Deck 8: Stock

Question 1

The ex-dividend date follows the date of record.

Answer 1

False

Question 2

Stock splits and stock dividends increase the earning capacity of the firm.

Answer 2

False

Question 3

Cumulative voting gives more power to minority stockholders.

Answer 3

True

Question 4

Managements are often reluctant to reduce dividends because reductions may be viewed as indicating financial weakness.

Question 5

Stock dividends reduce the firm's total equity.

Question 6

If an investor buys stock on the ex-dividend date, that individual will not receive the dividend.

Question 7

Corporate retained earnings are taxed on the individual investor's federal income form.

Question 8

Most stockholders of publicly held stock have pre-emptive rights.

Question 9

The payout ratio is dividends divided by earnings.

Question 10

If a firm operates at a loss, its retained earnings are decreased.

Question 11

Some firms have more than one class of common stock.

Question 12

Cash dividends are subject to federal income taxes.

Question 13

The price of a stock generally adjusts downward for the distribution of dividends.

Question 14

A two-for-one stock split doubles the number of shares and their price.

Question 15

The relationship between a firm and its state of incorporation is specified in the bylaws.

Question 16

Dividend increases usually occur prior to an increase in earnings.

Question 17

Stockholders in a publicly held corporation have limited liability.

Question 18

Stock dividends increase the firm's cash.

Question 19

Both corporate earnings and cash dividends received by stockholders are taxed by the federal government.

Question 20

If a firm retains earnings, total equity increases.

Question 21

A higher payout ratio implies a lower growth rate.

Question 22

If a cumulative preferred stock pays a dividend, it is said to be in arrears.

Question 23

An inventory turnover of 3.0 suggests that inventory is sold every four months.

Question 24

A major advantage associated with dividend reinvestment plans is forced saving.

Question 25

If accounts receivable are collected more rapidly, the average collection period (days sales outstanding)is reduced.

Question 26

A times-interest-earned of 0.9 means that interest will not be paid.

Question 27

The quick ratio is a better measure of liquidity than the current ratio for manufacturers.

Question 28

If the firm's current ratio exceeds 1:1 and the firm retires an account payable, the quick ratio increases.

Question 29

A one-for-two reverse split increases a stock's price but not its total value.

Question 30

If a firm's inventory turnover is 4 and days sales outstanding (average collection period)is 60, then it takes approximately five months for newly acquired inventory to generate cash.

Question 31

If accounts receivable are collected, the quick ratio is unaffected.

Question 32

Repurchases of shares may be viewed as an alternative to paying cash dividends.

Question 33

Dividend reinvestment plans are a means to postpone federal income tax on dividends.

Question 34

Preferred stock pays a fixed amount of interest.

Question 35

The current ratio and the quick ratio are measures of asset usage.

Question 36

The quick ratio excludes inventory, plant, and equipment.

Question 37

If inventory is sold for cash, inventory turnover is increased, but inventory turnover is not affected if inventory is sold on credit.

Question 38

Preferred stock is legally equity and represents ownership.

Question 39

Since preferred stock represents equity, the holders of the stock never have the right to vote.

Question 40

Preferred stock dividends are usually cumulative.

Question 41

The net profit margin increases as the firm's interest expense declines.

Question 42

Lower depreciation increases earnings and cash flow.

Question 43

Coverage ratios may be used to measure the safety of debt and other fixed obligations.

Question 44

The statement of cash flow places emphasis on management's ability to retire debt.

Question 45

The return on assets employs operating income instead of net income.

Question 46

An increase in retained earnings will increase the debt to equity ratio.

Question 47

The proportion of a firm's assets that are financed by debt is measured by the debt ratio.

Question 48

Firms with too much debt are undercapitalized.

Question 49

Cash flow depends on depreciation as well as the firm's earnings.

Question 50

Ratios may be used in both time-series and cross section types of analysis.

Question 51

If the ratio of debt to equity increases, the proportion of assets financed by debt is increased.

Question 52

The more financially leveraged a firm, the smaller is its debt ratio.

Question 53

An increase in an asset is a cash inflow.

Question 54

Advantages of the corporate form of business include

A)limited liability for stockholders
B)avoidance of state taxation
C)limited life
D)deductibility of dividends

Question 55

An increase in assets financed by equity increases the debt ratio.

Question 56

The return on equity measures earnings before interest and taxes.

Question 57

When a firm makes a profitable sale, its total assets increase.

Question 58

The gross profit margin on sales tends to exceed the operating profit margins on sales.

Question 59

Lower cash flow may be the result of higher depreciation expense.

Question 60

The greater the numerical value of the debt ratio, the riskier the firm.

Question 61

Preferred stock dividends are
1. a legal obligation
2. not a legal obligation
3. exempt from federal income taxation
4. not exempt from federal income taxation

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 62

Which of the following occurs when a 10 percent stock dividend is paid?

A)the firm's retained earnings decrease
B)the firm's equity is increased
C)the stock's par value is decreased
D)the stock's price is increased

Question 63

Issuing a stock dividend will immediately cause

A)the price of a share of stock to rise
B)the price of a share of stock to fall
C)the value of the firm to rise
D)the value of the firm to fall

Question 64

Dividend policy depends on
1. the firm's earnings
2. investment opportunities available to the firm
3. corporate income taxes

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 65

Preferred stock and long-term bonds are similar because

A)they both have voting power
B)interest and dividend payments are fixed
C)interest and dividend payments are legal obligations
D)interest and dividend payments are tax-deductible expenses

Question 66

Stock dividends increase

A)the number of shares outstanding
B)the firm's assets
C)the firm's equity
D)the stock's price

Question 67

The quick ratio

A)excludes accounts payable
B)excludes accounts receivable
C)includes inventory
D)includes cash and cash equivalents

Question 68

Cumulative voting permits a stockholder to

A)collect extra dividends
B)vote all the shares for one individual
C)cast the total number of votes for one individual
D)vote by proxy

Question 69

Earnings per preferred share are

A)earnings before interest and taxes
B)the ratio of earnings to number of preferred shares
C)the ratio of EBIT to number of preferred shares
D)the ratio of preferred shares to common shares

Question 70

Analysis of preferred stock uses

A)operating income (EBIT)
B)earnings after dividends to common stock
C)earnings after taxes
D)earnings after interest but before taxes

Question 71

The current ratio is unaffected by

A)using cash to retire an account payable
B)the collection of an account receivable
C)selling inventory for a profit
D)selling bonds and using the funds to finance inventory

Question 72

Preferred stock generally pays

A)a variable dividend
B)a fixed dividend
C)a stock dividend
D)no dividend

Question 73

Pre-emptive rights permit stockholders to

A)collect dividends before they are reinvested
B)participate in dividend reinvestment plans
C)maintain the proportionate share of ownership
D)vote their shares

Question 74

The procedure for the distribution of dividends does not include

A)the ex-dividend date
B)the date of record
C)the settlement date
D)the date of announcement

Question 75

Cash dividends
1. are paid from earnings
2. increase the capacity of the firm to grow
3. reduce the firm's assets

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 76

Which of the following immediately occurs when a stock is split two-for-one?

A)the price of the stock decreases
B)the firm's assets decrease
C)the firm's liabilities decrease
D)the firm's equity decreases

Question 77

Dividend reinvestment plans offer which advantages?
1. deferment of federal income taxes
2. a convenient means to accumulate shares
3. goodwill achieved by the firm by providing another service for its stockholders

A)1 and 2
B)1 and 3
C)2 and 3
D)all three

Question 78

Stockholders generally have which of the following rights?
1. right to vote
2. right to share in the firm's earnings
3. right to sell the stock

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 79

Earnings are

A)retained
B)distributed
C)invested
D)retained and/or distributed

Question 80

If a firm has substantial excess cash, it may
1. repurchase some of its shares
2. increase its cash dividends
3. increase its liabilities

A)1 and 2
B)1 and 3
C)2 and 3
D)only 2