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Finance Flashcards

Intro to Finance Ch 4

Considered alone, which of the following would increase a company’s current ratio?a. An increase in net fixed assets.b. An increase in accrued liabilities.c. An increase in notes payable.d. An increase in accounts receivable.e. An increase in accounts payable. d. An increase in accounts receivable.
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. c. The quick ratio increases.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? a. Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.b. Use cash to repurchase some of the company’s own stock.c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.e. Use cash to increase inventory holdings. d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Which of the following statements is CORRECT?a. A reduction in inventories would have no effect on the current ratio.b. An increase in inventories would have no effect on the current ratio.c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.d. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.e. If a firm increases its sales while holding its inventories constant, then, other things held constant, its fixed assets turnover ratio will decline. c. If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.
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 is probably judged by investors to be riskier.c. Company E must have a higher market-to-book ratio.d. Company E must pay a lower dividend.e. Company E trades at a higher P/E ratio. e. Company E trades at a higher P/E ratio.
Which of the following statements is CORRECT?a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” 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 another example of “window dressing.”b. 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.”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. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value. b. 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.”
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 would occur as a result of this action?a. The company’s current ratio increased.b. The company’s times interest earned ratio decreased.c. The company’s basic earning power ratio increased.d. The company’s equity multiplier increased.e. The company’s debt ratio increased. a. The company’s current ratio increased.
A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?a. Increase accounts receivable while holding sales constant.b. Increase EBIT while holding sales and assets constant.c. Increase accounts payable while holding sales constant.d. Increase notes payable while holding sales constant.e. Increase inventories while holding sales constant. b. Increase EBIT while holding sales and assets constant.
If the CEO of a large, 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 basic earning power ratio is above the average of other firms in its industry.b. The division’s total assets turnover ratio is below the average for other firms in its industry.c. The division’s debt ratio is above the average for other firms in the industry.d. The division’s inventory turnover is 6, whereas the average for its competitors is 8.e. The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30. a. The division’s basic earning power ratio is above the average of other firms in its industry.
Which of the following would indicate an improvement in a company’s financial position, holding other things constant?a. The inventory and total assets turnover ratios both decline.b. The debt ratio increases.c. The profit margin declines.d. The times-interest-earned ratio declines.e. The current and quick ratios both increase. e. The current and quick ratios both increase.
If a bank loan officer were considering a company’s loan request, which of the following statements would you consider to be CORRECT?a. The lower the company’s inventory turnover ratio, other things held constant, the lower the interest rate the bank would charge the firm.b. Other things held constant, the higher the days sales outstanding ratio, the lower the interest rate the bank would charge.c. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge.d. The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge.e. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. c. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge.
Which of the following statements is CORRECT?a. The use of debt financing will tend to lower the basic earning power ratio, other things held constant.b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.c. If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.d. The numerator used in the TIE ratio is earnings before taxes (EBT). EBT is used because interest is paid with post-tax dollars, so the firm’s ability to pay current interest is affected by taxes.e. All else equal, increasing the debt ratio will increase the ROA b. A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?a. 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.b. Issue new common stock and use the proceeds to increase inventories.c. Speed up the collection of receivables and use the cash generated to increase inventories.d. Use some of its cash to purchase additional inventories.e. Issue new common stock and use the proceeds to acquire additional fixed assets. a. 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.
Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?a. Borrow using short-term notes payable and use the proceeds to reduce accruals.b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.c. Use cash to reduce accruals.d. Use cash to reduce short-term notes payable.e. Use cash to reduce accounts payable. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
Which of the following statements is CORRECT?a. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm’s credit terms.c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline. e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Which of the following statements is CORRECT?a. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.b. A firm’s use of debt will have no effect on its profit margin.c. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.d. The debt 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.e. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a higher operating margin and return on assets. c. If two firms differ only in their use of debt–i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates–but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales and a lower return on assets.
Which of the following statements is CORRECT?a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.b. 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.c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.d. 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.e. 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. b. 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.
Which of the following statements is CORRECT?a. 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%. Under these conditions, the ROE will increase.b. 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%. Without additional information, we cannot tell what will happen to the ROE.c. The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.d. Other things held constant, an increase in the debt ratio will result in an increase in the profit margin.e. 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%. Under these conditions, the ROE will decrease. a. 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%. Under these conditions, the ROE will increase.
You observe that a firm’s ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?a. Its total assets turnover must be above the industry average.b. Its return on assets must equal the industry average.c. Its TIE ratio must be below the industry average.d. Its total assets turnover must be below the industry average.e. Its total assets turnover must equal the industry average. a. Its total assets turnover must be above the industry average.
Companies HD and LD are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company HD has the higher debt ratio. Which of the following statements is CORRECT?a. Company HD has a lower total assets turnover than Company LD.b. Company HD has a lower equity multiplier than Company LD.c. Company HD has a higher fixed assets turnover than Company LD.d. Company HD has a higher ROE than Company LD.e. Company HD has a lower operating income (EBIT) than Company LD. d. Company HD has a higher ROE than Company LD.
Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?a. The ROA will decline.b. Taxable income will decline.c. The tax bill will increase.d. Net income will decrease.e. The times-interest-earned ratio will decrease. c. The tax bill will increase.
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 debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin. e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
HD Corp and LD Corp have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT?a. Without more information, we cannot tell if HD or LD would have a higher or lower net income.b. HD would have the lower equity multiplier for use in the DuPont equation.c. HD would have to pay more in income taxes.d. HD would have the lower net income as shown on the income statement.e. HD would have the higher operating margin. d. HD would have the lower net income as shown on the income statement.
Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt 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. Company HD pays less in taxes.
Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?a. Company HD has a lower equity multiplier.b. Company HD has more net income.c. Company HD pays more in taxes.d. Company HD has a lower ROE.e. Company HD has a lower times-interest-earned (TIE) ratio. e. Company HD has a lower times-interest-earned (TIE) ratio.
Which of the following statements is CORRECT? a. If a firm has high current and quick ratios, this always indicate that the firm is managing its liquidity position well.b. 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.c. If a firm sold some inventory on credit, 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, there is no reason to think that either its current or quick ratio would change.e. 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. e. 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.
Which of the following statements is CORRECT?a. A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.c. If a firm’s fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. d. The more conservative a firm’s management is, the higher its debt ratio is likely to be.e. The days sales outstanding ratio tells us how long it takes, on average, to collect 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. e. The days sales outstanding ratio tells us how long it takes, on average, to collect 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.
Which of the following statements is CORRECT?a. Other things held constant, the more debt a firm uses, the higher its operating margin will be.b. 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.c. Other things held constant, the more debt a firm uses, the higher its profit margin will be.d. Other things held constant, the higher a firm’s debt ratio, the higher its TIE ratio will be.e. 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 debt ratio, the lower the risk. b. 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.
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 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.c. 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).d. 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 more risky and/or less likely to enjoy higher future growth.e. 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 debt 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. b. 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. In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.b. The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects. c. 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. d. 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 being more risky and/or less likely to enjoy higher future growth.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 the firms being compared have the same proportion of fixed assets to total assets. c. 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.
Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?a. 2.04b. 2.14c. 2.26d. 2.38e. 2.49 d. 2.38
Beranek Corp has $720,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets 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?a. $273,600b. $288,000c. $302,400d. $317,520e. $333,396 b. $288,000
Ajax Corp’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm’s times-interest-earned (TIE) ratio?a. 4.72b. 4.97c. 5.23d. 5.51e. 5.80 e. 5.80
Royce Corp’s sales last year were $280,000, and its net income was $23,000. What was its profit margin?a. 7.41%b. 7.80%c. 8.21%d. 8.63%e. 9.06% c. 8.21%
River Corp’s total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?a. 7.89%b. 8.29%c. 8.70%d. 9.14%e. 9.59% a. 7.89%
X-1 Corp’s total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?a. 11.70%b. 12.31%c. 12.96%d. 13.61%e. 14.29% c. 12.96%
Zero Corp’s total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?a. 14.82%b. 15.60%c. 16.42%d. 17.28%e. 18.15% d. 17.28%
Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?a. $41,234b. $43,405c. $45,689d. $48,094e. $50,625 e. $50,625
Song Corp’s stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?a. 17.17b. 18.08c. 18.98d. 19.93e. 20.93 b. 18.08
Hoagland Corp’s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?a. 1.34b. 1.41c. 1.48d. 1.55e. 1.63 a. 1.34
Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm’s ROE?a. 15.23%b. 16.03%c. 16.88%d. 17.72%e. 18.60% c. 16.88%
Meyer Inc’s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?a. $158,750b. $166,688c. $175,022d. $183,773e. $192,962 a. $158,750
Helmuth Inc’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?a. $2.14b. $2.26c. $2.38d. $2.50e. $2.63 d. $2.50
Garcia Industries has sales of $200,000 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?a. $241.45b. $254.16c. $267.54d. $281.62e. $296.44 e. $296.44
Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.a. 21.27b. 22.38c. 23.50d. 24.68e. 25.91 b. 22.38
Han Corp’s sales last year were $425,000, 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.a. 12.94b. 13.62c. 14.33d. 15.09e. 15.84 d. 15.09
Wie Corp’s sales last year were $315,000, 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?a. $201,934b. $212,563c. $223,750d. $234,938e. $246,684 c. $223,750
A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio (measured as debt/assets) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a. 41.94%b. 44.15%c. 46.47%d. 48.92%e. 51.49% e. 51.49%
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. 9.45%b. 9.93%c. 10.42%d. 10.94%e. 11.49% a. 9.45%
Last year Ann Arbor Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?a. 11.51%b. 12.11%c. 12.75%d. 13.42%e. 14.09% d. 13.42%
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/assets ratio was 44%. How much debt was outstanding?a. $4,586,179b. $4,827,557c. $5,081,639d. $5,349,094e. $5,630,625 e. $5,630,625
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-assets ratio was 45.0%. Based on the DuPont equation, what was the ROE?a. 13.82%b. 14.51%c. 15.23%d. 16.00%e. 16.80% a. 13.82%
Last year Rennie Industries had sales of $305,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt/assets ratio, sales, and costs remained constant, how much would the ROE have changed?a. 4.10%b. 4.56%c. 5.01%d. 5.52%e. 6.07% b. 4.56%
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $295,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed?a. 6.55%b. 7.28%c. 8.09%d. 8.90%e. 9.79% c. 8.09%
Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?a. 2.13%b. 2.35%c. 2.58%d. 2.84%e. 3.12% a. 2.13%
Last year Kruse Corp had $305,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?a. 2.85%b. 3.00%c. 3.16%d. 3.31%e. 3.48% c. 3.16%

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