Fin 534 – homework chapter 3

FIN  534 – Homework Chapter 3

Rating A

 

 

1. Which of the following statements is CORRECT?

 

a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.

b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.

c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.

d. An increase in the DSO, other things held constant, could be expected to increase the ROE.

e. An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.

 

2. Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

 

a. Company HD has a lower equity multiplier.

b. Company HD has more net income.

c. Company HD pays more in taxes.

d. Company HD has a lower ROE.

e. Company HD has a lower times interest earned (TIE) ratio.

 

3. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

 

a. Given this information, LD must have the higher ROE.

b. Company LD has a higher basic earning power ratio (BEP).

c. Company HD has a higher basic earning power ratio (BEP).

d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.

e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

 

4. Muscarella Inc. has the following balance sheet and income statement data:

 

Cash $ 14,000 Accounts payable $ 42,000

Receivables 70,000 Other current liabilities 28,000

Inventories 210,000 Total CL $ 70,000

Total CA $294,000 Long-term debt 70,000

Net fixed assets 126,000 Common equity 280,000

Total assets $420,000 Total liab. and equity $420,000

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, 2.70, 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. 4.28%

b. 4.50%

c. 4.73%

d. 4.96%

e. 5.21%

 

5. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $301,770, operating costs to be $266,545, assets 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 the TIE ratio would have to be kept at 4.00 or more. 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. 3.83%

b. 4.02%

c. 4.22%

d. 4.43%

 

e. 4.65%

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more