Question 1

Net profit divided by the total number of shares outstanding provides:&#10;A) Profit margin per share&#10;B) Share return&#10;C) Capital gain per share&#10;D) Earnings yield&#10;E) Earnings per share

Accepted Answer

Net profit divided by the total number of shares outstanding provides earnings per share (EPS), which measures the profitability of a company on a per-share basis. It is used by investors to evaluate the company's financial health and to determine its value.

Question 2

A high Price/Earnings ratio for a company's share could signify:&#10;A) The company has a high debt to equity ratio&#10;B) The stock market perceives relatively high risk in the share&#10;C) The stock market perceives low potential for share price growth&#10;D) Dividends are low relative to the share price&#10;E) The stock market believes EPS is going to increase.

Accepted Answer

A high Price/Earnings ratio indicates that the market believes the company's earnings per share (EPS) will increase in the future. This could be due to factors such as strong revenue growth, cost-cutting measures, or new product launches. A high debt to equity ratio (A) would not necessarily directly affect the P/E ratio, although it could indirectly affect the company's future earnings potential. The perception of risk (B) and potential for share price growth (C) may affect the P/E ratio, but a high ratio on its own does not necessarily indicate either of these factors. Dividends (D) are not directly related to the P/E ratio, although they can affect investor sentiment towards the stock.

Question 3

A high Price/Earnings ratio for a company's share could signify:&#10;A) The company has a high debt to equity ratio&#10;B) The stock market perceives relatively low risk in the share&#10;C) The stock market perceives low potential for share price growth&#10;D) Dividends are low relative to the share price&#10;E) The stock market believes EPS is going to decrease.

Accepted Answer

A high Price/Earnings ratio indicates that investors are willing to pay more per share for the company's earnings. This is usually a sign that the market believes the company has strong growth potential, which is perceived as a lower risk. Therefore, choice B is the best choice.

Question 4

A low Price/Earnings ratio could signify:&#10;A) A relatively low value of share earnings&#10;B) The stock market perceives relatively high risk in the share&#10;C) The stock market perceives a potential for high share price growth&#10;D) Dividends are low relative to the share price&#10;E) The stock market perceives the EPS to be relatively low.

Accepted Answer

A low Price/Earnings (P/E) ratio could indicate that the stock market perceives relatively high risk in the share. This is because a lower P/E ratio suggests that investors are not willing to pay a high price for each unit of earnings, possibly due to concerns about the company's future prospects, stability, or overall market conditions.

Question 5

The Stable Hotel Management Company has been consistently paying an annual dividend of $4 for many years. The market expects this annual dividend payment to continue well into the future. Analysts attribute a required rate of return of 10% for shareholders in the company. Based on the perpetuity formula, what is the value of the company's shares?

A) $38
B) $40
C) $42
D) $44
E) $46

Accepted Answer

According to the perpetuity formula, the value of the shares can be calculated as Dividend / Required Rate of Return. In this case, the value of the shares is $4 / 0.1 = $40. Therefore, the correct choice is B.

Question 6

The Immaculate hotel has a degree of operating leverage index of 2 and a degree of financial leverage of 2.5. If its room nights sold increased by 8%, by how much would you expect its earning per share to rise?

A) 32%
B) 34%
C) 36%
D) 38%
E) 40%

Accepted Answer

40%The total leverage effect can be calculated by multiplying the degree of operating leverage (DOL) by the degree of financial leverage (DFL), which is 2 * 2.5 = 5. Then, to find the expected increase in earnings per share, multiply this total leverage by the percentage increase in sales, which is 5 * 8% = 40%.

Deck 15: Other Managerial Finance Issues