Statement Analysis Tools and Accounting Ratios Test

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Statement Analysis Tools and Accounting Ratios Test - 13

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Weekly Quiz Competition

Question 1
1 / -0

Shares of face value of 10 are 80% paid up. The company declares a dividend of 50%. Amount of dividend per share is equal to ___________.

A
5

B
4

C
80

D
50

Solution

Dividend is calculated on paid up capital. In the given case, paid up capital is Rs.8, dividend 50% of paid up capital will be Rs.4.
Question 2
1 / -0

Formula for calculating Financial Leverage is _____________.

A
EBIT $$\div$$ Contribution

B
EBIT $$\div$$ EBT

C
EBIT $$\div$$ Sales

D
EBIT $$\div$$ Variable Cost

Solution

Financial leverage depicts the amount of the debt used to acquire additional assets. It is the proportion of debt present in the total Capital Structure. The formula for Financial leverage is EBIT/ EBT.
Question 3
1 / -0

Dividends are paid out of ____________.

A
Accumulated Profit

B
Gross Profit

C
Profit after Tax

D
General Reserve

Solution

A dividend is a payment made by corporation to its shareholders, usually as a distribution of profits. When a corporation earns profit or surplus, the corporation is able to re-invest its profits in the business (called retained earnings) and pay a proportion of the profit as a dividend to shareholders.
Question 4
1 / -0

Credit Policy of a firm should involve a trade-off between increased:

A
Sales and Increased Profit

B
Profit and Increased Costs of Receivables

C
Sales and Cost of goods sold

D
None of the above

Solution

Allowing credit to customer carries a cost to the company i.e. cost of interest of carrying debtors.Hence firm need to make a trade off between the profits generated through credit sales and the cost of receivables.
Question 5
1 / -0

Which of the following is studied with the help of financial leverage?

A
Marketing Risk

B
Interest Rate Risk

C
Foreign Exchange Risk

D
Financing Risk

Solution

Financial leverage represents the amount of debts that an equity uses to buy additional assets. Its basically represents the proportion of debt in the capital structure of the company. Higher the debt in the capital structure, higher is the financial leverage with high financing risk. Companies with high leverage are considered to be high risk of bankruptcy.
Question 6
1 / -0

Combined Leverage is obtained from OL and FL by their _____________.

A
Addition

B
Subtraction

C
Multiplication

D
Any of these

Solution

A degree of combined leverage is the combination of financial leverage and operating leverage.It provides the combined effect of degree of operating leverage and financial leverage. Combined leverage provide the % change in EPS against the % change in sales.
Question 7
1 / -0

Dividend payout ratio is equal to ____________.

A
PAT $$\div$$ Capital

B
DPS $$\div$$ EPS

C
Pref. Dividend $$\div$$ PAT

D
Pref. Dividend $$\div$$ Equity Dividend

Solution

Dividend payout ratio is a proportion of dividend per share upon earning per share. It represents the dividend pay out against the earning per share.
Question 8
1 / -0

If the closing balance of receivables is less than the opening balance for a month then which one is true out of __________________.

A
Collections > Current Purchases

B
Collections > Current Sales

C
Collections < Current Purchases

D
Collections < Current Sales

Solution

Collection is more than the current sales, In such situation closing balance of receivables will be less than the opening balance. As credit is more than the debit.

Question 9

1 / -0

If 'r' = '$$k_e$$', than MP by Walter's Model and Gordon's Model for different payout ratios would be ______________.

Unequal

Zero

Equal

Negative

Solution

RELATION OF DIVIDEND DECISION AND VALUE OF A FIRM

According to Walter’s theory, the dividend payout in relation to internal rate of return ‘r’ and (Cost of Capital) ‘k’ will impact the value of the firm in the following ways:

Relationship between r and k	Increase in Dividend Payout	Decrease in Dividend Payout
r>k	Value of the firm decreases	Value of the firm increases
r<k	Value of the firm increases	Value of the firm decreases
r=k	No change in the value of the firm	No change in the value of the firm

Question 10
1 / -0

If $$k_e$$ = r,
Under Walter's Model, which of the following is irrelevant?

A
Earnings per share

B
Dividend per share

C
DP Ratio

D
None of the above
Solution
Walter's formula :
P = D/k + [r/k(E-D)] /k or,
P = [D + r/k(E-D)]/k
where,
P= market price per share
D=dividend per share
E= earnings per share
r= internal rate of return (IRR) of the firm
k= cost of capital of the firm.
In the actual market scenario there are three types of firms
Growth firm
Normal firm
Declining firm
In case of a normal firm the internal rate of return (r) = the cost of capital (ke). It shows that the firm is making a return that a normal shareholder is already making from his funds. There would be no inertia to the shareholder to even think about purchasing or investing in such a share. He would not be concerned with the dividend payout policy of the company and hence there would be no influence of the dividend payout on the market price of the share and it would become irrelevant. In this scenario the total of the numerator would always be equal to the total earnings, because when ke = r then the retained earnings would get multiplied by $$1$$ and so basically we would be capitalising the total earnings by the cost of capital.

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Re-Attempt Weekly Quiz Competition

Statement Analysis Tools and Accounting Ratios Test - 13

Result

Statement Analysis Tools and Accounting Ratios Test - 13

Score

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Rank

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SHARING IS CARING

Question 1

5

4

80

50

Solution

Question 2

EBIT $$\div$$ Contribution

EBIT $$\div$$ EBT

EBIT $$\div$$ Sales

EBIT $$\div$$ Variable Cost

Solution

Question 3

Accumulated Profit

Gross Profit

Profit after Tax

General Reserve

Solution

Question 4

Sales and Increased Profit

Profit and Increased Costs of Receivables

Sales and Cost of goods sold

None of the above

Solution

Question 5

Marketing Risk

Interest Rate Risk

Foreign Exchange Risk

Financing Risk

Solution

Question 6

Addition

Subtraction

Multiplication

Any of these

Solution

Question 7

PAT $$\div$$ Capital

DPS $$\div$$ EPS

Pref. Dividend $$\div$$ PAT

Pref. Dividend $$\div$$ Equity Dividend

Solution

Question 8

Collections > Current Purchases

Collections > Current Sales

Collections < Current Purchases

Collections < Current Sales

Solution

Question 9

Unequal

Zero

Equal

Negative

Solution

RELATION OF DIVIDEND DECISION AND VALUE OF A FIRM

Question 10

Earnings per share

Dividend per share

DP Ratio

None of the above

Solution

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