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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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- The cost of equity is easier to estimate than the cost of either debt or preferred stock. True FalseExplain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because ofa. leverageb. solvencyc. Yieldd. quick assets
- If the revenues are correctly reported and the gross profit of a company is understated, what is the effect on stockholders' equity? a. understated b. correctly stated c. overstated d. None of these choices are correct.Is it true of false that stock sold for amounts in excess of par value results in a gain reported on the income statement?Choose the letter of the correct answer 2. When the cost model/method is used to account for an investment, which of the following would not result in an adjustment to the amount recorded in the investment account? A. The investee declares a regular dividend B. The investor sells some of the stock C. The investee declares a liquidating dividend D. The stock’s market value decreases to a point where is it below the investor’s cost
- NPAT Less prefernce dividend is used in O a. Return on Equity O b. Return on Equity share capital О с. Return on Capital Employed O d. Debt service ratioWhat is one problem in translating retained earnings using either the temporal or current rate method? A) There is no problem, since both methods use the historic rate method for stockholders' equity accounts. B) Dividends are based on an average cost method. C) Net income is calculated differently, depending upon which method is used. D) Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.Everything else remaining the same, the cheapest source in the calculation of WACC is: A) after tax cost of debt B) preferred stock C) cost of external equity D) cost of internal equity
- Which of the following is False in regards to Share premium account? a. It will be shown under the shareholders equity b. It will be collected when the issue price is more than the par value of shares c. It will be collected when the par value of share is more than the issue price d. It will not be shown under current assets in the balance sheetingH7. Which of the following ratios does not use net income in its calculation? Multiple Choice Net profit margin Earnings per share Return on equity Fixed asset turnover Explain also wrong options and explain with detailsWHICH STATEMENT IS FALSE?A. If the net income of prior period is overstated because of the change in accounting policy, the effect is deducted from the beginning retained earnings.B. Equity is also the net assets.C. Prior period errors are shown as adjustment of the ending balance of retained earnings. If the net income of the prior period is overstated, the amount of the error uis deducted from retained earnings.D. In the conversion of preference chares into ordinary shares, if the total par or stated value of the ordinary shares is more than the original issue of the preference shares, the difference is charged to retained earnings.