1. What would be the effect on book value per share and earnings per share if the
corporation purchased its own shares in the open market at a price greater than book
value per share?
A. B. C. D.
Book value per share No effect Increase Decrease Decrease
Earnings per share Increase Increase Decrease Increase
2. Which of the following statements is correct?
a. An increase in a firm’s inventories will call for additional financing unless the
increase is offset by an equal or larger decrease in some other asset account.
b. A high quick ratio is always a good indication of a well-managed liquidity position.
c. A relatively low return on assets (ROA) is always an indicator of managerial
incompetence.
d. A high degree of operating leverage lowers the risk by stabilizing the firm’s earnings
stream.
3. A company issued long-term bonds and used the proceeds to repurchase 40% of the
outstanding shares of its stock. This financial transaction will likely cause the
A. Total assets turnover ratio to increase. C. Times-interest-earned ratio to decrease.
B. Current ratio to decrease. D. Fixed charge coverage ratio to
increase.
4. The company issued new common shares in a three-for-one stock split. Identify the
statements that indicate the correct effect(s) of this transaction.
a. It reduced equity per share of common stock.
b. Share of each common stockholder is reduced.
c. The peso amount of capita stock is increased.
d. Working capital and current ratio are increased.
5. All of the following statements are valid except
a. The short term creditor is more interested in cash flows and in working capital
management that he is in how much accounting net income is reported.
b. If the return on total assets is higher than the after-tax cost of long-term debt, then
leverage is positive, and the common stockholders will benefit.
c. The results of financial statements analysis are of value only when viewed in
comparison with the results of other periods or other firms.
d. The inventory turnover is computed by dividing sales by average inventory.
PROBLEMS
1. The net sales of Grand Manufacturing Co. in 1990 is total, P580,600. The cost of goods
manufactured is P480,000. The beginning inventories of goods in process and finished
goods are P82,000 and P65,000, respectively. The ending inventories are, goods in
process, P75,000, finished goods, P55,000. The selling expenses is 5%, general and
administrative expenses 2.5% of cost of sales, respectively. The net profit in the year
1990 is
a. P90,000 b. P45,725 c. P53,850 d. P83,000
2. In 19x5, MPX Corporation’s net income was P800,000 and in 19x6 it was P200,000.
What percentage increase in net income must MPX achieve in 19x7 to offset the 19x6
