22. Which one of the following statements about common stock is true? A) Common
ID: 2644580 • Letter: 2
Question
22. Which one of the following statements about common stock is true?
A) Common stock can provide attractive capital appreciation opportunities.
B) Dividends generally provide the greatest rate of return on common stocks.
C) Common stocks generally have a negative rate of return over a ten-year period.
D) The DJIA is the best indicator of the overall performance of common stocks.
23. Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear
A) more leveraged.
B) less leveraged.
C) more profitable.
D) less efficient.
24. Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on assets of 9%. What is the return on equity?
A) 5.4%
B) 5.6%
C) 14.4%
D) 15.0%
25. Which one of the following is a leverage measure?
A) times interest earned
B) net working capital
C) return on equity
D) net profit margin
Explanation / Answer
22 ) A
Preferred stocks do not offer as much opportunity for capital appreciation as common stocks
23) A
EBITDA can easily make a company look like it has more money to make interest payments. Consider a company with $10 million in operating profits and $15 million in interest charges. By adding back depreciation and amortization expenses of $8 million, the company suddenly has EBITDA of $18 million and appears to have enough money to cover its interest payments.
24) C
Total assets = 240,000
Debt/Equity ratio = Total Liabilities / Equity = 0.60
Liabilities are 60% of Equity
Basic Accounting Equation
Assets = Liabilities + Equity
240,000 = (60% x Equity) + Equity
240,000 = 1.60 x Equity
Equity = 150,000
Return on Assets = Net Income / Assets = .09
Net Income / 240,000 = .09
Net Income = 21,600
Return on Equity = Net Income / Equity = ?
21.600 / 150,000 = 14.4%
25) A
The times interest earned ratio is another debt ratio that measures the long-term solvency of a business. It measures how well a company can meet its interest expense obligations.
An extremely high ratio, however, may indicate that the company is not leveraged enough to take advantage of current opportunities.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.