testbank ratio

8/12/2019 Testbank Ratio

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b. False

Debt management ratios Answer: a Diff: E

. The degree to which the managers of a firm attempt to magnify thereturns to owners' capital through the use of financial leverage iscaptured in debt management ratios.

a. Trueb. False

TIE ratio Answer: a Diff: E

/ . The times0interest0earned ratio is one indication of a firm's abilityto meet both long0term and short0term obligations.

a. Trueb. False

Profitability ratios Answer: a Diff: E

. rofitability ratios show the combined effects of liquidity$ assetmanagement$ and debt management on operations.

a. Trueb. False

ROA Answer: b Diff: E

3 . (ince R)- measures the firm's effective utilization of assets &withoutconsidering how these assets are financed*$ two firms with the same45#T must have the same R)-.

a. True

b. False

ar!et value ratios Answer: a Diff: E

16 . 7ar et value ratios provide management with a current assessment of howinvestors in the mar et view the firm's past performance and futureprospects.

a. Trueb. False

Trend analysis Answer: a Diff: E

11 . etermining whether a firm's financial position is improving ordeteriorating requires analysis of more than one set of financialstatements. Trend analysis is one method of measuring a firm'sperformance over time.

a. Trueb. False


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Medium:

Liquidity ratios Answer: b Diff:

12 . #f the current ratio of Firm - is greater than the current ratio ofFirm 5$ we cannot be sure that the quic ratio of Firm - is greaterthan that of Firm 5. 8owever$ if the quic ratio of Firm - e9ceedsthat of Firm 5$ we can be assured that Firm -'s current ratio alsoe9ceeds 5's current ratio.

a. Trueb. False

Inventory turnover ratio Answer: a Diff:

1" . The inventory turnover and current ratios are related. The combinationof a high current ratio and a low inventory turnover ratio relative to

the industry norm might indicate that the firm is maintaining too highan inventory level or that part of the inventory is obsolete or damaged.

a. Trueb. False

"i#ed assets turnover Answer: b Diff:

1%. :e can use the fi9ed assets turnover ratio to legitimately comparefirms in different industries as long as all the firms being comparedare using the same proportion of fi9ed assets to total assets.

a. Trueb. False

$EP and ROE Answer: a Diff:

1, . (uppose two firms have the same amount of assets$ pay the same interestrate on their debt$ have the same basic earning power &54 *$ and havethe same ta9 rate. 8owever$ one firm has a higher debt ratio. #f 54is greater than the interest rate on debt$ the firm with the higherdebt ratio will also have a higher rate of return on common equity.

a. Trueb. False

Equity multi%lier Answer: a Diff:

1 . #f the equity multiplier is 2.6$ the debt ratio must be 6.,.

a. Trueb. False


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TIE ratio Answer: a Diff:

1/ . (uppose a firm wants to maintain a specific T#4 ratio. #f the firmnows the level of its debt$ the interest rate it will pay on that

debt$ and the applicable ta9 rate$ the firm can then calculate theearnings level required to maintain its target T#4 ratio.

a. Trueb. False

Profit margin and leverage Answer: b Diff:

1 . #f sales decrease and financial leverage increases$ we can say withcertainty that the profit margin on sales will decrease.

a. Trueb. False

Multi)le C%#ice: C#"ce)tual

Easy:

Current ratio Answer: & Diff: E

13 . )ther things held constant$ which of the following will not affect thecurrent ratio$ assuming an initial current ratio greater than 1.6;

a. Fi9ed assets are sold for cash.b.


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a. =ompany > must have a higher A4 ratio.b. =ompany > must have a higher mar et to boo ratio.c. =ompany > must be ris ier.d. =ompany > must have fewer growth opportunities.e. -ll of the statements above are correct.

Leverage and finan&ial ratios Answer: e Diff: E

22 . (tennett =orp.'s =F) has proposed that the company issue new debt anduse the proceeds to buy bac common stoc . :hich of the following areli ely to occur if this proposal is adopted; &-ssume that the proposalwould have no effect on the company's operating earnings.*

a. Return on assets &R)-* will decline.b. The times interest earned ratio &T#4* will increase.c. Ta9es paid will decline.d. Bone of the statements above is correct.e. (tatements a and c are correct.

Medium:

Liquidity ratios Answer: d Diff:

2" . :hich of the following statements is most correct;

a. #f a company increases its current liabilities by C1$666 andsimultaneously increases its inventories by C1$666$ its currentratio must rise.

b. #f a company increases its current liabilities by C1$666 andsimultaneously increases its inventories by C1$666$ its quic ratiomust fall.

c. - company@s quic ratio may never e9ceed its current ratio.d. -nswers b and c are correct.e. Bone of the answers above is correct.

Current ratio Answer: e Diff:

2%. :hich of the following actions can a firm ta e to increase its currentratio;

a. #ssue short0term debt and use the proceeds to buy bac long0termdebt with a maturity of more than one year.

b. Reduce the company@s days sales outstanding to the industry averageand use the resulting cash savings to purchase plant and equipment.

c. Dse cash to purchase additional inventory.d. (tatements a and b are correct.e. Bone of the statements above is correct.

'ui&! ratio Answer: e Diff:


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"inan&ial statement analysis Answer: a Diff:

2 . :hich of the following statements is most correct;

a. -n increase in a firm's debt ratio$ with no changes in its sales andoperating costs$ could be e9pected to lower its profit margin onsales.

b. -n increase in the ()$ other things held constant$ would generallylead to an increase in the total asset turnover ratio.

c. -n increase in the ()$ other things held constant$ would generallylead to an increase in the R)4.

d. #n a competitive economy$ where all firms earn similar returns onequity$ one would e9pect to find lower profit margins for airlines$which require a lot of fi9ed assets relative to sales$ than forfresh fish mar ets.

e. #t is more important to ad+ust the ebtA-ssets ratio than theinventory turnover ratio to account for seasonal fluctuations.

Leverage and finan&ial ratios Answer: a Diff: 23 . =ompany - is financed with 36 percent debt$ whereas =ompany 5$ which

has the same amount of total assets$ is financed entirely with equity.5oth companies have a marginal ta9 rate of ", percent. :hich of thefollowing statements is most correct;

a. #f the two companies have the same basic earning power &54 *$=ompany 5 will have a higher return on assets.

b. #f the two companies have the same return on assets$ =ompany 5 willhave a higher return on equity.

c. #f the two companies have the same level of sales and basic earningpower &54 *$ =ompany 5 will have a lower profit margin.

d. -ll of the answers above are correct.e. Bone of the answers above is correct.

Leverage and finan&ial ratios Answer: d Diff:

"6 . - firm is considering actions which will raise its debt ratio. #t isanticipated that these actions will have no effect on sales$ operatingincome$ or on the firm@s total assets. #f the firm does increase itsdebt ratio$ which of the following will occur;

a. Return on assets will increase.b. 5asic earning power will decrease.c. Times interest earned will increase.d. rofit margin will decrease.e. Total assets turnover will increase.


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is&ellaneous ratios Answer: e Diff:

"1 . Reeves =orporation forecasts that its operating income &45#T* and totalassets will remain the same as last year$ but that the company@s debtratio will increase this year. :hat can you conclude about thecompany@s financial ratios; &-ssume that there will be no change inthe company@s ta9 rate.*

a. The company@s basic earning power &54 * will fall.b. The company@s return on assets &R)-* will fall.c. The company@s equity multiplier &47* will increase.d. -ll of the answers above are correct.e. -nswers b and c are correct.

is&ellaneous ratios Answer: b Diff:

"2 . :hich of the following statements is most correct;

a. #f two companies have the same return on equity$ they should havethe same stoc price.

b. #f =ompany - has a higher profit margin and higher total assetsturnover relative to =ompany 5$ then =ompany - must have a higherreturn on assets.

c. #f =ompany - and =ompany 5 have the same debt ratio$ they must havethe same times interest earned &T#4* ratio.

d. -nswers b and c are correct.e. Bone of the answers above is correct.

is&ellaneous ratios Answer: e Diff:

"" . :hich of the following statements is most correct;

a. #f a firm@s R)4 and R)- are the same$ this implies that the firm isfinanced entirely with common equity. &That is$ common equity Gtotal assets*.

b. #f a firm has no lease payments or sin ing fund payments$ its times0interest0earned &T#4* ratio and fi9ed charge coverage ratios must bethe same.

c. #f Firm - has a higher mar et to boo ratio than Firm 5$ then Firm -must also have a higher price earnings ratio & A4*.

d. -ll of the statements above are correct.e. -nswers a and b are correct.


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is&ellaneous ratios Answer: b Diff:

"%. :hich of the following statements is most correct;

a. #f Firms - and 5 have the same level of earnings per share$ and thesame mar et to boo ratio$ they must have the same price earningsratio.

b. Firms - and 5 have the same level of net income$ ta9es paid$ andtotal assets. #f Firm - has a higher interest e9pense$ its basicearnings power ratio &54 * must be greater than that of Firm 5.

c. Firms - and 5 have the same level of net income. #f Firm - has ahigher interest e9pense$ its return on equity &R)4* must be greaterthan that of Firm 5.

d. -ll of the answers above are correct.e. Bone of the answers above is correct.

Tough:

ROE and debt ratios Answer: b Diff: T

", . :hich of the following statements is most correct;

a. #f =ompany - has a higher debt ratio than =ompany 5$ then we can besure that - will have a lower times0interest0earned ratio than 5.

b. (uppose two companies have identical operations in terms of sales$cost of goods sold$ interest rate on debt$ and assets. 8owever$=ompany - uses more debt than =ompany 5 that is$ =ompany - has ahigher debt ratio. Dnder these conditions$ we would e9pect 5'sprofit margin to be higher than -'s.

c. The R)4 of any company which is earning positive profits and whichhas a positive net worth &or common equity* must e9ceed thecompany's R)-.

d. (tatements a$ b$ and c are true.e. (tatements a$ b$ and c are false.

Ratio analysis Answer: a Diff: T

" . Hou are an analyst following two companies$ =ompany I and =ompany H.Hou have collected the following informationJ

The two companies have the same total assets. =ompany I has a higher total assets turnover than =ompany H. =ompany I has a higher profit margin than =ompany H. =ompany H has a higher inventory turnover ratio than =ompany I. =ompany H has a higher current ratio than =ompany I.

:hich of the following statements is most correct;

a. =ompany I must have a higher net income.b. =ompany I must have a higher R)4.c. =ompany H must have a higher quic ratio.


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d. (tatements a and b are correct.e. (tatements a and c are correct.

Ratio analysis Answer: d Diff: T

"/ . Hou have collected the following information regarding =ompanies = andJ

The two companies have the same total assets. The two companies have the same operating income &45#T*. The two companies have the same ta9 rate. =ompany = has a higher debt ratio and a higher interest e9pense than

=ompany . =ompany = has a lower profit margin than =ompany .

5ased on this information$ which of the following statements is mostcorrect;

a. =ompany = must have a higher level of sales.b. =ompany = must have a lower R)4.c. =ompany = must have a higher times0interest0earned &T#4* ratio.d. =ompany = must have a lower R)-.e. =ompany = must have a higher basic earning power &54 * ratio.

Leverage and finan&ial ratios Answer: d Diff: T

" . 5lair =ompany has C, million in total assets. The company@s assets arefinanced with C1 million of debt$ and C% million of common equity. Thecompany@s income statement is summarized belowJ

)perating #ncome &45#T* C1$666$666#nterest 49pense 166$6664arnings before ta9 &45T* C 366$666Ta9es &%6K* " 6$666Bet #ncome C ,%6$666

The company wants to increase its assets by C1 million$ and it plans tofinance this increase by issuing C1 million in new debt. This actionwill double the company@s interest e9pense$ but its operating incomewill remain at 26 percent of its total assets$ and its average ta9 ratewill remain at %6 percent. #f the company ta es this action$ which ofthe following will occurJ

a. The company@s net income will increase.b. The company@s return on assets will fall.c. The company@s return on equity will remain the same.d. (tatements a and b are correct.e. -ll of the answers above are correct.


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Multi)le C%#ice: *'#+le!s

Easy:

"inan&ial statement analysis Answer: a Diff: E

"3 . Russell (ecurities has C166 million in total assets and its corporateta9 rate is %6 percent. The company recently reported that its basicearning power &54 * ratio was 1, percent and that its return on assets&R)-* was 3 percent. :hat was the company@s interest e9pense;

a. C 6b. C 2$666$666c. C $666$666d. C1,$666$666e. C1 $666$666

ROA Answer: d Diff: E

%6

. - firm has a profit margin of 1, percent on sales of C26$666$666. #fthe firm has debt of C/$,66$666$ total assets of C22$,66$666$ and anafter0ta9 interest cost on total debt of , percent$ what is the firm'sR)-;

a. .%Kb. 16.3Kc. 12.6Kd. 1"."Ke. 1,.1K

ROE Answer: & Diff: E

%1. Tapley ental (upply =ompany has the following dataJ

Bet incomeJ C2%6 (alesJ C16$666 Total assetsJ C $666ebt ratioJ /,K T#4 ratioJ 2.6 =urrent ratioJ 1.254 ratioJ 1".""K

#f Tapley could streamline operations$ cut operating costs$ and raisenet income to C"66$ without affecting sales or the balance sheet &theadditional profits will be paid out as dividends*$ by how much wouldits R)4 increase;

a. ".66Kb. ".,6Kc. %.66Kd. %.2,Ke. ,.,6K


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Profit margin Answer: & Diff: E

%2. Hour company had the following balance sheet and income statementinformation for 266"J

5alance sheetJ=ash C 26-AR 1$666#nventories ,$666Total =.-. C $626 ebt C %$666Bet F.-. 2$3 6 4quity ,$666Total -ssets C 3$666 Total claims C 3$666

#ncome statementJ(ales C16$666=ost of goods sold 3$26645#T C 66#nterest &16K* %6645T C %66Ta9es &%6K* 1 6Bet #ncome C 2%6

The industry average inventory turnover is ,. Hou thin you can changeyour inventory control system so as to cause your turnover to equal theindustry average$ and this change is e9pected to have no effect oneither sales or cost of goods sold. The cash generated from reducinginventories will be used to buy ta90e9empt securities which have a /percent rate of return. :hat will your profit margin be after thechange in inventories is reflected in the income statement;

a. 2.1Kb. 2.%Kc. %.,Kd. ,."Ke. ./K

Medium:

A&&ounts re&eivable Answer: a Diff: R

%". Ruth =ompany currently has C1$666$666 in accounts receivable. #ts dayssales outstanding & ()* is ,6 days &based on a " ,0day year*. -ssume a" ,0day year. The company wants to reduce its () to the industryaverage of "2 days by pressuring more of its customers to pay theirbills on time. The company's =F) estimates that if this policy isadopted the company's average sales will fall by 16 percent. -ssumingthat the company adopts this change and succeeds in reducing its () to"2 days and does lose 16 percent of its sales$ what will be the levelof accounts receivable following the change;

a. C,/ $666


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b. C / $ /c. C// $666d. C366$666e. C3/ $ /

ROA Answer: a Diff: %%. The 7eryl =orporation's common stoc is currently selling at C166 per

share$ which represents a A4 ratio of 16. #f the firm has 166 sharesof common stoc outstanding$ a return on equity of 26 percent$ and adebt ratio of 6 percent$ what is its return on total assets &R)-*;

a. .6Kb. 16.6Kc. 12.6Kd. 1 ./Ke. 26.6K

ROA Answer: a Diff:

%, . L =orp. has a basic earnings power &54 * ratio of 1, percent$ and has atimes interest earned &T#4* ratio of . Total assets are C166$666.The corporate ta9 rate is %6 percent. :hat is L =orp.'s return onassets &R)-*;

a. /.,Kb. 16.6Kc. 12.2Kd. 1".1Ke. 1%.,K

ROA Answer: e Diff:

% . 8umphrey 8otels@ operating income &45#T* is C%6 million. The company@stimes0interest0earned &T#4* ratio is .6$ its ta9 rate is %6 percent$and its basic earning power &54 * ratio is 16 percent. :hat is thecompany@s return on assets &R)-*;

a. .%,Kb. ,.3/Kc. %.""Kd. ., Ke. ,.2,K

ROE Answer: & Diff: R %/ . (elzer #nc. sells all its merchandise on credit. #t has a profit

margin of % percent$ days sales outstanding equal to 6 days &based ona " ,0day year*$ receivables of C1%/$3%,.2$ total assets of C" million$and a debt ratio of 6. %. :hat is the firm's return on equity &R)4*;


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a. /.1Kb. ""."Kc. "."Kd. /1.6Ke. .1K

ROE Answer: b Diff:

% . Hou are considering adding a new product to your firm's e9istingproduct line. #t should cause a 1, percent increase in your profitmargin &i.e.$ new 7 G old 7 1.1,*$ but it will also require a ,6percent increase in total assets &i.e.$ new T- G old T- 1.,*. Houe9pect to finance this asset growth entirely by debt. #f the followingratios were computed before the change$ what will be the new R)4 if thenew product is added and sales remain constant;

Ratios before new productrofit margin G 6.16

Total assets turnover G 2.66 4quity multiplier G 2.66

a. 11Kb. % Kc. %6Kd. 26Ke. ,"K

ROE Answer: d Diff:

%3

. -ssume 7eyer =orporation is 166 percent equity financed. =alculate thereturn on equity$ given the following informationJ

&1* 4arnings before ta9es G C1$,66&2* (ales G C,$666&"* ividend payout ratio G 6K&%* Total assets turnover G 2.6&,* -pplicable ta9 rate G "6K

a. 2,Kb. "6Kc. ",Kd. %2K

e. ,6K


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Liquidity ratios Answer: a Diff:

,6 . )liver #ncorporated has a current ratio G 1. $ and a quic ratio equalto 1.2. The company has C2 million in sales and its currentliabilities are C1 million. :hat is the company@s inventory turnoverratio;

a. ,.6b. ,.2c. ,.,d. .6e. ."

Debt ratio Answer: & Diff:

,1 . ?ansas )ffice (upply had C2%$666$666 in sales last year. The company@snet income was C%66$666. #ts total assets turnover was .6. Thecompany@s R)4 was 1, percent. The company is financed entirely withdebt and common equity. :hat is the company@s debt ratio;

a. 6.26b. 6."6c. 6.""d. 6. 6e. 6.

Profit margin Answer: a Diff:

,2 . The 7erriam =ompany has determined that its return on equity is 1,percent. 7anagement is interested in the various components that wentinto this calculation. Hou are given the following informationJ totaldebtAtotal assets G 6.", and total assets turnover G 2. . :hat is theprofit margin;

a. ".% Kb. ,.%2Kc. .3 Kd. 2.%,Ke. 12. 2K


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(ales volume Answer: a Diff:

," . 8arvey (upplies #nc. has a current ratio of ".6$ a quic ratio of 2.%$and an inventory turnover ratio of . 8arvey's total assets are C1million and its debt ratio is 6.26. The firm has no long0term debt.:hat is 8arvey's sales figure;

a. C /26$666b. C 126$666c. C1$ 26$666d. C " 6$666e. C 6$666

"inan&ial statement analysis Answer: e Diff: R

,% . =ollins =ompany had the following partial balance sheet and completeannual income statementJ

artial 5alance (heetJ=ash C 26-AR 1$666#nventories 2$666Total current assets C "$626Bet fi9ed assets 2$3 6Total assets C $666

#ncome (tatementJ(ales C16$666=ost of goods sold 3$26645#T C 66#nterest &16K* %6645T C %66Ta9es &%6K* 1 6Bet #ncome C 2%6

The industry average () is "6 &based on a " ,0day year*. =ollinsplans to change its credit policy so as to cause its () to equal theindustry average$ and this change is e9pected to have no effect oneither sales or cost of goods sold. #f the cash generated fromreducing receivables is used to retire debt &which was outstanding alllast year and which has a 16 percent interest rate*$ what will =ollins'debt ratio &Total debtATotal assets* be after the change in () isreflected in the balance sheet;

a. "".""Kb. %,.2 Kc. ,2./,Kd. 6.66Ke. ,./1K


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"inan&ial ratios Answer: b Diff: R

,, . Taft Technologies has the following relationshipsJ

-nnual sales C1$266$666=urrent liabilities C "/,$666ays sales outstanding & ()* &" ,0day year* %6#nventory Turnover ratio %.=urrent ratio 1.2

The company@s current assets consist of cash$ inventories$ and accountsreceivable. 8ow much cash does Taft have on its balance sheet;

a. 0C $"""b. C $%3"c. C12,$666d. C266$666e. C"1 $ /

'ui&! ratio Answer: & Diff:

, .


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d. 1.2e. ".6

Current ratio Answer: b Diff: R

, . 7ondale 7otors has forecasted the following year0end balance sheetJ

-ssetsJ=ash and mar etable securities C "66#nventories ,66-ccounts receivable /66Total current assets C1$,66Bet fi9ed assets ,$666Total assets C $,66


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:hat were erry@s current liabilities;

a. C%"6$666b. C,66$666c. C16/$,66d. C 1$%23

e. C,/"$"""

Tough:

ROE Answer: d Diff: T

6 . (outheast ac aging's R)4 last year was only , percent$ but itsmanagement has developed a new operating plan designed to improvethings. The new plan calls for a total debt ratio of 6 percent$ whichwill result in interest charges of C $666 per year. 7anagementpro+ects an 45#T of C2 $666 on sales of C2%6$666$ and it e9pects to

have a total assets turnover ratio of 2.6. Dnder these conditions$ theaverage ta9 rate will be %6 percent. #f the changes are made$ whatreturn on equity will (outheast earn;

a. 3.66Kb. 11.2,Kc. 1/.,6Kd. 22.,6Ke. ",.66K

ROE Answer: & Diff: T

1 . Roland M =ompany has a new management team that has developed an

operating plan to improve upon last year's R)4. The new plan wouldplace the debt ratio at ,, percent which will result in interestcharges of C/$666 per year. 45#T is pro+ected to be C2,$666 on salesof C2/6$666$ and it e9pects to have a total assets turnover ratio of".6. The average ta9 rate will be %6 percent. :hat does Roland M=ompany e9pect return on equity to be following the changes;

a. 1/. ,Kb. 21. 2Kc. 2 . /Kd. %%.%%Ke. ,1.2,K


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ROE Answer: d Diff: T

2 . Eeorgia 4lectric reported the following income statement and balancesheet for the previous yearJ

5alance sheetJ-ssets


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Current ratio Answer: & Diff: T

" . Nance 7otors has current assets of C1.2 million. The company@s currentratio is 1.2$ its quic ratio is 6./$ and its inventory turnover ratiois %. The company would li e to increase its inventory turnover ratioto the industry average$ which is ,$ without reducing its sales. -nyreductions in inventory will be used to reduce the company@s currentliabilities. :hat will be the company@s current ratio$ assuming thatit is successful in improving its inventory turnover ratio to ,;

a. 1.""b. 1. /c. 1.22d. 6./,e. 2.2

"inan&ial statement analysis Answer: a Diff: T

% . - company has +ust been ta en over by new management which believesthat it can raise earnings before ta9es &45T* from C 66 to C1$666$

merely by cutting overtime pay and thus reducing the cost of goodssold. rior to the change$ the following data appliedJ

Total assetsJ C $666 ebt ratioJ %,KTa9 rateJ ",K 54 ratioJ 1"."12,K45TJ C 66 (alesJ C1,$666

These data have been constant for several years$ and all income is paidout as dividends. (ales$ the ta9 rate$ and the balance sheet willremain constant. :hat is the company's cost of debt; &8intJ :oronly with old data.*

a. 12.32Kb. 1".2"Kc. 1".,1Kd. 1"./,Ke. 1%.66K

E$IT Answer: e Diff: T

, .


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LECTURE 3ANS ERS AND SOLUTIONS


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1 ) Ratio analysis Answer: a Diff: E

2 ) Liquidity ratios Answer: b Diff: E

" ) Current ratio Answer: b Diff: E

%) Asset management ratios Answer: a Diff: E

, ) Inventory turnover ratio Answer: b Diff: E

) Debt management ratios Answer: a Diff: E

/ ) TIE ratio Answer: a Diff: E

) Profitability ratios Answer: a Diff: E

3 ) ROA Answer: b Diff: E

16 ) ar!et value ratios Answer: a Diff: E

11 ) Trend analysis Answer: a Diff: E

12 ) Liquidity ratios Answer: b Diff:

1" ) Inventory turnover ratio Answer: a Diff:

1%) "i#ed assets turnover Answer: b Diff:

1, ) $EP and ROE Answer: a Diff:

1 ) Equity multi%lier Answer: a Diff:

47 G 2.6 G Total assetsATotal equity G 2A1.Therefore$ 2 G Total debt O 1$ or Total debt G 1.Total debtATotal assets G 1A2 G 6.,6.

1/ ) TIE ratio Answer: a Diff:

1 ) Profit margin and leverage Answer: b Diff:

13 ) Current ratio Answer: & Diff: E

26 ) 'ui&! ratio Answer: d Diff: E

The quic ratio is calculated as followsJ

=urrent -ssets P #nventories .=urrent


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lower ta9able income and less ta9. Therefore$ statement e is the bestchoice.

2" ) Liquidity ratios Answer: d Diff:

2%) Current ratio Answer: e Diff:

2, ) 'ui&! ratio Answer: e Diff:

2 ) Ratio analysis Answer: & Diff:

2/ ) "inan&ial statement analysis Answer: a Diff:

2 ) "inan&ial statement analysis Answer: a Diff:

(tatement a is true because$ if a firm ta es on more debt$ its intereste9pense will rise$ and this will lower its profit margin. )f course$ therewill be less equity than there would have been$ hence the R)4 might rise eventhough the profit margin fell.

23 ) Leverage and finan&ial ratios Answer: a Diff:

(tatement a is correct. 5oth companies have the same 45#T and total assets$so =ompany 5$ which has no interest e9pense$ will have a higher net income.Therefore$ =ompany 5 will have a higher R)-.

"6 ) Leverage and finan&ial ratios Answer: d Diff:

"1 ) is&ellaneous ratios Answer: e Diff:

(tatements b and c are correct. R)- G B#AT-. -n increase in the debt ratiowill result in an increase in interest e9pense$ and a reduction in B#. ThusR)- will fall. 47 G -ssetsA4quity. -s debt increases$ the amount of equityin the denominator decreases$ thus causing the equity multiplier &47* toincrease. Therefore$ statement e is the correct choice.

"2 ) is&ellaneous ratios Answer: b Diff:

""

) is&ellaneous ratios Answer: e Diff:

(tatements a and b are correct. Dse the u ont equation to find that theequity multiplier equals 1$ so the company is 166K equity financed. #f a firmhas no lease payments or sin ing fund payments$ then its T#4 and fi9ed chargecoverage ratios are the same.

T#4 G#nterest

45#T$ while

Fi9ed charge coverage ratio GT*0&1

2ymts(FO2ymts


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(tatement b is correct. 45#T G 45T O #nterest. (tatement c is incorrectbecause higher interest e9pense doesn@t necessarily imply greater debt. Forthis statement to be correct$ -@s amount of debt would have to be greaterthan 5@s.

", ) ROE and debt ratios Answer: b Diff: T

" ) Ratio analysis Answer: a Diff: T

(tatement a is correct the others are false. #f =ompany I has a highertotal assets turnover &(alesAT-* but the same total assets$ it must havehigher sales than H. #f I has higher sales and also a higher profit margin&B#A(ales* than H$ it must follow that I has a higher net income than H.

(tatement b is false. R)4 G B#A4L or R)4 G R)- 4quity multiplier. #neither case we need to now the amount of equity that both firms have. Thisis impossible to determine given the information in the question. Therefore$we cannot say that I must have a higher R)4 than H.

(tatement c is false. -n e9ample demonstrates this. (ay I has =- G C266$ =

testbank ratio

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