5) Which of the following shows the relationship between net income available to common shareholders and average common equity?
A) Net income
B) The rate of return on total assets
C) Inventory turnover
D) The rate of return on common stockholders' equity
6) The rate of return on total assets and the rate of return on common stockholders' equity are used to evaluate the:
A) profitability of the business.
B) liquidity of the business.
C) ability to pay current liabilities with current assets.
D) cash flow of the business.
7) Rattner Company has the following information available for the year 2014:
Total assets, January 1
|
$420,000
|
Total assets, December 31
|
500,000
|
Net income
|
37,400
|
Interest expense
|
4,000
|
How much is the return on total assets? (Please round to two decimal places.)
A) 0.10
B) 0.04
C) 0.09
D) 0.12
8) Quad Sales has the following information for the year 2015:
Total assets, January 1
|
$102,000
|
Total assets, December 31
|
108,000
|
Net income
|
2,100
|
Interest expense
|
0
|
How much is the return on total assets? (Please round to two decimal places.)
A) 0.10
B) 0.02
C) 0.09
D) 0.12
9) Reed Company reports the following information for the year 2013:
Net income
|
$46,000
|
Preferred dividends
|
12,000
|
Common equity, Jan 1
|
800,000
|
Common equity, Dec 31
|
900,000
|
Please calculate the rate of return on common stockholders' equity. Please round to 3 decimal places.
A) 0.054
B) 0.040
C) 0.043
D) 0.014
10) Sheffield Company had $42,000 of net income in 2013. Equity at the beginning of the year was $1,200,000 and at the end of the year was $1,600,000. Sheffield has no preferred stock. Please calculate the rate of return on common stockholders' equity. (Round to 3 decimal places.)
A) 0.035
B) 0.026
C) 0.030
D) 0.032
Learning Objective 8
1) Normally, a company's book income and tax income should be the same.
2) Deferred tax can either be an asset or a liability.
3) Origami Company is considering a new project and needs to raise $800,000 of capital. Their after-tax net income would be $75,000 if they do not implement the new project. If the new project is implemented, it will add an additional $50,000 of profits before tax and interest. Origami's income tax rate is 40%. If they use debt financing, the interest will be at 5%. Origami has 25,000 shares of common stock outstanding and no preferred stock. They would have to issue an additional 10,000 shares of common stock to finance the project with equity capital.
If Origami decides to use equity financing, their earnings per share will be higher than if they use debt.
4) A company's income tax expense is calculated on the basis of book income, but the income tax payable amount is based on the:
A) sales tax rate applied to sales revenues.
B) amount of payroll tax that has not been paid yet.
C) amount of taxable income, as calculated on the income tax return.
D) amount of dividends paid to shareholders.
5) Which of the following factors may cause a difference between book income and taxable income?
A) The company uses straight-line depreciation for books and accelerated depreciation for tax.
B) The company pays its federal income taxes quarterly as opposed to annually.
C) The company sells stock right before the end of the year.
D) The company has a deposit in transit at year-end.