Chapter Questions
Give a simple definition of earnings per share.
Assume that a corporation is a nonpublic company. Comment on the requirement for this firm to disclose earnings per share.
Keller & Fink, a partnership, engages in the wholesale fish market. How would this company disclose earnings per share?
Dividends on preferred stock total $$\$ 5,000$$ for the current year. How would these dividends influence earnings per share?
The denominator of the earnings per share computation includes the weighted average number of common shares outstanding. Why use the weighted average instead of the year-end common shares outstanding?
Preferred dividends decreased this year because some preferred stock was retired. How would this influence the earnings per share computation this year?
Retroactive recognition is given to stock dividends and stock splits on common stock when computing earnings per share. Why?
Why do many firms try to maintain a stable percentage of earnings retained?
Define financial leverage. What is its effect on earnings? When is the use of financial leverage advantageous and disadvantageous?
Given a set level of earnings before interest and $\operatorname{tax}$, how will a rise in interest rates affect the degree of financial leverage?
Why is the price/earnings ratio considered a gauge of future earning power?
Why does a relatively new firm often have a low dividend payout ratio? Why does a firm with a substantial growth record and/or substantial growth prospects often have a low dividend payout ratio?
Why would an investor ever buy stock in a firm with a low dividend yield?
Why is book value often meaningless? What improvements to financial statements would make it more meaningful?
Why should an investor read the note concerning stock options? How might stock options affect profitability?
Why can a relatively small number of stock appreciation rights prove to be a material drain on future earnings and cash of a company?
Explain how outstanding stock appreciation rights could increase reported income in a particular year.