Exercise 1

Common stock dividends paid to stockholders are equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.

In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.

Time-series analysis evaluates performance of firms at the same point in time using financial ratios.

Both present and prospective shareholders are interested in the firm's current and future level of risk and return. These two dimensions directly affect share price.

Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity.

The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of days' sales in inventory.

The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.

Return on total assets (ROA) measures the overall effectiveness of management in generating profits with the owners' investment in the firm.

The price/earnings (P/E) ratio represents the degree of confidence that investors have in the firm's future performance.