Chapter 4
current ratio
current assets/current liabilities
Firm A's balance sheet is shown below. By how much would its current ratio change if it sold off $4,000 of inventories and used the funds obtained to reduce notes payable by $3,000 and accruals by $1,000? Assets Cash 2,346 AR 6,748 Inventories 10,520 Current Assets 19,614 Net Fixed assets 12,351 Total Assets 31,965 Liabilities AP 2,346 Accruals 2,758 Notes Payable 3,222 Current Liabilities 8,326 Common equity 23,639 Total claims 31,965
1.25
trend analysis
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition.
liquid asset
An asset that can be converted to cash quickly without having to reduce the asset's price very much.
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company's total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm's interest rate is 5%, and its tax rate is 40%. What is its ROIC?
EBIT 1,916,666,667 Interest 250,000,000 EBT 1,666,666,667 Taxes (40%) 666,666,667 Net Income = 1,000,000,000 EBT+interest .05*.5*10,000,000,000 1,000,000,000/(1-.40) EBT*.40 1,916,666,667/10,000,000,000=11.5%
Return on Invested Capital (ROIC)
EBIT(1-T)/total invested capital
TIE
EBIT/ interest expense
Basic Earning Power (BEP) Ratio
EBIT/Total Assets
A firm's ROE is equal to 9% and its ROA is equal to 6%. The firm finances only with short-term debt, long-term debt, and common equity, so assets equal total invested capital. The firm's total debt to total capital ratio must be 50%. a. True b. False
False
A high current ratio is always a good indication of a well-managed liquidity position. True/False
False
Companies with high P/E and high M/B ratios generally are regarded as being relatively risky and/or having relatively poor growth prospects, according to investors. a. True b. False
False
If a firm takes steps that increase its expected future ROE, this means that its shareholders' wealth must also increase. True or false?
False
Return on Common Equity (ROE)
Net Income/Common Equity
Profit Margin (or Net Profit Margin)
Net Income/Sales
return on total assets (ROA)
Net Income/Total Assets
EVA
Net income - (Equity*Cost of Equity) OR (Equity)*(Net income/equity-cost of equity) OR Equity*(ROE-Cost of Equity)
total assets turnover ratio
Sales/Total Assets
benchmarking
The process of comparing a particular company with a subset of top competitors in its industry.
times-interest-earned (TIE) ratio
The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the firm's ability to meet its annual interest payments. EBIT/Interest charges
operating margin
This ratio measures operating income, or EBIT, per dollar of sales; operating income/sales revenue
An asset is liquid if it is easily converted to cash. True/False
True
Analyzing financial statements to help appraise a firm's financial position and strength is called "ratio analysis." True/False
True
The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future. a. True b. False
True
The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income. a. True b. False
True
Collins Corporation had sales of $100,000, year-end receivables of $12,000, inventories of $21,500, and total assets of $75,000. It uses a 365-day year for ratio calculations. What was Collins' total assets turnover ratio? a. 1.33 b. 1.77 c. 1.61 d. 1.46 e. 1.95
a. 1.33
Keys Industries has assets of $2,100, sales of $2,960, operating costs of $2,675, and $250 of total current liabilities consisting of $200 of accruals and $50 of notes payable. Its long-term debt is $850, its common equity is $1,000, its interest charges are $125, and its tax rate is 40%. What is Keys' basic earning power (BEP) ratio? a. 13.57% b. 12.25% c. 12.89% d. 11.05% e. 11.63%
a. 13.57%
Etzkorn Corporation's year-end assets are $1,650, its sales for the year are $2,730, its operating costs are $2,438, its interest charges are $52, and its tax rate is 40%. Its total current liabilities are $300 consisting of $225 of accruals and $75 of notes payable. Its long-term debt is $450. Etzkorn uses only debt and common equity in its capital structure. Using the DuPont equation, what is Etzkorn's ROE rounded to the nearest whole percentage? a. 16% b. 13% c. 14% d. 15% e. 17%
a. 16%
Which of the following statements is CORRECT? a. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. b. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be. c. Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk. d. Other things held constant, the more debt a firm uses, the higher its operating margin will be. e. Other things held constant, the more debt a firm uses, the higher its profit margin will be.
a. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
Suppose a firm's P/E ratio showed a rising trend over the last 5 years. This would suggest that the firm's image was a. not changing. b. getting better. c. getting worse.
b. getting better.
book value per share
common equity / shares outstanding
Cutler Enterprises has current assets equal to $4.5 million. The company's current ratio is 1.25. What is the firm's level of current liabilities (in millions)? a. $1.8 b. $2.9 c. $0.8 d. $3.6 e. $2.4
d. $3.6
Wie Corp's sales last year were $260,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant? Do not round your intermediate calculations. a. $241,733 b. $222,000 c. $197,333 d. $207,200 e. $246,667
e. $246,667
X-1 Corp's total assets at the end of last year were $490,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio? a. 10.29% b. 11.57% c. 13.07% d. 12.86% e. 10.71%
e. 10.71%
market/book (M/B) ratio
market price per share/book value per share
Days sales outstanding (DSO) can be used to determine how long it takes, on average, to collect payment after a sale is made. The DSO can be compared with the firm's credit terms to get an idea of whether customers are paying on time. a. True b. False
True
An analysis based on ratios should be supplemented with judgmental considerations such as the possible effects of new competitors like the Internet on newspapers, labor problems such as those experienced by the U.S. auto industry, environmental problems such as those facing the U.S. electric utilities, and the like. If the fundamentals of an industry change, then strong historical ratios won't help its future performance. True or false?
True
Due to significant variations in accounting methods among firms, meaningful ratio comparisons between firms is more difficult than it would be if all firms used the same or similar accounting methods. a. True b. False
True
If current liabilities are rising faster than current assets, the current ratio will fall; and this is a sign of possible trouble. True/False
True
If the current ratio is high and the inventory turnover ratio is low, relative to industry norms, then the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False
True
Rowe and Company has an equity multiplier equal to 2.0, a total assets turnover of 0.25, and a profit margin of 10%. Rowe has no preferred stock. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 14% and (2) by increasing debt utilization. Total assets turnover will not change. The firm's total assets equal $10 million, its total current liabilities are $400,000, and the firm has no short-term debt or preferred stock. What is the firm's total debt to total capital ratio if the ROE is doubled under these assumptions? a. 0.600 b. 0.635 c. 0.706 d. 0.750 e. 0.557
b. 0.635
Beer Brothers Inc. forecasts that its year-end assets will be $3,000, its sales will be $3,500, its operating costs will be $2,650, its interest charges will be $100, and its tax rate will be 40%. Its total current liabilities are $250 consisting of $60 of accruals and $190 of notes payable. Its long-term debt is $950. Beer's capital structure consists of only debt and common equity. What is Beer's forecasted equity multiplier? a. 2.25 b. 1.67 c. 1.50 d. 2.50 e. 2.00
b. 1.67
A fire has destroyed many of the financial records at Anderson Associates. You are assigned to piece together information to prepare a financial report. You have found that the firm's return on equity is 12% and its equity multiplier is 1.6667. Anderson has no preferred stock, its total current liabilities equal $250,000, and its total assets equal $2,500,000. The firm has no short-term debt. What is the firm's total debt to total capital ratio if its ROE is 15%, its ROA is 10%, and its total current liabilities and total assets remain constant? a. 50.0% b. 25.9% c. 66.7% d. 45.0% e. 33.3%
b. 25.9%
From the financial statements given below, calculate the market value ratios, that is, the price/earnings ratio and the market/book value ratio. Roberts had an average of 10,000 shares outstanding during 2014, and the stock price on December 31, 2014, was $40.00. a. 4.76; 1.54 b. 4.76; 0.36 c. 3.20; 1.54 d. 3.20; 0.36 e. 4.21; 0.36
b. 4.76; 0.36
Bauer Inc. has $2,050 of assets and $2,995 of sales. Its operating costs are $2,701, including $31 of lease payments, $450 of depreciation, and $500 of amortization charges. Its total current liabilities are $315, consisting of $265 of accruals and $50 of notes payable. Its long-term debt is $850, and its interest charges are $125. The firm's debt includes all short-term and long-term interest-bearing debt, but it does not include operating items such as accounts payable and accruals. What is Bauer's debt-to-capital ratio? a. 57.0% b. 50.4% c. 63.4% d. 65.1% e. 60.2%
b. 50.4%
Debt management ratios
which give an idea of how the firm has financed its assets as well as the firm's ability to repay its long-term debt.
Liquidity ratios
which give an idea of the firm's ability to pay off debts that are maturing within a year.
Market value ratios
which give an idea of what investors think about the firm and its future prospects.
quick, or acid test, ratio
(Current Assets - Inventory) / Current Liabilities
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company's total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm's interest rate is 5%, and its tax rate is 40%. What is its ROA?
1 billion/10 billion = 10%
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company's total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm's interest rate is 5%, and its tax rate is 40%. What is its profit margin?
1 billion/20 Billion = 5%
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company's total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm's interest rate is 5%, and its tax rate is 40%. What is its ROE?
1 billion/5 billion = 20 %
ratio analysis is used by three main groups:
1. Managers 2. Credit Analysts 3. Stock Analysts
profitability ratios
A group of ratios that show the combined effects of liquidity, asset management, and debt on operating results.
debt management ratios
A set of ratios that measure how effectively a firm manages its debt.
A company has current liabilities of $500 million, and its current ratio is 2.0. What is the total of its current assets?
Current ratio = 2.0 2.0 = Current Assets/Current Liabilities 2.0 = CA/500 million CA= 2*500 million CA=1,000 million
A company has current liabilities of $500 million, and its current ratio is 2.0. If this firm's quick ratio is 1.6, how much inventory does it have?
Current ratio = 2.0 2.0 = Current Assets/Current Liabilities 2.0 = CA/500 million CA= 2*500 million CA=1,000 million 1,000 million - Inventories = 1.6 * (500 million) Inventories = 1,000 million - 800 million = 200 million
If a firm used more debt, this would increase its interest costs and lower its profit margin, and that would almost certainly cause its ROE to decline. True or false?
False
One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. a. True b. False
False
Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA. a. True b. False
False
Suppose two firms have identical sales, operating costs, employee competence, assets, and financing policies. These firms would have to report the same amount of profits, and their ratios would all be the same, provided they both followed generally accepted accounting principles in their financial reporting. True or false?
False
The average firm in each industry must have an M/B ratio that is equal to 1.0. True or false?
False
The equity multiplier can be found as ROE/ROA. a. True b. False
False
The fact that relationships can sometimes be manipulated is one problem with ratio analysis. If our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE. a. True b. False
False
You are looking at two firms in the same industry. High Performance Tire Co. has a profit margin of 10% and All-Year Tires has a profit margin of 8%. High Performance Tire Co.'s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus one of 20% for All-Year Tires. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of High Performance Tire Co.'s higher profit margin. a. True b. False
False
A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company's total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm's interest rate is 5%, and its tax rate is 40%. Would this firm's ROA increase if it used less leverage? (The size of the firm does not change.)
If the company used less debt, it would increase net income because interest expense would be reduced. Because assets would not change and net income increases, ROA will increase.
DuPont equation
ROE = Net Profit Margin x Asset Turnover x Leverage Multiplier Or... Net Income / Equity **A formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. It shows the relationships among asset management, debt management, and profitability ratios.
"window dressing" techniques
Techniques employed by firms to make their financial statements look better than they really are.
total debt to total capital
The ratio of total debt to total capital. Total debt/(Total debt+Equity)
Asset management ratios
which give an idea of how efficiently the firm is using its assets.
Ratios help us make better comparisons between the operations of firms that differ in size and other aspects. True or false?
True
The asset management ratios measure how effectively a firm is managing its assets relative to sales. True or false?
True
The basic earning power ratio (BEP) is a better means of judging a company's operating efficiency than the return on total assets because the BEP does not reflect the effects of debt and taxes. a. True b. False
True
The easier it is to convert an asset to cash at close to a given value, the more liquid the asset. True or false?
True
Trend analysis is one method of examining changes in a firm's performance over time, which the analysis of only one year's ratios will not show. a. True b. False
True
International Appliances has a current ratio of 1.2. Which of the following actions would improve (increase) this ratio? Use cash to pay off current liabilities. Use cash to pay off some long-term debt. Collect some of the current accounts receivable. Purchase additional inventory on credit (accounts payable). Use cash to pay for some fixed assets.
Use cash to pay off current liabilities.
A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40%, and a profit margin of 6%. What is the firm's TIE, if its profit margin decreases to 3% and its interest charges double to $40,000 per year? a. 3.5 b. 4.2 c. 3.7 d. 2.5 e. 3.0
a. 3.5
Jericho Motors has $4 billion in total assets. The other side of its balance sheet consists of $0.4 billion in current liabilities, $1.2 billion in long-term debt, and $2.4 billion in common equity. The company has 500 million shares of common stock outstanding, and its stock price is $25 per share. What is Jericho's market-to-book ratio? a. 5.21 b. 4.27 c. 1.42 d. 3.57 e. 2.00
a. 5.21
A fire has destroyed many of the financial records at Anderson Associates. You are assigned to piece together information to prepare a financial report. You have found that the firm's return on equity is 12% and its equity multiplier is 1.6667. Anderson has no preferred stock. What is its return on assets? a. 7.20% b. 4.90% c. 6.60% d. 8.40% e. 5.35%
a. 7.20%
Suppose a firm's managers receive bonuses that increase with the size of the firm's ROE, which was 30% last year and is forecasted to remain at this level during the coming year provided the firm takes on no new expansion projects. Its cost of capital is 10%. Now the firm has the opportunity to make a new investment that promises a 20% return on the invested capital. Which of the following statements is not correct? a. The new project should be rejected because, if it is accepted, the firm's ROE will decline from 30% because the new ROE will be a weighted average of the old 30% and the 20% returns on the new investment. b. The example in this question demonstrates the serious weakness in using ROE as the primary criterion in setting executive compensation. c. The new project should be accepted because its expected return exceeds the cost of the capital that will be used to finance it.
a. The new project should be rejected because, if it is accepted, the firm's ROE will decline from 30% because the new ROE will be a weighted average of the old 30% and the 20% returns on the new investment.
Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? a. The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio. b. The transactions would lower both firm' financial strength as measured by their current ratios. c. The transactions would improve Safeco's financial strength as measured by its current ratio but lower Risco's current ratio. d. The transactions would have no effect on the firm' financial strength as measured by their current ratios. e. The transactions would improve both firms' financial strength as measured by their current ratios.
a. The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
Lewis Inc. has sales of $2 million per year, all of which are credit sales. Its days sales outstanding is 42 days. What is its average accounts receivable balance? Assume a 365-day year. a. $266,667 b. $366,750 c. $230,137 d. $333,333 e. $350,000
c. $230,137
Brookman Inc.'s latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding, and its debt/total invested capital ratio was 44%. The firm finances using only debt and common equity and its total assets equal total invested capital. How much debt was outstanding? a. $4,586,179 b. $4,827,557 c. $5,630,625 d. $5,081,639 e. $5,349,094
c. $5,630,625
From the financial statements given below, calculate the total debt to total capital and times-interest-earned ratios. a. 0.350; 3.16 b. 0.433; 3.16 c. 0.433; 5.00 d. 0.350; 5.00 e. 0.555; 3.16
c. 0.433; 5.00
Taylor Toys Inc. has $6 billion in assets, and its tax rate is 35%. The company's basic earning power (BEP) is 10%, and its return on assets (ROA) is 2.5%. What is Taylor's times-interest-earned (TIE) ratio? a. 2.750 b. 2.000 c. 1.625 d. 2.433 e. 3.000
c. 1.625
Beer Brothers Inc. forecasts that its year-end assets will be $3,000, its sales will be $3,500, its operating costs will be $2,650, its interest charges will be $100, and its tax rate will be 40%. Its total current liabilities are $250 consisting of $60 of accruals and $190 of notes payable. Its long-term debt is $950. Beer's capital structure consists of only debt and common equity. What is Beer's forecasted profit margin? a. 13.18% b. 13.51% c. 12.86% d. 14.20% e. 13.85%
c. 12.86%
Bauer Inc. has $2,050 of assets and $2,995 of sales. Its operating costs are $2,701, including $31 of lease payments, $450 of depreciation, and $500 of amortization charges. Its total current liabilities are $315, consisting of $265 of accruals and $50 of notes payable. Its long-term debt is $850, and its interest charges are $125. The firm's debt includes all short-term and long-term interest-bearing debt, but it does not include operating items such as accounts payable and accruals. What is Bauer's times-interest-earned (TIE) ratio? a. 2.23 b. 2.72 c. 2.35 d. 2.59 e. 2.47
c. 2.35
Keys Industries has assets of $2,100, sales of $2,960, operating costs of $2,675, and $250 of total current liabilities consisting of $200 of accruals and $50 of notes payable. Its long-term debt is $850, its common equity is $1,000, its interest charges are $125, and its tax rate is 40%. What is Keys' profit margin? a. 2.92% b. 3.56% c. 3.24% d. 2.62% e. 2.36%
c. 3.24%
From the financial statements given in Exhibit 4-1, calculate the asset management ratios, that is, the inventory turnover ratio, fixed assets turnover, total assets turnover, and days sales outstanding. Assume a 365-day year. a. 3.84; 2.20; 1.48; 34.10 days b. 3.84; 2.00; 1.24; 34.10 days c. 3.84; 2.00; 1.06; 37.26 days d. 3.84; 2.00; 1.06; 35.25 days e. 3.84; 2.00; 1.06; 34.10 days
c. 3.84; 2.00; 1.06; 37.26 days
Last year Shrieves Inc.'s sales were $68,250 and its year-end accounts receivable were $5,782. This year sales rose to $98,625, and its receivables rose to $12,305. What was last year's DSO calculated on a 365-day year? a. 31.6 days b. 34.7 days c. 30.9 days d. 32.4 days e. 33.1 days
c. 30.9 days
Keys Industries has assets of $2,100, sales of $2,960, operating costs of $2,675, and $250 of total current liabilities consisting of $200 of accruals and $50 of notes payable. Its long-term debt is $850, its common equity is $1,000, its interest charges are $125, and its tax rate is 40%. What is Keys' return on total assets, ROA? a. 3.33% b. 3.70% c. 4.57% d. 4.80% e. 4.11%
c. 4.57%
From the financial statements given below, use the DuPont equation to determine Roberts' return on equity. a. 7.24% b. 6.90% c. 7.60% d. 7.47% e. 8.41%
c. 7.60%
Which of the following is an example of a liquid asset? a. House b. Roth IRA c. Checking account d. Car
c. Checking account
Which of the following statements regarding the DuPont Equation is CORRECT? a. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's return on assets, fixed assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE. b. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's operating margin, inventory turnover, and the debt ratio to explain how the interaction among these ratios impact the firm's ROE. c. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's profit margin, total assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE. d. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's operating margin, total assets turnover, and the times-interest-earned ratio to explain how the interaction among these ratios impact the firm's ROE. e. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's gross margin, return on assets, and the debt ratio to explain how the interaction among these ratios impact the firm's ROE.
c. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's profit margin, total assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE.
Profitability ratios
which give an idea of how profitably the firm is operating and utilizing its assets.
Southeast Jewelers Inc. sells only on credit. Its days sales outstanding is 73 days, and its average accounts receivable balance is $500,000. What are its sales for the year? Assume a 365-day year. a. $2,750,000 b. $2,000,000 c. $1,500,000 d. $2,500,000 e. $3,000,000
d. $2,500,000
Collins Corporation had sales of $100,000, year-end receivables of $12,000, inventories of $21,500, and total assets of $75,000. It uses a 365-day year for ratio calculations. What was its inventory turnover ratio? a. 5.63 b. 4.19 c. 5.12 d. 4.65 e. 3.77
d. 4.65
From the financial statements given in Exhibit 4-1, calculate the profitability ratios, that is, the operating margin, the profit margin, return on total assets, return on common equity, return on invested capital, and basic earning power of assets. a. 7.29%; 3.50%; 4.25%; 7.60%; 6.50%; 8.00% b. 7.29%; 3.70%; 3.50%; 7.60%; 5.38%; 7.71% c. 7.50%; 4.25%; 3.70%; 7.60%; 6.50%; 8.00% d. 7.29%; 3.50%; 3.70%; 7.60%; 5.38%; 7.71% e. 7.50%; 3.70%; 3.50%; 8.00%; 4.75%; 8.00%
d. 7.29%; 3.50%; 3.70%; 7.60%; 5.38%; 7.71%
Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, 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? a. 9.93% b. 10.42% c. 11.49% d. 9.45% e. 10.94%
d. 9.45%
Firms that use a lot of debt are said to have a great deal of a. financial strength. b. liquidity. c. turnover. d. financial leverage. e. benchmarks.
d. financial leverage.
From the financial statements given below, calculate the current ratio. a. 1.33 b. 1.51 c. 1.20 d. 1.60 e. 1.44
e. 1.44
A firm has total interest charges of $20,000 per year, sales of $2 million, a tax rate of 40%, and a profit margin of 6%. What is the firm's times-interest-earned ratio? a. 12 b. 10 c. 14 d. 13 e. 11
e. 11
Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's equity multiplier? a. 0.50 b. 1.00 c. 0.75 d. 1.50 e. 2.00
e. 2.00
Info Technics Inc. has total assets equal to $1,000,000. Its total current liabilities equal $200,000 and it has no short-term debt. The firm's total equity equals $500,000. What is the firm's total debt to total capital ratio? a. 30.33% b. 45.00% c. 25.00% d. 42.75% e. 37.50%
e. 37.50%
Keys Industries has assets of $2,100, sales of $2,960, operating costs of $2,675, and $250 of total current liabilities consisting of $200 of accruals and $50 of notes payable. Its long-term debt is $850, its common equity is $1,000, its interest charges are $125, and its tax rate is 40%. What is Keys' ROE? a. 9.26% b. 11.29% c. 10.75% d. 10.24% e. 9.60%
e. 9.60%
Which of the following statements about ratio analysis is CORRECT? a. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. b. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." d. Using some of the firm's cash to reduce long-term debt is an example of "window dressing." e. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
e. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
Two companies—Davis & Associates and Matrix Enterprises—each reported the same earnings per share (EPS), but Davis & Associates' stock trades at a higher price. Which of the following statements is CORRECT? a. Davis & Associates must have a higher market-to-book ratio. b. Davis & Associates is probably judged by investors to be riskier. c. Davis & Associates probably has fewer growth opportunities. d. Davis & Associates must pay a lower dividend. e. Davis & Associates trades at a higher P/E ratio.
e. Davis & Associates trades at a higher P/E ratio.
International Appliances Inc. has a current ratio of 0.5. Which of the following actions would improve (increase) this ratio? a. Collect some of the current accounts receivable. b. Sell some of the existing inventory at cost. c. Use cash to pay off some long-term debt. d. Use cash to pay off current liabilities. e. Purchase additional inventory on credit (accounts payable).
e. Purchase additional inventory on credit (accounts payable).
