Question

_____ 1. Using financial leverage: All of the following are correct except:

a.	results in a fixed charge that may materially affect earnings available to common shareholders.
b.	increases risk to the firm as interest rates rise and returns to shareholders decrease.
c.	may be favorable when earnings generated by use of borrowed funds exceeds borrowing costs.
d.	requires reviewing planned business transactions for the potential impact they may have on operating income and the ability to cover fixed interest charges.
e.	all of the above are correct.

_____2. The following information is available for Kimball Company:

                                                                                                            20XX

             Market price per share of common stock                           $135.00

                Diluted Earnings per share of common stock                     $     2.75

    Basic Earnings per share of common stock                         $     2.78

Dividends per share of common stock                                $    2.00

   

Calculate:

1. Price-earnings ratio_________________

2. Dividend payout ratio______________

3. Dividend yield ________________

4. T or F   The price/earnings ratio is used to assess the past earnings performance of the firm. (If false, identify and correct the error)

5. ______3. a. _____ T or F Stock options are recorded as compensation expense over the periods during which the employee provides associated service to vest in the options

1.   b. _____ T or F Stock appreciation rights are a contractual commitment to provide the employee with compensation at a future date. Compensation is tied to future stock price.

Answer 1

1) Answer is Option d.

Financial leverage includes all of the above characteristics mentioned above.

2)

a) Answer is 48.56

Price earnings ratio is share price divided by eps

So $135/ $2.78 = 48.56

b) Answer is

Dividend payout ratio is Dividend per share divided by epd

So $2/ $2.78= 0.71

c) Answer is 71%

Dividend yield js expressed as a percentage so 71% of eps is declared as dividend.

d) Answer is false.

The price earnings ratio is not used to assess the past earnings performance of the firm.