Question

1- Which of the following statements is NOT true?

1. Basic shares outstanding are always included in fully diluted shares outstanding.

2. Fully diluted shares outstanding include all potentially dilutive securities that have been issued.

3. Fully diluted shares outstanding can not decrease unless shares are repurchased.

4. Basic shares outstanding are always equal to or less than fully diluted shares outstanding

2- An analyst has built a forecast showing a rapidly rising Fixed Asset Turnover Ratio. What error has the analyst likely made?

1. The CAPEX forecast is too low.

2. The depreciation forecast is too low.

3. The net profit forecast is too low.

4. The net sales forecast is too low

3- The number of shares repurchased and/or issued in a given period is shown on the:

1. income statement.

2. balance sheet.

3. cash flow statement.

4. statement of shareholders equity

4- Assume a firm has a current ratio of 2.0x and a debt ratio of 0.5x. The firm takes a charge to write-down some obsolete inventory. The firm's current ratio and debt ratio will:

1. Both decrease.

2. The current ratio will increase and the debt ratio will decrease.

3. The current ratio will decrease and the debt ratio will increase.

4. Both increase.

Answer 1

1. Fully diluted shares outstanding can not decrease unless shares are repurchased.
   Fully diluted shares include employee stock option and security conversion, such conversion/exercise is at the option of the holder; the employee can choose not to exercise option and security holder can decide not to convert security to shares, Therefore, Diluted shares can decrease at the discretion of the option holder.
   
2. The CAPEX forecast is too low.
   The formula for Fixed Asset Turnover Ratio is Net Revenue / Average Net Fixed Assets(Fixed Asset - Accumulated Depreciation). The ratio would rise under 2 circumstances i.e. the numerator increases or the denominator decreases. The capital expenditure forecast would be low resulting in a lower Average Total assets, resulting in rapid increase of Asset Turnover Ratio.
   
3. statement of shareholders equity
   Statement of shareholder's equity shows the changes to the Equity component of the Balance Sheet.
   
4. The current ratio will decrease and the debt ratio will increase.
   Current ratio = Current Assets / Current Liabilities - if there is a decrease in Current Asset the ratio will decrease because of the reduced numerator. 200/100 = 2 & 150/100 = 1.5.
   Debt Ratio = Liabilities / Assets - if there is decrease in inventory, it will result in reduced Assets and therefore denominator, resulting in increase in ratio. 100/100 = 1 & 200/100 = 2.