Operating Profit Margin A) 40% 20% B) 20% 15% C) 40% 10% D) 20% 10%

you are right, goel_ar. it is 1.5

Given the following income statement and balance sheet for a company: Balance Sheet Assets Year 2006 Year 2007 Cash 200 450 Accounts Receivable 600 660 Inventory 500 550 Total CA 1300 1660 Plant, prop. equip 1000 1580 Total Assets 2600 3240 Liabilities Accounts Payable 500 550 Long term debt 700 1052 Total liabilities 1200 1602 Equity Common Stock 400 538 Retained Earnings 1000 1100 Total Liabilities & Equity 2600 3240 Income Statement Sales 3000 Cost of Goods Sold (1000) Gross Profit 2000 SG&A 500 Interest Expense 151 EBT 1349 Taxes (30%) 405 Net Income 944 Which of the following is closest to the company’s return on equity (ROE)? A) 0.576. B) 0.292. C) 1.833. D) 0.752.

maratikus Wrote: ------------------------------------------------------- > Given the following information about a firm: > > Net Sales = $1,000 > Cost of Goods Sold = $600 > Operating Expenses = $200 > Interest Expenses = $50 > Tax Rate = 34% > What are the gross and operating profit margins? > > Gross Operating Margin Operating Profit Margin > > > A) 40% 20% > > > B) 20% 15% > > > C) 40% 10% > > > D) 20% 10% —answer should be A

maratikus Wrote: ------------------------------------------------------- > Given the following income statement and balance > sheet for a company: > > Balance Sheet > > Assets Year 2006 Year 2007 > Cash 200 450 > Accounts Receivable 600 660 > Inventory 500 550 > Total CA 1300 1660 > Plant, prop. equip 1000 1580 > Total Assets 2600 3240 > > Liabilities > Accounts Payable 500 550 > Long term debt 700 1052 > Total liabilities 1200 1602 > > Equity > Common Stock 400 538 > Retained Earnings 1000 1100 > Total Liabilities & Equity 2600 3240 > > > Income Statement > > Sales 3000 > Cost of Goods Sold (1000) > Gross Profit 2000 > SG&A 500 > Interest Expense 151 > EBT 1349 > Taxes (30%) 405 > Net Income 944 > > Which of the following is closest to the company’s > return on equity (ROE)? > > > A) 0.576. > > > B) 0.292. > > > C) 1.833. > > > D) 0.752. —answer is also A?

liaaba Wrote: ------------------------------------------------------- > maratikus Wrote: > -------------------------------------------------- > ----- > > Given the following information about a firm: > > […] > > > > Gross Operating Margin Operating Profit Margin > > > > > > > A) 40% 20% > > > > > > B) 20% 15% > > > > > > C) 40% 10% > > > > > > D) 20% 10% > > —answer should be A seconded.

liaaba Wrote: ------------------------------------------------------- > maratikus Wrote: > -------------------------------------------------- > ----- > > Given the following income statement and > balance > > sheet for a company: > > > > Balance Sheet > > > > Assets Year 2006 Year 2007 > > Cash 200 450 > > Accounts Receivable 600 660 > > Inventory 500 550 > > Total CA 1300 1660 > > Plant, prop. equip 1000 1580 > > Total Assets 2600 3240 > > > > Liabilities > > Accounts Payable 500 550 > > Long term debt 700 1052 > > Total liabilities 1200 1602 > > > > Equity > > Common Stock 400 538 > > Retained Earnings 1000 1100 > > Total Liabilities & Equity 2600 3240 > > > > > > Income Statement > > > > Sales 3000 > > Cost of Goods Sold (1000) > > Gross Profit 2000 > > SG&A 500 > > Interest Expense 151 > > EBT 1349 > > Taxes (30%) 405 > > Net Income 944 > > > > Which of the following is closest to the > company’s > > return on equity (ROE)? > > > > > > A) 0.576. > > > > > > B) 0.292. > > > > > > C) 1.833. > > > > > > D) 0.752. > > —answer is also A? liaaba, you’re too fast :slight_smile: I get 0.6215, i.e. A

The Gaffe Company had net income of $1,500,000. Gaffe paid preferred dividends of $5 on each of the 100,000 preferred shares. Each preferred share is convertible into 20 common shares. There are 1 million Gaffe common shares outstanding. In addition to the common and preferred stock, Gaffe has $25 million of 4 percent bonds outstanding. If Gaffe’s tax rate is 40 percent, what is it’s diluted earnings per share? A) $0.33. B) $1.00. C) $0.50. D) $1.50.

lola Wrote: ------------------------------------------------------- > liaaba Wrote: > -------------------------------------------------- > ----- > > maratikus Wrote: > > > -------------------------------------------------- > > > ----- > > > Given the following income statement and > > balance > > > sheet for a company: > > > > > > Balance Sheet > > > > > > Assets Year 2006 Year 2007 > > > Cash 200 450 > > > Accounts Receivable 600 660 > > > Inventory 500 550 > > > Total CA 1300 1660 > > > Plant, prop. equip 1000 1580 > > > Total Assets 2600 3240 > > > > > > Liabilities > > > Accounts Payable 500 550 > > > Long term debt 700 1052 > > > Total liabilities 1200 1602 > > > > > > Equity > > > Common Stock 400 538 > > > Retained Earnings 1000 1100 > > > Total Liabilities & Equity 2600 3240 > > > > > > > > > Income Statement > > > > > > Sales 3000 > > > Cost of Goods Sold (1000) > > > Gross Profit 2000 > > > SG&A 500 > > > Interest Expense 151 > > > EBT 1349 > > > Taxes (30%) 405 > > > Net Income 944 > > > > > > Which of the following is closest to the > > company’s > > > return on equity (ROE)? > > > > > > > > > A) 0.576. > > > > > > > > > B) 0.292. > > > > > > > > > C) 1.833. > > > > > > > > > D) 0.752. > > > > —answer is also A? > > liaaba, you’re too fast :slight_smile: I get 0.6215, i.e. A —nah, maratikus is faster, he pumped out 3 questions in no time assuming these questions were from schweser, for this one, if you use the yr end figure rather than the avg equity, then you’ll get 0.576, they probably assumed you’ll use the extended version and use the year end figures instead, typical schweser quality…

lola Wrote: ------------------------------------------------------- > The Gaffe Company had net income of $1,500,000. > Gaffe paid preferred dividends of $5 on each of > the 100,000 preferred shares. Each preferred share > is convertible into 20 common shares. There are 1 > million Gaffe common shares outstanding. In > addition to the common and preferred stock, Gaffe > has $25 million of 4 percent bonds outstanding. If > Gaffe’s tax rate is 40 percent, what is it’s > diluted earnings per share? > > A) $0.33. > > B) $1.00. > > C) $0.50. > > D) $1.50. —answer is C?

liabaa, that’s what I thought (I got $0.7/share), but here is Schweser’s answer: --------------------------- The correct answer was A. The preferred shares are convertible into 100,000 x 20 = 2 million common shares. They are dilutive since: Basic EPS : $1,000,000 / 1,000,000 = $1.00 Diluted EPS : = $1,500,000 / 3,000,000 = $0.50 which is less. --------- it seems that they deduct the preferred dividends from NI in the numberator, even though the pref shares are dilutive, or more like they fail to add back the income that commons are now receiving since there are no more pref shares. Oddly enough, they do the same thing on their Video lectures. Anyone else seen this?

lola Wrote: ------------------------------------------------------- > liabaa, that’s what I thought (I got $0.7/share), > but here is Schweser’s answer: > > --------------------------- > > The correct answer was A. > > The preferred shares are convertible into 100,000 > x 20 = 2 million common shares. They are dilutive > since: > > Basic EPS : > > $1,000,000 / 1,000,000 > = $1.00 > > > Diluted EPS : > = > $1,500,000 / 3,000,000 > = $0.50 which is less. > ----hold on, is this their answer? didn’t they get 0.5?..or is this your calculation? > --------- > > it seems that they deduct the preferred dividends > from NI in the numberator, even though the pref > shares are dilutive, or more like they fail to add > back the income that commons are now receiving > since there are no more pref shares. Oddly enough, > they do the same thing on their Video lectures. > Anyone else seen this?

$0.5 is their calc. I got $0.7 b/c I added the interest for servicing the debt since they’re no longer paying it, as well as the pref dividends, since there’s no more pref stock and that goes to the common shareholders now. Apparently they didn’t add the pref dividends.

lola Wrote: ------------------------------------------------------- > $0.5 is their calc. > > I got $0.7 b/c I added the interest for servicing > the debt since they’re no longer paying it, as > well as the pref dividends, since there’s no more > pref stock and that goes to the common > shareholders now. Apparently they didn’t add the > pref dividends. —they would still be paying interest, those bonds are not convertible, they’re just there to confuse you if they calculated 0.5, then why is A is answer? A is 0.33…C is 0.5, which is what I got

shoot, I always forget to check if the securities are dilutive. Sorry, the answer is C: $0.5. I searched for the question in a different way and they shift the answers around every time you see it. thanks, liaaba.

Based on the following data, how many shares of common stock should be used to calculate diluted earnings per share? Net income of $1,500,000, tax retention rate of 60% 1,000,000 shares of common are outstanding at the beginning of the year. 10,000, 6% convertible bonds with each bond convertible into 20 shares of common stock were issued at par ($100) on June 30th of this year. The firm has 100,000 warrants outstanding all year with an exercise price of $25 per share. The average stock price for the period is $20, and the ending stock price is $30. A) 1,100,000. B) 1,200,000. C) 1,000,000. D) 1,016,667.

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lola Wrote: ------------------------------------------------------- > Based on the following data, how many shares of > common stock should be used to calculate diluted > earnings per share? > > Net income of $1,500,000, tax retention rate of > 60% > 1,000,000 shares of common are outstanding at the > beginning of the year. > 10,000, 6% convertible bonds with each bond > convertible into 20 shares of common stock were > issued at par ($100) on June 30th of this year. > The firm has 100,000 warrants outstanding all year > with an exercise price of $25 per share. > The average stock price for the period is $20, and > the ending stock price is $30. > > A) 1,100,000. > > B) 1,200,000. > > C) 1,000,000. > > D) 1,016,667. —answer should be A?