0 Stimmen dafür0 Stimmen dagegen

46 Aufrufe9 SeitenFinance chapter 4 homework

Jan 14, 2018

© © All Rights Reserved

PDF, TXT oder online auf Scribd lesen

Finance chapter 4 homework

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

46 Aufrufe

Finance chapter 4 homework

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

- CHAPTER 3
- Accounting Ratios for Project
- Toy World, Inc. Case Solution
- Winter 2018
- Chapters1 5PracticeQ's
- Investors Often Overlook The
- The body shop
- 9 Mths Ended 31 Mar
- Q1 1WhatAreEquityInvestors VideoTranscript PDF
- A Proposed Definition of the Modified Cash Basis
- balsht1.xlsx
- Finance Slides - 14 Aug 2012
- Balance Ratios j 200
- Course Outline MB101(S10 11)Final
- Accounting
- Financial Accounting March 2011 Exam Paper
- acountng
- Updated FAWCM Practice Questions
- 02 Measuring and Reporting Financial Position
- Corporate Accounting

Sie sind auf Seite 1von 9

Homework Ch 4

____ 1. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and

easy-to-use estimates of a firm's liquidity position.

____ 2. High current and quick ratios always indicate that the firm is managing its liquidity position well.

____ 3. If a firm's fixed assets turnover ratio is significantly higher 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.

____ 4. The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and

short-term debt obligations.

____ 5. The operating margin measures operating income per dollar of assets.

____ 6. The profit margin measures net income per dollar of sales.

____ 7. 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 one of 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.

____ 8. 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.

____ 9. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, a zero debt ratio and

therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow money,

use it to buy back stock, and raise the debt ratio to 50% and the equity multiplier to 2.0. She thinks that

operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This

would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.

____ 10. If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must

be 0.667.

____ 11. 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.

1

Name: ________________________ ID: A

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.

____ 13. 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. 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.

____ 15. Your sister is thinking about starting a new business. The company would require $380,000 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. $58,482

b. $45,144

c. $52,326

d. $51,300

e. $39,501

2

Name: ________________________ ID: A

____ 16. Last year Rennie Industries had sales of $240,000, 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. 3.55%

b. 3.19%

c. 3.66%

d. 3.01%

e. 3.59%

____ 17. Jordan Inc has the following balance sheet and income statement data:

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, 2.10, 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?

a. 28.16%

b. 20.93%

c. 24.28%

d. 32.29%

e. 25.83%

____ 18. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000,

operating costs to be $265,000, assets (capital) to be $200,000, and its tax rate to be 35%. Under Plan A it

would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a

contract with existing bondholders the TIE ratio would have to be maintained at or above 3.2. Under Plan B,

the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs,

assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in

response to the change in the capital structure?

a. 7.10%

b. 7.40%

c. 8.21%

d. 8.73%

e. 7.25%

3

Name: ________________________ ID: A

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.

Assets 2010

Cash and securities $1,290

Accounts receivable 9,890

Inventories 13,760

Total current assets $24,940

Net plant and equipment $18,060

Total assets $43,000

Liabilities and Equity

Accounts payable $8,170

Notes payable 6,020

Accruals 4,730

Total current liabilities $18,920

Long-term bonds $8,815

Total debt $27,735

Common stock $5,805

Retained earnings 9,460

Total common equity $15,265

Total liabilities and equity $43,000

Net sales $51,600

Operating costs except depreciation 48,246

Depreciation 903

Earnings bef interest and taxes (EBIT) $2,451

Less interest 927

Earnings before taxes (EBT) $1,524

Taxes 533

Net income $990

Other data:

Shares outstanding (millions) 500.00

Common dividends (millions of $) $346.67

Int rate on notes payable & L-T bonds 6.25%

Federal plus state income tax rate 35%

Year-end stock price $23.77

____ 19. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.

4

Name: ________________________ ID: A

a. 55.27

b. 66.46

c. 80.45

d. 57.37

e. 69.96

a. $2.36

b. $1.68

c. $1.98

d. $1.94

e. $1.62

5

ID: A

Homework Ch 4

Answer Section

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.2) Liquidity ratios

2. ANS: F

It might have too much liquidity. Liquid assets generally provide low returns.

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.2) Current ratio

3. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.3) FA turnover ratio

4. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.4) TIE ratio

5. ANS: F PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.5) Operating margin

6. ANS: T PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.5) Profit margin

7. ANS: F

A's higher debt ratio would tend to lower its profit margin. Since its margin is already higher, this indicates

that A is the better managed company.

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.5) Profit margin

8. ANS: T PTS: 1 DIF: MEDIUM NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.5) BEP ratio

9. ANS: T

DuPont equation: ROE = PM TATO Equity multiplier. Given the data, the statement is true.

5.0 % 1.5 1.0 7.5 %

4.5 % 1.5 2.0 13.5 %

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.7) DuPont equation

1

ID: A

10. ANS: T

Equity multiplier = Assets/Equity = 3.0 , so Equity/Assets = 1/3.0 = 0.333.

By definition, Equity/Assets + Debt/Assets = 1.00, so

0.333 + Debt/Assets = 1.0.

Therefore, Debt/Assets = 1.0 - 0.333 = 0.667. Thus, the statement is true.

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.7) Equity multiplier

11. ANS: E PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (Comp.) Misc. ratios

12. ANS: B PTS: 1 DIF: EASY NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (Comp.) Leverage effects

13. ANS: A PTS: 1 DIF: EASY/MEDIUM

NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.2) Quick ratio

14. ANS: C PTS: 1 DIF: MEDIUM NAT: Analytic skills | Reflective thinking

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (Comp.) Various ratios

15. ANS: D

Assets = Equity $380,000

Target ROE 13.5%

Required net income = Target ROE Equity = $51,300

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.5) Return on equity

16. ANS: E

Old New

Sales $240,000 $240,000

Original assets $175,000

Reduction in assets $51,000

New assets = Old assets - Reduction = $124,000

TATO = Sales / Assets = 1.37 1.94

Profit margin 5.30% 5.30%

Equity multiplier 1.20 1.20

ROE = PM TATO Eq Multiplier = 8.72% 12.31%

Change in ROE 3.59%

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.7) DuPont equation and reducing assets

2

ID: A

17. ANS: E

Original 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

Target current ratio 2.10

Current assets to have CR = Target: Target current ratio Cur. Liab = $147,000

Reduction in current assets = Old CA - New CA = Inventory reduction = $217,000

Reduction in common equity = Reduction in inventory = $217,000

New common equity = Old equity - Reduction = $63,000

New ROE = NI/New Equity: 33.33%

D ROE = 25.83%

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.3) DSO and net income

3

ID: A

18. ANS: B

Work down the Plan A column, find the Max Debt, then use it to complete Plan B and the ROEs.

Plan A Plan B

Interest rate 8.80% 8.80%

Tax rate 35% 35%

Assets $200,000 $200,000

Debt ratio: Plan A given, Plan B calculated 25% 62.1%

Debt $50,000 $124,290

Equity $150,000 $75,710

Operating costs 265,000 265,000 Constant

EBIT $35,000 $35,000

Interest 4,400 10,938

Taxable income $30,600 $24,063

Taxes 10,710 8,422

Net income $19,890 $15,641

ROE = NI / Equity = 13.26% 20.66%

TIE = EBIT/Interest = 7.95

Minimum TIE 3.20

$ of Interest consistent with

minimum TIE = EBIT/Min TIE = $10,938

Max debt = Interest/interest rate = $124,290

Change in ROE 7.40%

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (Comp.) Debt management

19. ANS: E

DSO = Accounts receivable/(Sales/365) = 69.96

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.3) DSO

20. ANS: C

EPS = Net income/Common shares outstanding = $1.98

LOC: Students will acquire knowledge of financial analysis and cash flows.

TOP: (4.6) EPS

- CHAPTER 3Hochgeladen vonElsa Mendoza
- Accounting Ratios for ProjectHochgeladen vonRoyal Projects
- Toy World, Inc. Case SolutionHochgeladen vonArjun Jayaprakash Thirukonda
- Winter 2018Hochgeladen vonNIHAL
- Chapters1 5PracticeQ'sHochgeladen vonMichaelFraser
- Investors Often Overlook TheHochgeladen vonSoumava Paul
- The body shopHochgeladen vonKhalid Mehmood
- 9 Mths Ended 31 MarHochgeladen vonashokdb2k
- Q1 1WhatAreEquityInvestors VideoTranscript PDFHochgeladen vonramu reddy
- A Proposed Definition of the Modified Cash BasisHochgeladen vonInternational Consortium on Governmental Financial Management
- balsht1.xlsxHochgeladen vonPuji Leksana Traffic
- Finance Slides - 14 Aug 2012Hochgeladen vonMotlatjo Rakgotho
- Balance Ratios j 200Hochgeladen vonnikunjbansal909
- Course Outline MB101(S10 11)FinalHochgeladen vonairguys
- AccountingHochgeladen vonsachinrema
- Financial Accounting March 2011 Exam PaperHochgeladen vonkarlr9
- acountngHochgeladen vonFadel Khalif Muhammad
- Updated FAWCM Practice QuestionsHochgeladen vonParth
- 02 Measuring and Reporting Financial PositionHochgeladen vonAlloysius Paril
- Corporate AccountingHochgeladen vonAkshit Jhingran
- Ratio analysis problemsHochgeladen vonNavya Sree
- c9_selfstudyHochgeladen vonChris Marasigan
- Financial Accounting PresentationHochgeladen vonWaleed Nadeem
- Vibe Financial Statements Explained 24thJulyHochgeladen vonMMMMM
- Balance SheetHochgeladen vonKiran A S
- jscHochgeladen vonSwapnil Jain
- Balance SheetHochgeladen vonKashyap Pandya
- PP for Chapter 1 - Introduction to Accounting - FinalHochgeladen vonYong Hy
- Notes From PM Bear S Tip of IcebergHochgeladen vonZhiyang Zhou
- Bajaj Auto LimitedHochgeladen vonNimisha Oli

- 0719.pdfHochgeladen vonBrooke Leverton
- Solution Ch.13Hochgeladen vonBrooke Leverton
- Cash flow with tax shieldHochgeladen vonBrooke Leverton
- Roche Holding AGHochgeladen vonBrooke Leverton
- Chapter-15Hochgeladen vonBrooke Leverton
- ExamView - Homework Ch 10Hochgeladen vonBrooke Leverton
- Calculus Cheat Sheet Limits Definitions Limit at Infinity :Hochgeladen vonapi-11922418
- ExamView - 7e Homework Ch. 3Hochgeladen vonBrooke Leverton
- ExamView - Homework Ch 1 2Hochgeladen vonBrooke Leverton
- Chapter 15 FinancingHochgeladen vonBrooke Leverton

- Mutual Funds assignmentHochgeladen vonAbhijeet
- Gov. Dayton Misuses State Resources with Self-Promoting Message to Income Tax FilersHochgeladen vonMinnesota Senate Republican Caucus
- Policy Cancellation Form NewHochgeladen vonteja_praveen
- FAQs Part 1 ResidentsHochgeladen vonFaizahKadir
- Ardolino - Warner Email - Angie's EstateHochgeladen vonreef_gal
- Shipping Newsletter Week48[1]Hochgeladen vonmurphycj25
- IFRS-Implementation Challenges and Approaches for BanksHochgeladen vonAreeb Khan
- Forest Hill AuditHochgeladen vonThe Town Talk
- SALARY_18-19NEETU.xlsxHochgeladen vonNeha
- Security Bank Corp vs Spouses MercadoHochgeladen vonQueenie Boado
- Duties and FunctionsHochgeladen vonEonart Salcedo
- SA501.pdfHochgeladen vonLaura D'souza
- Application Form - Individual (Aif)Hochgeladen vonJoan Muñoz Heredia
- Powerpoint SlideshowHochgeladen vonpotratz
- Micheak DellHochgeladen vonShourav Kabir
- fa2prob4-6Hochgeladen vonjay
- randomHochgeladen vonLakhan Patidar
- MBA-2017.pdfHochgeladen vonAnees Roy
- Hague-Visby Rules.docxHochgeladen vonmohammadbadrifar
- EberhardHochgeladen vonMuhammad Bilal Moon
- bhartiya post march 09Hochgeladen vonK V Sridharan General Secretary P3 NFPE
- Factors Affecting Option PricesHochgeladen vonRajneesh MJ
- Nuked • Prager - 1 thru 23Hochgeladen vonTulay Azize Tuncay
- Annexure BHochgeladen vonSushant Saxena
- Microsoft PowerPoint - JLL-2014 Corporate Facts_6-30_final.pdfHochgeladen vonKuldeep Singh
- PwC Graduate Brochure 2016Hochgeladen vonvikasdstar1669
- 1. MSPI Standards and Guidlines IrelandHochgeladen vonBilguun Workaholic
- Fin Acc 3 - Chapter 33Hochgeladen vonTong Wilson
- Working Capital Project by HILAL AHMADHochgeladen vonmohitnonu
- 07363760010357813Hochgeladen vonapi-320655500

## Viel mehr als nur Dokumente.

Entdecken, was Scribd alles zu bieten hat, inklusive Bücher und Hörbücher von großen Verlagen.

Jederzeit kündbar.