Return on Assets, Equity, & Investments
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CPA Auditing and Attestation (AUD) › Return on Assets, Equity, & Investments
A stock priced at \$50 per share is expected to pay \$5 in dividends and trade for \$60 per share in one year. What is the expected return on this stock?
10%
25%
20%
30%
Explanation
The expected return is \$15, which consists of \$5 in dividends and the \$10 increase in stock value from \$50 to \$60. A \$15 return on a \$50 investment yields a return of 30%.
An analyst is reviewing a company with no net earnings. If the analyst wants to use a price multiples approach to valuation rather than a DCF method, the analyst would most likely select:
P/E ratio projections
Return on residual P/E ratio
PEG ratio projections
Price-sales ratio projection
Explanation
Price-sales ratio projection approaches can provide meaningful information in the event that net earnings data is not available.
An investor wants to buy shares of XYZ Corporation. If the investor uses a zero growth model, a desired rate of return of 20%, and a dividend of \$10, what was XYZ's price?
\$100
\$20
\$2
\$50
Explanation
Using a zero growth model, the price of a company's stock is equal to the dividend divided by the discount rate. P=D/R. In this case P=$10/20%. P=$50.
Which of the following transactions does not change the current ratio or total current assets?
A cash advance is made to a divisional office
Equipment is purchased with a three year note and a 10 percent cash down payment
Short term notes payable are retired with cash
A cash dividend is declared
Explanation
This does not change the current assets or the current ratio because the reduction of cash is offset by an increase in A/R.
The collection of A/R can be accelerated by the use of:
A lockbox system
Turnaround documents
Remittance advices
Bank drafts
Explanation
Lockbox systems are mailboxes in many locations where customers send payments. The bank checks these frequently.
The general formula for return on investment is calculated as:
Inflows/Outflows
Outflows/Inflows
Assets/Liabilities
Cash * Sales
Explanation
To calculate the return on something purchased, whether a stock, machine or employee, divide the cash inflows divided by the cash outflows.