1. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? a. The company issued new common stock. b. The company made large investments in fixed assets. c. The company sold a division and received cash in return. d. The company cut its dividend. e. The company issued new long-term debt. 2. Which of the following statements is CORRECT? a. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be. b. 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 total debt to total capital ratio, the lower the risk. c. 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. d. Other things held constant, the more debt a firm uses, the higher its operating margin will be. e. Other things held constant, the more debt a firm uses, the higher its profit margin will be. 3. Please see attachments and show workings Exhibit 4.1The 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 mustbe retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $)Assets2018Cash and securities$3,000Accounts receivable15,000Inventories18,000Total current assets$36,000Net plant and equipment$24,000Total assets$60,000Liabilities and EquityAccounts payable$18,630Accruals8,370Notes payable6,000Total current liabilities$33,000Long-term bonds$9,000Total liabilities$42,000Common stock$5,040Retained earnings12,960Total common equity$18,000Total liabilities and equity$60,000Income Statement (Millions of $)2018 Income Statement (Millions of $)2018Net sales$84,000Operating costs except depreciation78,120Depreciation1,680Earnings before interest and taxes (EBIT)$4,200Less interest900Earnings before taxes (EBT)$3,300Taxes1,320Net income$1,980Other data:Shares outstanding (millions)500.00Common dividends (millions of $)$693.00Int rate on notes payable & L-T bonds6%Federal plus state income tax rate40%Year-end stock price$47.52Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.O a. 45.45%O b. 39.09%O c. 44.09%O d. 38.18%O e. 39.55%

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Answered: Analysts who follow Howe Industries…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter2: Analysis Of Financial Statements

Section: Chapter Questions

Problem 18PROB

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Question

1. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

a. The company issued new common stock.

b. The company made large investments in fixed assets.

c. The company sold a division and received cash in return.

d. The company cut its dividend.

e. The company issued new long-term debt.

2. Which of the following statements is CORRECT?

a. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be.

b. 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 total debt to total capital ratio, the lower the risk.

c. 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.

d. Other things held constant, the more debt a firm uses, the higher its operating margin will be.

e. Other things held constant, the more debt a firm uses, the higher its profit margin will be.

3. Please see attachments and show workings

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.
Balance Sheet (Millions of $)
Assets
2018
Cash and securities
$3,000
Accounts receivable
15,000
Inventories
18,000
Total current assets
$36,000
Net plant and equipment
$24,000
Total assets
$60,000
Liabilities and Equity
Accounts payable
$18,630
Accruals
8,370
Notes payable
6,000
Total current liabilities
$33,000
Long-term bonds
$9,000
Total liabilities
$42,000
Common stock
$5,040
Retained earnings
12,960
Total common equity
$18,000
Total liabilities and equity
$60,000
Income Statement (Millions of $)
2018

Income Statement (Millions of $)
2018
Net sales
$84,000
Operating costs except depreciation
78,120
Depreciation
1,680
Earnings before interest and taxes (EBIT)
$4,200
Less interest
900
Earnings before taxes (EBT)
$3,300
Taxes
1,320
Net income
$1,980
Other data:
Shares outstanding (millions)
500.00
Common dividends (millions of $)
$693.00
Int rate on notes payable & L-T bonds
6%
Federal plus state income tax rate
40%
Year-end stock price
$47.52
Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.
O a. 45.45%
O b. 39.09%
O c. 44.09%
O d. 38.18%
O e. 39.55%

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