Question

1. Which statement is incorrect?

a. Dividend yield measures the rate of return on the market price of a share.
b. The dividend payout ratio measures the percentage of profit paid out in dividends to ordinary shareholders.
c. Dividend per share is the ratio to use when comparing income from shares with income from alternative investments.
d. Dividend yield is an important ratio for an investor who is acquiring shares mainly for income.

2. A profit ratio for a retailer of 4.1% in year 2 compared to 5.5% for the previous year indicates:

a. an improving profit margin.
b. a declining profit margin.
c. no change in the profit margin.
d. impending bankruptcy.

3. All of these are possible explanations of why profitability is inadequate except:
a. selling prices are too low.
b. borrowing costs too low.
c. excessive investment in assets in relation to revenues.
d. expenses are too high.

4. In relation to the price-earnings ratio (P/E ratio), which statement is incorrect?

a. It measures how much investors are willing to pay for each dollar of earnings.
b. Higher P/E ratios tend to be associated with growth companies.
c. A P/E ratio of 9.1 means that the shares of the company are selling at 9.1 times current profits.
d. As expectations of future profits increase the P/E ratio tends to fall.

5. Which statement concerning earnings per share is incorrect?

a. It represents a conversion of the absolute dollar amount of profit to a per share basis.
b. Even if profits increase earnings per share could decrease if share capital increases at a greater rate than profits.
c. Earnings per share is regarded as one of the least important financial ratios.
d. In calculating earnings per ordinary share, preference dividends are deducted from profit.

Answer 1

1. Option d,Dividend yield is an important ratio for an investor who is acquiring shares mainly for income

2. Option b. a declining profit margin.

3. Option b. borrowing costs too low.

4. Option b, Higher P/E ratios tend to be associated with growth companies.

5. Option, c. Earnings per share is regarded as one of the least important financial ratios.