Chapter 14 Part 4

Question 1

Small-Cap Stocks

Answer 1

Approximately $300 million up to $2 billion. These are usually new companies with more volatility, but more growth potential as well.

Question 2

Micro-Cap Stocks

Answer 2

From $50 million up to $300 million. These companies are generally considered suitable only for speculative investors

Question 3

liquidity ratios indicate a company’s ability to

Answer 3

meet its current liabilities as well as convert current assets into cash

Question 4

leverage ratio measures the

Answer 4

long-term solvency of the firm

Question 5

Working capital is the measurement of

Answer 5

a company’s ability to pay its current liabilities. If the working capital is positive, it means that the company’s current assets are sufficient to cover its current liabilities. If the working capital is negative, the company may have difficulty repaying liabilities due in the short term.

Question 6

Working Capital =

Answer 6

Current Assets - Current Liabilities

Question 7

Current ratio is

Answer 7

another measurement of liquidity. However, it measures the ratio between current assets and current liabilities. Analysts believe that you should compare the current ratio of a company against its industry peers. Different industry groups have different capital and liquidity needs. However, the company’s total assets include its inventory, which is the least liquid of the current assets. In some cases, what appears to be a safe current ratio may be distorted by a high amount of inventory comprised of goods that are not easily liquidated. Companies with small inventories and accounts receivable that are easily collected may be able to operate with a low current ratio.

Question 8

Current ratio =

Answer 8

Current Assets/Current Liabilities

Question 9

The quick ratio (asset test ratio) is a

Answer 9

more stringent measurement of a company’s liquidity than its current ratio. In this calculation, the company’s inventory is subtracted from its current assets to arrive at its quick assets. Quick assets are then divided by current liabilities to find the quick ratio. A quick ratio of more than 1 to 1 is generally considered safe because it indicates that the company would be able to pay its current liabilities for a short period without having to access any additional revenue from sales

Question 10

quick ratio (asset test ratio) =

Answer 10

(total current assets - inventory)/total current liabilities

Question 11

The debt-to-equity ratio measures the

Answer 11

relationship between equity and debt securities in the corporation’s capital structure–the amount of debt the company has taken on to finance its operations compared to the amount it has raised through issuing stock. A company with more debt than equity outstanding is considered leveraged. A high debt-to-equity ratio may be a sign of financial weakness. the company’s ability to grow and operate may be negatively affected by the need to service its debt. In the worst case scenario, the company may be forced into bankruptcy.

Question 12

Debt-to-Equity Ratio =

Answer 12

(Bonds+ Preferred Stock)/(Common Stock at Par+ Capital Surplus+ Retained Earnings)

Question 13

The income statement (also called the profit and loss statement) shows a company’s performance during

Answer 13

a specified period

Question 14

The earnings per share (EPS) is a measurement of

Answer 14

a company’s profitability as it is allocated to each outstanding common share. The following formula is used to calculate the earnings per share. Keep in mind, information from both the balance sheet and income statement will be required.

Question 15

Earnings per Share =

Answer 15

(Net Income - Preferred Dividends)/Number of Outstanding Shares

Question 16

The price-to-earnings ratio measures the

Answer 16

price of a stock in relation to its earnings. It indicates how much investors are willing to pay for each dollar the company earns

Question 17

Price/Earnings Ratio =

Answer 17

Current Market Price/Earnings Per Share

Question 18

A publicly traded corporation is required to register with the SEC if it has total assets of more than

Answer 18

$10,000,000 and more than 500 shareholders, or if its securities trade on a national exchange or Nasdaq. These securities are referred to as Section 12 securities since that is the section of the Act that requires the issuer to register. This registration is in addition to the registration of the issuer’s securities under the Securities Act of 1933 when they are first offered to the public.

Question 19

The following reports are required to be filed with the SEC and are generally made available to the public

Answer 19

Form 8-K, Form 10-Q, Form 10-K, Proxy Statements, Schedule 13D, Schedule 13G, Schedule 13F

Question 20

Form 8-K is filed with the SEC if

Answer 20

an event occurs that would materially affect the issuer’s financial condition or share price. A report must be made to the SEC on Form 8-K.