Deck 1: Overview of Financial Statement Analysis

Question 1

What is your estimate of price per share using the dividend discount model at 12/31/05?

A) $20.62
B) $21.65
C) $23.56
D) $24.74

Answer 1

D

Question 2

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$$\begin{array} { | l | c | c | c | } \hline & 2004 & 2005 & 2006 \\\hline \text { Sales } & 100 & 120 & 135 \\\hline \text { Net Income } & 100 & 118 & 128 \\\hline \text { Total Assets } & 100 & 119 & 130 \\\hline\end{array}$$

-Which of the following ratios is not generally considered to be helpful in assessing short-term liquidity?

A) Acid test ratio
B) Current ratio
C) Days to collect receivables
D) Days goodwill held

Answer 2

Days goodwill held

Question 3

Following is some financial information for Dell Inc.
$$\begin{array} { | l | r | r | } \hline & { 2006 } & { 2005 } \\\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \\\hline \text { Net income } & 3,043 & 2,645 \\\hline \text { Total assets } & 23,215 & 19,311 \\\hline \text { Shareholder's equity } & 6,485 & 6,280 \\\hline \text { Cash flow from operations } & 5,310 & 3,670 \\\hline \text { Basic earnings per share } & 1.21 & 1.03 \\\hline \text { Book value per share } & 2.61 & 2.46 \\\hline \text { Closing stock price } & 33.44 & 23.86 \\\hline\end{array}$$

-What is Dell's asset turnover for 2006?

A) 2.12
B) 3.58
C) 3.65
D) 2.31

Answer 3

2.31

Question 4

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$$\begin{array} { | l | c | c | c | } \hline & 2004 & 2005 & 2006 \\\hline \text { Sales } & 100 & 120 & 135 \\\hline \text { Net Income } & 100 & 118 & 128 \\\hline \text { Total Assets } & 100 & 119 & 130 \\\hline\end{array}$$

-While determining the most profitable company from the given number of companies, which of the following would be the best indicator of relative profitability?

A) Highest net income
B) Highest retained earnings
C) Highest return on equity
D) Highest operating margin

Question 5

Following is some financial information for Dell Inc.
$$\begin{array} { | l | r | r | } \hline & { 2006 } & { 2005 } \\\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \\\hline \text { Net income } & 3,043 & 2,645 \\\hline \text { Total assets } & 23,215 & 19,311 \\\hline \text { Shareholder's equity } & 6,485 & 6,280 \\\hline \text { Cash flow from operations } & 5,310 & 3,670 \\\hline \text { Basic earnings per share } & 1.21 & 1.03 \\\hline \text { Book value per share } & 2.61 & 2.46 \\\hline \text { Closing stock price } & 33.44 & 23.86 \\\hline\end{array}$$

-What is Dell's profit margin for 2005?

A) 6.27%
B) 6.18%
C) 6.38%
D) 6.86%

Question 6

Wilco Company reports the following: $$\begin{array} { | l | c | c | } \hline & 2005 & 2004 \\\hline \text { Retained Earnings } & \$ 2,000,000 & \$ 1,300,000 \\\hline \text { Common Stock } & \$ 500,000 & \$ 500,000 \\\hline \text { Paid-in Capital } & \$ 3,000,000 & \$ 3,000,000 \\\hline \text { Net Income for year } & \$ 900,000 & \$ 400,000 \\\hline\end{array}$$ Dividend payout ratio for 2005 was:

A) 27%
B) 12%
C) 22.2%
D) Not determinable

Question 7

The Management Discussion and Analysis Section of the annual report:

A) is required by the SEC.
B) is optional but normally included in the annual report.
C) is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company.
D) is required by the SEC only if they have a qualified audit opinion.
You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.

Question 8

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$$\begin{array} { | l | c | c | c | } \hline & 2004 & 2005 & 2006 \\\hline \text { Sales } & 100 & 120 & 135 \\\hline \text { Net Income } & 100 & 118 & 128 \\\hline \text { Total Assets } & 100 & 119 & 130 \\\hline\end{array}$$

-Which of the following statements is incorrect?

A) Net Income in 2006 increased by 28% compared to 2004.
B) XYZ's net income to sales (return on sales) increased in 2006 compared to 2004.
C) XYZ's net income to sales (return on sales) decreased in 2006 compared to 2004.
D) Assets have increased over time.

Question 9

$371,700 + ( 58,900 \times 1.05 - ( .12 \times 371,700 ) )$ / $( .12 - .05 )$
_______________________________________________________________
$$25,000$$

-Which of the following is not a common tool used in financial statement analysis?

A) Random walk analysis
B) Ratio analysis
C) Common size statement analysis
D) Trend series analysis

Question 10

Following is some financial information for Dell Inc.
$$\begin{array} { | l | r | r | } \hline & { 2006 } & { 2005 } \\\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \\\hline \text { Net income } & 3,043 & 2,645 \\\hline \text { Total assets } & 23,215 & 19,311 \\\hline \text { Shareholder's equity } & 6,485 & 6,280 \\\hline \text { Cash flow from operations } & 5,310 & 3,670 \\\hline \text { Basic earnings per share } & 1.21 & 1.03 \\\hline \text { Book value per share } & 2.61 & 2.46 \\\hline \text { Closing stock price } & 33.44 & 23.86 \\\hline\end{array}$$

-What is Dell's P/E ratio for 2006?

A) 27.63
B) 12.81
C) 23.65
D) 9.70

Question 11

Which of the following would not be considered a source of financing?

A) Notes receivable
B) Common stockholders' equity
C) Retained earnings
D) Debentures

Question 12

Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?

A) Auditor's letter
B) Management discussion and analysis
C) Proxy statement
D) Footnotes

Question 13

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$$\begin{array} { | l | c | c | c | } \hline & 2004 & 2005 & 2006 \\\hline \text { Sales } & 100 & 120 & 135 \\\hline \text { Net Income } & 100 & 118 & 128 \\\hline \text { Total Assets } & 100 & 119 & 130 \\\hline\end{array}$$

-Which of the following statements concerning financial ratios is incorrect?

A) Accounting principles and methods used by a company will not affect financial ratios.
B) The informational value of a ratio in isolation is limited.
C) A ratio is one number expressed as a percentage or fraction of another number.
D) Calculation of financial ratios is not sufficient for a complete financial analysis of a company.

Question 14

Liquidity of a company is generally defined as a measure of:

A) the ability of a company to pay its employees in a timely manner.
B) the ability to pay interest and principal on all debt.
C) the ability to pay dividends.
D) the ability to pay current liabilities.

Question 15

When conducting comparative analysis by reviewing consecutive balance sheets,

A) all items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1.
B) all items on the balance sheet in Year t-1 must be subtracted from their corresponding value in Year t.
C) all items on the balance sheet in Year t must be divided by net income in Year t-1.
D) Both A and B are correct.

Question 16

A common size income statement would typically be prepared by dividing:

A) all items on income statement in Year t by their corresponding value in Year t-1.
B) all items on income statement in Year t by their corresponding balance sheet accounts in Year t.
C) all items on income statement in Year t by net income in Year t-1.
D) all items on income statement in Year t by sales in Year t.

Question 17

$$\frac { ( 58,900 \times 1.05 \times 0.7 ) / ( .12 - .05 ) } { 25,000 }$$

-What is your estimate of price using the residual income valuation model at 12/31/05?

A) $20.62
B) $21.65
C) $23.56
D) $24.72

Question 18

Following is some financial information for Dell Inc.
$$\begin{array} { | l | r | r | } \hline & { 2006 } & { 2005 } \\\hline \text { Revenues } & \$ 49,205 & \$ 41,444 \\\hline \text { Net income } & 3,043 & 2,645 \\\hline \text { Total assets } & 23,215 & 19,311 \\\hline \text { Shareholder's equity } & 6,485 & 6,280 \\\hline \text { Cash flow from operations } & 5,310 & 3,670 \\\hline \text { Basic earnings per share } & 1.21 & 1.03 \\\hline \text { Book value per share } & 2.61 & 2.46 \\\hline \text { Closing stock price } & 33.44 & 23.86 \\\hline\end{array}$$

-What is Dell's profit margin for 2006?

A) 6.27%
B) 6.18%
C) 6.38%
D) 6.86%

Question 19

If a company receives an unqualified audit opinion it means the auditors:

A) did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements.
B) are providing assurance that the company will remain financially viable for at least the next year.
C) are providing assurance that the company's financial statements fairly present company's financial performance and position.
D) are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

Question 20

You have prepared a trend series for Company XYZ for three years, 2004-2006 inclusive, using 2004 as the base year. Below are selected data.
$$\begin{array} { | l | c | c | c | } \hline & 2004 & 2005 & 2006 \\\hline \text { Sales } & 100 & 120 & 135 \\\hline \text { Net Income } & 100 & 118 & 128 \\\hline \text { Total Assets } & 100 & 119 & 130 \\\hline\end{array}$$

-From the above information, you can infer that:

A) rate of sales growth has decreased.
B) net income to sales (return on sales) is increasing over time.
C) asset turnover is decreasing over time.
D) None of the above

Question 21

Which of the following statements is most correct?

A) Technical analysis concerns itself with determining the intrinsic value of a stock.
B) Active investing is defined as buying and selling stock within six months.
C) Fundamental analysis attempts to value a company by examining the past prices patterns of a company's stock.
D) Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis.

Question 22

The semistrong efficiency of market implies that:

A) stock prices fully reflect all inside information.
B) stock prices do not reflect information contained in past trading volume.
C) stock prices fully reflect all information found in 10-K filing.
D) stock prices fully reflect all information about future price changes.

Question 23

Which of the following statements regarding the intrinsic value of a company is correct?

A) It can be calculated as book value plus the present value of future expected dividends, discounted at the cost of equity capital.
B) It can be calculated as present value of future expected dividends, discounted at the cost of debt.
C) It can be calculated as present value of future expected residual income, discounted at the cost of equity capital.
D) It can be calculated as book value plus the present value of future expected residual income, discounted at the cost of equity capital

Question 24

Which of the following statements is incorrect?

A) It is possible for some markets to be more efficient than others.
B) It is possible for markets to be efficient with respect to some information and inefficient with respect to other information.
C) The market is likely to be more efficient with respect to companies where there is greater analyst following.
D) The market is totally efficient with respect to companies providing regular dividends to investors.

Question 25

$$\begin{array}{l}\text { Rivaz Corporation }\\\begin{array} { | l | r | } \hline & 2005 \\\hline \text { Net Income } & \$ 3,000 \\\hline \text { Dividends } & \$ 1,000 \\\hline \text { Total Assets } - 12 / 31 / 05 & \$ 35,000 \\\hline \text { Total Liabilities } - 12 / 31 / 05 & \$ 21,225 \\\hline \text { Number of shares outstanding } & 1,000 \\\hline \text { Cost of Equity } & 12 \% \\\hline\end{array}\end{array}$$

-Net income is expected to increase by 10% for the next year, and dividend payout ratio is expected to remain constant. After 2006, retained earnings are expected to decrease to zero. Using the residual income method what is the value per share of Rivaz stock as of 12/31/05?

A) $15.25
B) $15.16
C) $14.38
D) $13.77

Question 26

Fluno Corporation has 1 million shares outstanding at the end of fiscal 2005. Its stock is trading at $15 per share. It issued $0.6 million in dividends, and had net income of $1million in fiscal 2005. At the end of 2005, its total assets, liabilities and retained earnings were $25 million, $15 million and $7.5 million, respectively. Fluno's price to book ratio and dividend yield ratios for 2005 are: $\begin{array}{|c|c|c|}\hline &\text { Price to Book } & \text { Dividend Yield } \\\hline A)&2 & 60 \% \\\hline B)&1.5 & 60 \% \\\hline C)&1.5 & 4 \% \\\hline D)&2 & 4 \% \\\hline\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D

Question 27

How much would you be prepared to pay for a $500 bond which comes due in 5 years and pays $80 interest annually assuming your required rate of return is 8% (pick closest answer)?

A) $740
B) $660
C) $608
D) $500

Question 28

Return on Common Equity for 2006 is:

A) 15.46%
B) 24.14%
C) 16.79%
D) 22.04%

Question 29

Which of the following ratios would be considered useful in assessing operating profitability?

A) Debt/Equity ratio
B) Acid test ratio
C) Gross profit margin
D) Return on equity

Question 30

$$\begin{array}{l}\text { Rivaz Corporation }\\\begin{array} { | l | r | } \hline & 2005 \\\hline \text { Net Income } & \$ 3,000 \\\hline \text { Dividends } & \$ 1,000 \\\hline \text { Total Assets } - 12 / 31 / 05 & \$ 35,000 \\\hline \text { Total Liabilities } - 12 / 31 / 05 & \$ 21,225 \\\hline \text { Number of shares outstanding } & 1,000 \\\hline \text { Cost of Equity } & 12 \% \\\hline\end{array}\end{array}$$

-Using the dividend discount model, assuming dividends grow at 10% per year for the next two years and at 5% thereafter, what is the value per share of Rivaz Corporation at 12/31/05?

A) $16.61
B) $16.51
C) $16.42
D) $14.87

Question 31

You have been provided the following information about High Inc.
$\begin{array}{|l|l|l|}\hline {\text { in thousands of dollars) }} & {2005} &{2006} \\\hline \text { Current Assets } & \$ 158 & \$ 163 \\\hline \text { Long Term Assets } & \$ 453 & \$ 502 \\\hline \text { Current Liabilities } & \$ 102 & \$ 143 \\\hline \text { Long Term Liabilities } & \$ 302 & \$348 \\\hline \text { Net Income } & \$ 32 & \$ 42 \\\hline\end{array}$

-Current Ratio for 2005 is:

A) 1.55
B) 1.51
C) 1.50
D) 1.14

Question 32

You have been provided the following information about High Inc.
$\begin{array}{|l|l|l|}\hline {\text { in thousands of dollars) }} & {2005} &{2006} \\\hline \text { Current Assets } & \$ 158 & \$ 163 \\\hline \text { Long Term Assets } & \$ 453 & \$ 502 \\\hline \text { Current Liabilities } & \$ 102 & \$ 143 \\\hline \text { Long Term Liabilities } & \$ 302 & \$348 \\\hline \text { Net Income } & \$ 32 & \$ 42 \\\hline\end{array}$

-Working Capital for 2005 is:

A) $56,000
B) $20,000
C) $151,000
D) $207,000

Question 33

You have been provided the following information about High Inc.
$\begin{array}{|l|l|l|}\hline {\text { in thousands of dollars) }} & {2005} &{2006} \\\hline \text { Current Assets } & \$ 158 & \$ 163 \\\hline \text { Long Term Assets } & \$ 453 & \$ 502 \\\hline \text { Current Liabilities } & \$ 102 & \$ 143 \\\hline \text { Long Term Liabilities } & \$ 302 & \$348 \\\hline \text { Net Income } & \$ 32 & \$ 42 \\\hline\end{array}$

-Owner's Equity for 2006 is:

A) $20,000
B) $154,000
C) $174,000
D) $207,000

Question 34

You have been provided the following information about Wert Inc. $$\begin{array} { | l | c | r | } \hline \text { (in thousands of dollars) } & 2005 & 2006 \\\hline \text { Sales } & \$ 2,456 & \$ 3,778 \\\hline \text { Net Income } & \$ 172 & \$ 202 \\\hline \text { Interest expense } & \$ 50 & \$ 55 \\\hline \text { Total Assets } & \$ 1,800 & \$ 1,950 \\\hline \text { Tax Rate } & 35 \% & 35 \% \\\hline\end{array}$$ Return on Assets for 2006 is:

A) 13.71%
B) 12.68%
C) 10.77%
D) 13.21%

Question 35

On January 1, 2005, Systil Corporation issues $50M 10 year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006 is 8%, what will be the price of the bonds be at this date?

A) $56.71M
B) $56.25M
C) $44.24M
D) $43.86M

Question 36

Given the following information, calculate the inventory turnover for ABC Co. for 2006 (pick closest number). $$\begin{array} { | l | r | r | } \hline \text { (in thousands of dollars) } & { 2006 } & { 2005 } \\\hline \text { Sales } & \$ 19,535 & \$ 15,470 \\\hline \text { Cost of Goods Sold } & \$ 15,101 & \$ 11,184 \\\hline \text { Inventory } & \$ 2,809 & \$ 2,260 \\\hline\end{array}$$

A) 8.96
B) 7.22
C) 6.93
D) 6.18

Question 37

Two otherwise equal companies have significantly different dividend payout ratios. Which of the following statements is most likely to be correct? The company with higher the dividend payout ratio:

A) will have a higher inventory turnover ratio.
B) will have a lower inventory turnover ratio.
C) will have higher earnings growth.
D) will have lower earnings growth.

Question 38

Which of the following statistics would be the most useful in determining the efficiency of a car rental company?

A) Inventory turnover
B) Number of employees per car rental
C) Average length of car rental
D) Number of days cars are rented as a percentage of number of days available for rent

Question 39

Which of the following statements is correct?

A) The more efficiently a company utilizes its assets, the greater its return on investment, all other things being equal.
B) If return on equity increases, the return on assets must have also increased.
C) If the number of days inventory is held increases, the return on assets will increase, all other things being equal.
D) If the gross margin decreases, the inventory turnover must have increased, all other things being equal.

Question 40

Which of the following ratios does not relate to market price of a company under analysis?

A) Price-to-earnings
B) Earnings yield
C) Price-to-book
D) Return on common equity

Question 41

The SEC requires that Management Discussion and Analysis found in the annual report (10K) contains, among other things, a discussion about the company's liquidity, capital resources and results of operations.

Question 42

You wish to compare the performance of two companies. Which of the following statements is most likely to be incorrect?

A) If the companies operate in different industries, this will hinder comparability.
B) The use of different accounting methods will hinder comparability.
C) If the companies are of significantly different sizes, this will hinder comparability.
D) If companies have different auditors, this will hinder comparability.

Question 43

In a common size income statement net income is expressed as 100 percent.

Question 44

$$\begin{array}{l}\text { Rivaz Corporation }\\\begin{array} { | l | r | } \hline & 2005 \\\hline \text { Net Income } & \$ 3,000 \\\hline \text { Dividends } & \$ 1,000 \\\hline \text { Total Assets } - 12 / 31 / 05 & \$ 35,000 \\\hline \text { Total Liabilities } - 12 / 31 / 05 & \$ 21,225 \\\hline \text { Number of shares outstanding } & 1,000 \\\hline \text { Cost of Equity } & 12 \% \\\hline\end{array}\end{array}$$

-Assuming total assets grew by $5,000 from 2004 to 2005, what is the return on assets of Rivaz Corporation for 2005?

A) 9.23%
B) 8.57%
C) 10.00%
D) 6.15%

Question 45

The current ratio will always be greater than or equal to the acid test ratio.

Question 46

Common size statements are useful for inter-company comparisons.

Question 47

Inventory turnover is generally a more important ratio for a manufacturing firm than a service firm.

Question 48

Which of the following statements is incorrect?

A) Current assets are expected to be converted into cash sooner than noncurrent assets.
B) Equity investors have unlimited downside exposure if the company declares bankruptcy.
C) Paid-in capital of company is not affected by the payment of dividends.
D) Retained earnings at the inception of a company equals zero.

Question 49

Which of the following is not an equity valuation model?

A) Residual income model
B) Dividend discount model
C) Free cash flow to equity model
D) Terminal value model
True / False Questions

Question 50

If a company has no liabilities its return on equity will equal its return on assets.

Question 51

As of December 31, 2005, two otherwise identical companies in the same industry, East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking forward one year, which outcomes are least likely?
I) East Co. requires debt financing.
II) West Co. increases its dividend payout.
III) West Co.'s share price is twice that of East Co.
IV) East Co. repurchases outstanding shares.

A) I and II
B) II and IV
C) I, II and III
D) II, III and IV

Question 52

In a common size balance sheet total assets are expressed as 100 percent.

Question 53

The statement of cash flows is separated into four parts: operating, investing, financing and planning.

Question 54

Which of the following, if increased by 10%, results in a 10% higher stock price?

A) Dividend yield
B) Earnings yield
C) Net profit margin
D) None of the above

Question 55

Theoretically the value of a stock should equal the sum of the present value of future expected dividends, discounted at the cost of equity.

Question 56

Two popular techniques of comparative analysis are year-to-year change analysis and index-number trend analysis.

Question 57

Details of compensation paid to officers and directors can be found in proxy statement.

Question 58

The value of a bond is equal to the sum of the present value of future expected interest and principal payments, discounted at the coupon rate.

Question 59

The explanatory notes (footnotes) accompanying the financial statements are generally of little value in aiding the financial analyst when interpreting the financial statements.

Question 60

Financial statement analysis is an exact science.

Question 61

Earnings Yield is the reciprocal of the price/earnings ratio.

Question 62

Problem One: Information contained in Financial Statements
List ten different items you would expect to find in an average annual report to shareholders.

Question 63

A creditor's risk is said to be asymmetric because the downside is limited to the required interest payments.

Question 64

Dividend yield is defined as dividends divided by shareholders' equity.

Question 65

Prospective analysis is the forecasting of future payoffs-typically earnings and cash flows, or both.
Essay Questions

Question 66

Problem Two: Identify Industries
Below are selected ratios for three companies which operate in three different industries: Discount Retail Store, Drug and Utility.
Identify which industry each of the companies A, B and C operate in. Give two reasons for each of your selections.

Question 67

When comparing two companies the company with the highest net income should normally have the highest stock price.

Question 68

The income statement is the only one of the four basic financial statements that does not contain balances at a specific point in time.

Question 69

A capital-intensive company requires high cash turnover.

Question 70

A security can be under or overvalued, depending on the extent of an incorrect interpretation or faulty evaluation of available information by the aggregate market.

Question 71

All other things being equal, the lower a company's cost of equity the higher its stock price should be.

Question 72

Problem Five: Equity Valuation
In the table below is selected information for Sprigue Company.
All figures are in thousands and represent expectations of the future.
a. Calculate the expected free cash flow to equity for the years 2005 to 2009.
b. Explain the expected changes in debt levels over the five years

Question 73

A bank with a loan to a company is generally exposed to greater risk than the shareholders of the company.

Question 74

Problem Four: Valuation of Equity
Assets and liabilities at the end of 2005 for Tripod Inc. are $4,970K and $2,220K respectively. Net income and dividends for fiscal 2005 were $ 500K and $200K, respectively. Tripod has 100 shares outstanding as of 12/31/05.
Net income is expected to grow at 10% for the next three years (2006 - 2008). The dividend payout ratio is expected to remain at 2005 level for next three years. After 2005 abnormal earnings are expected to be zero. Cost of debt is 8% and cost of equity is 15%.
What would you be prepared to pay per share for Tripod stock at the end of fiscal 2005, using the accounting based equity valuation formula?

Question 75

a. It is January 1, 2006 and you are considering buying $20,000 of Hilever Company's 10% bonds, which come due on December 31, 2015. The bonds pay interest semi-annually on June 30 and December 31 of each year. The prevailing interest rate on bonds of similar risk is 12%. How much would you be prepared to pay for the bond?
b. If coupon rate was 12% on these bonds, how much would you be prepared to pay?
c. If the coupon rate was 10% and the bonds were convertible into common equity (5 shares for every $1,000 face value coupon bond), and common stock is currently trading at $11 per share would this change your answer to part a? Why? Why not?

Question 76

A friend tells you that you should buy Leclerc Company stock as it is a "great deal". It is January 1, 2006 and the stock is trading at $25 per share. You obtain the financial statements for Leclerc and determine the following:
1. Book value is $12 per share as of December 31, 2005
2. Earnings for 2005 were $4.0 per share
3. Earnings are expected to grow at 20% for the next four years
4. Dividend payout is 40%
5. Residual income is expected to be zero from 2007 onwards
6. Cost of equity capital is 15%
Determine, using the residual income method, whether you should buy Leclerc stock as of January 1, 2006.

Question 77

The current ratio is used to evaluate the company's operating performance.

Question 78

When calculating the return on assets you should use average total assets.

Question 79

Debt-to-equity ratio is a commonly used measure of liquidity.