CPA Business Environment and Concepts (BEC) : Return on Assets, Equity, & Investments
Study concepts, example questions & explanations for CPA Business Environment and Concepts (BEC)
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Example Questions
Example Question #1 : 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%
30%
20%
30%
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%.
Example Question #1 : Return On Assets, Equity, & Investments
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
Price-sales ratio projection
PEG ratio projections
Return on residual P/E ratio
Price-sales ratio projection
Price-sales ratio projection approaches can provide meaningful information in the event that net earnings data is not available.
Example Question #3 : Return On Assets, Equity, & Investments
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?
$2
$50
$20
$100
$50
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.
Example Question #2 : Return On Assets, Equity, & Investments
Which of the following transactions does not change the current ratio or total current assets?
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 advance is made to a divisional office
A cash dividend is declared
A cash advance is made to a divisional office
This does not change the current assets or the current ratio because the reduction of cash is offset by an increase in A/R.
Example Question #5 : Return On Assets, Equity, & Investments
The collection of A/R can be accelerated by the use of:
A lockbox system
Remittance advices
Bank drafts
Turnaround documents
A lockbox system
Lockbox systems are mailboxes in many locations where customers send payments. The bank checks these frequently.
Example Question #2 : Return On Assets, Equity, & Investments
The general formula for return on investment is calculated as:
Inflows/Outflows
Outflows/Inflows
Cash * Sales
Assets/Liabilities
Inflows/Outflows
To calculate the return on something purchased, whether a stock, machine or employee, divide the cash inflows divided by the cash outflows.
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