Midterm

Question 1

Contribution Margin (cm/u)

Answer 1

= variable cost - selling price

Question 2

Break-even point (BEP)

Answer 2

= total fixed costs / cm/u

Question 3

Sales in units required for a given profit

Answer 3

= total fixed costs + required profit / cm/u

Question 4

Contribution Margin Ratio(CMR)

Answer 4

= total contribution margin / total sales

Question 5

Break-even sales / Sales

Answer 5

= fixed costs / CMR

Question 6

Net income

Answer 6

= total contribution margin - total fixed costs

Question 7

A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs

Answer 7

Operational Leverage

Question 8

It tells us the percentage change in EBIT for a given percentage change in sales (units: x)

Answer 8

Degree of Operating Leverage (DOL) = contribution margin / EBIT

Question 9

The interest results from debt which is assumed in order to increase the efficiency of the company

Answer 9

DFL = EBIT / EBT

Question 10

If we want a multiplier that will give us the % increase in EAT for a given % increase in sales

Answer 10

DCL = CM / EBT or DCL = DOL x DFL

Question 11

• They invest in their own capital in the business

- The profits made by the business

Answer 11

Owners

Question 12

The two items above constitute

Answer 12

Equity Capital

Question 13

The business may borrow from outsiders

Answer 13

Debt Capital

Question 14

The relative importance of debt and equity to the business

Answer 14

Creditors

Question 15

3 Forms of Business Organizations

Answer 15

1. Sole proprietorship
2. Partnership
3. Corporation

Question 16

What are the common shareholders’ rights?

Answer 16

• right to vote
• right to receive dividends
• right to a share of assets
• right to buy and sell the shares

Question 17

Shareholders who buy preferred shares

Answer 17

Preferred Shareholders

Question 18

2 Basic Types of Preferred Shares

Answer 18

1. Non-cumulative

2. Cumulative

Question 19

Preferred shareholders get their current year dividends before the common shareholders get any dividends but not any unpaid dividends from past year

Answer 19

Non-cumulative

Question 20

Preferred shareholders get their current and all past unpaid dividends before the common shareholders get any dividends

Answer 20

Cumulative

Question 21

A distribution of retained earnings to a company’s shareholders

Answer 21

Dividends

Question 22

The money invested by owners in the form of shares, both common and preferred

Answer 22

Contributed capital

Question 23

The profits made and retained by a company, less dividends declared

Answer 23

Retained earnings

Question 24

How the company performed during the year

Answer 24

Income statement

Question 25

Changes to retained earnings for the year

Answer 25

Statement of Retained Earnings

Question 26

How assets, liabilities and equity stood at the end of the year

Answer 26

Balance Sheet

Question 27

How cash was managed during the year

Answer 27

Statement of Cash Flows

Question 28

• The common shareholders own the net income of the company except for the dividends that are allocated to the preferred shareholders.
• The annual earnings of one common share

Answer 28

Earnings Per Share (EPS) = EAT / # of common shares

Question 29

The percentage of EPS paid out in dividends to the common shareholders

Answer 29

Payout Ratio = Dividend per share (common) / EPS