Instructions

Only Question Q9-9 & Q9-11

(Pg. 376)

Allof P9-14 (pg. 382-383).

Q 9-9 Define financial leverage. What is its effect on earn- ings? When is the use of financial leverage advantageous and disadvantageous? Q 9-10 Given a set level of earnings before interest and tax, how will a rise in interest rates affect the degree of fi- nancial leverage? Q 9-1 1 Why is the price/earnings ratio considered a gauge of future earning power?nvestor P 9-14 Answer the following multiple-choice questions: d. In 2009 and 2010, Zoret Company reported earnings per share of 90.80 and $1.00, resp avely. In 2011, Zoret Company declared a 4-for-1 stock split. For the year 2011, Zoref Company reported earnings of $0.30 per share. The appropriate earnings per share presen. tation for a three-year comparative analysis that includes 2009, 2010, and 2011 would ph 2009 2010 2009 2011 2010 $0.80 $0.25 1 100 1. $0.30 $4.00 $3.20 28 $0.30 N $0.25 $0.20 201 $0.30 $0.25 $0.20 $1.20 25 20 $4.00 $3.20 $1.20 b. The degree of financial leverage for Zorro Company was 1.50 when EBIT was reported at $1,000,000. If EBIT goes to $2,000,000, the accompanying change in net income will be 1. $2,500,000. 2. $3,000,000. 3. $2,000,000. 4. $1,500,000. 5. $1,000,000. In 2012, Zello Company declared a 10% stock dividend. In 2011, earnings per share was $1.00. When the 2011 earnings per share is disclosed in the 2012 annual report, it will be disclosed at 1. $1.00. 2. $1.10. 3. $1.20. 4. $0.91. 5. $0.81. for the firm? d. Which of the following ratios usually reflects investors' opinions of the future prospects 1. Dividend yield 2. Book value per share (3.) Price/earnings ratio 4. Earnings per share 5. Dividend payout e. Which of the following ratios gives a perspective on risk in the capital structure? 1. Book value per share 2. Dividend yield 3. Dividend payout 4. Degree of financial leverage 5. Price/earnings ratio f. The earnings per share ratio is computed for 1. Convertible bonds. 2. Redeemable preferred stock. 3. Common stock. 4. Nonredeemable preferred stock. 5. None of the above. of companies having g. Increasing financial leverage can be a risky strategy from the viewpoint of stockholders 1. Steady and high profits. 2. Low and falling profits. 3. Relatively high and increasing profits. 4. A low debt/equity ratio and relatively high profits. 5. None of the above.h. A firm has a degree of financial leverage of 1.3. If earnings before interest and tax increase by 10%, then net income METHOMA MALION 1. Will increase by 13.0%. 1 .3 x 10 2. Will increase by 13. 3. Will decrease by 13.0%. 4. Will decrease by 13. 5. None of the above. re emphasis i. The ratio that represents dividends per common share in relation to market price per common share is 1. Dividend payout. 2. Dividend yield. ELECTRONICS (2 010//) asblodsisde nommoo 3. Price/earnings. 4. Book value per share. DTO side fog (esol) eggingon 191/ 5. Percentage of earnings retained. j. Book value per share may not approximate market value per share because 601. Investments may have a market value substantially above the original cost. 2. Land may have substantially increased in value. 3. Market value reflects future potential earning power. 4. The firm owns patents that have substantial value. 5. All of the above