Finance Chapter 4

$577.53

Garcia Industries has sales of $152,500 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed up by this change, how would that affect its net income, assuming other things are held constant? Assume all sales to be on credit. Do not round your intermediate calculations.

True

Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm's operating results.

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.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? a. Speed up the collection of receivables and use the cash generated to increase inventories. b. Issue new common stock and use the proceeds to acquire additional fixed assets. c. Issue new common stock and use the proceeds to increase inventories. d. Use some of its cash to purchase additional inventories. e. 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.

The company's current ratio increased

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects occurred as a result of this action? a.The company's total debt to total capital ratio increased. b.The company's basic earning power ratio increased. c.The company's equity multiplier increased. d.The company's current ratio increased. e.The company's times interest earned ratio decreased.

Company E trades at a higher P/E ratio

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? a.Company E probably has fewer growth opportunities. b.Company E must have a higher market-to-book ratio. c.Company E is probably judged by investors to be riskier. d.Company E trades at a higher P/E ratio. e.Company E must pay a lower dividend.

11.21

Han Corp's sales last year were $465,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO. Assume all sales to be on credit. Do not round your intermediate calculations.

$2.10

Helmuth Inc's latest net income was $1,050,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare? Do not round your intermediate calculations.

False

High current and quick ratios always indicate that the firm is managing its liquidity position well.

0.98

Hoagland Corp's stock price at the end of last year was $24.50, and its book value per share was $25.00. What was its market/book ratio?

9.17%

Jordan Inc has the following balance sheet and income statement data: Cash $14,000 Accounts payable $42,000 Receivables 70,000 Other current liabilities 28,000 Inventories 280,000 Total CL $70,000 Total CA $364,000 Long-term debt 140,000 Net fixed assets 126,000 Common equity 280,000 Total assets $490,000 Total liab. and equity $490,000 Sales $280,000 Net income 21,000 ​ The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 3.00, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change? Do not round your intermediate calculations.

1.23

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 2021 Cash and securities $4,500 Accounts receivable 12,500 Inventories 13,000 Total current assets $30,000 Net plant and equipment $20,000 Total assets $50,000 Liabilities and Equity Accounts payable $13,330 Accruals 8,170 Notes payable 6,000 Total current liabilities $27,500 Long-term bonds $9,000 Total liabilities $36,500 Common stock $3,915 Retained earnings 9,585 Total common equity $13,500 Total liabilities and equity $50,000 Income Statement (Millions of $)2021Net sales $55,000 Operating costs except depreciation 51,150 Depreciation 1,100 Earnings before interest and taxes (EBIT) $2,750 Less interest 900 Earnings before taxes (EBT) $1,850 Taxes (25%) 463 Net income $1,388 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $485.63 Int. rate on notes payable & L-T bonds 6% Federal plus state income tax rate 25% Year-end stock price $33.30 ​​ ​ Refer to Exhibit 4.1. What is the firm's market-to-book ratio? Do not round your intermediate calculations.

True

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.

False

The more conservative a firm's management is, the higher the firm's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.

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

The profit margin measures net income per dollar of sales.

False

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

c. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.

Which of the following statements is CORRECT? a. Other things held constant, the less debt a firm uses, the lower its return on total assets will be. b. 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 riskier and/or less likely to enjoy higher future growth. c. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. d. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio is 70% versus 20% for Firm B. 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 Firm A's higher profit margin. e. The return on common equity (ROE) is generally considered less significant, from a stockholder's viewpoint, than the return on total assets (ROA).

the quick ratio increases

Which of the following would generally indicate an improvement in a company's financial position, holding other things constant? a.The TIE declines. b.The DSO increases. c.The quick ratio increases. d.The current ratio declines. e.The total assets turnover decreases.

11.41%

X-1 Corp's total assets at the end of last year were $460,000 and its EBIT was $52,500. What was its basic earning power (BEP) ratio?

14.29% (net income/common equity)

Zero Corp's total common equity at the end of last year was $490,000 and its net income was $70,000. What was its ROE?