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Exam 4: Analysis of Financial Statements

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Question 41

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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).

A) True
B) False

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Question 42

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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.

A) True
B) False

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Question 43

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Last year Hamdi Corp.had sales of $500,000,operating costs of $450,000,and year-end assets (which is equal to its total invested capital) of $425,000.The debt-to-total-capital ratio was 17%,the interest rate on the debt was 7.5%,and the firm's tax rate was 25%.The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio.Assume that sales,operating costs,total assets,total invested capital,and the tax rate would not be affected,but the interest rate would rise to 8.0%.By how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.

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.

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?

Even though Firm A's current ratio exceeds that of Firm B,Firm B's quick ratio might exceed that of A.However,if A's quick ratio exceeds B's,then we can be certain that A's current ratio is also larger than B's.

Beranek Corp has $625,000 of assets (which equal total invested capital) ,and it uses no debt-it is financed only with common equity.The new CFO wants to employ enough debt to raise the total debt to total capital 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?

Which of the following statements is CORRECT?

Exhibit 4.1 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. ​ ​ ​ -Refer to Exhibit 4.1.What is the firm's ROE? Do not round your intermediate calculations.

Meyer Inc's total invested capital is $670,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?

One problem with ratio analysis is that relationships can sometimes be manipulated.For example,if our current ratio is greater than 1.5,then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.

Suppose a firm wants to maintain a specific TIE ratio.It knows the amount of its debt,the interest rate on that debt,the applicable tax rate,and its operating costs.With this information,the firm can calculate the amount of sales required to achieve its target TIE ratio.

Hoagland Corp's stock price at the end of last year was $24.00,and its book value per share was $25.00.What was its market/book ratio?

The operating margin measures operating income per dollar of assets.

Zero Corp's total common equity at the end of last year was $510,000 and its net income was $70,000.What was its ROE?

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.

A firm's ROE is equal to 9% and its ROA is equal to 6%.The firm finances only with short-term debt,long-term debt,and common equity,so assets equal total invested capital.The firm's total debt to total capital ratio must be 50%.

Which of the following statements is CORRECT?

Chang Corp.has $375,000 of assets,and it uses only common equity capital (zero debt) .Its sales for the last year were $550,000,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%.What profit margin would the firm need in order to achieve the 15% ROE,holding everything else constant? Do not round your intermediate calculations.