COMPRE 1 Flashcards
A major difference between economic profit and accounting profit is that economic profit
a.
Minimizes the impact of accounting estimates.
b.
Allows for more accurate expense accruals.
c.
Reduces profits by associated cost of capital.
d.
Adjusts accounting profit by depreciation.
c.
Reduces profits by associated cost of capital.
Foley Mfg. performed the following horizontal analysis on sales. What was the rate of inflation
in 20X2?
20X2 20X1
Sales P 586,860 P489,050
Inflation Adjusted Sales P 523,982 P489,050
a.
13%
b.
9%
c.
12%
d.
8%
e.
10%
f.
11%
c.
12%
Term structure of interest rates illustrates:
a.
the relationship between bond maturity and yield for such securities.
b.
security yields ranked by default risk structure (interest rate risk is assumed
zero)
c.
how interest rates vary over the years
d.
the pattern of interest rates over the long-term business cycle
a.
the relationship between bond maturity and yield for such securities.
A futures contract is an agreement to trade an asset
a.
in the future at a price prevailing in the future
b.
today at a price prevailing at some future date
c.
in the future at a price determined today
d.
today at a price determined today
c.
in the future at a price determined today
Which one of the following is the most relevant evidence suggesting that the quality of a
company’s earnings is weak?
a.
Inventory levels are rising during a period of falling prices.
b.
The company intentionally overestimates the useful life of its PPE by two-fold.
c.
The company’s accounts receivable turnover ratio rises during an economic
downturn.
d.
A significant portion of the company’s business is located in a country where it
is difficult for multinational corporations to repatriate profits.
b.
The company intentionally overestimates the useful life of its PPE by two-fold.
The ICA Company has the following characteristics:
Sales: P1,000
Total Assets: P1,000
Total Debt/Total Assets: 35%
EBIT: P 150
Tax rate: 40%
Interest rate on total debt: 4.57%
What is ICA’s ROE?
a.
12.37%
b.
30.77%
c.
11.04%
d.
28.31%
e.
16.99%
a.
12.37%
A company’s net profit as presented on its income statement is generally
a.
less than its economic profits because accountants include labor costs, while
economists exclude labor costs.
b.
greater than its economic profits because opportunity costs are not
considered in calculating net income.
c.
The same as economic profit.
d.
greater than its economic profit because economists do not consider interest
payments to be costs.
b.
greater than its economic profits because opportunity costs are not
considered in calculating net income.
Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that
a.
None of the statements are true.
b.
the amount of current liabilities is equal to the amount of inventory and
prepayments.
c.
the amount of current assets is equal to the amount of current liabilities.
d.
the amount of current assets is equal to the amount of inventory and
prepayments
e.
All of the statements are true
b.
the amount of current liabilities is equal to the amount of inventory and
prepayments.
Tucker Corporation’s manager believes that the economic environment during the next year
can be good, normal, or bad, and he thinks that a stock’s returns will have the following
probability distribution shown below.
Good .50 15%
Normal .20 0%
Bad .30 -5%
Calculate the expected rate of return
a.
6.00%
b.
3.33%
c.
9.00%
d.
10.00%
a.
6.00%
In 20x7, Moreno Cheeses had a net income of P42,390, paid common share dividends of P6,000,
and had 18,000 shares of common stock outstanding. What was Moreno’s earnings per share
(EPS) for 20x7?
a.
P1.69
b.
P2.69
c.
P2.36
d.
P2.02
c.
P2.36
Which is an implicit cost for a company?
a.
The cost of salaries foregone by the employer.
b.
The cost paid for production supplies for the firm.
c.
The cost paid for renting a building for the firm.
d.
The cost of salaries of an employee of the firm.
e.
The cost paid for purchasing merchandize for resale
a.
The cost of salaries foregone by the employer.
Statement 1. The income statement presents a summary of the firm’s revenues and expenses
over an accounting period.
Statement 2. On the balance sheet, total assets must equal total liabilities plus stockholders
equity.
a.
Statement 1 is true
b.
Statement 2 is true
c.
Both statements are false
d.
Both statements are true
d.
Both statements are true
Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $50 million
to finance it. The company plans to raise the money through a general cash offering priced at
$25.00 a share. Star’s underwriters charge a 4% spread. How many shares does the company
have to sell toachieve its goal? (Round your final answer to the nearest unit of share.)
a.
1,198,083 shares
b.
1,153,846 shares
c.
1,200,000 shares
d.
1,250,000 shares
e.
2,083,333 shares
f.
2,000,000 shares
e.
2,083,333 shares
The assets of Moreland Corporation are presented below.
January 1 December 31
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Accounts receivable 68,000 47,000
Inventory 125,000 138,000
Plant & equipment
(net of accum. Depr.) 325,000 424,000
For the year just ended, Moreland had net income of $84,000 on $800,000 of sales. Moreland’s
total asset turnover ratio is
a.
1.48.
b.
1.37.
c.
1.22
d.
1.50.
e.
1.27.
c.
1.22
Which of the following statements is true?
a.
Ceteris paribus, long-term bonds have less price risk than short-term bonds.
b.
Ceteris paribus, short-term bonds have less reinvestment risk than long-term
bonds.
c.
Ceteris paribus, long-term bonds have less reinvestment risk than short-term
bonds.
d.
Ceteris paribus, high-coupon bonds have less reinvestment risk than lowcoupon bonds.
e.
Ceteris paribus, low-coupon bonds have less price risk than high-coupon
bonds.
c.
Ceteris paribus, long-term bonds have less reinvestment risk than short-term
bonds.
A share of perpetual preferred stock pays an annual dividend of P6 per share. If investors
require a 12 percent rate of return, what should be the price of this preferred stock?
a.
P62.38
b.
P57.25
c.
P50.00
d.
P46.75
e.
P41.64
c.
P50.00
Bonds that can be exchanged for shares of equity at the owner’s discretion are called what?
a.
Convertible bond.
b.
Putable bond.
c.
Debenture.
d.
Indenture.
e.
Callable bond
a.
Convertible bond.
All of the following statements about accounting profit and economic profit are true except
a.
Accounting profit is the difference between accounting revenues and
accounting expenses.
b.
Accounting profit is the difference between accounting revenues and implicit
costs.
c.
Economic profit is the difference between accounting profit and opportunity
costs.
d.
Economic profit is the difference between accounting revenues and both
types of costs.
b.
Accounting profit is the difference between accounting revenues and implicit
costs.
In the capital asset pricing model (CAPM), a security market line (SML):
a.
indicates the degree to which two stock returns move together in a portfolio.
b.
shows the effect of portfolio diversification on market risk.
c.
represents the weighted average of the expected returns of all the
investments composing that portfolio.
d.
provides a benchmark for evaluating the relative merits of different stocks or
portfolios.
d.
provides a benchmark for evaluating the relative merits of different stocks or
portfolios.
The equity section of Allen Inc.’s statement of financial position is presented as follows.
Preferred stock ($100 par value) $ 8,000,000
Common stock ($10 par value) 5,000,000
Paid-in capital in excess of par 12,000,000
Retained earnings 6,000,000
Net worth $31,000,000
The book value of Allen Inc.’s common stock is
a.
$10.00
b.
$62.00
c.
$31.00.
d.
$17.00.
e.
$23.00.
f.
$46.00.
g.
$5.00.
f.
$46.00.
Which of the following statements is NOT CORRECT?
a.
When a corporation’s shares are owned by a few individuals, we say that the firm
is “closely, or privately, held.”
b.
“Going public” establishes a firm’s true intrinsic value and guarantees that a
liquid market will always exist for the firm’s shares.
c.
It is possible for a firm to go public and yet not raise any additional new capital
for the firm itself.
d.
When stock in a closely held corporation is offered to the public for the first time,
the transaction is called “going public, or an IPO,” and the market for such stock
is called the new issue or IPO market.
e.
The stock of publicly owned companies must generally be registered with and
reported to a regulatory agency such as the SEC.
b.
“Going public” establishes a firm’s true intrinsic value and guarantees that a
liquid market will always exist for the firm’s shares.
Which of the following is likely to discourage a firm to increase the amount of debt in its capital
structure?
a.
The corporate tax rate increases.
b.
The firm’s earnings become less volatile.
c.
The firm’s assets become less liquid.
d.
The standard deduction for estate tax decreases
e.
The capital gains tax increases
f.
The personal tax rate decreases.
c.
The firm’s assets become less liquid.
Which of the following is true about the impact of price inflation on financial ration analysis?
a.
Inflation impacts financial ratio analysis for one firm over time, as well as
comparative analysis of firms of different ages.
b.
Inflation impacts financial ratio analysis for one firm over time, but not
comparative analysis of firms of different ages.
c.
Inflation impacts comparative analysis of firms of different ages, but not
financial ratio analysis for one firm over time
d.
Inflation has no impact on financial ratio analysis
a.
Inflation impacts financial ratio analysis for one firm over time, as well as
comparative analysis of firms of different ages.
Which of the following ratios measures the extent to which operating profit covers its annual
interest costs?
a.
Op. profit margin
b.
ROE ratio
c.
Debt-to-Equity Ratio
d.
Debt-to-Assets ratio
e.
fixed charge coverage ratio
f.
TIE ratio
f.
TIE ratio