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- A firm had the following values for the four debt ratios discussed in the chapter: Liabilities to Assets Ratio: less than 1.0 Liabilities to Shareholders Equity Ratio: equal to 1.0 Long-Term Debt to Long-Term Capital Ratio: less than 1.0 Long-Term Debt to Shareholders Equity Ratio: less than 1.0 a. Indicate whether each of the following independent transactions increases, decreases, or has no effect on each of the four debt ratios. (1) The firm issued long-term debt for cash. (2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction). (3) The firm redeemed short-term debt with cash. (4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction). b. The text states that analysts need not compute all four debt ratios each year because the debt ratios are highly correlated. Does your analysis in Requirement a support this statement? Explain.Which of the following statements is false?(a) The quickest way to determine whether a firm has too much debt is to calculate the debt-to-equity ratio.(b) The best guideline to determine the firm's liquidity is to calculate the current ratio.(c) From the investor's point of view, the rate of return on common equity is a good indicator of whether the firm is generating an acceptable return to the investor.( d) We can determine the operating margin by expressing net income as a percentage of total sales.For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure rs: Cost of equities new stock issuance re: Cost of equities retained earnings rd: Cost of debts WACC: Weigthed average costs of capital rs > re rd WACC re rs > WACC rd. WACC > re> rs >rd. rd >rers > WACC
- Which of the following statements are false? Select all that apply a. Liquidity ratios are used to measure the speed with which various accounts are converted into sales. b. When ratios of different years are being compared, inflation should be taken into consideration c. Return on total assets (ROA) is sometimes called return on investment d. Generally, inventory is concerned with the most liquid asset that a firm possesses. e. A P/E ratio of 20 indicates that investors are willing to pay $20 for each $1 of earnings.Which of the following statements is CORRECT? A. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased B. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. C. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. D. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.Which of the following statements is correct?(a) The quickest way to determine whether the firmhas too much debt is to calculate the Timesinterest-earned ratio.(b) The best rule of thumb for determining the firm’sliquidity is to calculate the current ratio.(c) From an investor’s point of view, the price-toearnings ratio is a good indicator of whether ornot a firm is generating an acceptable return tothe investor.(d) The operating margin is determined by subtracting all operating and non-operating expensesfrom the gross margin.
- If we know that a firm has a net profit margin of 4.3 %, total asset turnover of 0.77, and a financial leverage multiplier of 1.36, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Raymond Co. has $1.4 million of debt, $3 million of preferred stock, and $1.2 million of common equity. What would be its weight on debt? 0.59 0.25 0.49 0.21Some of the financial ratios of V, W, X, Y, and Z companies are calculated and presented in the following table. Ratio V W X Y Z Quick Ratio 4.1 times 2.4 times 3.9 times 2.8 times 3.2 times Return on sales 12% 8% 10% 16% 14% Inventory Turnover Ratio 9.7 times 12.6 times 10.4 times 11.5 times 7.8 times Debt-to- equity Ratio 0.45 0.64 0.21 0.36 0.81 You are an individual investor assessing the publicly traded companies V, W, X, Y, and Z based on their profitability. If you are to choose one of the companies to invest your money, which one would you choose? Explain your reason You are the loans manager of a bank assessing the applications of companies V, W, X, Y, and Z for long-term debt. If you are to choose one of the companies to lend money, which one would you choose? Explain your reason You are the loans manager of a bank assessing the applications of companies V, W, X, Y, and Z for short-term debt. If you…
- Which of the following statements is false? a. A firm’s return on equity exceeds its return on investment under conditions of favorable leverage. b. A common-size balance sheet states each asset, liability and shareholder’s equity account as a percentage of total assets. c. Common-size statements are used to evaluate trends and to make industry comparisons. d. Creditors tend to favor a firm with high financial leverage.Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset SelectionA profitability measure of ROE is affected by the level of a firm’s debt. Thus,an investor must consider the debt-equity ratio to evaluate the firm’sprofitability. The debt-equity ratio determines a firm’s financial leverage whichindicates how much of assets the firm is able to deploy for each monetary unitof stockholders’ equity.1) Explain how the financial leverage effect can be defined as the differencebetween ROE and ROA. 2) Explain how the financial leverage effect is affected by the debt ratio and theinterest rate.
