Q: An investor is interested in the earnings per share (EPS) of a company. Which formula should they use to calculate basic EPS?

$$ \text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average \# of Common Shares Outstanding}} $$

Q: The Price-to-Earnings (P/E) ratio is calculated as:

$$ \text{P/E Ratio} = \frac{\text{Market Price of Common Stock}}{\text{Earnings per Share}} $$

Q: The Dividend Payout Ratio is calculated as:

$$ \text{Dividend Payout Ratio} = \frac{\text{Dividends per Share}}{\text{Earnings per Share}} $$

Question 1

Which of the following best describes the purpose of market ratios in financial statement analysis?

Accepted Answer

They measure returns to stockholders and the value the marketplace puts on a company’s stock.

Question 2

An investor is interested in the earnings per share (EPS) of a company. Which formula should they use to calculate basic EPS?

Accepted Answer

$$ 	ext{Basic EPS} = \frac{	ext{Net Income} - 	ext{Preferred Dividends}}{	ext{Weighted Average \# of Common Shares Outstanding}} $$

Question 3

A company has net income of $9,294,000 and average shares outstanding of 4,299,041. What is its earnings per share (EPS)?

Accepted Answer

$$ \frac{9,294,000}{4,299,041} = 2.16 $$

Question 4

Which of the following would cause the diluted EPS to be lower than the basic EPS?

Accepted Answer

The existence of convertible securities, options, or warrants that increase the number of shares outstanding.

Question 5

A company has net income after preferred dividends of $10,000,000, 10,000,000 shares outstanding, and 1,000,000 options outstanding. What is the diluted EPS?

Accepted Answer

$$ \frac{10,000,000}{11,000,000} = 0.91 $$

Question 6

Which of the following is NOT a type of EPS commonly reported or discussed?

Accepted Answer

Market Value EPS

Question 7

The Price-to-Earnings (P/E) ratio is calculated as:

Accepted Answer

$$ 	ext{P/E Ratio} = \frac{	ext{Market Price of Common Stock}}{	ext{Earnings per Share}} $$

Question 8

If a company’s stock trades at $$30.00 and its earnings per share is 2.16$$, what is its P/E ratio?

Accepted Answer

$$ \frac{30.00}{2.16} = 13.9 $$

Question 9

Which of the following factors is LEAST likely to affect a company’s P/E ratio?

Accepted Answer

Amount of inventory purchased

Question 10

A high P/E ratio generally indicates:

Accepted Answer

The market expects higher future growth from the company.

Question 11

The Dividend Payout Ratio is calculated as:

Accepted Answer

$$ 	ext{Dividend Payout Ratio} = \frac{	ext{Dividends per Share}}{	ext{Earnings per Share}} $$

Question 12

If a company pays dividends per share of $$0.36 and has earnings per share of 2.16$$, what is its dividend payout ratio?

Accepted Answer

$$ \frac{0.36}{2.16} = 0.167  or 16.7$$%

Question 13

The Dividend Yield is calculated as:

Accepted Answer

$$ 	ext{Dividend Yield} = \frac{	ext{Dividends per Share}}{	ext{Market Price of Common Stock}} $$

Question 14

If a company pays dividends per share of $$0.36 and its stock price is 30.00$$, what is its dividend yield?

Accepted Answer

$$ \frac{0.36}{30.00} = 0.012  or 1.2$$%

Question 15

Which of the following is a reason an investor might prefer a company with a low dividend payout ratio?

Accepted Answer

It suggests the company is reinvesting more earnings for growth.

Question 16

Which of the following best describes the relationship between dividend yield and stock price?

Accepted Answer

As stock price increases, dividend yield decreases if dividends per share remain constant.

Question 17

An investor is evaluating two companies: Company A has a P/E ratio of 10, and Company B has a P/E ratio of 25. Which statement is most accurate?

Accepted Answer

Company B’s stock is valued higher relative to its earnings, possibly due to higher expected growth.

Question 18

Which of the following is a limitation of relying solely on market ratios for investment decisions?

Accepted Answer

Market ratios ignore the company’s environment and qualitative factors.

Question 19

A company issues 100,000 new shares in June and buys back 50,000 shares in November. If it started the year with 2,000,000 shares, what is the weighted average number of shares outstanding for the year?

Accepted Answer

2,041,667

Market Ratios and Investment Analysis: Financial Statement Analysis

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