Review Lecture 4 Quiz and Test Questions
1. BS10 Which of the following descriptions of the New York Stock Exchange is false?
a. it has the second largest market capitalization of any stock exchange in the world
b. the NYSE is a profit-making member-owned self-regulatory organization
c. daily volume averages $30-to-$50 billion and about 2,400-to-3,000 securities are
listed
d. companies must request and pay for their securities to be listed
e. securities mostly trade by open outcry (yelling & screaming)
2. BS10 The company computes that each unit of production incurs variable operating costs
of $29 and sells for $40 . The company's fixed costs are $29,750 per year. Find the
number of units per year the company must sell to earn $30,000 of operating income.
a. 4,489
b. 4,938
c. 5,975
d. 4,081
e. 5,432
3. BE3 The most recent annual report lists company Sales revenue at $55,000 . Cost
analysis suggests that annual Total fixed costs equal $25,500 and Total variable costs
equal $25,250 . The company believes that the ratio of Sales revenue to Total variable
costs is constant. Find the percentage decline in annual Sales revenue that would cause
the company to fall to its operating breakeven point.
a. -14.3%
b. -15.7%
c. -17.3%
d. -19.0%
e. -20.9%
4. FA16 Company X reports that next year they expect a 13% return-on-equity. Company Z
expects exactly the same ROE. Both companies also have a 40% dividend payout ratio.
You assume that the equity P/B ratios are likely to stay constant. The current P/B equals
0.75 for company X and 1.24 for company Z. What is the difference between expected
shareholder rates of return ("ROR") for each company?
a. The ROR equals 16.9% for company X and 10.4% for company Z
b. The ROR equals 12.8% for company X and 10.4% for company Z
c. The ROR equals 16.9% for company X and 12.0% for company Z
d. The ROR equals 14.7% for company X and 12.0% for company Z
e. The ROR equals 14.7% for company X and 10.4% for company Z
5. FF12 Whenever the price-to-book ratio is constant then which is the most accurate
comparison of the return on equity (= Net incomet / Stockholders' equityt-1 ) with the
stockholders' market rate of return (= (Sharepricet + Dividendt ) / Sharepricet-1 )?
a. If the price to book ratio is bigger than one, the return on equity is smaller than
the shareholder rate of return.
b. If the price to book ratio is smaller than one, the return on equity is bigger than
the shareholder rate of return.
c. If the price to book ratio is smaller than one, the shareholder rate of return is
smaller than the return on equity.
d. If the price to book ratio is smaller than one, the return on equity is smaller than
the shareholder rate of return.
e. If the shareholder rate of return is smaller than the return on equity then the price
to book ratio is smaller than one.
6. TR38 When both the (i) equity price-to-book ratio and (ii) number of common shares
outstanding are constant then a stable relation exists between the accounting measure
for return-on-equity ("ROE" = Net income ÷ Stockholders' equity) and the market
measure of shareholder rate of return ("RORt" = (Pt + dividendt - Pt-1 ) ÷ Pt-1 ). Given that
conditions (i) and (ii) hold, what is an accurate description of that stable relation?
a. When the company never pays dividends then the ROE always equals the ROR.
b. When the equity price-to-book ratio is constant at unity (1.0) then the ROR is
always bigger than the ROE.
c. When the company dividend payout ratio is 100% then the ROR equals the ROE
divided by the equity price-to-book ratio.
d. Two choices, A and C, are correct
e. The three A-B-C choices are all correct
7. BE2a The most recent annual report lists company Sales revenue at $82,985 . Cost
analysis suggests that annual Total fixed costs equal $34,000 and Total variable costs
equal $45,450 . The company believes that the ratio of Sales revenue to Total variable
costs is constant. Find the company's operating breakeven Sales revenue.
a. $90,955
b. $110,056
c. $82,687
d. $75,170
e. $100,051
8. BE4b The company computes that each unit of production incurs variable operating costs
of $20 and sells for $30 . The company's fixed costs are $42,500 per year. Find the
annual Sales revenue at which the company attains a 19.7% operating margin [= (Sales
revenue - total operating costs) / Sales] .
a. $414,921
b. $283,396
c. $377,200
d. $311,736
e. $342,910
9. BE7b The most recent annual report lists company Sales revenue at $79,375 . Cost
analysis suggests that annual Total fixed costs equal $25,650 and Total variable costs
equal $40,600 . The annual Interest expense is $4,250 and there is no preferred stock.
The company pays 35% of taxable income as taxes. The annual report also shows ROE,
that is return on equity (=Net incomet / Stockholders' equityt), equals 17.8%. The
company wants to increase its ROE to a target of 25.0%. They plan to hold constant
Stockholders' equity, Total assets, Total fixed costs, Interest, and the ratio of Sales
revenue to Total variable costs. Find the target Sales revenue and net profit margin
(=Net income / Sales revenue) that provides the target ROE.
a. Target Sales revenue equals $99,732 and the net profit margin is 9.3%
b. Target Sales revenue equals $86,724 and the net profit margin is 9.3%
c. Target Sales revenue equals $75,412 and the net profit margin is 9.3%
d. Target Sales revenue equals $99,732 and the net profit margin is 8.1%
e. Target Sales revenue equals $86,724 and the net profit margin is 8.1%