chapter 4 quiz finance 3000

Which of the following statements is CORRECT?

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.

HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. Both firms finance using only debt and common equity and total assets equal total invested capital. However, HD uses more debt than LD. Which of the following statements is CORRECT?

HD would have the lower net income as shown on the income statement.

Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. Both firms finance using only debt and common equity and total assets equal total invested capital. However, company HD has a higher total debt to total capital ratio. Which of the following statements is CORRECT?

If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?

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?

Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

Which of the following statements is CORRECT?

Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity and total assets equal total invested capital. Under these conditions, the ROE will increase.