Week #4 FIN

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? Do not round your intermediate calculations. A. $5,574,319 B. $6,193,688 C. term-11$5,912,156 D. $6,587,831

5,630,625= Debt total invested capital= 7,166,250 No answer

Hoagland Corp's stock price at the end of last year was $20.50, and its book value per share was $25.00. What was its market/book ratio? a. 0.69 b. 0.87 c. 0.94 d. 0.82 e. 0.67

D

Song Corp's stock price at the end of last year was $22.00 and its earnings per share for the year were $1.30. What was its P/E ratio? A. 20.82 B. 19.29 C. 19.97 D. 16.92 E. 19.12

D 22/1.3= 16.92

Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

False

The 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 2018 Cash and securities $5,000 Accounts receivable 12,500 Inventories 12,500 Total current assets $30,000 Net plant and equipment $20,000 Total assets $50,000 Liabilities and Equity Accounts payable $11,040 Accruals 4,960 Notes payable 7,000 Total current liabilities $23,000 Long-term bonds $12,000 Total liabilities $35,000 Common stock $4,200 Retained earnings 10,800 Total common equity $15,000 Total liabilities and equity $50,000 Income Statement (Millions of $) 2018Net sales $70,000 Operating costs except depreciation 65,100 Depreciation 1,400 Earnings before interest and taxes (EBIT) $3,500 Less interest 1,140 Earnings before taxes (EBT) $2,360 Taxes 944 Net income $1,416 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $495.60 Int rate on notes payable & L-T bonds 6% Federal plus state income tax rate 40% Year-end stock price $33.98 ​ ​ A. $3.51 B. $3.06 C. $2.83 D. $2.63 E. $3.17

NO AMSWER

Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both firms finance using only debt and common equity, and total assets equal total invested capital. Both companies have positive net incomes. Company HD has a higher total debt to total capital ratio and therefore a higher interest expense. Which of the following statements is CORRECT? A. Company HD pays less in taxes. B. Company HD has a lower equity multiplier. C. Company HD has a higher ROA. D. Company HD has a higher times-interest-earned (TIE) ratio. E. Company HD has more net income.

a

Which of the following statements is CORRECT? A. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio. B. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. C. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. D. An increase in the DSO, other things held constant, could be expected to increase the ROE. E. An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

a

Which of the following statements is CORRECT? a. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. b. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. c. A reduction in inventories will have no effect on the current ratio. d. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. e. An increase in inventories will have no effect on the current ratio.

a

Which of the following statements is CORRECT? a. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets. b. If a firm sold some inventory for cash and left the funds in its bank account, then its current ratio would probably not change much, but its quick ratio would decline. c. If a firm sold some inventory on credit, then its current ratio would probably not change much, but its quick ratio would decline. d. If a firm sold some inventory on credit as opposed to cash, then there is no reason to think that either its current or quick ratio would change. e. If a firm has high current and quick ratios, then it must be managing its liquidity position well.

a

If the CEO of a large and diversified firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. a. The division's total assets turnover ratio is below the average for other firms in its industry. b. The division's DSO (days' sales outstanding) is 40 days, whereas the average for its competitors is 30 days. c. The division's inventory turnover is 6×, whereas the average for its competitors is 8×. d. The division's basic earning power ratio is above the average of other firms in its industry. e. The division's total debt to total capital ratio is above the average for other firms in the industry.

d

Which of the of the following statements is CORRECT? a. The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as more risky and/or less likely to enjoy higher future growth. b. It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only all the firms being compared have the same proportion of fixed assets to total assets. c. The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects. d. The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed. e. In general, if investors regard a company as relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios

d

Which of the following statements is CORRECT? a. If Firms X and Y have the same earnings per share and market-to-book ratio, then they must have the same price/earnings ratio. b. If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. c. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same. d. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

e

Which of the following statements is CORRECT? a. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. b. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE. c. A reduction in inventories will have no effect on the current ratio. d. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. e. An increase in inventories will have no effect on the current ratio.

e

It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all of the firms being compared have the same proportion of fixed assets to total assets.

false

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)], the higher its TIE ratio will be. 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.

false

Last year Ann Arbor Corp had $125,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes that a new computer program will enable the company to reduce costs and thus raise net income to $33,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost reduction improve the ROE? Do not round your intermediate calculations. A. 19.64% B. 20.30% C. 12.98% D. 13.48% E. 16.64%

no answer

Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm's performance over time.

true

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase. a. True b. False

true

If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.

true

If a firm's fixed assets turnover ratio is significantly higher than the average for its industry, then it could be that the firm uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. a. True b. False

true

Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects. These ratios include the Price/Earnings, the Market/Book, and Enterprise Value/EBITDA ratios. a. True b. False

true

Other things held constant, the more debt a firm uses, the lower the firm's return on total assets will be.

true

Ratio analysis involves analyzing financial statements to help appraise a firm's financial position and strength. a. True b. 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 less risky and/or more likely to enjoy higher growth in the future.

true