HW 3 (Chr 4)
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 15.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations. 11.09% 8.85% 8.94% 9.03% 7.42%
8.94%
T or F Other things held constant, the more debt a firm uses, the lower its operating margin will be. True False
False
Meyer Inc's total invested capital is $660,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio? $217,160 $178,000 $176,220 $172,660 $138,840
$178,000
Beranek Corp has $695,000 of assets (which equal total invested capital), and it uses no debt - it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? $219,620 $278,000 $344,720 $294,680 $247,420
$278,000
Exhibit 4.1The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $)Assets 2016 Cash and securities $2,145 Accounts receivable 8,970 Inventories 12,480 Total current assets $23,595 Net plant and equipment $15,405 Total assets $39,000 Liabilities and Equity Accounts payable $7,410 Accruals 4,290 Notes payable 5,460 Total current liabilities $17,160 Long-term bonds $7,800 Total liabilities $24,960 Common stock $5,460 Retained earnings 8,580 Total common equity $14,040 Total liabilities and equity $39,000 Income Statement (Millions of $)2016Net sales $58,500 Operating costs except depreciation 54,698 Depreciation 1,024 Earnings before interest and taxes (EBIT) $2,779 Less interest 829 Earnings before taxes (EBT) $1,950 Taxes 683 Net income $1,268 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $443.63 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 35% Year-end stock price $30.42 Refer to Exhibit 4.1. What is the firm's current ratio? Do not round your intermediate calculations. 1.46 1.65 1.58 1.38 1.72
1.38
Hoagland Corp's stock price at the end of last year was $48.50, and its book value per share was $25.00. What was its market/book ratio? 2.17 1.94 1.63 1.55 1.80
1.94
Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $520,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? Do not round your intermediate calculations. 11.03% 8.76% 10.82% 11.14% 12.98%
10.82%
Ajax Corp's sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio? 11.80 8.85 13.10 12.15 14.75
11.80
Precision Aviation had a profit margin of 8.00%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE? 22.68% 16.63% 20.95% 23.76% 21.60%
21.60%
Considered alone, which of the following would increase a company's current ratio? An increase in net fixed assets. An increase in accrued liabilities An increase in notes payable. An increase in accounts receivable. An increase in accounts payable.
An increase in accounts receivable.
Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT? Company E probably has fewer growth opportunities. Company E is probably judged by investors to be riskier. Company E must have a higher market-to-book ratio. Company E must pay a lower dividend. Company E trades at a higher P/E ratio.
Company E trades at a higher P/E ratio.
T or F High current and quick ratios always indicate that the firm is managing its liquidity position well. True False
False
T or F If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. True False
False
Which of the following statements is CORRECT? If one firm has a higher total debt to total capital ratio than another, we can be certain that the firm with the higher total debt to total capital ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses. A firm's use of debt will have no effect on its profit margin. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets. The total debt to total capital ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable. If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, operating costs, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a higher operating margin and return on assets.
If two firms differ only in their use of debt—i.e., they have identical assets, identical total invested capital, sales, operating costs, interest rates on their debt, and tax rates—but one firm has a higher total debt to total capital ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger? Increase accounts receivable while holding sales constant. Increase EBIT while holding sales and assets constant. Increase accounts payable while holding sales constant. Increase notes payable while holding sales constant. Increase inventories while holding sales constant.
Increase EBIT while holding sales and assets constant.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. Use cash to repurchase some of the company's own stock. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. Use cash to increase inventory holdings.
Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
T or F If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5. True False
True
T or F Other things held constant, the more debt a firm uses, the lower its return on total assets will be. True False
True
T or F Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results. True False
True
T or F The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. True False
True