Question Details

stockholders of companies 




1.	Which of the following is not a true statement regarding stock options?
a.	They may cause dilution of earnings per share.
b.	They generally allow the purchase of common stock at favorable terms.
c.	They involve a compensation expense.
d.	Exercise improves the short-term liquidity and debt position of the issuing firm.
e.	The potential dilution can be disregarded in financial analysis.
	

	2.	Good Boss Inc. had the following pattern of results related to stock appreciation rights.

Shares in the plan 	20,000
Option price	$15.00
Market price—	
end year 1	$20.00
end year 2	$18.00
end year 3	$22.00

The compensation expense would be:

Year 1	Year 2	Year 3

a.	$100,000        $   -0-           $40,000
b.	 100,000          60,000           40,000
c.	 100,000         (40,000)         80,000
d.	 400,000              -0-             40,000
e.	none of the answers are correct


	3.	Using financial leverage is a good financial strategy from the viewpoint of stockholders of companies having:
a.	a high debt ratio
b.	cyclical highs and lows
c.	steady or rising profits
d.	a steadily declining current ratio
e.	none of the answers are correct


	4.	A firm has a degree of financial leverage of 1.20. If earnings before interest and tax increase by 20%, then net income:
a.	will not necessarily change
b.	will increase by 20%
c.	will decrease by 24%
d.	will decrease by 20%
e.	none of the answers are correct


	5.	The price/earnings ratio:
a.	measures the past earning ability of the firm
b.	is a gauge of future earning power as seen by investors
c.	relates price to dividends
d.	relates price to total net income
e.	all of the answers are correct





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