Learning Objective 12.4 Questions
1) Xemen Company has the following data:
2X13 2X12 2X11
Sales $ 930 $700
Less: Cost of Goods Sold 410 235
Gross Profit 520 465
Less: Operating Expenses 284 255
Operating Income 236 210
Less: Other Revenue/Other Expense:
Interest Revenue 24 24
Interest Expense (30) (30)
Income before Tax 230 204
Less: Income Tax Expense 92 82
Net Income $138 $122
Total Common Stockholders' Equity $467 $389 $300
Preferred Dividend Per Share $0 $0 $0
What is the return on common stockholders' equity for Xemen Company in 2X13? Has the return on common stockholders' equity improved or not improved since 2X12?
A) 32.2%, improved
B) 32.2%, not improved
C) 29.6%, not improved
D) 31.6%, not improved
E) 29.6%, improved
2) Steve Harvey Company has the following data:
2X13 2X12 2X11
Sales (all credit sales) $800 $740 $675
Less: Cost of Goods Sold 525 490 450
Gross Profit $275$250 $225
Less: Operating Expenses 150 140 125
Operating Income $125 $110 $100
Less: Other Expense: Interest 10 8 5
Income before Tax $115 $102 $ 95
Less: Income Tax Expense 51 46 43
Net Income $ 64 $ 56 $ 52
Total Common Stockholders' Equity$125$110$90
Preferred Dividends Per Share $0 $0 $0
What is the return on common stockholders' equity for Steve Harvey Company in 2X13? Has the return on common stockholders' equity improved or not improved since 2X12?
A) 25.6%, improved
B) 25.6%, not improved
C) 54.5%, improved
D) 54.5%, not improved
E) 128.0%, improved
3) Ramirez Company has a weighted-average after-tax cost of capital of 12%; $320,000 in long term assets; $80,000 in current assets; and $400,000 in capital. In order to create Economic Value Added, net operating profit after taxes must exceed
A) $26,400.
B) $38,400.
C) $ 7,200.
D) $16,800.
E) $48,000.
4) Debt is often a more attractive vehicle for financing long-term investments for which of the following reasons?
1. Debt is less risky than common stock.
2. Debt may be converted into common stock in a tax-free exchange.
3. Interest payments are tax deductible, and dividend payments are not.
4. Ownership rights are kept by the present stockholders.
A) 3 and 4
B) 1 and 3
C) 2 and 4
D) 1 and 2
E) 1, 2, 3, and 4
5) ROE = Return on sales × Total asset turnover × Financial Leverage.
6) Financial management is concerned with where a company gets cash and how it uses that cash to its benefit.
7) The rate of return on investment is equal to invested capital divided by income.
8) Different measures of income such as net income and earnings before interest and taxes are used to calculate different financial ratios.
9) A disadvantage of debt for long-term financing is that the interest expense incurred on debt reduces net income.
10) Trading on the equity refers to using money borrowed at fixed interest rates to try to enhance the rate of return on common shareholders' equity.
