Finance and Dividend Policy Quiz
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Questions and Answers

What financial condition might lead a company to have a high dividend payout rate?

  • Increasing share buyback activities
  • A large amount of retained earnings
  • A consistent decrease in operational costs
  • Stable earnings that allow a high payout (correct)

What does a low dividend payout typically indicate about a company's earnings strategy?

  • Dividends will be increased in the near future
  • All earnings are being distributed to shareholders
  • Earnings are reinvested back into the company's operations (correct)
  • The company is experiencing consistent losses

Which factor is NOT relevant when analyzing a company's capital structure?

  • Shareholder voting rights (correct)
  • The amount of debt used in operations
  • The maturity dates of current debt issues
  • The type of security that might be required for future financing

What effect might a company with low interest coverage experience concerning its dividend policy?

<p>Limitations in its dividend policy and financing options (A)</p> Signup and view all the answers

What potential issue does the existence of convertible securities present to earnings per common share (EPS)?

<p>They can lead to an increase in outstanding shares, diluting EPS (D)</p> Signup and view all the answers

What was the Earnings per Share (EPS) for Pulp and Paper Company A in Year 3?

<p>$1.73 (B)</p> Signup and view all the answers

In Year 2, what trend ratio did Pulp and Paper Company B achieve?

<p>113 (C)</p> Signup and view all the answers

Which of the following years for Company A shows the largest percentage increase in Earnings per Share from the previous year?

<p>3 (A)</p> Signup and view all the answers

What does the decline in the trend ratios of Pulp and Paper Company B suggest about its recent performance?

<p>Over-capacity issues affecting earnings (D)</p> Signup and view all the answers

Why is it important for trend ratio calculations to utilize a truly representative base period?

<p>It affects the accuracy of year-to-year comparisons. (C)</p> Signup and view all the answers

What does the debt-to-equity ratio primarily illustrate?

<p>The relationship between a company's borrowing and shareholders' capital (A)</p> Signup and view all the answers

Which of the following statements about value ratios is accurate?

<p>Price-to-earnings ratios can help investors assess the market value of shares (A)</p> Signup and view all the answers

In assessing a manufacturing company, which ratio should be prioritized?

<p>Working capital ratio (A)</p> Signup and view all the answers

What can be concluded about individual financial ratios?

<p>Ratios must be interpreted in context to derive meaningful insights (B)</p> Signup and view all the answers

Why is the working capital ratio less significant for an electric utility company?

<p>They do not maintain significant inventories like manufacturing firms (B)</p> Signup and view all the answers

What does an above-average inventory turnover rate generally indicate about a company?

<p>The company has a well-managed balance between inventory and sales. (B)</p> Signup and view all the answers

Which scenario may lead to a low inventory turnover rate?

<p>The inventory contains a significant amount of unsaleable goods. (C)</p> Signup and view all the answers

What do value ratios measure in relation to a company's stock market performance?

<p>The comparison between market price of shares and financial statement information. (B)</p> Signup and view all the answers

How is the dividend payout ratio calculated?

<p>Common Share Dividends divided by Profit multiplied by 100. (B)</p> Signup and view all the answers

What happens if the dividend payout ratio is deducted from 100?

<p>It shows the percentage of earnings reinvested in the business. (D)</p> Signup and view all the answers

Flashcards

Capital Structure

The mix of debt and equity a company uses to finance its operations. It reveals how much debt a company uses and suggests if future financing may be needed.

Interest Coverage

A company’s ability to cover its interest payments with its earnings. A low ratio may limit dividend policy & financing options.

Depleting Resources

When a company's earnings are based on using up a finite resource, like mining companies extracting minerals.

Low Dividend Payout

When a company has more earnings than it distributes to shareholders through dividends. This could mean company is reinvesting in growth or preparing for future dividend increases.

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High Dividend Payout

When a company pays a higher percentage of earnings to shareholders, indicating stable earnings, declining earnings, or a company using up its resources.

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Trend Ratio

A measure of a company's earnings performance over time, expressed as a percentage relative to a base year.

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Base Period

The year used as the starting point for calculating trend ratios. The EPS (Earnings Per Share) for this year is set as 100, and all other years are compared to it.

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Earnings Decline

A decrease in a company's earnings over time, often caused by factors like over-capacity or declining demand.

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Adding New Machinery

The practice of adding new machinery or equipment, which can cause temporary over-capacity and lower earnings until demand catches up.

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Misleading Trend Line

A trend line is unreliable when the base year does not accurately represent the typical performance of the company.

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Working Capital Ratio

A ratio that shows the relationship between a company's current assets and current liabilities. It indicates how well a company can meet its short-term financial obligations.

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Operating Performance Ratios

Ratios that assess a company's ability to manage and utilize its resources effectively.

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Risk Analysis Ratios

Ratios that provide insights into a company's financial health and its ability to manage its debt obligations. They show how much debt a company has compared to its equity.

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Value Ratios

Ratios that help investors understand the value of a company's stock and the return they can expect from owning it. They link a company's earnings with its stock price.

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Debt-to-Equity Ratio

A ratio that measures the relationship between a company's debt and its equity. It shows how much of the company's funding comes from borrowing versus shareholder investments.

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Inventory Turnover

A measure of how efficiently a company manages its inventory, calculated by dividing the cost of goods sold by the average inventory.

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High Inventory

When a company holds too much inventory, leading to potential waste, deterioration, or obsolescence.

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Low Inventory

When a company doesn't have enough inventory to meet customer demand, leading to lost sales and potentially unhappy customers.

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Price-Earnings Ratio (P/E Ratio)

A financial ratio that compares the market value of a company's stock to its earnings per share.

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Dividend Payout Ratio

The percentage of a company's profits that is paid out to shareholders in the form of dividends.

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